Piedmont Realty Trust Inc (PDM) 2015 Q4 法說會逐字稿

Greetings and welcome to the Piedmont Office Realty Trust fourth-quarter 2015 earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Robert Bowers, Chief Financial Officer. Thank you; you may begin.

Thank you, operator. Good morning and welcome to Piedmont's fourth-quarter 2015 conference call. Last night, we published our quarterly earnings release and we filed the Form 8-K containing our unaudited supplemental information. Both are available on our website 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 risk 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 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 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 on 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 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.

I will now turn the call over to Don.

Good morning everyone, and thank you for joining us as we review our quarterly financial and operational results. We continue to exceed our own expectations for leasing and capital recycling in the fourth quarter of 2015. Our comments today will also include our expectations for 2016 and certain assumptions in arriving at those estimates.

The fourth quarter's leasing activity totaled over 800,000 square feet, which brought our total 2015 leasing to more than 3.1 million square feet. As a result, we soundly beat our internal objective of being over 90% leased by year-end 2015. Indeed, this year's leasings resulted in overall occupancy gains and a year-end lease percentage of 91.5%, up from 87.7% a year ago. Also noteworthy is that the majority of the new tenant leasing activity during the fourth quarter centered around vacancies in our Washington DC portfolio.

I want to acknowledge the hard work of our DC-based property and leasing teams and the assistance of our new Board member, Barbara Lang, the former head of the DC Chamber of Commerce, with numerous valuable professional contacts in the area.

The Washington DC leases signed during the quarter included the District of Columbia's 102,000-square-foot 12-year lease at One Independence Square. Also at One Independent Square, the Federal Mediation and Conciliation Service's approximately 35,000-square-foot 15-year lease, and MakeOffices' approximately 40,000-square-foot 12-year lease at 3100 Clarendon Boulevard in Arlington, Virginia.

Our largest fourth-quarter renewals included a 7-plus year extension with First Data Corporation for approximately 194,000 square feet at our Glenridge Highlands Two asset in Atlanta. A 10-plus year renewal and traction with Comdata Inc. for approximately 135,000 square feet at our 5301 Maryland Way asset in Nashville, a four-year extension with BFH Home Appliance for 67,000 square feet at 1901 Main Street in Los Angeles, and a five-year early extension with Microsoft Mobile for 55,000 square feet at 5 Wayside Road in Boston.

This is just a few of the larger leases during the quarter. Please review the more detailed listing of quarterly leasing activity included in our supplemental information.

As a general view, we saw significant leasing activity in almost all of our markets throughout most of 2015. Given that only 5% of our square footage is scheduled to expire during 2016, we expect that continued good leasing activity will drive our current portfolio of in-service properties to a total lease percentage of up to 93% by the end of the year. Having said that, we have noticed a slowdown in overall leasing activity since year end and we are watching for further economic direction in the coming weeks.

During the fourth quarter, we also completed significant transactional activity, most of which we discussed during last quarter's earnings call in November. 2015 was a year where market strength stimulated disposition activity to capture peak cycle pricing, and in turn, limited acquisitions to only a few prudent strategic transactions.

For Piedmont in the fourth quarter, we closed on the sale of our largest asset, Aon Center, in October, and the sale of 2 Gatehall in Parsippany, New Jersey, in December. This quarter's financial results include the $114 million gain on the sale of Aon Center.

Of the more than $700 million in net disposition proceeds collected in the quarter, almost $400 million was used to pay down debt and approximately $300 million was used for three previously announced Sunbelt acquisitions: SunTrust Center in Orlando and 300 Galleria and Glenridge Highlands One in Atlanta.

We are now the sole owners of the Glenridge Highlands office park located at intersection of Georgia 400 and I-285 in Atlanta. This park includes over 700,000 square feet of existing rentable office space in the Glenridge Highlands One and Two buildings and contains one additional developable land parcel with direct access on those two major arterial highways in Atlanta. Several of these acquisitions were structured as reverse 1031s and therefore may be used to offset taxable gains on sales of assets in the first half of 2016.

During calendar year 2015, in anticipation of the previously mentioned disposition proceeds, we also capitalized on the volatility in the equity markets and repurchased over 9 million shares of our common stock at an average price of $17.68 per share, a significant discount to our estimated net asset value. During the year, we had a used capacity on our credit facility for interim funding for this program before making a large debt balance reduction with a majority of this quarter's sales proceeds.

2015 capital transaction activity also included the on-time and on-budget completion of two development projects. At 3100 Clarendon the Rosslyn-Ballston Corridor of Washington DC, and the Enclave Place in the Energy Corridor of Houston. As stated earlier, we are now focused upon leasing up currently vacant space at these two projects.

Our 80% preleased development project at 500 TownPark in the Lake Mary submarket of Orlando has also now begun. The site has been cleared and we expect to pour the foundation slab in the next few weeks. The 135,000-square-foot project is expected to be complete in early 2017.

The only other transactional activity report for the quarter was the purchase of a five-acre land parcel adjacent to our Suwanee Gateway One asset, which will initially provide expanded parking for that building, along with the ability to sell the remaining portion of the track to a hotel or retail developer.

Looking ahead to 2016 on the leasing front, our intention is to continue to commit much of our time and energy to leasing up vacancies in our portfolio. As it relates to capital markets activity, similar to our activities in the previous year, we anticipate being a net seller. Bobby will touch more on this in a minute.

There are several portfolio refinement objectives we hope to accomplish in the year, including a potential sale of our California portfolio, but our ability to achieve these objectives is obviously dependent upon market conditions.

I will now turn the call over to Bobby to review our year-end financials and expectations for 2016. Bobby?

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

For the fourth quarter of 2015, we reported FFO and core FFO of $0.41 per diluted share. That's increases of $0.01 and $0.02, respectively, over those same metrics in the fourth quarter of 2014. Primary drivers for the improved results were the commencement of several significant leases and the expiration of various operating expense abatement periods.

General and administrative expenses increased in 2015 as a result of accruals for potential performance-based compensation. These accruals relate to improved financial and operating results in the year as well as better relative total stock returns under our three-year stock performance plans, which included a nonrecurring catch-up accrual for prior periods of approximately $1.5 million recorded during the year. I will note, as we stated previously, our general and administrative expenses, specifically the compensation expense, will fluctuate and will be heavily correlated to the Company's overall performance.

The leasing activity that was executed in the fourth quarter that Don mentioned results in an approximate 4% increase in cash basis rents. And a 15% increase in accrual basis rents, which will benefit future operating results as we head into 2016.

Cash basis same-store NOI increased approximately 9% for both the fourth quarter and for the year. I will also note this increase would have been 11% if Aon Center was added back in. Cash NOI is expected in 2016 to increase in the range of 3% to 5%, depending of course on our disposition activity during the coming year.

The reported leasing percentage at year end was 91.5%, up 3.8% from a year ago. Included in this percentage are 600,000 square feet of executed leases that have not yet commenced, and another 1.4 million square feet of leases that are in some form of rent abatement as of year end, all of which will help future periods as these abatements burn off and leases commence.

AFFO for the fourth quarter of 2015 was $0.29 per diluted share, an increase of $0.02 compared to $0.27 a year ago and reflects the same items I just mentioned in discussing core FFO, plus decreased non-incremental capital expenditures and the effect of lower non-cash straight-line rent adjustments during the year. Our dividend payout ratio to AFFO was approximately 68% for the year.

Looking ahead, contractual non-incremental capital expenditures over the next five years total approximately $40.4 million as of December 31, the lowest amount in many years.

Turning to the balance sheet, with the influx of net sales proceeds during the fourth quarter, we paid down debt and ended the year with approximately $2 billion in debt outstanding, a 37% debt to gross assets ratio, a quarterly debt to EBITDA ratio moving back into the upper 6 times range, and a weighted average remaining debt term of approximately five years.

Looking forward to estimated 2016 operating results, we anticipate core FFO in the range of $1.58 to $1.66 per diluted share. The midpoint is above that of our 2015 range, despite selling Aon and losing its approximately $0.20 per share in FFO contribution. And despite projecting lower average leverage level for the coming year. We also anticipate 2016 AFFO will approximate our 2015 results, but may vary a bit with leasing activity from the timing of capital expenditures.

Additionally, we are budgeting that we will be a net seller of assets of about $200 million during 2016. We believe net proceeds will go towards the further pay down of debt and/or the opportunistic repurchase of our common stock. There are no current plans for additional debt issuances during 2016 and we are committed to keeping our debt level at its current level or lower.

Using capacity on our newly extended $500 million line of credit, we've already paid off a maturing $125 million 5.5% mortgage loan in January of 2016. And we currently have approximately $350 million in capacity on the line.

The balance sheet is in great shape and we anticipate utilizing disposition proceeds or the line to pay off our only remaining 2016 maturity. That's a $42.5 million mortgage that's at 5.7% that opens for prepayment in July.

With that, I will now ask the operator to provide our listeners with instructions on how we can submit our questions. We will attempt to answer all of your questions now, but 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.

Operator?

(Operator Instructions) Jed Reagan, Green Street Advisors.

Good morning, guys. You mentioned the $200 million net selling target. Are you able to break that down between dispositions and investment opportunities, acquisitions, or development starts?

Yes. Glad to do it, Jed. I think we've got $500 million to $600 million budgeted for dispositions, and we will call it $300 million to a little more than that for acquisitions. Obviously, you never know when the acquisition side will materialize, so you just sort of throw a marker in there.

We do in our own budget have the disposition sort of disproportionately budgeted towards earlier in the year and the acquisitions towards later in the year, which probably was a little dilutive to our earnings for the projections for the guidance. But that is sort of how we looked at it for the year.

Okay. Can you give a little flavor on the types of opportunities on the acquisition side you might be most focused on? And maybe how you kind of stack that up to alternate uses -- additional debt pay downs or share repurchases?

I would say in descending order, debt paydowns are our first priority, unless the stock just got extremely compelling again. And then that might move a little above the debt paydown in terms of order of priority, but I would say they are 1A and 1B and acquisitions would be priority two.

The actual acquisitions themselves would be things that are very strategic to we already own; probably very much like the one acquisition that we announced at the end of the quarter, the Glenridge Highlands One building, which was the little brother to our Glenridge Highlands Two building we already owned, and allowed us to control that entire park, including the land parcel there.

So those kinds of things would be the things we're going to be focusing our attention on. You're probably not going to see us entering a new market or doing anything that's very different than what we already have today.

Okay. And I don't think I heard a cash same-store NOI outlook for 2016. Are you guys able to provide that?

Cash NOI outlook? Same-store we mentioned 3% to 5% -- you're talking about cash property NOI?

Yes.

Let us work on that just for a second and I'll try to answer it for you. The other thing I was going to mention on the acquisition side is we don't have any share repurchase budgeted in the numbers that we forecast for guidance for the year. So we are not assuming we are buying back any shares.

Just to be clear, I did mean same-store NOI growth. Did you say 3% to 5%, Don?

Sorry, we said 3% to 5% in the script.

Okay. Sorry, I must've missed that. My apologies.

That's heavily dependent on the timing of dispositions and acquisitions, as you can imagine.

Okay. Thanks. And then just lastly, Don, you mentioned seeing some slowing in the leasing markets earlier this year. Just wondering if you can give a little more color on what you think is driving that, where you see that happening the most, and then maybe what kind of tenants or size of tenants or industries of tenants you might be seeing that more than others.

Glad to. I would say starting mid-December, we saw just the new activity slow down. That's very typical in mid-December; the latter half of the month is typically very slow, and usually you start to see the new activity start coming out about the second week of January.

I would say we've seen a slower list of tenants popping up as new opportunities. Those are the things that don't end up getting signed for two or three quarters typically, but we are not seeing as many new opportunities. Some of that is just because we are better leased than we have been in a while, and so there's fewer vacant spaces to fill.

And then the other part of it I think it's just a little bit of a slowdown. And I would say it's relatively across the board; obviously, Houston is dead as a doornail. But -- and DC is improving, but not improving as rapidly as we would like it to be, but it is getting better. And then I would say across the board the Atlantas, the Dallases, the Phoenixes are all -- Austin, those are all pretty active; steady, but not spectacular.

Okay, thank you.

Dave Rodgers, Robert W. Baird.

Good morning, guys. Just wanted to maybe ask a little bit more on the disposition side. I heard you say $500 million to $600 million. Does that include California and is that something you're looking to exit all at once, or on a one-off basis? I guess a little bit more color on the California sale would be helpful.

I'll start. Ray might jump in. So we've got all four buildings in the market for sale as we speak. We decided to go with individual marketed packages with the idea that if there is a buyer who wants to do more than one or the entire package, we're going to coordinate putting them together at the centralized level here in Atlanta.

But -- so [EStill], JLL, and C&W are all individually marketing individual buildings in that package and we expect to take offers in the next week or two. And as a result, we should start to get pretty good sense of where things are coming together over that period of time.

We are still optimistic; LA is very strong, rents are still growing there, capital market activity seems good. So we remain very optimistic on that sale. But until you get the bids, then you never know for sure.

And then I guess on acquisition target of about $300 million, is that because you feel really good about the opportunities out there, or is that purely just a function of 1031 and needing to get that money back out into the market?

There's actually no need to get any money out from a 1031 standpoint. As you may have heard in the call, we did some reverse 1031s on some of the dispos that we did -- some of the acquisitions we did at the end of last year. So we are pretty well covered on some of the disposition gains that we expect to deliver out of Los Angeles.

And so as a result, there's no pressure to do any acquisitions. So our budget is, like I said earlier, it's just a marker. We don't know what's going to happen during the course of a year. That's why we back ended it a little bit; we expect that if pricing does get more attractive, we will be more active. If pricing doesn't get more attractive, we may not be as active and maybe we'll be a bigger net seller than the $200 million. But it's so hard to tell at this point in time, given where we are during the year.

Okay. Maybe one more on development. I know you've got a couple of parcels -- Glenridge is one; I think you've got some in Dallas as well. Have you thought about any additional development starts? Are you penciling anything out for this year, or is that going to be longer-term focus?

It's going to continue to be a longer-term focus. But I would say the development activity is going to be almost exclusively build-to-suit or largely pre-leased. I would say the places that we are most active right now would be continuing to be in Orlando. We are seeing a lot of good activity in our land there.

George Wells, our head of our region here in Atlanta, is working on some things in Atlanta, but I think they're probably a little further off. And we do have some things in preliminary stages in Dallas. But I would say very unlikely you're going to see much in the way of -- maybe we get another deal done this year, but it's not going to be a flood by any stretch of the imagination. And no spec.

Okay, great. Thanks, guys.

(Operator Instructions) Steven Manaker, Oppenheimer.

Good morning. This is Amit Nihalani with Steve. My question pertain to the dispositions and acquisitions. Are you able to comment on the expected cap rates on both dispositions and acquisitions?

Yes. Be glad to. As we budget acquisitions, and Ray might have to help me a little bit here, I think we are expecting cap rates in the 6%s and FFO -- initial FFO yields probably in the low 7%s. Ray, is that about right?

Yes. High 6%s, low 7%s.

High 6%s, low 7%s on the acquisition side? I would say depending on what assets you are selling, you would see cap rates all over the board. But without being too specific about what we are expecting on our LA asset, we think cap rates will be very low on that portfolio, not only because those assets are very high quality, but also because the rents are well below market there. So we would expect much lower cap rates going out on those dispositions.

And then if you go to the other end of the extreme, maybe a Detroit, you probably see acquisition -- or disposition yields above what we are buying property at. But not materially, as a lot of those secondary markets have improved quite a bit. And if we are successful in selling a couple of Detroit assets, probably a little bit above what we are expecting on acquisition yields, but not dramatically.

Great. And just one more question in regards to 2016 guidance. Can we expect G&A to be similar in 2016 as it was in 2015?

Yes, if we were doing model, obviously it doesn't flow in evenly throughout the year due to when we issue stock, things like that. But I would model in about a 7 [million], 7.25 [million] per quarter, so that would put you around $29 million for 2016 G&A.

Got it. Thank you, that's it for me.

Ladies and gentlemen, we have no further questions in queue at this time. I would like to turn the floor back over to Mr. Miller for closing remarks.

Again, thank you so much for attending the quarterly call. As you can tell, we are very enthused about how things have been going here. The markets continue to have wind at our back and it's been a nice time to be an office REIT, which we can't always say throughout the cycle in our business.

But we continue to see a lot of opportunities to create value for our shareholders and we are thrilled you're part of that. Thank you for participating. Have a good day.

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.