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Edited Transcript of PDM earnings conference call or presentation 3-May-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Piedmont Office Realty Trust Inc Earnings Call

JOHNS CREEK May 6, 2017 (Thomson StreetEvents) -- Edited Transcript of Piedmont Office Realty Trust Inc earnings conference call or presentation Wednesday, May 3, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brent Smith

* Donald A. Miller

Piedmont Office Realty Trust, Inc. - CEO, President and Director

* Raymond L. Owens

Piedmont Office Realty Trust, Inc. - Co-CIO and EVP

* Robert E. Bowers

Piedmont Office Realty Trust, Inc. - CFO and EVP

* Robert K. Wiberg

Piedmont Office Realty Trust, Inc. - Head of Development and EVP of Mid-Atlantic Region

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Conference Call Participants

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* Anthony Paolone

JP Morgan Chase & Co, Research Division - Senior Analyst

* John W. Guinee

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Joseph Edward Reagan

Green Street Advisors, LLC, Research Division - Senior Analyst

* Michael Robert Lewis

SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the Piedmont Office Realty Trust First Quarter 2017 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Robert Bowers, Chief Financial Officer for Piedmont Office Realty Trust. You may begin.

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Robert E. Bowers, Piedmont Office Realty Trust, Inc. - CFO and EVP [2]

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Thank you, operator. Good morning, everyone. Welcome to Piedmont's First Quarter 2017 Conference Call.

This morning, we filed an 8-K that includes our earnings release and our unaudited supplemental information for the first quarter. This information is available for your review on our website, piedmontreit.com, under the Investor Relations section.

On today's call, the company's prepared remarks and answers to your questions will contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters which are subject to risks and uncertainties that may cause actual results to differ from those we discuss today. Examples of forward-looking statements include those related to Piedmont Office Realty Trust's future revenues, operating income and financial guidance as well as future leasing and investment activity. You should not place any undue reliance on any of these forward-looking statements and these statements speak only as of the date they are made. We encourage all of our listeners to review the more detailed discussion related to risks associated with forward-looking statements contained in the company's filings with the SEC.

In addition, during this call, we'll refer to non-GAAP financial measures such as FFO and core FFO and AFFO and same-store NOI. The definitions and reconciliations of our non-GAAP measures are contained in the supplemental financial information available on the company's website.

I'm sure a major topic on most listener's minds is the prior period noncash restatement issue. We filed an 8-K this morning to quantify our calculation of this prior period adjustment and I encourage you to carefully review this information. It has no impact on the first quarter's results, which results were really quite good.

I'll review this quarter's financial results and the goodwill issue after Don Miller, our Chief Executive Officer, discusses some of the quarter's operational highlights. In addition, we are also joined today by various members of our management team, all of whom can provide additional perspective during the question-and-answer portion of the call.

At this time, I'll turn the call over to Don.

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Donald A. Miller, Piedmont Office Realty Trust, Inc. - CEO, President and Director [3]

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Good morning, everyone, and thank you for joining us as we review our first quarter 2017 financial and operational results.

This quarter's financial results reflect the continued growth in FFO and NAV that we've been working hard to achieve for many years. As you saw in our leasing press release issued 2 weeks ago and our SEC filings this morning, our leasing activity was typical the first quarter of each year, totaling about 400,000 square feet. The activity is widespread across our portfolio, covering all of our strategic markets.

The larger leases executed during the first quarter included: In Washington, D.C., the GSA, on behalf of the Social Security Administration commissioner, signed an approximately 53,000 square foot 10-year new lease at One Independence Square. In our metro New York market, Futurewei Technologies, Inc. completed an approximately 38,000 square foot 7-plus-year lease renewal at 400 Bridgewater Crossing in northern New Jersey. And in the Boston region, Ipswitch signed an approximately 33,000 square foot 7-plus-year new lease at 5&15 Wayside Road in Burlington.

Please review the more detailed listing of quarterly leasing activity in our previously issued press release for this quarter's leases and this quarter's supplemental information for more leasing information.

Leasing economics were in line with management's expectations during the quarter. We saw an almost 5% cash rent roll up and a nearly 10% roll up on a GAAP basis.

Generally, fundamentals across the 8 strategic markets remained relatively steady. We've seen tenant activity modestly improve compared to fourth quarter 2016, but that's not necessarily translated into uptick in tenants actually entering new leases. Despite tenants' cautious stance, base rents have held and lease concessions have improved somewhat across the board, but still vary by market, with the lowest concessions being in Dallas and Atlanta and the greatest required in Washington, D.C. and Chicago.

As we noted previously, our lease percentage was adjusted at the beginning of this quarter as we placed in service our 2 completed development projects, 500 SouthPark in Orlando and Enclave Place in Houston, and our redevelopment project at 3100 Clarendon in Arlington, Virginia. The addition of these projects, totaling approximately 700,000 square feet, revised our reported lease percentage to 91.5% from 94.2% at the end of last quarter. These projects will provide Piedmont with additional opportunities for lease-up and potential for growth as we move forward.

Because of this adjustment to overall occupancy, we believe it may be temporarily more meaningful to focus on portfolio same-store occupancy. On a same-store basis, our reported occupancy increased from 92.3% a year ago to 94.1% as of March 31 of this year, primarily attributable to leasing of many vacant spaces last year.

Consequently, our cash and GAAP basis same-store net operating income has increased 16.9% and 9.6%, respectively, for the first quarter compared to a year ago due to commencement of new leases and the burn-off of abatements over the past year and the recognition of a modest restructuring fee. Due to the timing and the large number of these lease commencements and the abatement burn-offs early in the prior year, we expect overall same-store NOI to be between 7% and 10% for cash and 5% and 7% for GAAP for the year.

We will note that with many lease abatement periods coming to an end over the next few months such as in our One Independence Building, 500 West Monroe, 4250 North Fairfax, 500 TownPark and Piedmont CNL Center, we expect, without significant new leasing over the next few months, that the gap between our economic occupancy and reported overall lease percentage to narrow to less than 5% during the second half of the year.

Turning to the capital markets. The asset transaction activity within our target markets is perhaps the biggest area where we saw pause in the first quarter. We saw very few strategic properties that were priced appropriately in our opinion. In fact, we felt like the capital markets showed a bit of strengthening in the office segment in the first quarter, counter to prevailing sentiment. We're glad to discuss this further with you in the Q&A portion of the call.

On the disposition side, the market does present opportunities to monetize value previously created. To that end, as previously reported, we did enter into a binding contract to sell Two Independence Square, our 606,000 square foot 9-storey office building located in the southwest submarket of Washington, D.C. and which is headquarters location for NASA. The sale is subject to limited contingencies and we currently anticipate the transaction will close around midyear.

In summary, we believe the first quarter was a very positive performance for the company, a period where we executed leases with accretive economics, where we also put in service quality development projects and where we further our strategy of refining our portfolio of assets by timely commencing the disposition of a large fully leased nonstrategic asset.

Obviously, this disposition, in conjunction with our plan to be a net seller during the year, will have an impact on our reported numbers later in the year. Therefore, I will now turn the call over to Bobby to review our first quarter financial results and the outlook for the rest of the year. Bobby?

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Robert E. Bowers, Piedmont Office Realty Trust, Inc. - CFO and EVP [4]

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Thank you, Don. While I'll discuss some of the highlights for the quarter, I encourage you to please review the 8-K, the earnings release and supplemental financial information that was filed this morning for more complete details.

As Don noted earlier, this quarter's results benefited from meaningful cash flow growth from the commencement of new leases that has occurred over the past year. This phenomenon and, to a lesser extent, the net contributions from capital market activities and a $1 million lease restructuring fee has had a considerable positive lift in the comparative financial results between the first quarter of 2017 and the first quarter of 2016.

For the quarter ended March 2017, we reported FFO and core FFO of $0.45 per diluted share, up $0.04 over the same metrics a year ago. AFFO was approximately $54 million for the quarter, up 24% compared to the first quarter of 2016 and well in excess of the first quarter of 2017's dividend.

With no new financing activity during the quarter, our debt to gross asset ratio remained around 38% as of quarter-end. The growth in same-store and portfolio-wide operating results contributed to improved core EBITDA. Therefore, our average net debt to core EBITDA ratio decreased to 6.1x for the first quarter of 2017. That's compared to 6.6x a year ago and 6.4x in December 2016. We had approximately $277 million of capacity remaining on our $500 million line of credit at quarter-end.

Don mentioned the sale of Two Independence Square. With a gross selling price of $360 million, we plan to use the proceeds from the sale to further strengthen our balance sheet by paying down our line of credit and paying off a $140 million 5.76% mortgage, which is eligible for prepayment without penalty in August. This will free up capacity to fund potential strategic acquisitions, to return capital to our shareholders and to pursue share repurchase opportunities should they arise.

The sale of such a large asset will obviously have an impact on future quarterly earnings to the tune of approximately $0.02 of core FFO per diluted share per quarter. Depending upon the timing of the net transaction activity that we do in the capital markets area for the remainder of the year, this large disposition could cause the [upgrade] of our guidance range for 2017 to move down to $1.76 per diluted share.

The noncash restatement issue that we just -- we'll discuss next relates to a GAAP rule that was changed prior to this year-end -- I mean, prior to this year and has no impact on future financial guidance. We restated the GAAP basis information included in our financial supplement and earnings release for prior periods related to recorded goodwill which originated on our books on the purchase of management companies.

In accordance with GAAP rules, beginning in 2010, a portion of our goodwill should have been allocated to each asset disposition that occurred between December 2010 and September 2016 in accordance with the Accounting Standard Codification 350 that relates to business combinations. During this particular period, building dispositions were considered dispositions of businesses according to the standard. This change had no impact on the current quarter and our last year's first quarter net income and this noncash adjustment has no impact on current nor any previously reported FFO, AFFO or cash flow. We plan to file within a week an amended 10-K and the first quarter 10-Q which will reflect this prior period change that is quantified for you in today's 8-K filing.

I would now like to turn the call back over to Don for some additional comments.

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Donald A. Miller, Piedmont Office Realty Trust, Inc. - CEO, President and Director [5]

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Thanks, Bobby. I wanted to remind everyone of some organizational changes taking place here at Piedmont over the next several weeks before we get to Q&A.

During the fourth quarter, we announced that Ray Owens, our Chief Investment Officer, has decided to retire on June 30 of this year. Ray and I have worked together closely for 14 years. Together, we've taken Piedmont's footprint from a collection of assets in 35 cities to a cohesive, superior office provider within our targeted submarkets in 8 major markets. I'll miss our daily interaction, but will continue to value his sound counsel and friendship.

Succession planning for our each of our major officers' role is an important part of senior management and board's responsibilities. We're pleased that Brent Smith, who has worked as either an advisor to Piedmont or directly for Piedmont for the past 10 years, has already assumed the Co-CIO role -- or sorry, the Co-CIO role with Ray and will take on the full CIO role starting July 1. Brent is working diligently to further our strategy and continue to grow shareholder value for all of us.

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

(Operator Instructions) Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Michael Lewis with SunTrust Robinson Humphrey.

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Michael Robert Lewis, SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst [2]

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Just on the accounting issue, I appreciate all the detail there. Maybe you could just walk us through kind of why or how that happened? Was it a systems issue? Did -- was the rule misinterpreted? And kind of how did that happen? And then, how did you catch it?

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Donald A. Miller, Piedmont Office Realty Trust, Inc. - CEO, President and Director [3]

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I never thought that question was going to be asked, Mike. No, obviously we take these things extremely seriously. It's -- we're pretty discouraged to have this event come up because we pride ourselves so much in trying to get these things right all the time. And as a result, we want to try to be as open and disclosive as possible. Obviously, we've spent a lot of time over the last 7 years of being public to try to be as transparent and open disclosures as we possibly can. So we're not going to change now. Now, we've got a problem and we're not going to change that. So let me see if I can give you a little bit of color commentary, and I'm sure Bobby can provide a more technical answer to that.

Prior to 2009, goodwill in REIT balance sheets wasn't allocated to the basis of individual properties when they were sold, but starting in that year, GAAP required REITs to start treating individual real estate properties as a business, which, in turn, requires allocation of goodwill on a proportionate basis at the time of sale. Interestingly, FASB reversed course last year and now most individual asset sales no longer meet the definition of a business. We adopted that revision incidentally on October 1 of last year.

However, previously, since our goodwill was generated by the acquisition of 2 management companies, we didn't believe that the goodwill allocation would apply to the sale of real estate properties. Very recently, we sort of identified that this error was regarding treatment for a period from 2010 to about 2016. Given the issue was noncash and it only impacts GAAP numbers and does not affect key non-GAAP financial metrics, we decided it was better to address the issue immediately.

Bobby, would you add anything to that in terms of color?

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Robert E. Bowers, Piedmont Office Realty Trust, Inc. - CFO and EVP [4]

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Yes. If you don't mind, Mike, you asked how did this come up? It came up during the first quarter's review. We have a really good relationship working with [BNY]. And together, we worked with them so that we were able to quickly address this and what we thought was important to quantify that for our investors to know what the extent of the issue was. So that's why we really encourage you to look at that 8-K which details it by year.

Now, we are reviewing -- you asked our internal control procedures with the auditors and our company personnel to make sure something like this doesn't happen. We had, in fact, reviewed that guidance. And as Don had alluded, we felt that it didn't apply because our goodwill was associated with the purchase of management companies, not real estate. This was wrong from reviewing the guidance more carefully.

But because the standard did change, I want to emphasize a couple of things. This does not apply to the current period or future periods. It only relates to prior periods. Also, it's a noncash item so it never affected FFO or AFFO and, frankly, it doesn't impact our guidance going forward. We believe this is it, that there are no other issues to be addressed at this time.

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Michael Robert Lewis, SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst [5]

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Okay. Good. That's really helpful. A question on the guidance, right? So the Two Independence sale is not in there. You said it would bring the high end down to $176 million, I believe. I don't think you said anything about the low end. Why not put it in there now since it seems like that's happening?

And then, on the flip side of that, is there no offset there? Because the -- in other words, were you expecting 10% same-store NOI growth in the first quarter? Or are you kind of running ahead on the operations part of the business relative to the guidance after the first quarter?

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Donald A. Miller, Piedmont Office Realty Trust, Inc. - CEO, President and Director [6]

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Two good and fair questions, Mike. Well, let me see if I can try to address it -- address both of them. That -- we cannot -- with a $1.70 to $1.80 initially, recognizing that we didn't know if we were going to have success in selling Two Independence or not. And I think we were fairly -- hopefully, we're fairly clear about that in the last quarter's guidance. And so we said $1.70, $1.80, recognizing that if we held Two Independence for the entire year and didn't have a lot of other transactional activity or one direction or the other, that we had the potential to still hit the $1.80.

The reason we're not formally changing guidance from $1.70, $1.80 down to $1.70, $1.60 is there are limiting contingencies associated with the transactions that are usual. They're related to federal regulations associated with the nature of the tenant being NASA and the nature of the buyer being foreign. And so we just want to make sure that we get through those issues before we sort of changed guidance formally and then get whipsawed because the deal didn't move forward or something like that. So we just want to be -- we're still very confident it will, but we just want to make sure that we don't get whipsawed on that issue.

As it relates to the first quarter, we did outperform nicely in the first quarter relative to our own economics. As you'll see in our same-store cash numbers, same-store GAAP numbers, they're well in excess of what we anticipate seeing for the rest of the year, partly because we have some leases expiring and partly because Two Independence will move out of the portfolio. At the same time, we just -- we also hit the ball out of the park in the first quarter from a standpoint of we've generated some leasing activity that allowed us to create a little bit of termination income or restructuring income, whatever you want to call it, for leases with space that is staying leased now because we're able to lease the space and get a tenant -- a termination payment for the tenant leaving. So that created about $1 million worth of uplift. And then, frankly, the operating expenses outperformed pretty dramatically because we had a mild winter and so our northeastern properties didn't have much in the way of snow removal and utility costs were in line and property taxes have stayed below budget. So all of the above were really good results.

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Michael Robert Lewis, SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst [7]

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Okay. If I can ask just one more. Don, in your remarks, you said you felt like the capital markets showed some strength, counter maybe to what people thought. And then, you actually said -- I think you -- we could discuss it more in the Q&A. So I'll bite -- let's discuss that a little bit. What causes you to say that?

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Donald A. Miller, Piedmont Office Realty Trust, Inc. - CEO, President and Director [8]

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Yes. Well, and I'll let Ray or Brent jump in as well. But I think what we're seeing in the first quarter was a lot of the properties that we felt like were -- comparable properties that we were looking at last year, which we're having a struggle to get enough bids to make a market for, seemed to get a lot more activity on those same quality of properties in the first quarter. And as a result, we saw pricing, what we felt like, be even stronger in first quarter of '17 than we saw at any point in time during '16.

Now, that's not necessarily across the board in every market, but that's the most of the market, the 8 markets that we operate within. And so I think we would tell you that we've seen -- we think we've seen a strengthening for the quality of product that we own and want to buy relative to what we saw in '16. And as a result, it sort of priced us out on a handful of deals we would have liked to move on. Ray?

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Raymond L. Owens, Piedmont Office Realty Trust, Inc. - Co-CIO and EVP [9]

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Yes. Certainly, Mike. I think, to echo what Don was saying, we continue to try to be very focused and strategic in the asset that would fit our portfolio strategy. And the ones that we really felt had a fit, we did see much more interest than what's made for buyer pools for those quality of assets in those submarkets. And frankly, they got beyond pricing levels that we felt comfortable moving on.

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Brent Smith, [10]

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And, finally, I think I'd add too, Mike, we have also seen an increase in the number of foreign buyers in these 18-hour cities in the Sunbelt region, particularly as they continued to chase yield away from some of the gateway markets, as well as an increased number of value-add private equity players who are awash with capital and are chasing more core plus deals continuing to drive strong prices for assets that are well located and, as Don mentioned, the quality that we like to go after.

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Operator [11]

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Our next question comes from the line of Jed Reagan with Green Street Advisors.

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Joseph Edward Reagan, Green Street Advisors, LLC, Research Division - Senior Analyst [12]

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Maybe just following up on that last point in question there. I mean, would you attribute sort of the increased investor demand and bidding tent -- I mean, are those investors that maybe had just been on the sidelines temporarily for maybe the latter half of last year, just kind of waiting to see how the dust is going to settle on some of the macro issues? Or, I mean, are there kind of new buyers altogether that are hitting the market and paying more aggressive prices?

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Donald A. Miller, Piedmont Office Realty Trust, Inc. - CEO, President and Director [13]

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Well, clearly, what we saw last year anyway, Jed, in the stuff that we sold was a fairly limited buyer pool and most of those buyers were coming from foreign countries. And so I think virtually everything we sold in 2000 -- well, both '15 and '16, were foreign entity buyers.

In the last quarter, we've seen a lot more domestic players, particularly leveraged domestic players. It seems as though that lending markets have strengthened not for new construction, but for existing income acquisitions. It seems like they have strengthened a bit and the activity level has picked up as a result. So it seems to me anyway, and I don't know if Brent or Ray will agree, that it's really the domestic buyers have come back into the market in the first quarter more than we saw at all in '16.

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Raymond L. Owens, Piedmont Office Realty Trust, Inc. - Co-CIO and EVP [14]

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Yes. I would echo that, Jed, because what we have seen is capital being raised by domestic, whether they be private equity or even some of the institutional guys, that might have taken a pause last year. They got a lot of capital that they have either raised or have been sitting in the Q. And so now they're -- instead of sending that money back to their investors or having to deal with that type of situation, they are being a little more aggressive in placing that capital.

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Joseph Edward Reagan, Green Street Advisors, LLC, Research Division - Senior Analyst [15]

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And you feel like this all kind of resulted in a tangible sort of upward shift in pricing or maybe just kind of firming?

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Donald A. Miller, Piedmont Office Realty Trust, Inc. - CEO, President and Director [16]

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Somewhere between the 2 maybe. I mean, it was a tangible move up in price. I don't know that I would call it a repricing the market or anything like that, but it just -- it seems like deals -- I'll make a number up. But let's say a deal that we thought might go for $200 a foot last year might have fallen back to -- we got it as low as $180, right? This year, that $200 a foot deal that we think might go off of that number seems to be poking up to $210 or $220 and we're just not competitive on it. And so that's -- I know that the example I just used are pretty widespread and maybe the reality isn't quite that wide, but hopefully you understand the point.

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Joseph Edward Reagan, Green Street Advisors, LLC, Research Division - Senior Analyst [17]

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Sure. Okay. That's helpful. And just on the cash same-store NOI guide, I think you were 5% to 8% last time. Shifted that up. I think you ran through a couple of the drivers behind that. How much did the D.C. sale -- it sounded like previously that was in the guidance. Now, not in the guidance. How much was -- of that shift is attributable to the just sort of the changing same store pool, I guess?

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Brent Smith, [18]

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It's really -- yes, that's really no contribution one way or the other. It's neutral to the guidance.

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Joseph Edward Reagan, Green Street Advisors, LLC, Research Division - Senior Analyst [19]

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Okay. All right. That's helpful. And then, maybe just last one for me. I wondered if you could just give some comments on activity you're seeing in the markets in D.C. and Houston, just sort of some of the vacancies you have there and how you're feeling about those -- kind of those markets currently?

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Donald A. Miller, Piedmont Office Realty Trust, Inc. - CEO, President and Director [20]

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Yes. I would say Houston is sort of no big change. There is one or 2 things running around out there that there's always a possibility you can knock it off, but it's not a deep pool of leasing activity in the west Houston corridor at least for larger tenants. And so I'm not sure we will change our guidance on that at all.

D.C. -- and I think Bob Wiberg is on the phone. I would say D.C. has slowed a little bit. The activity level's still decent, but the larger tenant activity seems to be slowing a little bit. And we've got 3 really good pieces of real estate to lease. And so if there's activity out there, we feel very confident we're going to capture our share, but the activity does seem to be a little slower.

Bob, would you concur with that?

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Robert K. Wiberg, Piedmont Office Realty Trust, Inc. - Head of Development and EVP of Mid-Atlantic Region [21]

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Yes. I would agree. It has been a bit slower, but I think in the backdrop, the employment numbers are still good, the job growth is still really strong. So we hope to see more coming through the pipeline. And it's been interesting so far. There is quite a bit of activity at a couple of buildings and some of the other ones are seeing a little bit less. So it's a little spotty that way depending on geographies and sectors.

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Joseph Edward Reagan, Green Street Advisors, LLC, Research Division - Senior Analyst [22]

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And do you think a budget resolution here in the near-term provides a kind of a pop and gets people off the sidelines?

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Robert K. Wiberg, Piedmont Office Realty Trust, Inc. - Head of Development and EVP of Mid-Atlantic Region [23]

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Well, I think there was definitely concern about the proposal for cutting a lot of federal budgets, but at least with the bill that passed funding through September, there really was pretty minor changes in funding. So we don't see any immediate impact on the horizon.

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Operator [24]

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(Operator Instructions) Our next question comes from the line of Anthony Paolone with JP Morgan.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [25]

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Just to start, following up to Jed's question on Houston and D.C., can you go through some of your other major markets and give us an update on how leasing trends look?

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Donald A. Miller, Piedmont Office Realty Trust, Inc. - CEO, President and Director [26]

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I'd be glad to, Tony. Atlanta and Dallas, I would say the places that we're seeing the greatest level of activity.

Atlanta, in fact, I wish we had the space available because we're seeing a lot of really good activity at all of our projects and just don't have the space to accommodate it. We're virtually full across our portfolio here. I would say we're upper 90s.

Dallas, a similar situation. Obviously, we have some space coming back to us in Las Colinas next year. So we anticipate that if the activity level stays strong, it would actually be very positive for us in Dallas. Our inta -- town buildings there are virtually full as well.

Orlando, I would say is a little slower than we would like to see and slower than we expected given the very positive job growth there, but we're seeing, I would say, steady flows of activity in Orlando.

Boston has been -- continue to be very strong. You'll see in the quarter we got several nice deals done at 5&15 Wayside. And I think the activity level still seems to be fairly good there.

I'll let Brent -- I will skip over New York and let Brent Smith address that because he's in the room.

Chicago and Minneapolis, I think, are historically very similar to where they usually set. Very steady levels of activity. 500 West Monroe is largely leased up now. Our biggest concern, if we have one, is sort of suburban Chicago and what level of activity we'll see out there given that we have some space to lease. And then, Minneapolis, we're largely full and the activity level is pretty steady. I wouldn't say it's fantastic, but it's not quiet either, so fairly good.

Brent, you want to comment on New York?

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Brent Smith, [27]

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Sure, Don. Jed, so we focus downtown primarily and, as we've seen, that continues to be a good opportunity for us with our assets and where they're priced within the market to capture our own fair share of the creative class tenants that are leaving midtown south looking for rents that are probably $20, $15 less than what they're paying or more in midtown south. And so we continue to capture that creative class tenant.

The other bit that we have as we look ahead to probably to New York City and New York State roll is there's not a lot of large block space as well in Lower Manhattan, which is typically where those tenants will reside, particularly at our price point. So we feel pretty good about that dynamic as well.

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Donald A. Miller, Piedmont Office Realty Trust, Inc. - CEO, President and Director [28]

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Let's talk about northern New Jersey real quick.

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Brent Smith, [29]

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In Bridgewater, where we have most of our vacancy, we still see excellent activity. I think that just goes to show the quality of the asset and its location, particularly with the significant amenity base directly adjacent to the property, has resulted in a good bit of deal flow across a number of sectors, whether -- particularly pharmaceuticals, legal and technology as well. So that building has headquarters for Brother's North American operations as well as Synchronoss, which recently acquired Intralinks, continuing to kind of add to the breadth of that building. So good activity in New Jersey as well as Lower Manhattan. Well, it's reflective of issues that you continue to kind of potentially hear about midtown.

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Donald A. Miller, Piedmont Office Realty Trust, Inc. - CEO, President and Director [30]

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Well, I think, admittedly, the bridging point on Bridgewater is, I think, unique to that asset more so than it is to the broader marketplace.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [31]

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Okay. Got you. My second question is if I'm looking at Pages 6 and 7 of the supplemental where you lay out some of the bigger expirations that are coming and then also some of the leases kind of on the sidelines that are waiting to commence. If I net those 2, should we think -- is there a way to quantify what that earnings gap might be that, I guess, would be to go get from a leasing point of view over the next 18 months?

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Donald A. Miller, Piedmont Office Realty Trust, Inc. - CEO, President and Director [32]

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Fair question, Tony. Yes, there certainly is. We haven't released that and don't have that number right in front of us, but we could calculate that and, if that made some sense right here, how we could disclose something along those lines.

Obviously, the other aspect of that is we would want to make sure we'd somehow give credit to whatever leasing we get done between now and middle of next year, of sizable chunks that would contribute to that sort of offset as well because if you were just to look at the top left, the bottom, you're not really giving any credit to the fact that we made that leasing done between now and then.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [33]

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All right. Maybe just answer it differently for 2017, in your guidance, how much, I guess, speculative leasing or just how much of that hold you need to do this year that's still out there to go get?

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Donald A. Miller, Piedmont Office Realty Trust, Inc. - CEO, President and Director [34]

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To core FFO, virtually -- we're virtually done because even if we were budgeting leasing for the remainder the year, which we have some, more often than not, there will be pre-runs on the front end of that and so that will spill into next year. So very little cash impact either. Cash seems to run higher than our AFFO at this point, but there is very modest, I mean, less than $0.01 probably of remaining FFO to achieve based on leases to accomplish for the remainder of the year.

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Operator [35]

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Our last question comes from the line of John Guinee with Stifel.

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John W. Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [36]

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Okay. Let me -- 7 years ago, the goodwill was $180 million, which was basically $180 million to purchase a worthless management company owned by Leo Wells essentially to get Leo to go away and for you guys to run the show. And then, you're telling us that you and Ray worked together for 14 years where you went from 35 markets to 8 markets. Didn't the first 7 years, wasn't that building it to 35 markets and then the next 7 years tearing it back down to 8 markets?

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Donald A. Miller, Piedmont Office Realty Trust, Inc. - CEO, President and Director [37]

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No, John, it wasn't. But I'm not sure what the purpose of trying to revisit history is, which you try to seem to do on every single call, that has nothing to do with what's going on with our business today. So let's talk about our business today, John.

Okay. Everyone, thank you very much for the participation in the call. We obviously will be following up with those of you who would like to talk further about anything going on within the business or our releases of information last night. And we look forward to sharing that information with you. Thank you very much.

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Operator [38]

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This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.