Piedmont Office Realty Trust, Inc. Price & Performance (PDM)

The most leasing we've completed on an annual basis since 2015 We grew cash basis same store NOI by 2.6% with both metrics well above our original projections and guidance for the year. Over 1,000,000 square feet of our 2024 leasing was related to new tenant lease resulting in absorption for our in service portfolio a year end lease percentage of 88.4%. Additionally, the leases we executed during 2024 reflected very strong real rate growth. Approximately 12% on a cash basis and almost 20% on an accrual basis. The strongest growth we've experienced in the past five years on accrual basis and in over a decade on a cash basis. During 2024, we also saw incremental liquidity coming into the office sector. National office transactional activity, albeit still at up 29% year over year We were able to capitalize on this uptick to accomplish another 2024 strategic goal by disposing of two properties, which generated approximately $77,000,000 of gross [indiscernible] As office fundamentals continue to improve, debt financing is becoming more readily available. And spreads continue to tighten for high quality assets. As Chris will touch on on his remarks, this bolsters our expectations to dispose of select non core and mature assets in 2025.

As expected, our refinancing activity continued in full force and was a top strategic goal for 2024. The team did an outstanding job to complete a $400,000,000 bond in June at a significantly improved credit spread compared to our 2023 offering. And just this week, we completed some additional transactions Sherry will go into in more detail about in a moment. The headline being that we now have no debt with a final maturity until 2028. Finally, core FFO for the year was $1.49 per diluted share, and reflected approximately $22,000,000 or $0.17 per diluted share of increased net interest expense compared to the previous year. Additionally, our 2024 results reflected the sale of two properties, and the downtime between the expiration of a few large leases during the year before newly executed leases commenced late in 2024 or will commence in 2025. No doubt, there is still work less to do and George will provide market specifics and details on the leasing pipeline in a moment, but we continue to believe that the investments we've made in our portfolio, combined with our relentless focus on best in class service and a sustainability mindset are resonating with the market. Clients and the brokerage community and the demand for highly amenitized well located work environments operated by a financially stable landlord will continue to grow throughout 2025.

We believe our portfolio is well positioned to capture more than our market share of customer demand and we will be able to continue to drive leasing percentage and rental rate growth This year, 2025 contractual expirations are very manageable with roughly half already filled or close to being backfilled. We expect our backlog of approximately 1,400,000 square feet representing roughly $46,000,000 of future annual cash flow to benefit our financial results during the latter half of twenty twenty five as those leases commence or reach the end of their abatement period. With that, I'll now hand the call over to George who will go into more details on fourth quarter operational results. Thanks, Brent. Good morning, everyone. Once again, our well located highly amenitized portfolio and the impact of greater in office attendance is being realized. During the fourth quarter, we completed 45 lease transactions for four three thousand square feet of total overall volume, well within our typical range of 350,000 to 500,000 square feet with renewal transactions dominating the activity. Our twenty twenty four year to date haul of over 1,000,000 square feet of new leasing is a regular amount not seen since 2016 when our portfolio was approximately 20% larger Lower new leasing volumes in the fourth quarter were reflective of users taking longer to make decisions post selection and I'll touch on our robust pipeline in a moment, but we believe the slowdown was related to economic uncertainty post election as well as a shortened period between Thanksgiving and the end of the year holiday slowdown.

Importantly, we have witnessed a more normalized level of new leasing in the first quarter. New activity for the fourth quarter was predominantly focused on smaller users and our retention rate came in at 66% line with our historical quarterly average trend of 70%. Leasing activity moved our lease percentage into the middle of our projected range ending at 884%. These economics were strong with 11.5% and a 14.7% roll up from increase in rents for the quarter on a cash and accrual basis, respectively. Leasing capital spend stayed relatively flat at approximately $6 per square foot per lease year in line with our average over the past several quarters. Sublease availability continues to hover around 5% of the total portfolio only 25,000 square feet expiring in 2025. Dallas was our most active segment this quarter closing on 16 deals per 225,000 square feet or 52% of the company's overall New transactions were completed in each of our three submarkets here which consists of Los Colinas, Uptown and Lower Tollway Galleria Towers continues to experience strong demand from large users due in part to its superior accessibility located at the nexus of two major highways the Lower Tollway and North Tollway and is also considered the most centrally located submarket in Dallas.

Kimley Horn, a national engineering firm extended on all of its 83,000 square feet at the complex for another ten years. Also at Galleria, a large international e commerce retailer released 43,000 square feet to accommodate its new five day a week return to office mandate. Also in the legal stage for a large user to backfill our sub substantial majority of Ryan's lease at three Galleria Towers, which is scheduled to expire during the first quarter of twenty twenty Galleria's exceptional location and many rich environment and hospitality infused redevelopment have allowed us to increase net rental rates by 10% over the past year and approximately 30% since acquisition in 2020. This unique 1,500,000 square foot project has had an incredible success story for Piedmont. The project stands at over 90% leased with an opportunity to push rents even higher now approaching $40 on a net rent basis resulting in strong economics on PMA book basis of approximately $280 a square foot. Moving to Suburban Boston, our third largest deal in the quarter was a renewal transaction at our Wayside Complex in Burlington, we've been a large technology company's lease for its entire 33,000 square foot footprint for a seven year term.

In Boxborough, two new deals were completed for 13,000 square feet at 80 Central Ave with one of those deals coming from an existing customer expanding its footprint by 30% for ten years term. The Piedmont formula for attracting and retaining customers worked extremely well in 2024 and we're confident of continued success in 2025. Today, our leasing pipeline is strong with over 3,000 square feet in late stage activity. Outstanding proposals stand at 2,600,000 square feet for both our in service and redevelopment portfolios which is higher than our trailing twelve months. Though demand is strong, the course of quarterly net space absorption is also dependent on the amount and timing of expirations it remains to be seen whether the uncertainty from the federal administration change usually brings. Will impact corporate decision making as we move into 2025. Our supplemental report shows 7.4% of our ALR As such, we project lease expirations for the first half of twenty twenty five to moderately exceed our due leasing quarterly average before we resume Assuming there's no downside surprise for The U. S. Economy, we project our lease percentage for our in service portfolio to end the year to Chris Komi for any comments on investment activity. [indiscernible] Thank you, George.

Pleased to report that we are in advanced negotiations for the disposition of two small non core assets, that if both are consummated will generate approximately $35,000,000 in gross proceeds We have another two to three assets that are currently in price discovery given market conditions, the outcomes of these efforts are uncertain, although the strategy for selling these assets is entirely consistent with Piedmont's Piedmont long standing recycling initiatives. As we have done for years, we will continue to elevate and optimize the portfolio and we will look to selectively shed non core assets throughout the year.

On the new investments front, we remain highly engaged in each of our key markets and we expect to see some interesting opportunities in 2025.

These could materialize in a variety of forms, including joint ventures, note purchases, and or our more traditional fee simple acquisition. Our core investment strategy of owning high quality differentiated assets located in healthy, thriving markets certainly will not change. While we are in active dialogue, the BARDA transact will be high. And there is nothing imminent to report at this time. We remain very focused on executing our disposition pipeline and on continuing to position the balance sheet in order to play offense in 2025. [indiscernible] With that, I'll pass it over to Sherry to cover our financial results.

Thank you, Chris.

While we will be discussing some of this quarter's financial highlights today, please review the entire earnings release and the accompanying supplemental financial information which were filed yesterday for more complete details. Core FFO per diluted share for the fourth quarter of twenty twenty four was $0.37 versus $0.41 per diluted share, for the fourth quarter of twenty twenty three and in line with consensus. Approximately $0.02 of the decrease is due to increased net interest as a result of refinancing activity over the past year. With the remaining decrease attributable to lower reported rental income due to the sale of two properties during 2024 as well as the downtime between the expiration of a few large leases earlier in the year before newly executed leases commence, AFFO generated during the fourth quarter of twenty twenty four was a approximately $28,000,000 providing ample coverage of a current $15,000,000 quarterly dividend and the funding for our foreseeable capital needs. As we've previously mentioned, CapEx for 2024 was elevated as we concluded several major building redevelopment projects, and we expect lower redevelopment requirements this year. As Brent mentioned, our core FFO per diluted share was $1.49 outperforming consensus by a penny and below the prior year's $1.74 due to the factors articulated by Brent earlier.

Turning to the balance sheet. Our liquidity position as of year end was comprised of the full capacity on our $600,000,000 revolving line of credit, and approximately $110,000,000 of cash and cash equivalents. I'm pleased to report that yesterday, we amended our 200,000,000 syndicated bank term facility to increase the capacity by $125,000,000 and to add two six month extensions extending the final maturity to 2028. We used these new proceeds along with cash on hand and our revolving credit facility to repay the $250,000,000 term loan that was scheduled to mature on March 31. [indiscernible] conjunction with that transaction, we also recast our [indiscernible] with two one year extension options for final maturity of 02/1930. As a result of this activity, as Brent indicated, we currently have no final debt maturities until 2028. Obviously, the large amount of refinancing activity that took place over the last two years has resulted in markedly higher interest expense. Fortunately, All unsecured debt maturing for the rest of this decade is expected to be refinanced at lower interest rates given the current forward yield curve and thus be a tailwind to FFO per Further, our large backlog of executed but not commenced leases and leases and abatement begins to burn off later this year and should drive improved FFO results as well as improvement in our Please refer to Page 39 of the supplemental information filed last night for details of major leases that have not yet commenced or are currently in abatement.

We are introducing twenty twenty five annual core FFO guidance in the range of $1.38 to $1.44 per share with the following assumptions. We expect executed leasing for the year of approximately 1,400,000 to 1,600,000 square feet resulting in an anticipated year end leased percentage for the company's in service portfolio of approx exclusive of any speculative acquisition or disposition activity. Same store NOI of flat to 3% increase on both a cash and accrual basis for the year. Net interest expense of approximately $127,000,000 to $129,000,000 versus $119,000,000 in 2024, reflecting a full year of higher interest rates as a result of refinancing activity completed by the company during 2024 and early twenty twenty five. General and administrative expense of approximately $30,000,000 to $32,000,000 dollars As a reminder, this guidance does not include any speculative acquisition, disposition or refinancing activity, for the remainder of the year. If such transactions occur, we will update this guidance. To help everyone understand the year over year change, the primary positive contribution to projected core FFO growth is a positive $0.04 to $0.08 from higher property operations, which is offset by $0.07 to $0.08 from a full year of interest costs given the refinancings completed in 2024 and early twenty twenty five.

Core FFO is further impacted by dispositions and modestly higher G and A and weighted average share count. With regard to specific quarterly guidance, as noted in previous calls, we expect quarterly results to improve in the second half of twenty twenty five as the backlog of newly And with that, I will turn the call over to Brent for closing comments. Thank you, George.

Chris and Sherry.

As we turn the page on 2024, we are assured that as George said, the Piedmont formula is working. The investments that we've made in our portfolio combined with our customer centric placemaking mindset, continue to resonate with existing and prospective tenants. Now that all our refinancing needs have been addressed for the next few years, we will continue to be selective with capital deployment and our focus in 2025 will be to drive our lease percentage and generate increased rental rate growth, which will ultimately result in FFO and cash With that, 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 your questions now or we will follow-up with appropriate public disclosure if necessary. Operator?

Certainly. At this time, we will be conducting a question and answer session. [indiscernible] Your first question for today is from Anthony Paolone with JPMorgan.

Thank you. Good morning. First question relates to the leasing pipeline. I think last quarter you talked about something in the maybe mid-2s range. Can you maybe give an update there and what it looks like tenant wise and size, industry, that sort of thing?

Certainly, Tony. This is George and good morning to you.

Look, I think what we clearly had a phenomenal year in 2024 accomplishing about 2,400,000 square feet in totality. And as we look in terms of how we came up with our projections and our guidance for 2025, Let me break that down in two different buckets. From a new deal perspective, we accomplished $1,000,000 in 2024. And I think we really need to back out the T and L transaction for nearly 200,000 square feet out of that total to get to about 800,000 square feet, which is kind of the ballpark of where we believe we will we will hit in 2025. And the reason I'm backing out that T and L deal from last year and not not able to duplicate that in 2025 is we just don't have another large block of this size in our current in service portfolio.

So So I think from that perspective, we're on a reasonable path. From a renewal perspective, we accomplished again, we're $2,400,000 in total, back half the million dollars in new. Or $1,400,000 square feet. We had a couple of large transactions during the year. But we really have a much lighter role in 2025. And in 2025 itself, we already know about Ryan who is leaving at the end of the first quarter. Which we previously announced and is heading during on development of a little further north. From our current location.

So in totality, we feel it's it's an assumption down the middle of the fairway. And then getting back to your question in terms of where is how is our pipeline and what sectors are we seeing. Well, I would say today our pipeline is really good. We're looking at late stage activity, as I mentioned on my call, at about 300,000 square feet. So in the context of where we sit today, We are well on our way to meeting our overall goals for 2025 and comparing that to where we were in the first quarter twenty twenty four, has a similar trajectory.

And then going even further back into proposals, to our early stage proposal list. We have 2,600,000 square feet in totality. Which is above our trailing twelve months of 2,400,000 square feet.

And then when you take further into that, which is really what is in the new bucket, we're looking at 2,000,000 square feet of new activity and three quarters of that is for our end service portfolio. Sectors, coming back to that, we're seeing insurance sector, law, accounting, engineering firms and we even started to see some activities in the technology sector.

Okay, great. Thank you for that. And then just my follow-up is maybe for Brent. Just how are you thinking about [indiscernible] acquisitions versus dispositions because it sounds like on the disposition side, market's not not great. You may not want to execute in this kind of market, but I'd imagine there's some similar dynamics on the acquisition side. So So how do you weigh waiting on the dispositions [indiscernible] maybe the acquisition pricing may change on you too, Great question, Tony. I appreciate the time this morning. I'd say first, we've really taken a lot of effort to position the balance sheet to where we can focus on the portfolio and growth opportunities and disposition opportunities, but with no maturities or final maturities until 2028, '8 feel like that gives us a really great runway to continue to recycle capital. As we think about 2025, alluded to, we've got a couple of dispositions are in the hopper and a few more behind that doing price discovery. Think we take a holistic view of the portfolio. We're always looking to upgrade the quality, update the growth profile. And so you're going to continue to see us focus on those smaller non core, I'd say, not emblematic of the remainder of portfolio, I. E. The lowest quality assets initially to dispose of where we'll then continue throughout this year testing what we would call mature well leased as and looking to monetize.

Look, we're realistic on where the pricing is in the market, but we're also very mindful to continue to move the strategic needle continue to rotate further into the Sunbelt So we'll look to leverage the Piedmont platform to transform that 80s, 90s, 2000s vintage assets that we go after from an acquisition standpoint And we are evaluating call it $200,000,000 $300,000,000 on a growth asset value basis assets. But we recognize the key to being able to grow is really raising equity to target those growth opportunities that is and that we'll do so and utilize either public or private capital that will coincide with the risk of the asset. So as I talked about that that kind of evaluation portfolio or a deal that we're looking at they're predominantly opportunistic in nature. And so as a result, it really wouldn't facilitate or be what we'd look to bring on balance sheet at least day one. And so we think of those as probably more likely to be done with a joint venture % of all our assets We feel like that doesn't add a lot of complexity to the balance sheet. We were to go after a few assets in that manner, we typically be maybe 1020% of the equity in that venture.

And again, we'd be looking for low basis 20 plus percent IRRs And those assets would generally take two to three years to reposition. So we think about really then that creating a potential pipeline for acquisitions once the markets do start to stabilize and more normalized environment. But we're going to utilize our same recycling strategy to continue to cull the kind of bottom quality there would be modest dilution potential in some of those dispositions I think moving the strategic needle and improving the quality of the overall portfolio and again the growth will make up for that in the multiple And again, we feel like there's we can take our time, what we've got in terms of dispositions planned for this year, we feel like we'd fill that equity bucket in that joint venture program if we find they're able to consummate some of those opportunities. Is that helpful? Yes, that's great. Thank you.

Your next question is from Nick Fillmore with Baird.

Hey, good morning, everyone. Maybe George or Brent commenting on just the acceleration you guys kind of saw in new leasing to start the year. Just a little bit more commentary on the markets the type of users that you're seeing on that pickup of activity? And then maybe I know in November you're touching on in that proposal bucket you had a decent amount of requirements over 50,000 square feet.

Just a little bit more commentary on the larger users within that pipeline.

Certainly, Nick. Good morning.

This is George.

As I mentioned, we've got 2,000,000 square feet in overall new activity And when you break it down between the markets, the bulk of that 35% of that is is in Atlanta. And that's no surprise as we've got a large role there in 2026 that we're working on to backfill But then you've got Dallas that's sitting around 10% from a new activity perspective. In Minneapolis, does stick out as well as about 28% is related to new activity in Minneapolis and that's our redevelopment portfolio, right? We've got Excelsior, we've got Meridian Crossings that as you recall, we have some large vacancies there, but we feel good about it. We've got 500,000 of transactions amongst those two assets and about 10 deals over over 50,000 square feet apiece So in totality though, not just there, but we have 15 transactions that are over that are in our proposal stage for over 50,000 square feet. And that's up by three from last quarter. So and I think I've already hit on the sectors that we're looking at. So I don't think I need to touch that again.

Yes. I would say just to add, Nick, really on top of that from a sector standpoint, We've seen tech a little bit increase, but for the most part, it's bread and butter fire, professional services, accounting, engineering, Again, those higher collaboration, we call it maybe apprenticeship model businesses. Thank you. That's helpful. Endo $1,400,000,000 to 1,600,000 square feet of leasing, that doesn't include any sort of like chunkier renewals say like a New York City renewal or anything along those lines? Well, it does include the expected New York City renewal. Within those numbers. I think as we've talked about, if we were just going to touch on 2026 maturities, I think that's probably what you're alluding to. We are including the city renewals still expect it to hopefully execute sometime towards the end of the year and the second half of the year. And then as we think about EverSheds, there's also a first half of twenty twenty six expiration. That's been reported and we have noted that they are going to [indiscernible] but we have actually very good velocity behind that and we've got about half of their space now backfilled as well or in process that we're in legal stage.

So feel very comfortable about continuing to backfill that space before it actually ever sheds vacates. And then the last larger lease that we have in 2026 would be the Epsilon lease. That's in the second half of the year. It's still a little early to tell.

I think we still feel pretty good about the likely outcome of that in the and utilize the space extensively. But we'll continue to keep the investors updated on that as well. That's helpful. Sherry, just last one. On the lease percentage, for year end, there's no large scale move out or changes to the pool embedded in that number like in 2024 when you had the two assets going dark, that 100 basis point improvement at the midpoint is just kind of a clean apples to apples comparison.

Correct.

All right. Yes, that's right. We will have nothing that will kind of go into the out of service portfolio this year.

Again, we only would utilize that if a full building went dark and it was a single tenant like those two that we put in last year. They're deep in renovation and having it, as George alluded to, really good leasing success. We think we'll have some positive news to share on the next call around those transactions sorry, those assets Meridian and Excelsior.

Your next question for today is from Dylan Berzinski with Green Street.

Hi, guys.

For taking the question. Obviously, that sounds like another decent year, pretty good year in terms of 2025 being able to push that absorption.

And not to get too early in the house things will shape out for 2026, but to us that seems like the growth will finally be realized in terms of NOI coming online in 2026 it sounds like there's some larger move outs. So just trying to get a sense for, I mean do you guys think there's enough new leasing in the pipeline to continue to be able to push on this upward trajectory of lease percentage?

Hi, Dylan. It's Brent. Yes, I think that you capped it well. We had a great year in 2024. And we did have great net absorption. I think we also increased our guidance during the year by 100 basis points in terms of occupancy.

And we also hit at the top end of our range in terms of same store NOI guidance as well actually exceeded that range from the initial point during the year.

So it has been a great '24. As we look through to '25, George has alluded to, we have very low expiries. And a great pipeline. So we feel like we still got plenty of runway to continue to drive absorption in '25. We feel very comfortable And given where the blocks are coming, you noted we have some large blocks coming back. That's the Ryan space, which we've feel like we've got a backfilled tenant. Very close in that regard and we'll share more information on the next call. But then if you think about the remainder of twenty five, there's really just one other limited larger expiry in the fourth quarter. In Minneapolis. So we feel like very manageable And so 25% still feel very comfortable with 89% to 90%. If we look at 26%, we do have the Evershed lease that will vacate in the second quarter. It will and I think be very positive received in the marketplace when we share some of the leasing activity that we've got in the building. It's still a little early. But I feel very comfortable in saying that we'll have that back filled predominantly at higher rates and meaningful cash roll ups And then also within '26 we've talked about the city.

We feel very good about maintaining them keeping them in the space and occupancy for the substantial majority of not all the space. And then the remainder of '26 is still a little too early to tell once we get into [indiscernible] But overall, yes, we feel very comfortable where the pipeline is. It's going to feed the known that we've discussed. Continue to drive occupancy higher and cash roll ups as well will be very positive. During that timeframe.

Great.

And then just sort of touching on prospects for net effective rent growth. I mean, obviously, as you guys get closer to that 90% lease, it seems likely that obviously it's going to depend on specific submarket and assets, but mean do you guys see 2026 sort of being an inflection point in being able to push that effective rent growth across the portfolio?

I think we're actually order the point where we're pushing net effective rent growth, particularly in our Sunbelt markets, where we're at 90%, 93%, 94% leased in some of those. And we continue to have top of market rents for our product which still well below replacement cost and new construction rents.

So feel like we've got a great runway when it comes to the Sunbelt. I'd say Suburban Boston, Suburban Minneapolis, they've been sluggish. We probably would have said they're flat in 26.

We are seeing again in Minneapolis where one of the few well heeled and equipped landlords to fund TIs and improve and create the modern workplace environment. So I think we'll continue to vote very well there. We don't have a lot of vacancy overall in Boston It's really just in one asset.

And that asset is really well positioned for growth.

So at Boston effective rent growth again, modestly low single digits. I'd say New York, we're pretty full. We're just focused on one lease, not much to talk about there. And unfortunately, Northern Virginia doing pretty good. I'd probably say again flat to slightly positive in ERs. But the district is structurally very challenging We would expect there will be probably flat to negative NERs in that market overall. We continue to be very patient. And I would remind investors and yourself that again it represents two projects and very small percentage of the portfolio that resides in the district Again, it's about call it 5% of the overall ALR. And again, our GSA exposure is extremely limited It's less than 0.5% of the portfolio So with some of the decisions being made out of the new administration, we're expecting limited impact on the portfolio.

Great, Brian. Appreciate those comments. Have a good one. We have reached the end of the question and answer session. And I will now turn the call over to Brent Smith for closing remarks. I want to thank everybody for joining us today. Happy Valentine's Day.

We are really excited to share this track record of leasing and operational growth that we've been accomplishing. We've got the positioning and the platform for future growth. We're excited to share more of this at the Citi Conference if you happen to be there March 3 through the fifth.

In Florida. And again, I would encourage investors if you haven't had a chance come to Atlanta, see the portfolio and our strategies in person. We'd love to give you a tour Please contact Sherry or Jennifer and thank you today If that is, if you would like a tour, and or chance to sit down with management, Thanks for joining today.

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