Q2 2023 Piedmont Office Realty Trust Inc Earnings Call
<unk> your questions and comments after the presentation.
It is now my pleasure to turn the floor over to your host Eddie Gilbert Sir the floor is yours.
Thank you operator, and good afternoon, everyone. We appreciate you joining us today for Piedmont's second quarter 2023 earnings Conference call.
On Tuesday morning, we filed our 10-Q and an hour ago. We filed an 8-K that includes our earnings release and our unaudited supplemental information for the second quarter, but is available for your review on our website at Piedmont REIT Dot com under the Investor Relations section.
During this call you'll hear from senior officers at Piedmont their prepared remarks fall by answers to your questions will contain forward looking statements as defined in the private Securities Litigation Reform Act of 1095.
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 our press release as well as our SEC filings.
We encourage everyone to review the more detailed discussion related to risks associated with forward looking statements in our SEC filings.
Examples of forward looking statements include those related to piedmont's future revenues and operating income.
Dividends and financial guidance.
Future leasing and investment activity and the impact of this activity on the company's financial and operational results.
Should not place any undue reliance on any of these forward looking statements and these statements are based upon the information and estimates we have reviewed as of the date the statements were made.
Also on today's call Representatives of the company may refer to certain non-GAAP financial measures such as <unk> core <unk> <unk> and same store NOI the.
The definitions and reconciliations of these non-GAAP measures are contained in the earnings release and in the supplemental financial information, which were filed earlier this afternoon.
At this time, our president and Chief Executive Officer, Brent Smith will provide an update on our recent refinancing activity and second quarter operating results.
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Thanks, Eddie and good afternoon, everyone. As we appreciate all of you for accommodating us for the short notice of this moved up earnings call.
Given the refinancing activity that we announced Tuesday, we felt it was important to go ahead and get our full quarterly information into the market. So that all of our investors had the benefit of the most recent financial and operational information available.
First I'd like to walk you through our rationale for our recent refinancing activities that we've undertaken and give a brief overview of the quarterly results. Following me as usual you will hear from George Wells, Our Chief operating officer, Chris <unk>, our EVP of investments and Bobby Bowers, Our Chief Financial Officer.
We also have the usual full component of our management team available to answer any questions that you may have.
With that I'll jump right in on the refinancing activity.
As we announced Tuesday afternoon, we have closed a $400 million in aggregate principal amount of 9.25% five year unsecured notes concur.
Concurrent with the issuance of the new bonds. We also made a tender offer at par for any and all of our outstanding $400 million unsecured senior notes that are scheduled to mature during the first quarter of 2024.
Although we have no way of knowing exactly how many of our current holders will tender their bonds and.
And given the current interest rate environment, we are projecting that a majority of the 24 holders will participate in the tender which will close next week.
While the coupon rate on the new debt is certainly a high watermark for Piedmont. It is unfortunately reflective of where the market currently is for commercial office properties.
Over the last several months, we've gone through an extensive process of exploring and analyzing our various capital raising alternatives, including a number of potential asset sales.
The possibility of placing a mortgage on one or more of our properties either with a balance sheet lender are utilizing the MBS market.
Issuing in the unsecured market either through a bank term loan private placement or public bond offering.
In corporate level structured financings, including convertible debt and preferred equity among others.
At the end of the day asset sales have been extremely difficult to complete given the lack of asset level financing and we concluded that whatever modest discount there might be pad on our CBS execution did not justify encumbering more than a half dozen of the assets in our portfolio.
At low loan to value ratios.
Finally, the unsecured bond market offered the greatest financing capacity compared to other unsecured alternatives and maintaining a large unencumbered asset pool is an important consideration for the rating agencies.
In addition, a key component of our leasing and capital recycling strategy has been to maintain a flexible balance sheet with ample liquidity, primarily as an unsecured borrower.
This has helped the company in many ways, including expediting capital repositioning programs, allowing greater flexibility to move tenancy throughout the portfolio and avoiding debt prepayment penalties with property dispositions among others.
More recently, the lack of mortgage debt in our portfolio has been instrumental in driving leasing volumes.
Therefore, after considering the continued messaging from the fed regarding additional interest rate hikes during the latter half of the year and the overall lack of financing opportunities currently available to the office sector generally.
We ultimately concluded that accessing the public bond market.
The opportunity was available and addressing our largest near term maturity now was the most prudent course of action for Piedmont.
The expectations that rates will come back down over the next several years influenced our decision to go with a shorter five year tenure for the new notes.
Turning to our operating results the second quarter of 2023 demonstrated <unk> continued success. Despite the challenges facing the broader office sector.
Our leasing Formula is working and we continue to be optimistic about the value proposition for our customers and the opportunity to continue our leasing momentum, particularly in today's capital constrained market the flight to quality buildings and owner operators is favoring Piedmont.
After quarter, we continue to demonstrate that well designed monetized work environments operated by well capitalized service minded landlords is garnering outsized demand from small and medium sized businesses as well as larger non tech corporate tenants.
The flight to quality occurring in market is playing to piedmont's strategy, providing premier workspaces at meaningfully lower rental rates versus new construction.
In brief we sustained the leasing momentum from the first quarter with Piedmont's perspective tenant pipeline remaining robust and meaningful tenant lease volumes achieved.
In total we executed almost 585000 square feet of leasing and generated an over 14% roll up in cash rents.
Furthermore, we continue to make significant progress towards the renewal of our largest tenant U S bank for the extension of its lease on a substantial majority of its downtown Minneapolis headquarters location.
Given we remain in negotiation and documentation stage and the lease were limited with the details we can share.
But it is a long term lease under similar terms and metrics we've discussed on prior earnings calls.
U S banks renewal decisions for its <unk> and data center operations at Meridian crossings will follow the conclusion of the downtown agreement. So there are no incremental information regarding that location to share today.
At this time I will hand, the call over to George who will go into more details around our operational success during the quarter.
Thanks, Brent and good afternoon, everyone persist.
Persistent demand for Piedmont high quality assets led to another quarter of solid operational results office users recognize that piedmont's attractive workplace proposition can be a key driver for encouraging or supporting mandates for more in house attentive.
<unk> Spring 2023 U S. Occupier sentiment survey sites onside food and beverage cafe after ease of commuting and parking is having the most impact for attracting employees back into the office.
Piedmont, we provide a wide range of local to national food and beverage options across our portfolio.
Delivering orders.
Traditional cafes full service restaurants with bar service to White Tablecloth high end establishment.
In a moment I'll highlight three F&B transactions that were completed this quarter and are enhancing our competitive position in the marketplace.
Overall this quarter, we had another strong leasing performance with 49 lease transactions completed for approximately 585000 square feet of total overall volume.
Of this amount 237000 square feet or 41% of the total were related to new.
Tenant lease activity well over our pre Covid quarterly average of about 175000 square feet and our leasing pipeline activity is very strong.
Continuing with operational metrics, our lease economics were very favorable with 14, 3% and 19, 6% roll up or increase in rents for the quarter on a cash and accrual basis, respectively.
And our weighted average lease term achieve a new lease activity for the quarter was just under 10 years.
Our lease percentage at the end of the quarter was 86, 2% slightly up when compared to the previous quarter end.
Approximately 90% of new tenant activity occurred in our sunbelt portfolio were almost 70% of our vacancies reside.
Retention rates remained consistent at approximately 70% no doubt a reflection on both our customer centric service approach and high quality commute worthy portfolio.
Lastly, leasing capital commitments on our year to date leasing were $6 29 per square foot per year of lease term and in line with fourth quarter of last year's averages now I'd like to highlight a few key accomplishments and announcements which occurred in some of our operating markets this quarter.
Atlanta, our largest market at almost 5 million square feet of generated 28% of our company's ALR captured the most activity. This quarter was 16 deals accounting for 300000 square feet of which 60% were new leases.
Also the Galleria and investment company relocated its headquarters from a nearby class B facility, making this our eighth full floor larger new deals since 2020.
Six of which our headquarter location.
Our Midtown LEED Gold 90, 99, Peachtree also experienced good activity with three new deals.
One being a high end F&B, operator, that's well known in Atlanta Lazy Betty.
This operator has received multiple local culinary awards words carefully crafted tasting menus and unique dining experience.
We anticipate them opening in the fourth quarter.
In Northern Virginia, We're excited to welcome Panera bread is our second F&B, operator, or a lead silver 42, 50, North Fairfax tower.
We're also pleased that P. F chang's renewed its high performing restaurants that are LEED silver Arlington gateway for another five years with no concessions.
Along with a 3100 Clarendon tower all three of our Nova assets are four star rated by Costar and had been designated a Walker's paradise due to a plethora of nearby food and beverage options.
And the locations near Metro train stations.
Costar as the industry leader in commercial real estate information analytics and news and has designated 96% of our ALR.
Over 17 million square foot portfolio is either four or five stars its highest quality rating.
Our Nova portfolio is well positioned to capture share of leasing activity going forward.
Let's dropping in Minneapolis next onto our largest near term expiring customer U S Bank.
Extension negotiations with the bank at our downtown lead go U S Bank Center are accelerating and we're optimistic on retaining them for substantially all of its 490000 square foot space there. So.
So admittedly, we still have more work to do.
As an aside this world class tower continues to separate itself from its competitors with our soon to open elite restaurant that will be offering fresh refined seafood luxurious environment.
This tower also recently won boneless International Outstanding building of the year Award.
We will be addressing U S banks suburban lease location at our Meridian crossing complex. After we complete the largest downtown lease negotiation we.
We don't have any additional color on the suburb released at this time and we would reiterate a more concerted extension at this point.
50%.
That said suburban Minneapolis has been and continues to be quite active for us year to date, we've completed nearly 17000 square feet of transactional activity here with good deal flow in our pipeline.
Coming back to our overall portfolio, we remain positive about our future near term leasing trends and operational performance tour activity continues at the same healthy pace that we've seen for several quarters.
Polls will activities more than the trailing 12 months coming in around two and a half million square feet.
With only 3% of the rent roll expiring over the next two quarters, we expect positive net space absorption for the rest of the year, resulting in an anticipated year end lease percentage to end between 87 and 88% that was provided in our initial guidance.
I'll now turn it over to Chris <unk> to review, our second quarter investment activity Chris.
Thank you George as you might expect given the ongoing challenges in the market I have very little new information to report since our last call.
We announced last quarter that our two assets in Houston have gone under contract and we're through diligence, but terms did contain a financing contingency.
Potential buyer is working diligently to secure its capital structure, but it has not yet been finalized we.
We expect to have more clarity on their progress in the coming weeks.
We will certainly keep you all informed if and when we have additional information to share.
As for the balance of our activity we are in preliminary discussions on select non core assets, but it is far too early to speculate given the market backdrop.
We will continue to work creatively with interested parties on potential dispositions.
Sale proceeds will be earmarked towards the reduction of debt.
With that I'll turn the call over to Bobby to review, our financial results and to update you on 2023 guidance.
Thank you Chris.
Well, we will be discussing some of this period's financial highlights Tonight.
I encourage you to please review the entire earnings release.
The 10-Q.
And the accompanying financial.
Information, which were filed over the last few days for more complete details.
Core <unk> per diluted share for the second quarter of 2023 was 45 two months versus 50 cents per diluted share for the second quarter of 2022.
Reflecting approximately eight cents per share dilution from increased interest expense comparatively.
But this increase was partially offset by operational growth during the second quarter of this year, resulting from successful leasing efforts rising rental rates and asset recycling over the past year.
<unk> generated during the second quarter of 2023 was $44 million and $81 million on a year to date basis.
Our property operating costs and general and administrative expenses were in line with budget with no unusual variances.
As George and Brent notice.
Leasing has been strong throughout the year with over one 1 million square feet of executed leases completed during the first six months of the year.
Year to date cash rent roll ups for these newly completed leases are up 10% over expiring rates and accrual rates are up over 14%.
Same store NOI, however is relatively flat, thus far for the year compared to the previous year.
But this is a timing issue with 60% more leases yet to commence or an abatement at the end of this quarter.
That's a total of one 3 million square feet versus less than 800000 square feet that.
We began the previous year with.
With several leases that commence or begin paying rent, we still project cash NOI growth to be positive between one and 3% for the year.
Turning to the balance sheet.
During the second quarter, we repaid $350 million in maturing unsecured notes utilizing our cash and investments on hand, and our available $600 million revolver.
Now having addressed our $400 million bond maturity subsequent to quarter end.
We have no other debt with final maturity until 2025.
As Brent noted a key component of our leasing pool ignore is in our balance sheet and liquidity remains strong.
Sharing factor as perspective tenants scrutinize the capital structure of a potential future office building in landlord.
This differentiation among office product is driving increased market share for the highest quality place, making assets and well capitalized landlords.
We've already discussed our new five year bond issuance.
We've stated that any disposition proceeds will be used to strengthen our balance sheet.
Paying down our line or our bank term debt.
At this time I'd like to update our guidance for 2023.
With the $400 million in new debt issuance completed today and in place the approximate 5% increase in interest rate will result in interest expense, increasing approximately $20 million annually.
This increased interest expense will negatively impact 2023 earnings eight cents per diluted share over the remainder of the year.
Therefore, our guidance is lowered and narrowed to $1 74 to $1 80 per diluted share for 2023.
This guidance includes approximately $570 million to $580 million of total revenues.
$100 million to $104 million of total interest expense for the year.
The G&A expenses of $28 million to $29 million.
This guidance does not include any gains or losses from the potential sale of real estate assets that Chris mentioned.
We will update our guidance should a capital transaction occur.
As I conclude I will note that our board of directors will be meeting next week for.
For our regularly scheduled quarterly board meeting.
Management will be presenting this updated forecast information for their consideration as part of the Board's review of Piedmont's dividend.
The company's dividend for the last several years has been based upon our forecasted taxable income income.
That includes our property operating income.
Interest expense and gains and losses from the sale of real estate assets.
With gains anticipated from the possible dispositions that Chris discussed.
We are not in a position at this time speculate on what action. The board may take immediately regarding our dividend policy. However.
As has been our long term policy, we'd expect the dividend to be adjusted to taxable income forecast.
With that now.
I'll turn the call back over to Brent for closing comments.
Thank you George Chris and Bobby.
In summary for the remainder of the year, we anticipate modest space absorption and operational growth.
We'll continue to be a net seller of assets as we deleverage the balance sheet and enhanced our liquidity resources.
But we've as we've previously outlined increased interest expense will continue to weigh on earnings and <unk> in the near term.
Finally, I want to thank the outstanding employees at Piedmont to provide excellent service to our customers each and every day their dedication resilience and hard work continues to drive our leasing success, despite the challenging market.
With that I will now ask the operator to provide our listeners with instructions on how they can submit their questions.
We'll attempt to answer all your questions now or will make appropriate later public disclosure if necessary operator.
Certainly everyone at this time, we'll be conducting a question and answer session.
If you have any questions or comments. Please press star one on your phone at this time we.
We do ask them, while posing a question. Please pickup your handset if you're listening on speaker phone to provide optimum sound quality.
Once again, if you have any questions or comments. Please press star one on your phone.
Please hold while we poll for questions.
Your first question is coming from Nick Fillman from Baird. Your line is live.
Yeah.
Hey, good afternoon, or good evening, guys, maybe just a little bit on the decision to do.
Do the debt offering here instead of waiting maybe a little bit is this more of a matter of the debt markets are open. So we're just going to get it rip the band aid off here or like maybe walk through it sounds like there is still potential for some dispositions. So just kind of wondering around the time.
This transaction.
Sure Nick Great questions as brands and again thanks.
Seating and being flexible having move this up.
On the earnings call.
And a very reasonable question, we continue to canvas.
A number of different alternatives as we outlined in our May earnings call.
<unk> asset dispositions, but as we noted it's been very difficult in this environment, even though we've found a reasonable price from our equity standpoint that has just been faithful to achieve.
We've continued to evaluate secured debt within our own portfolio, having hired a broker to help us canvas, both the insurance kind of bank lending market. If you will as well as the <unk> market and of course, we looked at various forms of unsecured talking to our own bank lending groups, which we can utilize in early part of this year for a sizable term.
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And a number of different structured alternatives as well getting looking at creative situations around convertible preferred rather superstructures. If you will from a capital perspective, but when it all down to it there are a couple of things that kind of weighed on our mind first and foremost there is a large wall of commercial.
Debt coming due the remainder of this year and next year and.
And thinking about that overall implication and available funds. There is a lot of basically need and not a lot of supply.
So wanting to try to address those 2024 maturities earlier, rather than later was our mindset as we continue to kind of evaluate its been a very challenging market certainly the unsecured side, but more broadly just a lot of concerns around recession in the rates and we had a window here, where the general economic malaise that kind of lift.
It a little bit I think people were somewhat hopeful of a soft landing if you will.
And some continued.
Data points around reduced inflation overall created positive economic window, we felt at producing are positive economic results early and getting ahead of some of that negative headwind sorry negative headlines that maybe come forthcoming over the next months or we even.
With just a mindset of trying to go ahead and take some risk off the table.
Will we had a lot of inbound inquiry through.
Yes.
At last three months, we've been talking to fixed income investors regularly since our last earnings call and I think a lot of them have done the homework that unfortunately, we haven't seen necessarily in the equity markets to really discern the portfolio and they kind of heated our comments of following leasing.
Denoting success within the portfolio in that manner.
We've continued to demonstrate the fixed income market the stability of the portfolio. The leasing success to continued rental rate roll ups mindful use of capital and I think they recognize that they we decided it was a good opportunity to go into the market. It was well received several times oversubscribed and the offering.
But of course the rate with somewhat driven by just the general difficulties in our sector.
So I will I would say.
Representative of what we think the credit worthiness of the portfolio is that is worth Unfortunately, the market resided.
And we were pleased to be able to have the demand to accomplish a $400 million offering and tender and take out those 2020 fours that are mature now less than nine months. So in short we saw a window to derisk maturities and we took it.
Very helpful. And then maybe just going back to what you were saying about non encumbering the portfolio what was the rate differential between the secured and unsecured options.
Yes, I think even within our secured standpoint and I noted this on the call Ltvs are very low. So we were encumbering a number of assets frankly more than we would've anticipated too.
And the pricing was.
Better than the unsecured market, but I wouldn't say materially better, particularly if you think about some of the assets that we might have put that on where our most I guess long term.
In terms of its Walt and probably candidates for harvesting in terms of value because they've been maximized and mature under our ownership, which would have created prepayment penalties. In addition to the interest expense incurred so really we felt like the delta between secured and unsecured was within 100 basis points and we frankly feel like keeping.
The portfolio unsecured as we've talked about as a key component of our leasing strategy today and overall our capital recycling strategy. Once we're able to continue with that engine of growth and things normalize in the market. So given that lack of material discrepancy in pricing and the benefits of remaining unsecured.
We decided to take the window.
Within the market here in the past few days.
Great and then maybe last one it sounds like discussions for U S Bank or are moving along here you guys have traditionally or like in the past I've said somewhere between 50% to 100% the downtown renewal it sounds like we're trending more toward the upper end of that range is that does that kind of a reading.
Your comments.
That's fair to say, yes, yes, okay.
Thanks, guys.
Thank you.
Thank you once again, everyone. If you have any questions or comments. Please press star then one on your phone.
Your next question is coming from Dillon Brzezinski from Green Street. Your line is live.
Good evening guys. Thanks for taking the question here I guess, just touching on dispositions and transaction markets could you comment on sort of the environment today versus maybe three to six months ago. I think is improving with regards to liquidity coming back to the private capital markets are things still tough.
I would say maybe improvement on the very very small margin, but I still think we're going to be in a time period here, where theres going to be a lot of headline risk a lot of defaults and keys being thrown back hopefully theres someone there to catch them, but frankly right now the lenders aren't really interested in taking the assets either so I think youre going to.
Have a time period here, but call. It 12 to 18 months, where we're going to continue to deal with some of these issues.
And without any debt there is no equity so transaction volumes continue to be elusive and as a result, our sense of pricing and price discovery in the market and.
And frankly clarity around underwriting and what an exit cap rates should be is very difficult and that continues to weigh on overall transaction volumes as we've talked about those buyers that we've been approached by the market are generally non institutional or a local private equity local family office, who understand the nuances of the market and see.
Opportunities to either not have competitive bidding pool <unk> get a great price. So I think we continue to be very patient in that marketplace. Recognizing that we do have some good asset should garner fair value once things open back up Houston loans under contract, we are being patient with a buyer to find financing but.
We will continue to look at other alternatives as distributions as well and still guide accomplished somewhere between $100 million to $200 million of dispositions in the next six to 12 months.
Just sort of along those lines any desire or willingness to offer a seller financing in certain instances.
Very relevant point doing it and I think thats really what <unk> gotten most of the transaction volumes that we're aware of most of them not all of them over the goal line.
So we have considered in the past certainly done it in the past.
At this point right now with the Houston buyer.
Capitulated, we've had some discussions but I don't think that were meeting maybe that leveraged specials they would like to.
But overall I think thats something we will continue to consider it in some situations, but in the instance of Houston I think our preference would be to exit the market if possible.
And then just one last one if I can.
Assuming U S bank its spell out here at the high end of the range you guys guided to is that a potential future disposition candidate or I guess just broadly speaking how are you guys thinking about your Minneapolis presence over the longer term time horizon.
Yes.
Relevant question I think we are certainly very close U S bank and in discussions so I don't want to get too much in detail. Our ahead of ourselves, but I think we viewed along the downtown asset is a critical component of U S. Bank's operations, we would have a meaningful reposition of their space. If we were to do a long term lease.
We're talking about here and thats going to take several years to complete.
And I think we're very committed overall to our position in Minneapolis, recognizing there may be an opportunity or some buildings to reduce exposure.
But near term I think we're focused on accomplishing those leases and then we'll worry about opportunities overall in the marketplace.
Great appreciate the comments, Brian I forgot.
Thanks for joining us this evening.
Thank you that concludes our Q&A session I will now hand, the conference back to Brent Smith for closing remarks. Please go ahead.
But again I want to appreciate everyone who's taken the time to get on the call. This evening.
I'm pleased the operational performance of the portfolio and look forward to continuing to share that in the quarters to come I would like to remind investors as well we will be attending the bank of America REIT Conference on September 12, 13th in New York City, if you'd like to schedule a meeting with management. Please reach out to Eddie Guilbert, our body of ours.
And again, thank everyone for joining have a good evening.
Thank you everyone. This concludes today's event you may disconnect at this time and have a wonderful day.
You for your participation.