Piedmont Office Realty Trust, Inc.
Q4 2020 Earnings Call Transcript

Published: 11 Feb 2021

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Piedmont Office Realty Trust Fourth Quarter 2020 Earnings Call. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Eddie Guilbert. Sir, the floor is yours.

[Eddie Guilbert:]

Thank you, operator. Good morning, everyone. Thank you for joining us today for Piedmont's fourth quarter 2020 earnings conference call. Last night, we filed an 8-K that includes our earnings release and our unaudited supplemental information for the fourth quarter that is available on our website at piedmontreit.com under the Investor Relations section.

[Brent Smith:]

Good morning, everyone, and thank you for joining us to review our fourth quarter and annual results along with our outlook for the coming year. On the call with me are George Wells, our Executive Vice President of Operations; Eddie Gilbert, our Executive Vice President of Finance and Treasurer; and Bobby Bowers, our Chief Financial Officer, as well as other members of the senior management team. Let me start by saying that all of us at Piedmont, sincerely hope all our tenants, vendors and investors continue to be safe and healthy. And while we remain optimistic about the accelerating vaccine deployment and the path forward, as we begin 2021, the pandemic continues to disrupt American business. Today our portfolio utilization remains at approximately 25% to 40% on average, but it can vary greatly depending on city and tenant profile. Notwithstanding the disruption to the office sector in 2020, Piedmont continue to track record of delivering solid FFO growth for eight out of the last nine years, generating $0.10 more of core FFO per share, or approximately a 6% increase over the prior year for 2020. And we expect to continue this positive growth trajectory into 2021, as Bobby will discuss in our guidance later. Despite the challenges of the pandemic, my colleagues have kept the entire portfolio open and operational 24 hours a day, seven days a week, 365 days a year, while remaining laser-focused on the health and wellbeing of our tenants, assisting in their efforts to return to the workplace safely.

[Bobby Bowers:]

Thank you, Brent. While I'll discuss some of our financial highlights for the quarter and the year, I encourage you to please review the earnings release and supplemental financial information, which were filed last night for more complete details. For the fourth quarter of 2020, we reported $0.46 per diluted share of core FFO, which is comparable to the fourth quarter of 2019. Annual core FFO for 2020 was $1.89 versus $1.79 per diluted share for 2019, reflecting the $0.10 increase that Brent mentioned earlier. AFFO was approximately $36 million for the fourth quarter, well in excess of our current quarterly dividend level.

[Operator:]

Certainly. Ladies and gentlemen, the floor is now open for questions. Your first question is coming from Dave Rodgers . Your line is live.

[Nick Thillman:]

Hey, guys, it's Nick on for Dave. Just want to go circle back to that over 500,000 square feet of leasing to start the year. Can we get a little additional color on maybe the mix between renewals and new leasing? And then also like where the geographic regions are for that?

[Brent Smith:]

Sure, Nick. Thanks again for joining us this morning. Part of that desire to put that into our materials was really to help give real-time. I think as we continue to talk to investors, they want to understand what's going on, on the ground. And so we did want to provide a little bit more color. As you think about the combination or the split between new and renewal leases, I'd say that that level is in line with kind of prior quarter splits, if you will. And I'd say it's in various parts of the portfolio, not necessarily concentrated in any single market, but we've seen the activity on just the number of leases signed, pretty consistent across both Boston, Dallas, Atlanta as well. And so we'll continue to – we think see that pipeline growth through the year. But we were pleased and wanted to share that we've already made a pretty significant achievement relative to what the leasing momentum was in 2020.

[Nick Thillman:]

Yes, that was some surprising good news to start the year. I guess, going back to what you mentioned on like utilization, I guess we kind of have an idea of what markets are performing better on the returns to the office, but I guess maybe like the industries or the tenant size that you're noticing that are being in the office more than like other tenants?

[Brent Smith:]

We continue to see small tenants have really come back a little bit more in force than most of the other tenants and say, large national corporates probably be the most timid in coming back to the office. If you think about markets though, and kind of tenant size, so it costs less than 25,000 square foot type tenants, and we're seeing, obviously, it's been widely reported, just general economic activity is more robust than the Sunbelt. And no surprise, that's where we do see the higher levels of utilization. That's not to say we don't have, for instance, government-related or critical business operations elsewhere in the portfolio, where we're seeing almost 100% utilization, but I think that's the generalities that you're probably more interested in. We're seeing it really translate also to a leasing pipeline activity, being more active in those markets as well.

[Nick Thillman:]

Okay. And then last one for me, like moving to the portfolio, I know like prior calls, you mentioned the possibility of maybe monetizing some of your assets in stronger markets, such as Cambridge. I guess, is that still the case? And then turning to non-core portfolio, you trimmed a decent portion of that with 1901 Market and then the New Jersey portfolio in Q4. I guess, what are your plans as we look ahead into 2021?

[Brent Smith:]

Yes. Nick, it's choppy acquisitions, dispositions, capital markets in general. And so you're going to continue to see us do what we've done in the past, which is monetize mature assets under our ownership. And in today's market, that's generally lending itself to longer leased credit type tenancy. And so we have a number of those that fit that profile in the portfolio and that we think we could sell in this market. You mentioned Cambridge among others that could fit that profile and we're continuing to evaluate the potential disposition of those assets. And I think you're likely to see us probably recycled somewhere in the neighborhood of $200 million to $400 million this year. And then we're going to consistently continue to focus on recycling that capital into our healthiest markets and where we continue to see these larger kind of corporates and other activity from a leasing velocity standpoint pick up. So that's probably to focus mostly in Sunbelt and Boston at the moment. And we are continuing to evaluate development, but I think at the moment right now, that's a little bit further down the list in terms of capital allocation. But we do feel enthusiastic about seeing some of these corporates come into the Sunbelt markets. We're talking to economic development groups that represent the states and cities, and they are seeing an uptick in that activity in Dallas, Atlanta and Orlando. And so that's probably another reason to focus a little bit more on those. We're also continuing to lean into redevelopment. We'll be doing a project, at our 25 Mall Road building up in Boston, completing the 200 South Orange Avenue Campus now with the acquisition of 222 South Orange Avenue, really creating a preeminent product there at Downtown, Orlando. And then of course, we're continuing to build out the phases of redevelopment at the Galleria in Atlanta, and hope to have more to share with the market on that this summer. And of course our big boy right now is 60 Broad, and that's really related to the leasing, obviously with the state that's completed and the New York City that's underway. So we'll continue to evaluate those from a capital allocation standpoint as well as our buyback program appropriately within that same historical framework that we have in the past.

[Nick Thillman:]

Great. Thanks.

[Operator:]

Your next question is coming from Anthony Paolone . Your line is live.

[Anthony Paolone:]

Thanks. Hi, everybody. First question is on the 500,000 square feet of leasing here in the first month or two of the year. What does that do to the expiration schedule? I guess, because you only have I think in the supplemental 900,000 square feet this year. So, how much of that kind of knocks out this year versus future years?

[Brent Smith:]

I would say very little of that actually reduces the 2021 expirees. We've talked about, and you've heard me mentioned, Tony, we continue to have meaningful dialogue with these larger corporations and technology companies, who know their businesses really well, moving wholesale divisions or groups or expanding, et cetera. And so we've been sharing that dialogue and we've continued to see that translate now into some leasing activity. And we think that's going to be a positive that we'll want to share more detail with the market at the end of the first quarter, but overall that 2021 expirees still stands at about 5.8%. It was an early – series of early renewals and some new leasing that's really comprising that 500,000 square feet.

[Anthony Paolone:]

Okay, got it. And then is there a way to characterize just from what you've been able to execute so far and where your market discussions are, kind of where the all in net effective rents are landing compared to say pre-COVID levels?

[Brent Smith:]

It can vary by market. And right now I'd say we're seeing again, the most activity in the Sunbelt. So that's where the majority of our data points come from as well as Boston. But in generalizing, I'd say net effectives because concessions have moved up, call it, 10%, 15%, while rates have still held steady. So we've seen that effectives right now depending on the market, declining where from 5% to 10% just depending on the dynamics. But I think we view if you've got a larger indoor credit worthy tenant looking for space, we're going to fight for them. And right now in this marketplace, I think that's pretty reasonable to say those net effectives have been deemed. But we are pleased that ourselves and other landlords are holding rent. Despite the sublease space that is coming on in some of our markets, I think you have to peel back the onion a little bit and examine that a lot of that is not of the same quality and or duration that we provide as tenancy within the portfolio. So we still feel very good about our – where we are positioned in the market and where we're able to accomplish deals. I would say overall, we still feel like the mark-to-market and the whole portfolio of the leases still around that 5% to 10% level depending on market and building obviously.

[Anthony Paolone:]

On the 5% to 10% on the positive side for the whole portfolio?

[Brent Smith:]

Yes.

[Anthony Paolone:]

Okay. And then maybe a couple for Bobby. The $2.6 million termination fee from WeWork, is that something we'll see I guess in the first quarter? Or is that in the guidance like where's that show up?

[Bobby Bowers:]

Yes. Tony, this is Bobby. It is in our guidance, each year for the last several years we've recorded between $2 million to $3 million per year of termination fee income. In 2019, it was 2.8 million, believe it or not in 2020 is $2.8 million and in 2021 is exactly the same thing right now we're forecasting $2.8 million. So it's not an unusual item, but we do – but we are able to identify it now and tell you what it is. It will come through as you just asked primarily in the first quarter.

[Anthony Paolone:]

Okay. And then just remind us on that space, you mentioned no work ended up getting done. Was WeWork teed up to flip that bill or was that part of Piedmont's TI package that now you won't be spending those dollars, I guess?

[Bobby Bowers:]

That's correct. We were – had a TI obligation and those dollars will not be spent.

[Anthony Paolone:]

Okay. And then just last one, if I might free Bobby, just any brackets around G&A for 2021?

[Bobby Bowers:]

In terms of size Tony, that's what you're wondering?

[Anthony Paolone:]

Yes. I know it's tough with the comp accrual and the stock and stuff, but just kind of what's loaded into the guide.

[Bobby Bowers:]

Yes. In total, maybe $28 million somewhere in that, in total $7 million per quarter or something like that.

[Anthony Paolone:]

Okay. Great, that's all I got. Thank you.

[Operator:]

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

[Michael Lewis:]

Yes. Great, thank you. So I'm going to lead-off asking about the 0.5 million square feet of leasing year-to-date as well. I think it caught everybody's eye, I think you did about 230,000 a quarter, the three quarters during the pandemic. And Tony already talked about the low-lease expirations this year. With the 500,000 is there one or two big chunks in there that drive the bulk of that or is this kind of a broader level of activity? I'm just curious what kind of tenants are looking for space right now?

[Brent Smith:]

Yes, Michael, this is Brent. Tthanks for joining us today. I think it does include one of our top 20 tenants. So there is a sizable one in there. But again I want to provide you with a context of what we're seeing broadly across the portfolio. So it includes I would say one of those top 20 and then a lot of other leases throughout that both of the larger size 50,000 square foot plus and we have a few of those we're still chasing, but a number of those, also smaller 10,000 square foot deals, but what we're seeing is, you heard me in my prepared remarks really limited traction with 10,000 square foot to 25,000 square footer, or so. So wWhen we get into the detail into the first quarter and we can't disclose who that top 20 tenant is at this point in time, but when we can share that and the other detail, I think you'll see that it's very much that what I described is what we're seeing in real time.

[Michael Lewis:]

Okay, thanks. I wanted to ask, I was looking through the list of properties that you've got kind of a handful here that are 50% leased or below Two Pierce Place, 1201 Eye, 6031 Connection Drive, Las Colinas Corporate Center II, are those mostly just frictional vacancy or are there, redevelopment opportunities in that group or kind of – are these risks or opportunities?

[Brent Smith:]

We certainly see, many of them as more opportunities than I would say risks. The Las Colinas Corporate Center, I'd start with that one, a great asset right off by DFW, where we've seen a lot of the activity from those larger corporates kicking tires into the Dallas market and it's recently redeveloped. So we've done lot of amenity package, tenant lounge, fitness facilities great structured parking around that asset, free structured parking. So it has again, ease of access and we had a large center vacate there at the end of last year, which gave us the chance to reposition it. And we've already done with all of that work and so again, that fits within that encouraging pipeline in Dallas. And see as an opportunity. Our Eye Street assets in DC, we feel like they're well positioned in the market. One has done extremely well. The other one we continue to frankly struggle with, but the good news is we have very little expirations, expect none in DC. And we do have traction in that market with a number of tenants, because that is a more of a value priced asset there around the big city center, complex and development where rents are closer to 70 to 80, and we're more in the 50 zip code. And we feel like that's a compelling offering and we are seeing traction with that now as that market starts to reopen, but admittedly has been slower to reopen than our Sunbelt projects. I think the other locations that you mentioned, Two Pierce Place would be the one where I would say it's probably in your mind risk, but we view it as a likely disposition candidate. There are a number of large potential users that we're recording right now. And depending on whether they land or not land will really ultimately decide the disposition price, but you're likely to see that asset go within the next 12 months to 18 months, because it is part of that non-core market set that we have, which really includes the Chicago building and then the two buildings next door each other in Houston. So that's the one I would maybe deem more as a risk than the others. The others, we certainly view as opportunities.

[Michael Lewis:]

Great. And then last one from me, just maybe you said this before. What's the term on the New Jersey seller financing once that get paid back. And I think you said it was 7%?

[Brent Smith:]

Yes. It's a bifurcated note, a senior and a mezz piece, bothtechnically have a term of three years, although I will say we've worked with this buyer before and maybe a little bit of background on the whole transaction would be helpful. So it's always been a strategic goal of ours to get out of the New Jersey market. And it was a matter of really finding the right opportunity and really have someone appreciate which was at Bridgewater Crossing, one of the premier assets in Northern New Jersey. It's everything we described in our portfolio that's compelling, walkable, mixed use around it, lots of food and beverage and retail without ever having to get into a car, so really a unique office setting for Northern New Jersey. But we felt like we had some leasing momentum and given the high quality nature of the asset, we weren't – we felt like it was a good time to maybe see if some of the parties that expressed interest in the asset would be a willing to step up and purchase it, because we had not been willing to part with it prior to that. They had a few bid on the asset and particularly one group stood out from the others, three parties that we really whittled down to, all when we had prior relationships with. And the ultimate group that won, we have done deals with in the past and utilized a similar structure. So that's a longer winded answer, but I wanted to give you some background. So that final structure for that again, is the med is at roughly 13.6% as well as senior at 6% – to 7%. I anticipate generally this buyer pays-off the mortgages that we've used for financing within a year. I certainly would expect that on the mezz. And frankly, I think it's likely on the senior, given the leasing velocity at the asset that we had in tow when we sold the building to them. And we think that is going to come to fruition and give them an opportunity to refinance out of the asset. I know that was a long-winded answer, but hopefully that's helpful.

[Michael Lewis:]

No, it is helpful. I was going to say, I see those loans now with . So I apologize for asking a question that was answered in there, but the color is certainly helpful. So that's it for me. Thanks guys.

[Operator:]

There are no further questions in the line. I would now like to turn the floor back to Brent Smith for closing remarks.

[Brent Smith:]

Appreciate it. I want to thank again, everyone for joining us today. You know, despite a challenging 2020, I want to take this opportunity to one last time, thank the other employees at Piedmont for the job that they've done and really in an uncertain environment to protect each other, our vendors and our tenants. But we're excited about what we were able to accomplish from growth in 2020 and we entered into 2021. We've got low near term lease expirations, manageable debt maturities and frankly our portfolio vacancy, which has been pointed out is in the more attractive markets of Atlanta, Dallas, and Orlando, where we're seeing that activity and the pipeline rebuild fastest. We think that combined with our best-in-class ESG platform and paired with a high quality amenitized environments is going to position Piedmont to do well this year. And we look forward to continuing this dialogue as hopefully the economy opens back up and the vaccine rolls out. Thank you everyone. And we look forward to talking to you in the second quarter.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today's conference. You may disconnect at this time and have a wonderful day. Thank you for your participation.