Q3 2021 Piedmont Office Realty Trust Inc Earnings Call

Good morning, ladies and gentlemen, and welcome to the Piedmont Office Realty Trust's third quarter 2021 earnings call.

This time, all participants are in a listen only mode and the floor will be opened 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, and good morning, everyone. Thank you for joining us today for Piedmont's third quarter 2021 earnings Conference call last night, we filed our 10-Q and 8-K that includes our earnings release and our unaudited supplemental information for the third quarter. That's available on our website at Piedmont REIT Dot com under the Investor Relations section.

During this call you will hear from senior officers at Piedmont, and they may refer to certain non-GAAP financial measures such as <unk> core <unk> <unk> 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. 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 future revenues and operating income dividends and financial guidance.

Future leasing and investment activity and the impact on the company's financial and operational results.

You should not place any undue reliance on any of these forward looking statements as these statements speak as of the date they are made.

At this time, our president and Chief Executive Officer, Brent Smith will.

Who will provide some opening comments and discuss our third quarter results and accomplishments.

Brent.

Good morning, everyone and thank you for joining us on today's call as we review our third quarter financial and operating results on the call with me. This morning, along with Eddie Guilbert, Our executive Vice President of Finance and Treasurer, or George Wells, Our Chief operating officer, and Bobby Bowers, Our Chief Financial Officer, as well as other members of the <unk>.

Senior management team.

Reflecting upon the third quarter results. This was an outstanding quarter in which we've made meaningful progress against several strategic objectives.

<unk> metrics were strong with our highest reported quarterly <unk> per share since our IPO as well as a double digit increase in cash basis same store NOI, along with a sizeable double digit rent roll up on both the accrual and a cash basis.

Additionally, we were able to complete another significant debt refinancing extremely attractive spreads Bobby will touch more on that accomplishment during his comments.

Perhaps the accomplishment that we're most pleased with is the return of new tenant leasing activity to prepay endemic levels and importantly, our pipeline for the remainder of the year remains strong, giving us confidence that we'll meet most of our targeted annual leasing goals across our southern markets.

Equally significant was a sizable strategic acquisition that was completed subsequent to quarter end along with several meaningful ESG milestones that were achieved.

I'll go into more detail on each of these topics today, but first let me start by providing additional color on our third quarter leasing activity.

Leasing activity for the third quarter totaled 509000 square feet, bringing total year to date leasing to just under $1 8 million square feet significantly exceeding in three quarters, what we realized for the whole year in 2020, we.

We project that our 2021 leasing we will in fact exceed our average annual results for the four years prior to the Covid pandemic.

More importantly, however is at approximately 43% of our third quarter leasing or 221000 square feet was executed for new tenant leases, marking a return to pre pandemic new leasing levels.

This quarter's leasing activity was representative of the mark to market opportunity across our portfolio as well generating rent roll ups of 10, 5% on a cash basis and 16, 1% on an accrual basis, along with a weighted average lease term of six four years and with limited levels of committed capital of approximately $5 per square foot.

Per year of term.

Leasing volume was robust and well distributed across all our markets with almost 50 leases executed during the quarter and only one lease accounting for more than 25000 square feet.

The largest lease completed during the third quarter with an exciting and complex transaction with Microsoft at our five and 15 wayside property and the Boston Hubbard, but Burlington.

At the surface, the 10 year renewal and expansion totaling approximately 155000 square feet.

However, in conjunction with its pending acquisition of nuance communications.

At our adjacent one wayside property, Microsoft will soon lease 356000 square feet at the Wayside campus with the anticipation of leasing the remaining approximately 120000 square feet over time.

Making this a major single tenant campus for the company in the Boston market.

Looking forward I am encouraged by the continuing momentum in all our perspective tenant pipeline, particularly in our sunbelt markets of Atlanta, Dallas, and Orlando, where we are witnessing rental rate growth increased leasing velocity and confirmation of the population migration trends in major corporate relocations into these areas.

Moving to capital markets as many of you are aware a purchase and sale agreement was executed a few weeks ago for 999 Peachtree Street in Atlanta.

We completed our due diligence for the purchase of this iconic class a LEED platinum 28 story, 77% leased building located at the corner of Peachtree in 10th Street in the heart of Midtown Atlanta.

I am pleased to announce that we closed on this asset purchase this past Friday.

Property offers spectacular views of the Midtown skyline in nearby Piedmont Park has superior accessibility to the Interstate and the city's rail system Mara.

Along with our unique outdoor EMEA you set.

With close proximity to Georgia Tech and a large technology skilled millennial workforce with more than 30000 residents within a one mile radius and significantly more walkable multiple family housing under construction nearby.

This unmatched pinner pin corner asset with structured parking and a great window line is an ideal strategic acquisition for Piedmont as we establish a material foothold and expand into this high growth Atlanta Submarket.

The acquisition of the 622000 square feet.

99, Peachtree Street property at $360 per square foot allows Piedmont enter this submarket at a basis of approximately 40% below replacement cost and achieve immediate scale.

We plan to revitalize this asset mark modernizing the lobby energizing, the outdoor space, creating tenant balcony options and enhancing existing fitness and conference amenities.

We will deliver a differentiated product, which provides a premier tenant experience at 999% that we believe will attract both local and relocating tenants into the market.

The acquisition will be primarily funded by the $2 31 proceeds from the previously announced sale of our $2 25, and $2 35 presidential way assets in Boston There are scheduled to close early in the first quarter of 2022, along with other anticipated noncore asset sales.

Inclusive of our redevelopment efforts, which will be started immediately all in basis will be in the low $400 per square foot and we will compete favorably against new product costing $650 per square foot or more with gross rental rates asking over $60 per square foot for that new product.

With the completion of the 99 acquisition and President digital way dispositions are three sunbelt markets of Atlanta, Dallas, and Orlando are anticipated to provide approximately 55% of our annualized lease revenues.

Our goal over the next two to three years is to continue to drive that regional percentage to over 70% of the ALR.

Finally.

Touching on ESG and property operations. In addition to Piedmont being one of only 69 corporations, receiving the energy star partner of the year Award in 2021, we are pleased to announce that our entire 17 million square foot portfolio is submitted for the well healthy health safety rating from the international well building Institute.

The well health and safety rating is a relatively new evidence based third party verified rating for all new and existing building facility types that focus on operational policies maintenance protocols tenant engagement and emergency plans to prioritize the health and safety of all occupants, including staff visitors and stakeholders during the <unk>.

COVID-19 crisis and for longer term health and safety concerns.

Additionally, we continue to be a leader in our industry and BOMA 360 designations with approximately 90% of our portfolio now achieving this recognition of excellence and building operations and management.

We prioritize building operational efficiencies and during the most recent third quarter, our three lead certified Dallas Galleria Office towers.

We acquired just last year were awarded the BOMA 360 designation along with three other buildings five wall Street in Boston, and Northern one and Usbancorp Center, both in Minneapolis, and all three of these buildings were recognized with awards for being the outstanding building of the year or Toby Award recipient and you expect.

<unk> competitive classes.

Continuing to demonstrate the quality of the Piedmont portfolio.

Lastly, I am extremely pleased to report that Piedmont has awarded scholarships to minority students want Howard.

Howard University in Washington, DC, and the other and Morehouse College in Atlanta, Georgia.

The scholarships were awarded pursuant to Piedmont scholarship program, whereby Piedmont has partnered with these two historically black colleges and universities to provide need base scholastic support select rising sophomores interested in pursuing a career in the field related to the real estate industry, which.

Which we hope will draw a much needed diversity into our industry. The scholarship program also includes opportunities to join Piedmont and summer internship positions inventory opportunities initial.

Initiatives like this as well as other social programs, such as feeding the homeless and sponsoring education and health programs for families and homeless children, our means of which Piedmont looks to give back to the communities in which we operate.

These are more important corporate responsibilities to which our industry needs to be more proactively involved and we will continue to pursue.

With that I will turn it over to Bobby to walk you through the financial highlights of the quarter and guidance for the remainder of 2021 Bobby.

Thanks, Brett.

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

As Brent touched on for the third quarter of 2021, we reported 50 cents per diluted share of core <unk>.

A two set to increase as compared to the third quarter of 2020.

This increase is primarily due to rising rental rates, coupled with decreased operating expenses, particularly expenses related to lower than budgeted real estate taxes as well as the exploration of operating expense abatements on certain leases.

These revenue improvements however were partially offset.

By year to date, 0.9% reduction in.

Overall lease percentage, resulting from the industry wide reduce leasing activity brought on by the Covid pandemic.

The good news regarding our lease percentage.

Is that lease explorations for the next 12 months remain relatively low.

That is particularly true.

With minimal explorations in two markets that have been slower to recover that as the district of Washington DC.

And in New York City.

The improvement in new tenant leasing that Brent mentioned is encouraging to us all and leases to be optimistic about growing our overall lease percentage over the next few years.

This statistic however is complicated by our strategy of selling fully leased assets that have reached their full value potential during our ownership and then recycling the proceeds into lower leased assets that provide us with more organic growth opportunities.

We will update you on our guidance on occupancy as transactions are closed.

<unk> generated during the third quarter of this year was approximately $41 million, which is well above our current $26 million quarterly dividend level.

Same store NOI increased to 11, 6% and 5% on a cash and accrual basis, respectively with the increase in both metrics primarily attributable to improved rental rates.

And decreased operating expenses noted previously.

Turning to the balance sheet, we issued during the third quarter, a long 10 year bond totaling $300 million in aggregate principal amount at 275%.

The senior notes are due in 2032, and we use the proceeds from the bond to repay without penalty a $300 million bank term loan that was scheduled to mature next month.

Our average net debt to core EBITDA ratio as of the end of the third quarter of 2021 was five five times.

And our debt to gross asset ratio was approximately 34, 4%.

After the acquisition of nine nine Peachtree.

We currently have approximately $202 million of availability on our line of credit.

As Brent mentioned, we plan to utilize the proceeds from the sale of our two presidential way assets in Boston.

I expect it to close in January to pay down the line once the reverse 10 31 exchange proceeds are received.

With no other scheduled debt maturities for a couple of years, we currently plan to renew our $500 million revolver during 2022.

Finally.

I'd like to update you on our guidance for the rest of the year.

Based on our better than expected year to date operating results and strong leasing activity.

As well as the 999 Peachtree acquisition, along with almost 800000 square feet of leases in abatement are yet to commence for vacant space.

We've raised our 2021 financial guidance to a range of $1 95 to $1 98.

Per diluted share of core <unk>.

This guidance compares to our guidance last quarter that had been raised to a range of $1 90 to $1 96.

This latest 2021 guidance now includes approximately one seven <unk> contribution from the just completed the acquisition of 999 Peachtree Street.

No other acquisition or disposition activity before the end of the year as contemplated.

With the addition of the 77% leased 99 Peachtree building.

We also estimate our overall occupancy will be around 86% at year end.

And we also believe same store cash NOI will end the year 2021, and the upper end of our previously provided 5% to 7% guidance range.

With that I'll now ask our conference call operator providers.

With instructions on how you as our listeners can submit your questions. We will attempt to answer all of your questions now or we'll make appropriate later public disclosure if necessary.

The writer.

Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone now we ask that all posing your question you. Please pick up your handset effort going on speaker phone to provide outgrowing sound quality. Please hold them Amawi poll for questions.

Your first question is coming from Anthony Pallone.

Your line is live.

Thanks, Good morning.

My first question's on 99, nine Peachtree, Brian I think you gave some brackets and I think I caught that you said about $400. A foot is where you think you'll end up in your basis.

Some extra.

$25 million and spending.

So I'm just wondering if you can kind of go further and give us a little bit more of a sense as to where you think the yield is going to land.

Timing to lease up.

Got it good morning, Toni I appreciate you taking the time with US today. Indeed, we are very excited about the 99 nine strategic transaction.

Great iconic Midtown assets, we've known well in fact I live about seven blocks from the building.

And really been looking for way into that sub market for some time now.

As a unique opportunity to get scale quickly and it's certainly a foothold and we will continue to expand.

As you note it is <unk>.

Everything we'd want to buy accessibility prominence great bones big window line and the ability for us to add value through our repositioning in lease up and so as you noted we're going in at about $3 60, a foot will land somewhere around that 400, a foot call it $25 million of investment and that's really to transform the asset its Scott.

Great mechanical systems, but admittedly it needs to be modernized for today's workforce and you kind of take it into the neck and update it for the next generation of workforce and so that's really where a lot of that capital is going to be going towards.

We do have some what we think is near term lease up opportunity for some great already built out space that we think can drive occupancy up into the mid eighties here at more near term and then longer term, we do think that building stabilizes somewhere in the low nineties.

With additional lease up and opportunity set it greatly into buildings existing rents are about 20% below market. So theres, a great mark to market there.

As we've noted we're going in at a GAAP call. It six and a half I think with that near term lease up it gets quickly to nearer to seven.

And as we've noted in the materials on the website, which I encourage everyone to take a look at it a lawsuit youll see in the back of the presentation renderings of what we intend to do we've been working with Ginzler now for about two months on that they are a tenant in the building as well so really excited to kind.

Kind of bring this asset back to the prominent that it's well known for in the market here in Atlanta.

So hopefully that gives you some sense, but probably that stabilization will occur a little bit further out so again, let's call. It maybe two years too.

To get to that seven five.

Okay, that's $7 five mm.

Sorry, GAAP or cash.

That's all in GAAP, we typically provide cap again, GAAP, but as you know probably our cash numbers historically have been about 100 to 150 basis points inside of that.

Near term due to the fact, the rents are so far below market, but we anticipate that as those leases roll and it is a more near term role within that building will be able to quickly drive the cash numbers closer to those GAAP numbers I gave you over that kind of two year horizon.

Okay got it thank you.

Yeah.

And then second question.

It relates to non core asset sales it sounds like beyond Boston you still have some other things teed up can you give us some sense of order of magnitude there and also.

We should expect.

Acquisitions to kind of get paired with that as well.

As you have known we do.

I think a great job of pairing buys and sells it to.

Unique differentiator, we think to our business model and we continue to successfully drive earnings growth in.

In that manner, it's selling well leased long term stabilized assets for great pricing and buying other assets at higher cap rates low per square foot renovating and leasing them up and driving value creation in that manner. So we do feel like we've got a great pipeline of potential acquisitions, but more importantly, as you note on the dispose side, we do have non core.

Core assets that we have labeled that I've talked about selling in the next six to 12 months and we're in active dialogues around that quote noncore portfolio that we label in the supplemental.

As well as just mature assets that will also be disposing of regular way like we've always done we've got an exciting pipeline like I said to pair with those dispositions and we still believe we're able to accretively recycle I think the 999 acquisition is a perfect example of that pairing it with the Boston disposition.

We're going in day, one on an accretive basis on GAAP.

Earnings and then we're able to drive that even meaningfully higher and I think what youll see US continue to do is to leverage that noncore portfolio, along with Boston, Cambridge, particularly as you've heard me talk about it at least to Harvard is that an opportunity to.

To monetize a low cap rate asset and redeploy into the sunbelt and Thats, probably our next big rotation asset as long as the regular way in noncore, we've talked about.

Okay. So what.

For Cambridge seems like that's the one that's on deck here.

And then last question can you just give us some updated thoughts on a couple of the larger spaces that come up in the next couple of years like CBS and Ryan and just anything youre doing there proactively or updated thoughts on what happens to that space.

Absolutely so I think as.

As most people who have known we've been in dialogue with Cvs now for some time I think that continues to trend well there will be a modest downside, but not material and overall feel very good about where that transaction headed.

They're ones that are in the pipe, but much further out.

That's really the most near term within 12 months, but as you mentioned, we do have some in latter parts of the middle parts of 'twenty three.

We've noted Ryan has been in the press about a potential development. However, I think it's going to be and as we've discussed with them very very difficult for them to be able to complete that development.

Anywhere near where their lease rolls in so we will anticipate having some pretty substantial dialogue with them on an opportunities to keep them at the building at least longer term near term and maybe longer term as they continue to evaluate that opportunity in plano.

When it comes to Cargill, which is really even further out than that 24, I'd say, it's early but our indications from them are still very positive that this is their overflow and release valve for their headquarters location.

And they continually to actively use the building despite being one of the lower utilized markets. We still see a lot of card swipes into the building and a very active user of it and they are very fond of the campus away from their existing campus Excelsior crossing is really provide the unmatched amenity set in the suburban market with a 10000 square foot fitness center at the complex huge.

Multi food type cafe, and a 3000 square foot I'm, sorry, 3000 person auditorium.

Sorry, 300 person auditoriums, so it's a large.

Great amenity set at that building with light rail coming to it in about two to three years. So we feel still feel very good about cargill intend at that building.

And then as you probably know U S Bank is one of our largest tenants they have a suburban location that will expire in 'twenty three.

We feel very good again about our long term relationship with U S Bank, both at that location and then in 2020 for their downtown location their headquarters building, which we own.

I'll also come up for lease I'd say, we're being very proactive in those dialogues and so feel very good about again that long term opportunity to keep them in those assets.

Great. Thanks, Thanks for all that color.

Yes.

Your next question is coming from Dave Rodgers.

Your line is live.

Yes. Good morning, everybody wanted to talk about the lease pipeline into the fourth quarter brand do you mentioned that the activity was staying strong can you provide additional color on that with regard to kind of small versus larger tenants. Some of more of the urban versus suburban activity would be interested in any thoughts you have there.

Uh huh.

So I think it's really been consistent with what we've heard and kind of shared rather over prior quarters, which is <unk>.

Large tenants continue to be.

Active in the market those being greater than 50000 square feet, we're seeing them to make a little bit more decisions along that process.

And that's really in our Sun belt markets, where we're seeing in Boston like we did with Microsoft a lot of that larger tenant activity. We're seeing whats. Good news is again, we've talked about the small tenants 10000 square feet or less I would say they are back to pre pandemic levels now in most of our markets.

And so what we've continued to talk about as being more robust in and I think the third quarter and going into the fourth quarter is indicative of that.

Is that 25000.

15% to 25000 square foot single floor user middle market type firm and we continue to see that be more robust in the sunbelt and what's more positive as now we've seen it start to pick up in suburban Minneapolis.

But we do and admittedly I think a lot of our peers still have a little bit of lower utilization in our CBD assets and then also I think a result of a little bit lower lease velocity. So we're fortunate to have a lot of roll any other D. C proper downtown New York and downtown Minneapolis, but I would say those are still the markets.

Our slowest to come back from that perspective, I'm going to hand, it over to George Wells here, who will also give you just a little bit of detail around some of the pipeline that we have seen grow over here in the last year and with what's ahead of George Thank.

Thank you. Thank you I'll tell you, we're really optimistic about what we're seeing for the fourth quarter here. We are 28 days into October.

And that's we're looking at transactions that we've already agreed to on a legal stage. So that's what gives us the comfort that the optimism that you've seen from us or the activity you've seen from us in the second and third quarter continuing into the fourth I think also behind that when you look at the kind of proposals that we're seeing that isn't rising rapidly over the past couple of core.

<unk> that we started in the first quarter was around 60 proposals for just around 900000 square feet pop up in the second quarter was <unk> 75 transactions for $1 1 million square feet and then this past quarter were at 87 to $1 5 million square feet and then if you take a step back and look behind that in terms of what what are what our tour.

What do they look like across our markets I'll tell you. What it has been also increasing from 90 days I would say in the first quarter to mid Ninety's in the second quarter, and then jumped up about 25% in the third quarter for 116 tour. So we feel good we feel that our portfolio is truly resonates with the market demand that's out this way we feel pretty.

Confident about continuing to chip away at our vacancy.

That's great detail guys I really appreciate it I wanted to go back to I think it was going to Tony's questions about.

The asset sales you said, 70% of ALR from the Sun belt, and I don't know that you gave a specific timeframe but.

New York, Chicago, and the presidential way buildings would get you. There. So I guess I wanted to think about what that timing looks like did you include New York in that number or is that yet another kind of 9% to 10% that we can expect beyond this initial wave that youre doing in the next year or so.

Dave its various do you view that.

It is exactly part of that component as we've talked about New York City continues to progress.

We are still very much engaged in a 20 year renewal, we did a great five year renewal with no capital last quarter and.

The market continues to improve really day by day, we're excited the entire New York City is back in their space and utilization rates are up and starting to feel like New York is coming on par with some of our Sun belt markets as well as Boston in terms of just economic activity broadly.

So I think we're very encouraged by that.

As part of that overall rotation and potential into the sunbelt that doesn't include Cambridge as well as potentially monetizing New York at the right time, if you think about.

What we've said that's <unk>.

Probably a potential monetization event in mid to latter part of 'twenty. Three so I think we see the potential for that $1 billion rotation over the next two to three years.

Very helpful and then.

Maybe specifically I think you've talked about very much nearer term on assets like Houston and Chicago do you have any specific progress to report.

No.

Specific we will share at the right time, but I think the good news is we continue.

To get leasing are made at both of those kind of noncore assets that still have some availability and we've got great term and single credit users in Houston, which also positions them, well and frankly with well over $85 a barrel are around $85 a barrel, we feel pretty good about being able to be.

Well to dispose of the Houston assets in this environment, Schlumberger and Transocean, both continuing to have improving operations.

Alright, Thanks, Brian.

And I still think at six months to 12.

<unk> frame.

That's helpful. Thank you.

Your next question is coming from Daniel Ismail.

Your line is live.

Great. Thank you.

Circling back to the 70% goal of Sunbelt exposure, you mentioned potential aggregate.

Concurrent markets I'm curious if that goal include entering any new sunbelt markets.

The Peachtree acquisition, sorry, you guys I'm sure new Submarkets. So I'm just curious if there are any new markets.

Sorry about that you guys are currently currently considering.

Good morning, Dani I appreciate you joining the call.

The point is you make yes, we continue to really evaluate at this point more new Submarkets like the 90 999 acquisition and now we have a strong.

And we do continue to look for opportunities and have others that we think we could score to continue to gain scale in that submarket and we see it as a good opportunity given its high growth.

We still feel like right now, though between Atlanta, Dallas and some of these other existing markets. We've got plenty of product that fits the Piedmont style of having a good bones, you've heard me use that phrase a great window lines could ceiling heights, but needs. Some TLC, great accessibility, walkability and really what we've continue to fall.

As we talked to tenants is they don't care how old are building is right. They care about well my employees love coming to work here.

And so we will continue to focus right now on those markets. We were in potential new sub market, that's not to say, though we don't follow a number of other msas that we think are competitive to the some of what we're looking at today in terms of population migration and corporate relocations. So we very much are keeping our pulse on say a charlotte.

Phil.

Tampa.

Certainly potentially even Denver and Austin are competitors to some of our other markets. So.

We would go and do any of those specifically, but also just to say that we continue to get educated on them from a number of different perspectives and angle.

Great and then.

Question for Bobby I noticed it looks like disclosure changed a bit.

With respect to the.

The increase.

Utilization of their buildings that perhaps some savings.

In operating expenses I'm, just curious is that.

No longer the cases.

Physical utilization of your office building Thats picked up so busters.

No longer.

Kind of key operating expense savings that you saw earlier in the pandemic.

Hey, Dan.

If I may ask you a question to clarify this.

Youre talking about our disclosure so that changed.

Correct, specifically on the same store net operating income page.

In the supplemental it just looked like.

<unk> removed discussing.

The benefit of lower operating expenses as a result of lower utilization. So I'm just curious if that's no longer the case going forward.

Well now we're still experiencing that we did make some changes in our disclosures. This past quarter you might have noticed that we've incorporated the press release into the supplement.

Over the last year.

A year or two the disclosures almost began matching the press release, we just went ahead and pulled some of that information out.

Also decreased some of the disclosure.

When we have so many very large leases and stuff like that but Brent sorry to cover to leases that have come up but.

I can't think of anything that would causes right now operating expenses are a little bit lower as a result of the utilization that primarily as reflected in our janitorial costs.

And as it reflects to some extent in the real estate tax area.

Got it and then maybe a bigger picture question for brands.

We'd mentioned ESG at their conference call and in prior calls I'm curious how that has now.

Played into your underwriting on acquisitions.

Our environmental factors and carbon emissions or energy utilization now exclusively factored into your underwriting when looking at new.

The properties are new Submarket center too.

I would say absolutely its tough to say, it's quantifiable, but obviously, we try to identify if there energy efficient savings that we can implement where theres a reasonable payback period going into an acquisition, obviously, though I think what we see it right now driving.

From an underwriting perspective, making sure you have the capital to create the right environment for tenants.

And ESG is part of that REIT environment I think Microsoft is a perfect example, we were in discussions with two other tenants in the space that they took in Boston.

Went to them when the nuance of transaction got announced we knew that they were in the marketplace and we recorded them. If you will in what was a key differentiator was our director of sustainability and the team that we can provide to help them think about their space and in improving the quality of just their own individual space, even above and beyond the actual building.

In terms of as we look at new assets. We are still trying to focus on those that are more of a I'd say a more modern generation double window pane. So we're not having to do major facade components to it and also to really think about outdoor space and what you can create we continue to hear more and more tenants desire that.

Collaboration space to also include components outside of the building. So it's almost as important today, how youre lobby and your first floor interact as much as the area around the base of your building as well.

In terms of we've set corporate goals of 20% reduction in both water and energy consumption.

By 26%, respectively, and we also take that into consideration as okay. Can this building help us get to those levels of achievement. We're very pleased to have about 40% of our portfolio LEED certified excited that 99 nine is platinum LEED certified and so we continue to lean into that recognition as well.

It does still have kind of impact with tenants, who are looking for a more energy focused and environmentally friendly operator. So I think that's a long winded way of saying we've taken into account. Each building is different we try to look at for vintages that were able to at one day, we know throwing around this cost.

Sept of net zero I think it's a little early from our perspective, but we are very mindful of the energy and the potential expense that might come from making sure. We have a top of best in class energy efficient building.

I would also encourage you for those that are more interested in ESG. We do have a specific ESG report on our website and annual report most recently put out in October earlier, this month, and so I think I encourage those who want to learn more about our programs on all three of those fronts to visit our web site under the <unk>.

Mr Relations section or the sustainability section.

Got it thanks, everyone.

Okay.

As a reminder, ladies and gentlemen, if you have any questions or comments. Please press star one on your phone now.

Your next question is coming from Michael Lewis Your line is live.

Thank you.

My question is kind of along the lines of.

Rebuilding occupancy and you gave some good color on the leasing pipeline, Bobby talked about selling high occupancy building complying.

Lower ones with some lease up opportunity and that will move the numbers around.

Kind of.

Grasp onto the 770000 square feet that signs.

But not yet in occupancy are paying cash rent yet.

You compare that to 250000 square feet expiring in <unk> about 1 million square feet next year.

Assuming a portion of those explorations will renew you'll be doing some leasing.

Maybe talk about what you think the opportunity is to.

To grow occupancy and cash flow over the next year in this environment, where investors are.

Worried about office occupancy.

Do you have an opportunity here or do you think the kind of significantly grow from here.

I appreciate the question Michael and thank you again for joining.

We reviewed.

Our strategy of buying.

Vacancy more near term has been positioning the company to capture a lot of the movement into the sunbelt as we've talked about most of our vacancy enroll has been really Dallas, Atlanta, and Orlando and that is what continues to give us very good optimism about the projections and the opportunity for lease up across the portfolio and as you point out really.

Absorption. So we do have a limited amount of roll. This year and then next year pretty modest amount and the fact that we've continued to be able to even during the pandemic track to about a 70% retention rate also gives us some pretty good comfort on our ability to.

Not have too much walk out the door.

And so given that kind of backdrop I think thats, what really drives the occupancy growth. If you want a specific timing I'd have to say, that's freezer portfolio and say it's static today.

Because you just never know what comes in or out, but we already know Boston is technically.

We weren't assets are going out.

We stand at roughly call. It 86, I think theres, an opportunity to drive that call. It 100 to 200 basis points by the end of next year, but I think there is also a material upside potential to that given what we see from some potential big leak tenant leasing activity in both Dallas and Atlanta.

I would also point out that our redevelopment is more short term in nature than a more development focused model.

We do have some occupancy.

On the books, if you will in the portfolio, where some of our peers are doing development don't show that vacant development space, yet technically in the numbers.

But overall I think with construction costs, increasing and the potential for pushing out construction time periods given supply chain issues material availability et cetera. That's why we still feel very excited about the redevelopment opportunity because it's shorter time frame. If there are cost overruns, it's going to be a lot less impactful on your pro forma.

And frankly, we're going to be able to get tenants into space sooner and what we're finding is as we continue to talk to companies looking into Midtown Atlanta as we've already taken over the asset and have that dialogue is a lot of these reloads are looking for immediate seat they want to be in this space very near term and the reality is there is not actually that much space.

Either completed or soon to be completed in Midtown.

And given the deal flow that overall in the market, we feel very excited about to drive occupancy specifically at that asset and Galleria Atlanta, I'd say as well we're seeing.

A meaningful uptick in the activity.

Go Braves and the World series, I would add but I think it really that dynamic battery environment and being adjacent to it and continuing to create that mixed use component.

At the Galleria has also given us a great comfort around some absorption and then finally I'd have to mentioned in our downtown Orlando asset we continue to get great momentum.

Orlando Economic development Corporation, which is in charge of bringing new corporations into the market and.

Signed a lease at our building and will soon take occupancy and then it will bring in just about every company looking at that market into our building and we're wrapping up a very transformative redevelopment there was about call. It 200000 square feet between that and our Q2 two building to gain occupancy so between all of those in the leasing.

The last thing you heard George discussed we are very optimistic about that timeframe and those levels to achieve occupancy growth.

Yes.

Understood.

Just one more for me if you could correct me, if I'm wrong, but it looks to me like Piedmont Hasnt grown its dividends since 2014.

But today the coverage it looks like you are positioned now to potentially grow the dividend.

If you chose and.

Where does.

These are sensitive conversations these are board decisions about about setting the dividend, but maybe from a strategy perspective, where it is growing the dividend.

Coal or a priority or signaling that Piedmont is a different company than it than it once was.

Or do you have a strategy of you would rather keep the capital and pay the minimum I don't know I don't know when that would trigger.

Necessary increases, but any comments you could give kind of around that.

I think youre spot on Michael and that we've been recognized that the last time, we raised the dividend was in 2014.

We've got ample <unk> these days and a $1 10 to $1 20 range. So we've got plenty of room to meaningfully move the dividend I would say I think we've been conservative in that regard on two points.

And we've continued to tell the street that we were going to evaluated in 'twenty, two but with a significant redevelopment, particularly at 60 broad within New York State and significant capital outlay, there as well as in the onset of the pandemic. We felt it was prudent to reevaluate as I mentioned in 'twenty two so I would expect the company to.

Or more.

Specific comment towards the middle of the year, but certainly we recognize there is an opportunity to meaningfully grow the dividend and from a philosophical question. The company has no issue nor the board in that regard I think we've just been trying to conserve cash and make sure we feel comfortable with where the market stabilized post COVID-19 and we're starting to feel that clarity come into.

Picture, we're wrapping up the New York State work as we are.

Next year as well.

Around that middle of the year timeframe. So the good news is that project is under budget Thankfully, we ordered a lot of that material before at the early onset of the pandemic before the cost overruns and supply chain issues have come into effect. So we feel fortunate in that regard and we will reevaluate it at the middle of next year.

Makes sense. Thank you.

There are no further questions from the lines at this time I would now like to turn the floor back to Brent Smith for closing remarks.

Thank you I hope we have conveyed today that we feel like the opportunity set before Piedmont is really a unique we've got a differentiated opportunity and strategy and we're extremely excited about our progress on a number of fronts I would encourage everyone. If they want to hear more of learn more about some of the things we've touched on today to visit.

Our web site under the Investor Relations section pulled down our 999 acquisition piece also will have renderings of the new space that we've discussed around the outside of the building and what we're doing to really differentiate that product and I would also encourage those who are interested in ESG to visit that specific report on our website as well again.

Thank everyone for joining us today, we look forward to continuing the discussion at NAREIT in a few weeks that will be virtual.

But we look forward if you've got an interest in meeting with management, please reach out to Eddie or Justin and we're happy to get you on the calendar.

Quote virtual conference.

With that let me say go Braves and look forward to further dialogue. Thank you.

Thank you ladies and gentlemen. This concludes today's event you may disconnect at this time and have a wonderful day. Thank you for your participation.

[music].

[music].

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Good morning, ladies and gentlemen, and welcome to the Piedmont Office Realty Trust's third quarter 2021 earnings call.

At this time all participants are in a listen only mode and the floor will be opened 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, and good morning, everyone. Thank you for joining us today for Piedmont's third quarter 2021 earnings Conference call last night, we filed our 10-Q and 8-K that includes our earnings release and our unaudited supplemental information for the third quarter. That's available on our website at Piedmont REIT Dot 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 <unk> core <unk> and <unk>.

<unk> 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. 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 future revenues, and operating income dividends and financial guidance future leasing and investment activity and the impact on the company's financial and operational results.

You should not place any undue reliance on any of these forward looking statements as these statements speak as of the date they are made.

At this time, our president and Chief Executive Officer, Brent Smith.

I'll provide some opening comments and discuss our third quarter results and accomplishments.

<unk>.

Good morning, everyone and thank you for joining us on today's call as we review our third quarter financial and operating results on the call with me. This morning, along with Eddie Guilbert, Our executive Vice President of Finance and Treasurer, or George Wells, Our Chief operating officer, and Bobby Bowers, Our Chief Financial Officer, as well as other members of the <unk>.

Your management team.

Reflecting upon the third quarter results. This was an outstanding quarter in which we've made meaningful progress against several strategic objectives.

Metrics were strong with our highest reported quarterly <unk> per share since our IPO as well as a double digit increase in cash basis same store NOI, along with a sizeable double digit rent roll up on both the accrual and a cash basis.

Additionally, we were able to complete another significant debt refinancing at extremely attractive spreads Bobby will touch more on that accomplishment during his comments.

Perhaps the accomplishment that we're most pleased with is the return of new tenant leasing activity to pre pandemic levels and importantly, our pipeline for the remainder of the year remains strong, giving us confidence that we'll meet most of our targeted annual leasing goals across our southern markets.

Equally significant with a sizable strategic acquisition that was completed subsequent to quarter end along with several meaningful ESG milestones that were achieved.

Go into more detail on each of these topics today, but first let me start by providing additional color on our third quarter leasing activity.

Leasing activity for the third quarter totaled 509000 square feet, bringing total year to date leasing to just under $1 8 million square feet significantly exceeding in three quarters, what we realized for the whole year in 2020.

We project that our 2021 leasing we will in fact exceed our average annual results for the four years prior to the Covid pandemic more importantly, however is that approximately 43% of our third quarter leasing or 221000 square feet was executed for new tenant leases, marking a return to pre pandemic.

New leasing levels.

This quarter's leasing activity was representative of the mark to market opportunity across our portfolio as well generating rent roll ups of 10, 5% on a cash basis and 16, 1% on an accrual basis, along with a weighted average lease term of six four years and with limited levels of committed capital of approximately $5 per square foot.

Per year of term.

Leasing volume was robust and well distributed across all our markets with almost 50 leases executed during the quarter and only one lease accounting for more than 25000 square feet.

Larger lease completed during the third quarter was an exciting and complex transaction with Microsoft at our five and 15 wayside property in the Boston Hubbard, but Burlington.

At the surface, the 10 year renewal and expansion totaling approximately 155000 square feet. However, in conjunction with its pending acquisition of nuance communications.

At our adjacent one wayside property, Microsoft will soon lease 356000 square feet at the Wayside campus with the anticipation of leasing the remaining approximately 120000 square feet over time.

Making this a major single tenant campus for the company in the Boston market.

Looking forward I am encouraged by the continuing momentum in all our perspective tenant pipeline, particularly in our sunbelt markets of Atlanta, Dallas, and Orlando, where we are witnessing rental rate growth increased leasing velocity and confirmation of the population migration trends in major corporate relocations into these areas.

Moving to capital markets as many of you are aware a purchase and sale agreement was executed a few weeks ago for 90, 99 Peachtree Street in Atlanta.

We completed our due diligence for the purchase of this iconic class a LEED platinum 28 story, 77% leased building located at the corner of Peachtree intense street in the heart of Midtown Atlanta.

I am pleased to announce that we closed on this asset purchase this past Friday.

The property offers spectacular views of the Midtown skyline in nearby Piedmont Park has superior accessibility to the Interstate and the city's rail system Marta along with a unique outdoor EMEA you said.

With close proximity to Georgia Tech and a large technology skilled millennial workforce with more than 30000 residents within a one mile radius and significantly more walkable multiple family housing under construction nearby.

This unmatched pinner pin corner asset with structured parking and a great window line is an ideal strategic acquisition for Piedmont as we establish a material foothold and expand into this high growth Atlanta Submarkets.

The acquisition of the 622000 square feet.

99, Peachtree Street property.

$360 per square foot allows Piedmont entered this submarket at a basis, approximately 40% below replacement cost and achieve immediate scale.

We plan to revitalize this asset mark modernizing the lobby energizing, the outdoor space, creating tenant balcony options and enhancing existing fitness and conference amenities.

We will deliver a differentiated product, which provides a premier Trinity experienced at 99, 9% that we believe will attract both local and relocating tenants to the market.

The acquisition will be primarily funded by the $2 31 proceeds from the previously announced sale of our $2 25, and $2 35 presidential way assets in Boston that are scheduled to close early in the first quarter of 2022, along with other anticipated noncore asset sales.

Inclusive of our redevelopment efforts, which will be started immediately all in basis will be in the low $400 per square foot and we will compete favorably against new product costing $650 per square foot or more with gross rental rates asking over $60 per square foot for that new product.

With the completion of the 999 acquisition and President digital way dispositions are three sunbelt markets of Atlanta, Dallas, and Orlando are anticipated to provide approximately 55% of our annualized lease revenues.

Our goal over the next two to three years is to continue to drive that regional percentage to over 70% of ALR.

Finally touching.

Touching on ESG and property operations. In addition to Piedmont being one of only 69 corporations, receiving the energy star partner of the year Award in 2021, we're pleased to announce that our entire 17 million square foot portfolio is submitted for the well healthy health safety rating from the international well building Institute.

The well health and safety rating is a relatively new evidence based third party verified rating for all new and existing building and facility types that focus on operational policies maintenance protocols tenant engagement and emergency plans to prioritize the health and safety of all occupants, including staff visitors and stakeholders during the <unk>.

Over 19 crisis and for longer term health and safety concerns.

Additionally, we continue to be a leader in our industry and BOMA 360 designations with approximately 90% of our portfolio now achieving this recognition of excellence and building operations and management.

We prioritize our group building operational efficiencies and during the most recent third quarter, our three lead certified Dallas Galleria Office towers.

We acquired just last year were awarded the BOMA 360 designation along with three other buildings five wall Street in Boston, and Northern 0.1, and Usbancorp Center, both in Minneapolis, and all three of these buildings were recognized with awards for being the outstanding building of the year or Toby Award recipient and you expect.

<unk> competitive classes.

To demonstrate the quality of the Piedmont portfolio.

Lastly on extremely pleased to report that Piedmont has awarded scholarships to minority students one.

Howard University in Washington, DC, and the other and Morehouse College in Atlanta, Georgia.

The scholarships were awarded pursuant to Piedmont scholarship program, whereby Piedmont has partnered with these two historically black colleges and universities to provide need base scholastic support select rising sophomores interested in pursuing a career in the field related to the real estate industry.

Which we hope will draw a much needed diversity into our industry. The scholarship program also includes opportunities to joined Piedmont and summer internship positions inventory opportunities initially.

Initiatives like this as well as other social programs, such as feeding the homeless and sponsoring education and health programs for families and homeless children, our means of which Piedmont looks to give back to communities in which we operate.

These are more important corporate responsibilities, which our industry needs to be more proactively involved and we will continue to pursue.

With that I will turn it over to Bobby to walk you through the financial highlights of the quarter and guidance for the remainder of 2021 Bobby.

Thanks, Brett.

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

As Brent touched on for the third quarter of 2021, we reported 50 cents per diluted share a core F N.

A two set to increase as compared to the third quarter of 2020.

This increase is primarily due to rising rental rates, coupled with decreased operating expenses, particularly expenses related to lower than budgeted real estate taxes as well as the exploration of operating expense abatements on certain leases.

These revenue improvements, however were partially offset by year to day, 0.9% reduction in overall lease percentage, resulting from the industry wide reduced leasing activity brought on by the Covid pandemic.

The good news regarding our lease percentage is at lease explorations for the next 12 months remain relatively low.

That is particularly true with minimal explorations in two markets that have been slower to recover that as the district of Washington DC.

And in New York City.

The improvement in new tenant leasing that Brent mentioned is encouraging to us all and leases to be optimistic about growing our overall lease percentage over the next few years.

This statistic however is complicated by our strategy of selling fully leased assets that have reached their full value potential during our ownership and then recycling the proceeds into lower leased assets that provide us with more organic growth opportunities. We will update you on our guidance.

On occupancy as transactions are closed.

<unk> generated during the third quarter of this year was approximately $41 million, which is well above our current $26 million quarterly dividend level.

Same store NOI increased to 11, 6% and 5% on a cash and accrual basis, respectively with the increase in both metrics primarily attributable to improved rental rates.

And decreased operating expenses noted previously.

Turning to the balance sheet, we issued during the third quarter, a long 10 year bond totaling $300 million in aggregate principal amount at 275%.

The senior notes are due in 2032, and we used the proceeds from the bond to repay without penalty a $300 million bank term loan that was scheduled to mature next month.

Our average net debt to core EBITDA ratio as of the end of the third quarter of 2021 was five five times.

And our debt to gross asset ratio was approximately 34, 4%.

After the acquisition of nine nine Peachtree.

We currently have approximately $202 million of availability on our line of credit.

As Brent mentioned, we plan to utilize the proceeds from the sale of our two presidential way assets in Boston.

I expect it to close in January to pay down the line once the reverse 10 31 exchange proceeds are received.

With no other scheduled debt maturities for a couple of years, we currently plan to renew our $500 million revolver during 2022.

Finally.

I'd like to update you on our guidance for the rest of the year.

Based on our better than expected year to date operating results and strong leasing activity.

As well as the 99 nine Peachtree acquisition, along with almost 800000 square feet of leases in abatement are yet to commence for vacant space.

We've raised our 2021 financial guidance to a range of $1 95 to $1.98 per diluted share of core <unk>.

This guidance compares to our guidance last quarter that had been raised to a range of $1 90 to $1 96.

This latest 2021 guidance now includes approximately one 7% contribution from the just completed acquisition of 99 nine Peachtree Street.

No other acquisition or disposition activity before the end of the year as contemplated.

With the addition of the 77% leased 99 Peachtree building.

We also estimate our overall occupancy will be around 86% at year end.

And we also believe same store cash NOI will end the year 2021, and the upper end of our previously provided 5% to 7% guidance range.

With that I'll now ask our conference call operator providers.

With instructions of how you as our listeners can submit your questions. We will attempt to answer all of your questions now or make appropriate later public disclosure if necessary.

Operator.

Ladies and gentlemen, the floor is now open for questions.

Have any questions or comments. Please press star one on your phone now we ask that all burdening. Your question you. Please pickup your handset effort from you on speaker phone to provide outgrowing sound quality.

Please hold them on the Oi poll for questions.

Your first question is coming from Anthony alone.

Your line is live.

Thanks, Good morning.

My first question's on 99, nine Peachtree, Brian I think you gave some brackets right and I think I caught that you said about $400. A foot is where you think you'll end up in your basis right.

So an extra.

$25 million and spending.

So I'm just wondering if you can kind of go further and give us a little bit more of a sense as to where you think the yield is going to land and timing to lease up.

Got it morning, Toni I appreciate you taking the time with US today. Indeed, we are very excited about the 90 99 strategic transaction.

Great iconic Midtown assets, we've known it well in fact, I believe about seven blocks from the building.

And really been looking for way into that sub market for some time now.

As a unique opportunity to get scale quickly and certainly a foothold and will continue to expand.

As you note.

Everything we'd want to buy accessibility prominence great bone big window line and the ability for us to add value through our repositioning in lease up and so as you noted we're going in at about $3 60, a foot will land somewhere around that 400, a foot call it $25 million of investment and Thats really to transform the asset its Scott.

Great mechanical systems, but admittedly it needs to be modernized for today's workforce and you kind of take it into the next and update it for the next generation of workforce and so that's really where a lot of that capital is going to be going towards.

We do have some what we think is near term lease up opportunity for some great already built out space that we think can drive occupancy up into the mid eighties here at more near term and then longer term, we do think that building stabilizes somewhere in the low nineties with.

With additional lease up and opportunity set it's great into buildings existing rents are about 20% below market. So there is a great mark to market there and as we've noted we're going in at a GAAP call. It six five I think with that near term lease up it gets quickly year two it nearer to seven and then as we've noted in the materials on the website, which I encourage <unk>.

Everyone to take a look at it a lawsuit youll see in the back of the presentation renderings of what we intend to do we've been working with Ginzler now for about two months on that they are a tenant in the building as well so really excited.

Kind of bring this asset back to the provenance that it's well known for in the market here in Atlanta.

So hopefully that gives you some sense, but probably that stabilization will occur a little bit further out so again call. It maybe two years to kind of get to that seven and a half.

Okay, that's fair.

And have there is I am sorry, a GAAP or cash.

That's all in GAAP, we typically provide cap again gap, but as you know probably our cash numbers historically have been about 100 to 150 basis points inside of that.

Near term due to the fact that the rins are so far below market, but we anticipate that as those leases roll and it is a more near term role within that building, we will be able to quickly drive the cash numbers closer to those GAAP numbers I gave you over that kind of two year horizon.

Okay got it thank you.

Yep Yep.

And then second question.

It relates to non core asset sales it sounds like beyond Boston do you still have some other things teed up can you give us some sense of order of magnitude there and also.

We should expect.

Acquisitions to kind of get paired with that as well.

As you have known that we do.

I think a great job of pairing buys and sells it to.

Unique differentiator, we think to our business model and we continue to successfully drive earnings growth in that manner, it's selling well leased long term stabilized assets for great pricing and buying other assets at higher cap rates low per square foot renovating and leasing them up and driving value creation in that manner. So we do feel.

We've got a great pipeline of potential acquisitions, but more importantly, as you note on the dispose side, we do have noncore assets that we've labeled that I've talked about selling in the next six to 12 months and we're in active dialogues around that quote noncore portfolio that we label in the supplemental.

As well as just mature assets that we will also be disposing of regular way like we've always done we've got an exciting pipeline like I said to pair with those dispositions and we still believe we're able to kind of Accretively recycle I think the 999 acquisition is a perfect example of that pairing it with the Boston disposition, we're going in day one.

One on an accretive basis on GAAP earnings.

Earnings and then we're able to drive that even meaningfully higher and I think what youll see US continue to do is to leverage that noncore portfolio, along with Boston, Cambridge, particularly as you've heard me talk about at least the Harvard is it an opportunity.

To monetize a low cap rate asset and redeploy into the sunbelt and thats.

Probably our next big rotation asset as long as the regular way in noncore, we've talked about.

Okay. So we'll go for Cambridge seems like that's the one that's on deck here.

And then last question can you just give us some updated thoughts on a couple of the larger spaces that come up in the next couple of years like Cvs and Ryan and just anything youre doing there proactively or updated thoughts on what happens to that space.

Absolutely so I think as.

As most people who have known we've been in dialogue with Cvs now for some time I think that continues to trend well there will be a modest downside, but not material and overall feel very good about where that transaction headed.

They're ones that are in the pipe it much further out.

That's really the most near term within 12 months, but as you mentioned, we do have some in latter parts of the middle.

Middle parts of 'twenty three.

Noted Ryan has been in the press about a potential development. However, I think it's going to be and as we've discussed with them very very difficult for them to be able to complete that development anywhere near where they are lease rolls in so we will anticipate having some pretty substantial dialogue with them on an opportunity to <unk>.

At the building at least longer term near term and maybe longer term as they continue to evaluate that opportunity in plano.

When it comes to Cargill, which is really even further out than that 24, I'd say, it's early but our indications from NAND are still very positive that this is their overflow and relief valve for their headquarters location.

And they continually to actively use the building despite being one of the lower utilized markets. We still see a lot of card swipes into the building and a very active user of it and they are very fond of the campus away from their existing campus Excelsior crossing is really provide the unmatched amenity set in the suburban market with a 10000 square foot fitness center at the complex huge.

Multi food type cafe, and a 3000 square foot I'm, sorry, 3000 person auditorium. So it's.

Sorry, 300 person auditoriums, so it's a large.

Great amenity set at that building with light rail coming to it in about two to three years. So we feel still feel very good about cargos in Kansas that building.

And then as you probably know U S Bank is one of our largest tenants they have a suburban location that will expire in 'twenty three.

We feel very good again about our long term relationship with U S Bank, both at that location and then in 2020 for their downtown location their headquarters building, which we own.

I'll also come up for lease I'd say, we're being very proactive in those dialogues and so feel very good about again that long term opportunity to keep them in those assets.

Great. Thanks, Thanks for all that color.

Yes.

Your next question is coming from Dave Rodgers.

Your line is live.

Yes. Good morning, everybody wanted to talk about the lease pipeline into the fourth quarter. Bryan you mentioned that the activity was staying strong can you provide additional color on that with regard to kind of small versus larger tenants. Some of more of the urban versus suburban activity would be interested in any thoughts you have there.

So I think it's really been consistent with what we've heard any kind of shared rather over prior quarters, which is.

Large tenants continue to be active in the market those being greater than 50000 square feet, we're seeing them to make a little bit more decisions along that process.

And that's really in our Sunbelt markets, we're seeing in Boston like we did with Microsoft a lot of that larger tenant activity. We're seeing looks good news is again, we've talked about the small tenants 10000 square feet or less I would say they are back to pre pandemic levels now in most of our markets.

And so what we've continued to talk about as being more robust in and I think the third quarter and going into the fourth quarter is indicative of that.

Is that 25 call it 15% to 25000 square foot single floor user middle market type firm and we continue to see that be more robust in the sunbelt and what's more positive as now we've seen it start to pick up in suburban Minneapolis.

But we do and admittedly I think a lot of our peers still have a little bit of lower utilization in our CBD assets and then also I think a result of a little bit lower lease velocity. So we're fortunate to have a lot of roll any other D. C proper downtown New York and downtown Minneapolis, but I would say those are still the markets there.

Our slowest to come back from that perspective.

I hand, it over to George Wells here, who will also give you just a little bit of detail around some of the pipeline that we have seen grow over here in the last year and with what's ahead of Georgia.

Thank you I'll tell you, we're really optimistic about what we're seeing for the fourth quarter here. We are 28 days into October.

And that's we're looking at transactions that we've already agreed to on a legal stage. So that's what gives us the comfort that the optimism that you've seen from us or the activity you've seen from us in the second and third quarter continuing into the fourth I think also behind that when you look at the kind of proposals that we're seeing that is rising rapidly over the past couple of core.

<unk> that we start in the first quarter was around 60 proposals for just around 900000 square feet pop up in the second quarter was 75 transactions for one 1 million square feet and then this past quarter were at 87, and $1 5 million square feet.

And then if you take a step back and look behind that in terms of what what are what our tours what do they look like across our markets I'll tell you. What it has been also increasing from 90 days I would say in the first quarter to mid Ninety's in the second quarter, and then jumped up about 25% in the third quarter for 116 tour. So we feel good we feel.

That our portfolio is truly resonates with the market demand that's out this way and we feel pretty confident about continuing to chip away at our vacancy.

That's great detail guys I really appreciate it I wanted to go back to I think it was one of Tony's questions about.

The asset sale, you said, 70% of ALR from the Sun belt, and I don't know that you gave a specific timeframe but.

New York, Chicago, and the presidential way buildings would get you. There. So I guess I wanted to think about what that timing looks like did you include New York in that number or is that yet another kind of 9% to 10% that we can expect beyond this initial wave that youre doing in the next year or so.

Dave its various due to view.

That is exactly part of that component as we've talked about New York City continues to progress.

We are still very much engaged in a 20 year renewal, we did a great five year renewal with no capital last quarter end.

The market continues to improve really day by day, we're excited the entire New York City is back in their space and utilization rates are up and starting to feel like New York is coming on par with some of our sunbelt markets as well as Boston in terms of just economic activity broadly.

So I think we're very encouraged by that.

As part of that overall rotation and potential into the sunbelt that doesn't include Cambridge as well as potentially monetizing New York at the right time.

About what we've said that's.

Probably a potential monetization event in mid to latter part of 'twenty. Three so I think we see the potential for that $1 billion rotation over the next two to three years.

Very helpful and then.

Maybe specifically I think you've talked about very much nearer term on assets like Houston and Chicago do you have any specific progress to report.

No not specific we will share at the right time, but I think the good news is we continue.

To get leasing are made at both of those kind of noncore assets that still have some availability and we've got great term and single credit users and Houston, which also positions them, well and frankly with oil over $85 a barrel are around $85 a barrel, we feel pretty good about being able to be.

To dispose of the Houston assets in this environment, Schlumberger and Transocean, both continuing to have improving operations.

Alright, Thanks, Brian.

And I still think Thats six months to 12 in that timeframe.

That's helpful. Thank you.

Your next question is coming from Daniel Ismail.

Your line is live.

Great. Thank you.

Circling back to the 70% goal of Sunbelt exposure, you mentioned potential aggregate. So a concurrent markets I'm curious if that goal includes entering any new sunbelt markets.

The Peachtree acquisition, sorry, you guys uncertainty submarkets. So I'm just curious if there any new markets.

Sunbelt that you guys are currently currently considering.

Good morning, Danny and I appreciate you joining the call.

The point is you make yes, we continue to really evaluate at this point more new Submarkets like the 90 999 acquisition and now we have a strong.

And we do continue to look for opportunities and have others that we think we could score to continue to gain scale in that submarket and we see it as a good opportunity given its high growth.

We still feel like right now, though between Atlanta, Dallas and some of these other.

Existing markets, we've got plenty of product that fits the Piedmont style of having a good bones, you've heard me use that phrase a great window lines could ceiling heights, but needs. Some TLC, great accessibility walkability and really what we've continued to find as we talk to tenants is they don't care. How old are building is right they care about well my employees.

Love coming to work here and.

And so we will continue to focus right now on those markets. We were in potential new sub market, that's not to say, though we don't follow a number of other msas that we think are competitive to the some of what we're looking at today in terms of population migration and corporate relocations. So we very much are keeping our pulse on say a charlotte.

Phil.

Tampa.

Certainly potentially even Denver and Austin are competitors to some of our other markets.

We would go into any of those specifically, but also just to say that we continue to get educated on them from a number of different perspectives and ankle.

Great and then.

A question for Bobby I noticed it looked like the disclosure changed a bit.

With respect to the.

The increase.

Utilization of their buildings that perhaps some savings.

And operating expenses I'm, just curious is that.

No longer the cases.

Physical utilization of your office building Thats picked up so busters.

No longer.

Kind of key operating expense savings that you saw earlier in the pandemic.

And I.

I may ask you a question to clarify this.

Youre talking about our disclosure so that changed.

Correct, specifically on the same store net operating income page.

In the supplemental it just looked like.

<unk> removed discussing.

The benefit of lower operating expenses as a result of lower utilization and just curious if that's no longer the case going forward.

Well now we're still experiencing that we did make some changes in our disclosures. This past quarter you might have noticed that we've incorporated the press release into the supplement.

Over the last year.

A year or two the disclosures almost began matching the press release, we just went ahead and pulled some of that information out.

Also decreased some of the disclosure.

When we have so many very large leases and stuff like that but Brent sorry to cover to leases that have come up but.

I can't think of anything that would causes right now operating expenses are a little bit lower as a result of the utilization that primarily as reflected in our janitorial costs.

And as it reflects to some extent in the real estate tax area.

Got it and then maybe a bigger picture question for brands.

We've mentioned ESG at their conference call and in prior calls I'm curious how that has now <unk>.

Into your underwriting on acquisitions.

Our environmental factors and carbon emissions or energy utilization now exclusively factored into your underwriting when looking at new.

The properties are getting Submarket center too.

I would say absolutely its tough to say, it's quantifiable, but obviously, we try to identify if there are energy efficient savings that we can implement where theres a reasonable payback period going into an acquisition. We obviously, though I think what we see it right now driving.

From an underwriting perspective, making sure you have the capital to create the right environment for tenants.

And ESG is part of that REIT environment, I think Microsoft is a perfect example.

We're in discussions with two other tenants in the space that they took in Boston.

Went to them when the nuanced transaction got announced we knew that they were in the marketplace and we recorded them. If you will in what was a key differentiator with our director of sustainability and the team that we can provide to help them think about their space and in improving the quality of just their own individual space, even above and beyond the actual building.

In terms of as we look at new assets. We are still trying to focus on those that are more of I'd say, a more modern generation double window pane. So we're not having to do major facade components to it and also to really think about outdoor space and what you can create we continue to hear more and more tenants desire that.

Collaboration space to also include components outside of the building. So it is almost as important today, how youre lobby and your first floor interact as much as the area around the base of your building as well in.

In terms of we've set corporate goals of 20% reduction in both water and energy consumption.

<unk> 26 in 2008, respectively, and we also take that into consideration as okay. Can this building help us get to those levels of achievement. We're very pleased to have about 40% of our portfolio LEED certified excited that 99 nine is platinum LEED certified and so we continue to lean into that recognition as well.

It does still have kind of impact with tenants, who are looking for a more energy focused and environmentally friendly operator. So I think that's a long winded way of saying we've taken into account. Each building is different we try to look at for vintages that were able to at one day. We noted are throwing around this cost.

Sept of net zero I think it's a little early from our perspective, but we are very mindful of the energy and the potential expense that might come from making sure. We have a top of best in class energy efficient building.

I would also encourage you for those that are more interested in ESG, we do have a specific <unk>.

Report on our website and the annual report most recently put out in October earlier, this month, and so I think I encourage those who want to learn more about our programs on all three of those fronts to visit our web site under the Investor Relations section or the sustainability section.

Got it thanks, everyone.

Okay.

As a reminder, ladies and gentlemen, if you have any questions or comments. Please press star one on your phone now.

Your next question is coming from Michael Lewis Your line is live.

Thank you.

My question is kind of along the lines of.

Rebuilding occupancy and you gave some good color on the leasing pipeline, Bobby talked about selling high occupancy building combined.

Lower ones with some lease up opportunity and that will move the numbers around.

Kind of.

Grasp onto the 770000 square feet that signs.

But not yet in occupancy are paying cash rent yet.

You compare that to 250000 square feet expiring in <unk> about 1 million square feet next year.

Assuming a portion of those explorations will renew you'll be doing some leasing.

Maybe talk about what you think the opportunity is to.

To grow occupancy and cash flow over the next year in this environment, where investors are.

Worried about office occupancy.

Do you have an opportunity here or do you think the kind of significantly grow from here.

I appreciate the question Michael and thank you again for joining.

We reviewed.

Our strategy of buying.

Vacancy more near term has been positioning the company to capture a lot of the movement into the sunbelt as we've talked about most of our vacancy enroll is in really Dallas, Atlanta, and Orlando and that is what continues to give us very good optimism about the projections and the opportunity for lease up across the portfolio and as you point out really.

Georgia. So we do have a limited amount of growth. This year and then next year pretty modest amount and the fact that we've continued to be able to even during the pandemic track to about a 70% retention rate also gives us some pretty good comfort on our ability to.

Not have too much walk out the door.

And so given that kind of backdrop I think thats, what really drives the occupancy growth. If you want a specific timing I'd have to say, that's freezer portfolio and say it's static today.

Because you just never know what comes in or out, but we already know Boston is technically.

We weren't assets are going out.

We stand at roughly call. It 86, I think there is an opportunity to drive that call. It 100 to 200 basis points by the end of next year, but I think there is also a material upside potential to that given what we see from some potential big lead tenant leasing activity in both Dallas and Atlanta.

I would also point out that our redevelopment is more short term in nature than a more development focused model.

We do have some occupancy.

On the books, if you will in the portfolio, where some of our peers are doing development don't show that vacant development space, yet technically in the numbers.

But overall I think with construction costs, increasing and the potential for pushing out construction time periods given supply chain issues material availability et cetera. That's why we still feel very excited about the redevelopment opportunity because it's shorter timeframe. If there are cost overruns, it's going to be a lot less impactful on your pro forma.

And frankly, we're going to be able to get tenants into space sooner and what we're finding is as we continue to talk to companies looking into Midtown Atlanta as we've already taken over the asset and have that dialogue is a lot of these reloads are looking for immediacy. They want to be in this space very near term and the reality is there is not actually that much space.

Either completed or soon to be completed in Midtown and.

And given the deal flow that overall in the market, we feel very excited about to drive occupancy specifically at that asset and Galleria Atlanta, I'd say as well we're seeing.

A meaningful uptick in the activity.

Go Braves and the World series, I would add but I think it would really that dynamic battery environment and being adjacent to it and continuing to create that mixed used component.

The Galleria has also given us a great comfort around some absorption and then finally I'd have to mentioned our downtown Orlando asset we continue to get great momentum.

Orlando Economic development Corporation, which is in charge of bringing new corporations into the market and signed.

Signed a lease at our building and will soon take occupancy and then it will bring in just about every company looking at that market into our building and we're wrapping up a very transformative redevelopment there with about a call. It 200000 square feet between that and our Q2 two building to gain occupancy so between all of those in the leasing.

The last thing you heard George discussed we are very optimistic about that timeframe and those levels to achieve occupancy growth.

Okay.

Good.

Just one more for me if you could correct me, if I'm wrong, but it looks to me like Piedmont Hasnt grown its dividend since 2014.

But today the coverage it looks like your position now to potentially grow the dividend.

If you chose and.

Where does I realize these are sensitive conversations these are board decisions about about setting the dividend, but maybe from a strategy perspective, where it is growing the dividend set as a goal or a priority or.

Signaling that piedmont's, a different company than it than it once was.

Or do you have a strategy of you'd rather keep the capital and pay the minimum I don't know I don't know when that would trigger.

<unk> increases, but any comments you could give kind of around that.

I think youre spot on Michael in that.

We've been recognized at the last time, we raised the dividend was in 2014.

We've got ample <unk> these days and a $1 10 to $1 20 range. So we've got plenty of room to meaningfully move the dividend I would say I think we've been conservative in that regard on two points.

And we've continued to tell the street that we were going to evaluated in 'twenty, two but with a significant redevelopment, particularly at 60 broad with the New York State.

Inefficient capital outlay, there as well as in the onset of the pandemic. We felt it was prudent to reevaluate as I mentioned in 'twenty. Two so I would expect the company to have a more.

Specific comment towards the middle of the year, but certainly we recognize there is an opportunity to meaningfully grow the dividend and from a philosophical question. The company has no issue or the board in that regard I think we've just been trying to conserve cash and make sure we feel comfortable with where the market stabilized post COVID-19 and we're starting to feel that clarity come into.

The picture, we're wrapping up the New York State work as we are.

Next year as well probably around that middle of the year timeframe. So the good news is that project is under budget Thankfully, we ordered a lot of that material before at the early onset of the pandemic before the cost overruns and supply chain issues have come into effect.

Fortunate in that regard and we will reevaluate it at the middle of next year.

Makes sense. Thank you.

There are no further questions from the lines at this time I would now like to turn the floor back to Brent Smith for closing remarks.

Thank you I hope we have conveyed today that we feel like that the opportunity set before Piedmont is really a unique we've got a differentiated opportunity and strategy and we're extremely excited about our progress on a number of fronts I would encourage everyone. If they want to hear more of learn more about some of the things we've touched on today to visit.

Our web site under the Investor Relations section pull down our 999 acquisition piece. We also will have renderings of the new space that we've discussed around the outside of the building and what we're doing to really differentiate that product and I would also encourage those who are interested in ESG to visit that specific report on our website as well again.

Thank everyone for joining us today, we look forward to continuing the discussion at NAREIT in a few weeks that will be virtual.

But we look forward if you've got an interest in meeting with management, please reach out to Eddie or Justin and we're happy to get you on the calendar while were.

Virtual conference and.

With that let me say go Braves and look forward to further dialogue. Thank you.

Thank you ladies and gentlemen. This concludes today's event you may disconnect at this time and have a wonderful day. Thank you for your participation.