Q3 2020 Piedmont Office Realty Trust Inc Earnings Call

Thank you for holding ladies and gentlemen, you are in line for this Piedmont Office Realty Trust Conference call. At this time, we are still gathering additional participants and well get started momentarily. We thank you for your patience and ask that you. Please continue to hold.

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Good day, ladies and gentlemen, and welcome to the Piedmont Office Realty Trust Inc.'s third quarter 2020 earnings Conference call.

All lines have been placed on a listen only mode and the floor will be opened for your questions and comments following the presentation.

At this time it is my pleasure to turn the floor, but your host for today Mr. Eddie Gilbert Sir the floor is yours.

Thank you operator, good morning, everyone. We thank you for joining us today for Piedmont's third quarter 2020 earnings Conference call.

Last night, we filed our form 10-Q in an 8-K that includes our earnings release, and our unaudited supplemental information for the third quarter.

All this information is available on our website at Piedmont reached Dot com under the Investor Relations section.

During this call refer to certain non-GAAP financial measures such as at the FFO core assets. So that's so in same store NOI.

Furnishings 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.

Forward looking statements address matters, which are subject to risks and uncertainties and therefore actual results may differ from those we anticipate and discussed today.

The risks and uncertainties are these forward looking statements are discussed in detail on our press release as well as our FCC filings. We encourage everyone to review the more detailed discussion related to risks associated with forward looking statements in are actually see filings.

Examples of forward looking statements include those related to Piedmont future revenues and operating income.

Dividends in 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 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 third quarter results and accomplishments Brent.

Good morning, everyone and thank you for joining us on todays call. Despite the challenging operating environment in the third quarter was another solid quarter for Piedmont in terms of operations and financial results and strategic objectives.

We saw an increase in new leasing activity, we're very encouraged by the uptick in leasing tours in proposals.

This trend is continuing into the fourth quarter is our leasing pipeline continues to rebuild but let me be clear, we're not back to levels of prepayment activity.

Operationally, we continue to feel very fortunate that most of our tenants are of investment grade quality and subject to long term leases with a weighted average lease term remaining for the portfolio over six years, we continued to collect substantially all of our build rate is 99% for the third quarter. These collections are net of approximately 60 total lease modification agreed.

Year to date, we've entered into with our tenants a majority of whom are retail related businesses and have experienced disruptions in their operations as a result of the pandemic.

As we indicated last quarter most of these agreements now totaling 6.7 million year to date in cash rent fillings are deferrals, a three to four months of rent.

The bulk of which are due to be paid back in the fourth quarter of this year or in 2021.

I'll remind everyone that during the second quarter, we did establish a 4.9 million dollar general reserve related primarily to those tenants with whom we've agreed to some form of rental relief should these businesses be unable to repay the deferred amounts when they become due or shouldn't your operations fail.

As of today, we still have 4.8 million of this reserve in place.

And I imagine, we will be well into 2021 before we will know how all these tenants will perform.

In addition to the availability of general receivables reserved I will note that we did recognize 700000 of specific account bad debt expense during the third quarter, bringing our total specific bad debt expense for the year to 2.5 million or about 0.5 person who they are.

Well covidien affected leasing demand, we do feel fortunate to have completed 229000 square feet of leasing during the third quarter with over a third related to new tenants.

Easy leasing results exclude a 172000 square foot lease that is backfilling most of the space related to first data, which was acquired earlier this year by Pfizer the new tenant Deluxe Corporation will be investing over $10 million to establish a technology innovation center and our 55 to 65 Glenridge Highlands to go.

And.

And according to the Georgia Governors office, they will create over 700, new jobs for the Atlanta community.

With a significant investment in workforce and the innovation Center, we believe it bodes well for a longer term tenancy at our headquarters location at Clearbridge Highland.

Aside from this leaves the most significant new tenant lease that was executed during the quarter, which were approximately 56000 square feet at 400, Virginia Avenue in Washington, DC with the district's department of employee services.

A more detailed list of these leases executed during that quarter is included in our quarterly supplemental information that was filed last night.

With regard to leasing activity in our markets those where we are currently seeing a strong activity taking place around the Washington, D.C. area, Boston and our Sunbelt markets.

We have concerns regarding the pandemics impact on lease rental rates in concessions, but with approximately a million square feet of leasing completed through the third quarter of 2020. We are encouraged that rents have held relatively steady with cash rent roll through your increasing approximately 5% and accrual based rents up over 11%.

Looking at renewals other than the New York City lease it 60 broad Street, we have no other significant expirations until the end of 2022.

We continue to make progress on the city of New York is 300000 square foot lease that is currently in holdover and we are diligently working with them towards executing a renewal we.

We still anticipate a shorter term renewals to be executed around the end of the year with a longer term deal still expected sometime in the latter half of 2021.

There are no development projects currently underway and all of our redevelopment projects and tenant build out programs are relatively modest in scale and are on budget and on schedule.

Our leased occupancy percentage has declined this year largely due to the slowdown in leasing activity attributable to the pandemic.

Likewise, our same store cash NOI comparison, which is basically flat on a year to date basis has been impacted approximately 2% by the $6.7 million of tenant lease modification agreements we've entered into.

Turning to capital transactions.

Obviously as the economy slowed from the pandemic transactional activity did as well, we did not complete any acquisitions or dispositions during the third quarter, but after the quarter end, we completed a portfolio sale, allowing us to dispose of our final three remaining new Jersey properties.

Consisted of 600 corporate drive Leucadia, Elevenone Jersey, and two and 400 Bridgewater crossing located in Bridgewater, New Jersey for approximately $130 million or $170 $176 per square foot.

The sale completes our exit from the New Jersey office market and refined our New York portfolio composition in lower Manhattan.

Also after September Thirtyth Piedmont acquired two due to South Park Avenue for $20 million or approximately $157 per square foot.

222, South Orange is approximately 127000 square foot office building located in what we believe is the pin corner location for downtown Orlando, Florida, and Orange Ave In Church Street and the building is directly connected to our 200, South Orange Ave asset physically sharing at several connection points, including a large atrium lobby.

And its actual acquisition provides our property with direct frontage now on or job too.

<unk> plans to immediately began a redevelopment of the property and reposition the asset to a standard consistent with the 200, South Orange Trophy tower.

Finally, one of the accomplishments this past quarter that I'm, most pleased with the issuance of our first green bond we use the proceeds from this $300 million bond issuance to provide the long term funding for the lead certified acquisition that we completed earlier this year of the Galleria office towers in Dallas, Texas.

Bobby will talk more specifics about the terms of the bond in a moment, but at Piedmont, we are dedicated to providing the highest quality office properties, while responsibly managing our impact on the environment.

We strive to only manned work places that are environmentally conscious productive and healthy for our tenants and employees to that end I hope you'll take a moment to review our latest environmental social and governance or he asked he reports that was also issued during the third quarter and is available on our corporate website.

You will see that Piedmont is not only environmentally sensitive, but we also serious about serving our local communities in schools.

And we're committed to treating fairly equally all individuals reengage, including our tenants employees and vendors.

Furthermore, we are proud of our top social score provided by proxy Advisory service and I will add we do this all because we believe passionately that this is truly fighting for the right thing to do together, we're all stronger and better.

At this point I will turn the call over to Bobby to walk you through the financial highlights for the quarter and guidance for 2020 Bobby.

Thanks, Brett well I'll discuss some of our financial highlights for the quarter Ive heard you to please review the earnings release and supplemental financial information, which were filed last night for more complete details.

Well the third quarter of 2020.

We reported 48 cents per diluted share of core AFFO.

Three cents or 6% increase compared to the third quarter of 2019.

Reflecting rental rate roll ups across the portfolio as.

As well as the benefits of accretive capital recycling activities since the third quarter of last year.

The Companys core Epo earnings have grown year over year, However, our topline revenue growth for the year. It was a little less than we originally anticipated.

Ooh reduce transient parking and retail revenues since the onset of the parent did it.

And slower leasing activity that Brent discussed due to uncertainties shelter and place orders and travel restrictions.

There are however, no unusual income items embedded in our year to date revenues, such as large termination fees or settlement income.

Although net it against our total year to date revenues are entries totaling $2.6 million for the write off of specific tenant receivables as well as a reserve of $4.8 million.

Partially offsetting these items are lower property operating expenses, resulting primarily from reduced utility charges and janitorial calls daily.

Daily occupancy at our buildings is slowly recovering, but it varies greatly by location and the type of tenants and usage.

All are buildings remaining open and fully operational throughout 2020.

We have some tenants associated with government services or defense related Tennessee that are near normal occupancy, while others have active physical abuse who's still in the tens or 20% right there.

The buildings located in Sunbelt do tend to have higher overall occupancy today and shelter in place restrictions were lifted earlier than other regions of the country.

Turning to cash flow and financing activity.

AFFO was approximately $38 million for the third quarter, well in excess of our third quarter dividend.

As Brent mentioned, we did issue $300 million of 3.15% green bonds during the quarter.

They are 10 year senior notes and we used the proceeds to repay all of the outstanding borrowings.

The 300 million dollar unsecured 2020 term loan that we put in place earlier this year to temporarily fund the acquisition of the Gallery office towers.

We ended the third quarter with approximately $24 million of cash and.

I'd have to four or $500 million capacity available on our line of credit.

With no debt maturities until late 2021.

As anticipated our average net debt to core EBITDA ratio for the third quarter of 2020 improved to 5.5 times, reflecting the sale of 19 in one market Street in June of this year and the use of proceeds to pay down debt.

Also our debt to gross asset ratio was approximately 34% at the end of the third quarter.

At this time I'd like to revisit the topic of guidance for the year.

Today, we believe we've identified most of the near term impacts of COVID-19, or 2020 operations. This equates to a total impact of approximately $6 million to $8 million for the year compared to the original 2020 guidance that we provided last February.

The major covert impacts are as follows.

Well, we have begun to experience an uptick in leasing tours at proposals during the third and early fourth quarters. Overall, we believe new tenant leasing for 2020 will be less than originally expected.

Modestly lowering 2020 occupancy and lowering net operating income or in a lie by approximately $5 million.

Likewise, our transient parking income is estimated to be lower by approximately $2 million to $3 million for the year.

Also overall retail in Hawaii, which comprises approximately 1% of the company's total 2020 revenues is estimated to be lower by approximately $2 million for the year.

In addition, during the nine months ended September 32020, as I mentioned earlier, we've taken approximately 2.6 million and bad debt charges against rental revenue as well as a 4.8 million dollar general reserve against build tenant receivables and straight line rent receivables.

Offsetting these items, our operating expenses net of our tenant share that are expected to be lower by $3 million to $4 million for the year.

Also we estimate $5 million of lower interest expense for 2020 due to lower prevailing interest rates and finally, we believe general and administrative expenses will be lower by $1 million to $2 million for the year.

Based on these projections, we are reinstating guidance for the year ended December 31, 2020, with a core FFO range of $1.88 to a $9.90 per diluted share which is at the low end of our original guidance.

These estimates include the acquisition and disposition activity in Orlando in New Jersey that we discussed earlier.

But no additional capital of transactions already included in these projections.

At this time I'll turn the call back over to Brent for some closing comments.

Thank you Bobby.

In April this year, we withdrew our annual 2020 guidance due to the vast number of uncertainties created by the pending.

Still today the longer term consequences on the economy and our tenants continue to be unknown, especially as it relates to the <unk> occupancy trends and tenant usage within the office sector.

That said as we help our clients evaluate their commercial real estate requirements discussions of Densification of obvious states are virtually nonexistent. Instead Ceos are turning their focus towards the impact work from home. It had on productivity operating efficiently and corporate culture, which are being balanced against trends for more flexibility and work schedule.

Yes.

Notwithstanding these uncertainties and economic ramifications I believe Piedmont is well positioned for the future.

We have a strong diversified tenant base, a majority of which is event investment grade quality with long term leases and with little near term expiration the company as a prudent balance sheet with excellent liquidity and we consider adequate and appropriate reserves we.

We also believe that piedmont's portfolio of assets will be attractive locations for future tenants located in many rich urban and suburban locations that you do not rely on mass transit and are more convenient to workforce housing.

When I became CEO, a little over a year ago I laid out four key strategic objectives for Piedmont that I believe would best serve our investors first to accelerate the transition of our portfolio properties and in targeted high growth in many rich August nodes within a few select markets second accomplish this portfolio transition, while improving the overall quality of our.

Properties and to do so accretive leading financial earnings.

Third commit to maintain the highest quality of 10 experience and satisfaction through the ongoing redevelopment and repositioning of our properties and amenities.

And finally, the Piedmont further bolster a best in class E. S. T platform, focusing on enhancing our market, leading social and environmental practices, while maintaining our accountability with the highest governance standards.

I could not be more proud of how the Piedmont team has risen to the challenge and continued to execute on the strategic objectives, even in the midst of a global pandemic.

This fall we exited the new Jersey market completed the strategic acquisition of our ARINC Avenue asset in Orlando launch the Piedmont scholarship program for historically black colleges and universities within our operating communities and accomplished our inaugural Green bond offering.

With regards to our financial goals.

We're pleased to have the reinstated 2020 earnings guidance, 6% above our 2019 operating results.

With that I will now ask our operator provide our listeners and instructions on how they can submit their questions. We will attempt to answer all your questions now we'll make appropriate the public disclosure later if necessary.

Operator.

Thank you and ladies and gentlemen, the floor is now open for your questions. If you do have a question. Please press star one on your telephone keypad at this time.

Using a speaker phone we asked that my posing your question you pick up your handset to provide the best sound quality.

Again that is star one up for any questions or comments at this time.

Well go first to Dave Rodgers with Baird.

Hi, Good morning, guys, Brent maybe start with you with a couple of questions. I guess can you talk about the utilization of the portfolio, specifically, maybe by asset type or by Metropolitan market and then I wanted to dovetail that in with you had talked about the pipeline is beginning to improve and so maybe in the utilization comment also talk about.

The average tenant size and market with the pipeline as well.

Okay. Good morning, Dave I appreciate your time today, yeah, that's it it's.

It's a little bit of a very complex question, we'll try to throw some generalities around that but I think what we're really seeing from utilization standpoint is continued.

Occupancy from tenants coming back, particularly over the last couple of months in after labor day, but still seeing I would say a diminished levels in the north probably in the neighborhood of 10% to 20% of the pre coven levels and then the south a little bit more activity, depending again on a market.

But call it anywhere from 15% to 40% depending on the building in the market I would say, though we also have some mission critical and government related facilities, a indoor spaces and buildings that are 80% to 100%.

And so its tough to really draw a general conclusion, but for the tenant mix I'd say, we're also seeing larger national tenants generally a as you read the headlines postpone coming back to the market, but we are seeing smaller a tendency or come back faster, particularly in the south.

And we're also seeing actually a number of our co working locations actually eating achieving over well over 50% utilization in some instances of the 80 plus at their facilities now and so I think we're seeing it really vary across the board and there's really no way to pinpoint one one data point, but hopefully that gives you a little bit.

Clarity around what were seeing when it comes to the leasing pipeline I'd say, a you know it went to almost nonexistent during the pandemic. Although we kept a few deals alive. So really that really started in earnest to rebuild the call. It mid summer and we've continued to see that accelerate and rebuild further and you know I'd say.

Hey that that is generally going to continue to improve I think if we don't see a meaningful second or third wave whatever you want to characterize it this fall.

And so I think we're hopeful that we're going to continue that momentum into next year I will say when it comes to renewals. We are seeing you know many tenants decide to try to do a shorter term renewal we're fighting for longer terms.

And that's generally playing itself out, but I would say we have a few larger national tenants that know their business very well consider this an opportunity maybe to extend out term loan on a larger lease and capture a favorable rate and so we're also seeing some of those larger potential renewals start to take shape.

At the moment, so we're hopeful but but I think I think the main message. There is the pipeline is continuing to rebuild off of what was a very low level in the summer.

Great. Thank you for that color I wanted to turn to the asset sales in New Jersey subsequent to the ended the quarter <unk> can you talk about you know the pricing of the discussions any re trade on that kinda why the timing was right now and any cap rate color that you can provide on kind of the discussions and the ultimate just.

In addition to those assets.

Yes, Thanks, Dave.

I think when we began the year it was really our objective to clean up what I would consider the mid Atlantic Slash northeast portfolio in terms of getting out of what we would consider noncore assets and of course, I think everybody knew when we were pretty vocal around our filly execution and wanting to get that off or off the portfolio.

And it being noncore or we were less vocal around a new jersey, but it's always been a goal of ours to continue to refine to our New York City Holdings to to just the lower Manhattan positions Ah and so it was really a strategic objective overall and then we had had dialogue with a number of parties pre pandemic and really get into that.

I hated to actually dispose the asset maybe a little sooner in the year than Tim what actually transpired, but we felt like we were able to achieve a pricing level that was reasonable relative to where we thought the value was prepaying debt, making where those discussions were and overall generating a cash and GAAP cap rate call. It in the high Sevens.

Eight ZIP code I felt pretty good given where we want to focus the rest of the business on a and b more strategic longer term and so you know we did reach a a transaction level or sorry, a transaction with one of the interested parties. We did discuss the deal with a number of parties. Other went with one or that we will.

We're comfortable with and it's got a few earn outs indoor other leasing component still to play out here over the next call. It few months, but we look forward to sharing all the final details on the next call.

Overall, though I'd say I'd also point out we think this is a good example.

Pricing within our our portfolio itself, but you're going to continue to see private market transactions that I think will.

B well inside on a cap rate basis to where some of either us or our peers trade.

I'm, an implied cap rate basis, and I think that's just one example, and frankly I would consider these probably one of our toughest markets and one of our highest cap rate and I point out that we did trade it inside of frankly, where we our stock trades today.

Last for me on the city of New York or what's the risk that they just pick up and move somewhere else.

Oh, we feel like that risk is very low as we've talked about in the past and it's a pretty unique building it fits their needs.

Needs very well from a user group side into space and its access or being as a dedicated lobbying elevator bank.

Obviously, we recognized the issues with the municipality, but everything from a leasing process continues to to kind of goes we would expect it to in the process. It's slow it's always slow dealing with government tenants, but nothing's really changed from what we've talked about in the past, we do anticipate having a shorter term renewals signed.

Were around the end of the year and then longer term deals still going to take some time to play out and finalized swing et cetera are very similar to what we did with the state last year and 19, and we'll do that again and that longer term lease still tracking to the end of next year.

Okay. Thank you.

Thanks for the reminder, ladies and gentlemen, it is star one if you have a question or comment star one for any questions or comments.

And with no other questions holding I'd like to turn the conference back to Mr., Brent Smith for any additional or closing comments.

Thank you.

We should everybody joining us on today's call I will remind you weve got a navy virtually coming up in a few weeks, we've got a tight schedule, but we'd love to include anybody else that is interested in meeting with management. We're excited about the prospects that we have in the leasing pipeline as you mentioned before I think we continue to see that.

So and we look forward to discussing that more ER and they read and then of course in January on our fourth quarter call everyone have a great Halloween weekend and thank you for your time.

Ladies and gentlemen that will conclude today's presentation. We thank you for your participation you may disconnect at this time and have a great day.

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