Piedmont Realty Trust Inc (PDM) 2014 Q2 法說會逐字稿

Greetings and welcome to the Piedmont Office Realty Trust second-quarter 2014 earnings conference call. (Operator Instructions).

As a reminder, this conference is being recorded. I would now like to turn the conference ever to your host, Robert Bowers, Chief Financial Officer.

Thank you, Mr. Bowers. You may begin.

Thank you, operator. Good morning and welcome to Piedmont's second-quarter 2014 conference call. Last night in addition to our earnings release, we also filed a Form 8-K, which includes our unaudited supplemental information. We encourage you to review all of this information, which is available 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 the 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 as they speak 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 will refer to non-GAAP financial measures such as FFO, core FFO, AFFO and same-store NOI. The definitions and reconciliations of our non-GAAP measures are contained in the supplemental financial information available in the Company's website.

I will review our financial results after Don Miller, our Chief Executive Officer, discusses some of the quarter's operational highlights. In addition, we are joined today by several members of our management team who will participate during the question-and-answer portion of the call.

I will now turn the call over to Don.

Good morning, everyone, and thank you for joining us this morning as review our second-quarter financial and operational results. I will begin my remarks today with a general reflection on the business climate in our markets.

As we have discussed previously, our markets that are driven by the energy, healthcare and technology sectors continue to perform extremely well. Recently we have begun seeing other markets in which we operate that have been persistently challenging to lease now beginning to demonstrate tenant momentum, some of which is seen in the markets where we completed larger leases this quarter.

Looking specifically at our leasing activity, I am pleased to report that we executed approximately 760,000 square feet of leasing this quarter with roughly half of the leasing related to new tenants. The largest lease completed this quarter was the long anticipated renewal with the National Park Service at our 1201 Eye Street asset in Washington DC.

Also, in the DC market, the Institute for Justice signed a 12 plus year renewal and expansion for a total of approximately 30,000 square feet at our Arlington Gateway property. It is nice to see this leasing activity in the DC market, along with increased prospective tenant inquiries within certain submarkets, particularly the district and the RB quarter.

I am optimistic this momentum may be an indication this market is bottomed and will begin to slowly improve. Additional noteworthy leases in other markets during the quarter included, a 162,000-foot new lease with Schlumberger Technology at 1430 Enclave Parkway in Houston, Texas. Schlumberger is taking half of that building under a new lease that extends two years beyond [Tekniqs] current lease expectation at the end of 2018. Some of you may remember that Schlumberger was the sole tenant in another of our Houston assets that we subsequently sold, but were able to leverage this previous relationship to benefit our current portfolio.

In Phoenix, Arizona, GM Financial completed a seven-plus year lease renewal and expansion, totaling just over 113,000 square feet at our Chandler Forum asset in Chandler, Arizona, bringing this asset now to 75% leased.

Durata Therapeutics completed an approximately 27,000 square foot 12 year new lease through 2026 at 500 West Monroe and West Loop of Chicago, and Children's Hospital Los Angeles signed an approximately six-year 20,000-foot lease expansion and extension at 800 North Brand Blvd. in Glendale, California. The expansion, along with the existing lease space, totaled approximately 43,000 square feet.

On the capital transaction side, it was an active quarter. We acquired one asset by Wall Street, a six-story 182,000 square-foot Class A property located in Burlington, Massachusetts that is 100% leased to three tenants. This transaction is consistent with our Boston Route 128 North acquisitions over the past few years, a targeted submarket that is experiencing strong demand from technology and healthcare-related tenants. This acquisition complements our 2013 purchase of two nearby Class A properties also located in Burlington at 5 & 15 Wayside Road. This is a prime example of Piedmont's aggregation strategy, and we will continue to grow our asset base in the major cities in which we operate, focusing on select submarkets where we can leverage our operating scale and expertise, along with local market knowledge to achieve strong risk-adjusted returns for our shareholders.

In addition, we completed the previously reported sale of four non-core assets this quarter. On a combined basis, the sales totaled $34 million in gross proceeds. The four assets were located in non-strategic markets such as Detroit and Kansas City. The sale of these assets further narrows our market selection and advances our objectives as we grow in the submarkets where we believe we have competitive advantages and can achieve meaningful market share. You can see this tragedy unfolding since our IPO with our aggregation in Route 128 North in Boston, the RB corridor in Washington, the Minneapolis market, Las Colinas in Dallas and the Buckhead and central perimeter submarkets of Atlanta.

To further demonstrate our progress in the strategic focus, over 90% of our revenue is now derived from nine major US markets with approximately two-thirds coming from CBD or urban infill locations.

Finally, to update you on our development projects, site work and foundation construction commenced in late April at Enclave Place, our planned 300,000 square-foot 11-story office tower in Houston. This project remains on track for completion in July 2015. The Houston market is still very active and with Class A vacancy in the energy corridor below 4%. At 3100 Clarendon in Washington DC, our project to reposition that asset for private sector usage is now in full swing with interior demolition work complete.

Office tower work is projected to be substantially finished in early 2015.

The Clarendon submarket continues to offer excellent demographics with the young professional workforce and transportation retail amenities for firms looking to attract top talent. We are seeing interest in the building and already working with several brokers in a few prospective tenants.

I do have one last announcement before I turn the call over to Bobby. As some are you aware, we have been transitioning into a more regionalized operating platform, one that embraces our geographic diversification focused on select submarkets within specific major US office markets. We have regionally added such as Bob Wiberg in Washington DC and Joe Pangburn in Texas that have local knowledge and relationships and are ultimately responsible for all leasing, development, acquisitions and asset management within their respective regions.

I am pleased to announce that we are furthering this regional structure with the hiring of Tom Prescott as our Midwest Regional Head in Chicago. Many of you may know Tom as a Midwest native and 30-year-real estate veteran with extensive leasing and development experience of primarily high-quality office properties located largely in the Metro Chicago market, as well as in California and Texas. Having worked for Forest City, Higgins Development and most recently for Metropolis Investment Holdings, Tom has a thorough understanding of the Chicago real estate market and deep relationships throughout the region and nationally. He brings a positive, thoughtful, can-do attitude to Piedmont, and we expect them to transition to us by the end of the quarter. Tom will be joining us on future calls to add his perspective on activity within the Midwest region.

With that, I will turn it over to Bobby to review our financials and expectations for the remainder of the year. Bobby?

Thanks, Don. While I will discuss some of the highlights of our financial results for the quarter, please review the earnings release and supplemental financial information which were filed last night for more complete details.

For the second quarter of 2014, we reported FFO of $57.7 million or $0.37 per diluted share, which was comfortable to the second quarter of last year. Core FFO, which removes the impact of various insurance recoveries and acquisition costs, was $56.6 million or $0.37 per diluted share for the quarter as compared to $0.35 per diluted share for the second quarter of 2013, reflecting several new leases commencing in properties acquired since June 30 of last year and the impact of our share buyback program. These increases were partially offset by a few expirations, including the DIA space in Washington, effective January 1st of this year, and some downtimes between expirations and new lease commencements.

AFFO for the second quarter of 2014 was $0.15 per diluted share and reflects larger than typical straight-line lease adjustments due to the commencement of several large long-term leases with free rent periods on the front-end of the leases. The largest of these leases and their abatement periods are detailed in the quarterly supplemental data that we filed for you last night. Many of these leases also have significant capital expenditures that were dispersed this quarter for tenant buildouts. This includes Epsilon at 6021 Connection Drive in Dallas whose lease began in July, Aon and Integrys at Aon Center whose leases have commenced during the first half of this year, and Independence Blue Cross at 1901 Market Street in Philadelphia who signed a lease last year. Our total lease percentage was 87% as of June 30, a slight improvement compared to either the first quarter of this year or second quarter of last year. The stabilized portfolio was 89% leased as of quarter end, and our weighted average remaining lease term was 7.2 years at quarter end.

Cash basis same-store NOI was down 2.5% as compared to the second quarter of 2013, primarily driven by downtimes before the commencement of two large replacement leases and initial abatement periods detailed in the supplement. However, as expected, same-store NOI improved considerably when compared to the first quarter of this year as abatement periods for certain significant tenants began to burn off.

Keep in mind, that we still have approximately 10% of our total leasable square footage contractually committed that is largely excluded from cash NOI. That is 1.4 million square feet of leases that are still in some form of abatement and another 700,000 square feet of executed leases for currently vacant space that have not commenced yet. We believe the first quarter of this year represented the trough in same-store NOI comparisons and that we have now begun a period of growth in same-store NOI, improving $4.5 million in the second quarter of this year over the first quarter.

Please note several other positive developments in the quarter. Leases for recently occupied space that were executed during the quarter translated into an average 9% rental rate rollout, which will positively impact results as these leases commence.

Also, committed capital for square foot per of lease term was $2.62, continuing a trend of less capital per square foot per year of lease term that began in 2013. Keep in mind, however, both of these quarterly metrics can be very inconsistent. Therefore, longer periods than one quarter should be used to evaluate trends.

Turning to the balance sheet, as of June 30, our total debt to gross assets ratio was 36.6%. Although the overall ratio has not changed much since year-end, I mentioned in last quarter's call that we have refinanced $575 million of secured debt this year but unsecured borrowings. Approximately 80% of our real estate assets and operating income are now unencumbered by mortgages.

Also, as a result of refinancing, our average cost of debt is now down to 3.5% with a weighted average maturity of over five years. As of quarter end, we had approximately $190 million of capacity on our line of credit and the only maturing debt in 2015 being $105 million mortgage due in May of 2015.

At this time, I would like to raise our 2014 annual guidance to the upper end of the previous range to be between $1.45 and $1.50 per diluted share for core FFO. This adjustment is due to the leasing activity Don mentioned, the acquisition of 5 Wall in Boston and slightly lower overall operating expenses. As I have stated previously, I expect our metrics in the last half of this year to improve over the first half as abatements expire and as certain significant leases for currently vacant space commence.

I will now ask the 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 will make appropriate later public disclosure if necessary. Please try to limit yourself to one follow-on question so that we can address as many of you as possible. Thank you. Operator?