Piedmont Realty Trust, Inc. (PDM) Earnings Call Transcript & Summary

Good day, everyone. Welcome to Piedmont Realty Trust, Inc. Second Quarter 2026 Earnings Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Laura Moon. Please go ahead.

Thank you, operator, and good morning, everyone. We appreciate you joining us today for Piedmont's Second Quarter 2026 Earnings Conference Call. Last night, we filed our 10-Q and an 8-K that includes our earnings release and unaudited supplemental information for the second quarter of 2026. Both of these documents are available for your review on our website at piedmontreit.com under the Investor Relations section. During this call, you will hear from senior officers at Piedmont. Their prepared remarks, followed by answers to your questions will contain forward-looking statements. as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements address matters which are subject to risks and uncertainties, and therefore, actual results may differ from those we anticipate and discuss today. The risks and uncertainties of these forward-looking statements are discussed in our supplemental information as well as our SEC filings. We encourage everyone to review the more detailed discussion related to risks associated with forward-looking statements in our SEC filings. Examples of forward-looking statements include those related to Piedmont's future revenues and operating income, dividends and financial guidance, future financing, leasing and investment activity and the impacts of this activity on the company's financial and operational results. You should not place any undue reliance on any of these forward-looking statements, and these statements are based upon the information and estimates we have reviewed as of the date the statements are made. Also on today's call, representatives of the company may refer to certain non-GAAP financial measures such as FFO, core FFO, AFFO and same-store NOI. The definitions and reconciliations of these non-GAAP measures are contained in the supplemental financial information, which was filed last night. At this time, our President and Chief Executive Officer, Brent Smith, will provide some opening comments regarding second quarter 2026 operating results. Brent?

Thanks, Laura. Good morning, and thank you for joining us today as we review our second quarter 2026 results. In addition to Laura, on the line with me this morning are George Wells and Alex Valente, our Chief Operating Officers; Chris Kollme, our EVP of Investments; and Sherry Rexroad, our Chief Financial Officer. We also have the usual full complement of our management team available to answer your questions. Piedmont had a strong quarter, beating consensus by $0.01 due to operational outperformance and raising our 2026 outlook for the second quarter in a row, which Sherry will touch on more in a moment. Our Piedmont places are generating meaningful earnings and cash flow growth as office using demand continues to strengthen for high-quality, well-located amenitized assets. The U.S. office market is no longer defined by excess space but rather by increasingly constrained supply at differentiated office buildings, driving higher occupancy, accelerating rent growth and reducing tenant concessions. Leasing activity has reached post-pandemic highs as availability continues to decline across most major markets and is now broadening to more metros and submarkets. While the development pipeline remains at historically low levels, with demand recovering and new supply scarce, our Piedmont places are benefiting from a more favorable operating environment and meaningful pricing power. As I noted on our last earnings call, Piedmont has materially increased asking rates across a substantial portion of the portfolio, in most cases, more than 15% over the past 12 to 18 months. Those rate increases implemented across the portfolio in early 2026 are now being reflected in our quarterly lease metrics. During the quarter, we signed 460,000 square feet of leasing with rental rate increases of 14% on a cash basis and over 32% on an accrual basis. And in fact, over the last 4 quarters, the average rental rate increase on a cash basis has been 12%, which is representative of the rental mark-to-market and embedded growth in the portfolio. Having renovated 90% of the portfolio since 2020, our amenity-rich, hospitality-driven Piedmont places are among the best assets in their respective submarkets and are leasing at record high rental rates. During Q2, we achieved the highest quarterly average net effective rent after CapEx in the company's history, now reaching the mid-20s per square foot, up more than 20% over the prior trailing 12-month average. Even more encouraging is that our rents still remain 35% to 40% below new construction pricing, providing further runway to increase rental rates. Additionally, Piedmont has leased over 80% of the portfolio since the pandemic, meaning the vast majority of our customers have already rightsized and upgraded their office space for the modern workforce. Our average tenant size across the approximately 16 million square foot portfolio is now just under 17,000 square feet with customer and industry diversification providing insulation against potential workforce disruption from AI implementation. Piedmont's customers with lease expirations several years out are also recognizing that the market for premium office space is tightening, particularly for tenants that occupy a full floor or greater. As a result, we are seeing customers approach us about renewals of their space well in advance of the expiration. In the coming quarters, we anticipate early renewal discussions with existing tenancy to accelerate, which should bolster client retention ratios above our 60% to 70% historical average with the ability to reduce free rent and tenant capital concessions. At Piedmont, we recognize the most effective way to reduce capital expenditures on leases is to retain our existing customers. That's why we continue to invest in our team and technology to create the best OpEx experience for our clients. This year, the team's hard work culminated in Piedmont being recognized by Kingsley as a top 5 national office platform, the highest ranking among all public office companies. For those who may not be familiar, Kingsley is a third-party research firm that conducts a national survey of office consumers to evaluate their landlord. Most of our public peers participate in the survey, so we couldn't be more proud to be recognized as a top 5 world-class operator. Additionally, during the second quarter, 9 projects throughout the portfolio won the Building Owners and Managers Association or BOMA's Outstanding Building of the Year Award in their respective size categories, a tangible testament to the quality of our product and service offering. The strategic repositioning of the Piedmont portfolio, along with the substantial leasing we've accomplished over the past 12 months, is translating into improved operating metrics, including higher economic occupancy, now over 80% for our in-service portfolio with continued improvement in the coming quarters. Same-store cash NOI growth, 10% on a cash basis for the first half of the year and meaningful earnings growth, $0.02 for the first half of '26 when compared to the first half of '25. Further, the portfolio is approaching 90% leased. And as of June 30, inclusive of our out-of-service portfolio, had an executed pipeline of leases that have not commenced equal to approximately $39 million of annualized cash rents. That's the equivalent of 570 basis points of occupancy that will flow into earnings over the next several quarters. The investment thesis in Piedmont is straightforward. Demand for differentiated office product is increasing while supply is shrinking. Return to office mandates are becoming more common and more enforceable. Companies recognize that the office is critical to the 4 Cs: building culture, creativity, collaboration and connectivity. At the same time, new office construction remains near 0, older buildings continue to be removed from inventory through conversion or demolition and many financially constrained owners lack the capital to compete. Piedmont is uniquely positioned for success in the marketplace. We're generating the highest earnings and cash flow growth in the office sector and trade at a very compelling valuation, with net effective rents after CapEx of $25 per square foot. On a stock price, that equates to a gross asset value of approximately $220 per square foot. Furthermore, we currently have an outsized earnings backlog, great opportunities for occupancy absorption, 10% to 15% of embedded rental rate growth and opportunities for accretive debt refinancings, which will all drive core FFO higher in the near term. With that, I'll hand it over to George for further details on second quarter operational performance. George?

Thanks, Brent, and good morning, everyone. The operating environment for high-quality office remains constructive, and the Piedmont platform continued to perform well during the second quarter. Leasing velocity continued its strong pace with 42 transactions completed for approximately 460,000 square feet. New business activity was slightly more than half of that volume with a large portion of that expected to translate into 2027 GAAP rent recognition. Average new deal size was approximately 11,000 square feet, reflecting a good mix of small, medium and large clients, and the weighted average lease term for new transactions was approximately 11 years, reflecting continued customer commitment to high-quality workplace environments. For the ninth consecutive quarter, expansions exceeded contractions in the portfolio. That is an important signal. It shows that our customers are not simply maintaining space but many are expanding to support growth, returning to office requirements and a renewed focus on collaboration. During the quarter, we completed 9 expansions for 22,000 square feet with no contractions. Lease economics remain strong. As Brent noted, cash rents of space vacated 1 year or less increased by 14%, while accrual rents increased by 32%. Overall, weighted average starting cash rent of $43.79 per square foot rose 5% from last quarter's $41.59 per square foot, and we anticipate more rental increases in the near term. Leasing capital spend for the quarter was stable at $5.83 per square foot per year and in line with our trailing 12-month average of $5.97 per square foot. Tightening conditions for high-quality space are leading to stronger pricing power as net effective rents surged this quarter to $25.56 per square foot, up over 20% from the prior 12-month average, and we anticipate maintaining NERs in the mid-20s per square foot or higher, supported by persistent demand for high-quality space and little to no new development in our submarkets. Equally impressive, the portfolio generated 9% same-store cash NOI growth, driven by both burn off of free rent and higher rental rates. We believe these very encouraging second quarter metrics will likely continue into the second half of the year. In Northern Virginia, the RBC corridor has been experiencing an uptick in demand over the past few months with the defense sector leading the way. Our local team captured the company's largest new deal of the quarter with a defense contractor for 73,000 square feet at our 4250 North Fairfax building. This 12-year deal commences as soon as the space can be built and boast a healthy annualized NER of $27 per square foot. Our NOVA assets are well located within dense, highly amenitized, walkable environments and sit adjacent to metro rail stations. The portfolio here is currently 80% leased, and we're projecting strong net positive occupancy and FFO growth over the near term. Atlanta was our most active market with 11 deals for 130,000 square feet. A majority of that was new business and landed in each of our 3 vibrant submarkets of Central Perimeter, Cumberland and Midtown. Most noteworthy, we signed a 57,000 square foot 15-year new lease at 1155 Perimeter Center West, preemptively backfilling a large portion of Broadcom space. We continue to experience strong customer interest in our remaining Central Perimeter space. Our Dallas team closed 8 deals for 107,000 square feet with Epsilon's 11-year extension driving most of that deal flow and yielded a hefty cash roll-up of 42%. Our pipeline for backfilling the balance of that space and pushing rate is deep with multiple tenants competing and improving rents. Over in the Lower Tollway submarket, the Dallas Maverick announced plans to develop a multibillion-dollar arena and entertainment district at the 100-acre Valley View site, which sits half a mile from our Galleria project. As we've experienced with the Braves battery development in Atlanta, being adjacent to such a massive entertainment venue will likely see private, public and reinvestments toward the neighborhood's infrastructure and elevates the desirability of an already healthy office submarket. Today, Galleria Towers asking net rent is $50 per square foot, up 40% from just 2 years ago when we completed the renovation, and we're excited for this 1.4 million square foot asset trajectory and future earnings growth. At 60 Broad, we previously announced that we had agreed to terms with the new administration of the City of New York for substantially all of the space and that a lease of this size will require other internal city reviews and a public hearing process before the transaction can be fully executed. The city is steadily progressing to conclude the lease renewal. However, it is likely the process will not be wrapped up until the fourth quarter. Our redevelopment projects posted another strong quarter of deal flow with over 60,000 square feet of new transactions signed, increasing the out-of-service lease percentage from 76% to 83%. During the second quarter, we placed 222 Orange Avenue back into service, and we're confident that the remainder of the out-of-service portfolio will reach stabilization around the end of 2026. Looking ahead, our leasing pipeline remains stout and now has over 700,000 square feet in the legal stage for the third quarter. Outstanding proposals continue to hold steady at approximately 2 million square feet. Our supplemental report shows 927,000 square feet or 6% of our operating portfolio expiring in the second half of 2026, which is very manageable and even less exposure when you back out the pending New York City extension. Assuming a typical run rate of 175,000 square feet of new transactions in each quarter and concluding known renewals, we're on a path to achieve our previously released guidance with overall lease volume projected to reach the high end of that range or 2 million square feet. We've never been more excited about the outlook for our business. Tenants are choosing Piedmont because our buildings provide the right combination of location, amenities, service and value that today's dynamic companies require. Our formula is working, and we believe it will continue to drive leasing, rent growth and occupancy gains. I'll now turn the call over to Chris Kollme for investment activity. Chris?

Thank you, George. From an investment perspective, our focus remains on optimizing the portfolio, preserving capital discipline and positioning Piedmont to benefit from strengthening liquidity in the transaction market. The office investment market is improving, driven by the steady increase in leasing demand, coupled with the dwindling supply of high-quality space. That said, buyers remain cautious, and we see only limited institutional investors in the market. The majority of transactions are being awarded to local operators, family offices and private capital with a focus on transactions less than $80 million. With limited well-capitalized operators in the market, Piedmont is well positioned to compete for value-add acquisitions. We're focused on opportunities within our existing markets, which are accretive to our earnings and growth trajectory. A quick update on dispositions in process, specifically the 2 land parcels that we have mentioned previously. Our Royal Lane land parcel in Dallas remains under contract, and we're feeling optimistic that it will close during the third quarter, generating approximately $12 million in net sale proceeds. The planned development will provide about 20,000 square feet of retail directly adjacent to our Connection Drive assets. The other land parcel in Orlando continues to move forward, albeit slowly as rezoning takes time and will likely be a mid-2027 closing. Similarly, the land will be redeveloped into a mixed-use project containing multifamily, over 40,000 square feet of retail space as well as several restaurants, all of which will benefit the environment next door to our TownPark assets in Lake Mary. Aside from those 2 known sales, we continue to actively weigh the disposition of mature and/or noncore assets, which lack the growth profile of the balance of our portfolio. In short, Piedmont's opportunity to recycle capital is improving as liquidity returns to the sector and our capital allocation priorities remain focused on high-return leasing capital. Improving balance sheet flexibility and acquisitions which improve our portfolio quality are accretive and are consistent with our long-term growth strategy. 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 earnings release and accompanying supplemental financial information, which were filed yesterday for more complete details. Core FFO per diluted share for the second quarter of 2026 was $0.38 per diluted share, $0.01 ahead of consensus and $0.02 ahead of the second quarter of 2025. Growth was largely driven by higher rental rates and higher economic occupancy, partially offset by the sale of one project during the 12 months ending June 30, 2026. AFFO generated during the second quarter of '26 was approximately $31 million. Turning to the balance sheet. I'm pleased to report that during the second quarter, we successfully refinanced our term loan that was scheduled to mature in January of '27. We increased the principal from $325 million to $400 million, pushed out the maturity to May of 2031 and tightened the spread by 15 basis points. So we are very pleased with this execution. We used the net proceeds from the increase in principal to pay off the balance outstanding under our line of credit. Consequently, we have the full $600 million capacity under the line as well as around $17 million in cash available as of June 30. As we've highlighted previously, we currently have no debt maturities until 2028, and our maturity ladder is now very smooth at roughly 20% per year from 2028 to 2033. Our overall weighted average cost of debt continues to decrease and is now at 5.5%. It's important to note that as the impact of the team's leasing success over the last 12 months ramps up in the second half of this year, our net debt-to-EBITDA ratio will trend below 7x by the end of the year. This trend will continue in 2027 as the balance of the nearly 900,000 square feet or $39 million of lease revenue commences. The current 570 basis point spread between leased and commenced occupancy will also compress to approximately 400 basis points by year-end. We continue to think creatively as we evaluate balance sheet management options and look for opportunities to further reduce our interest costs and/or extend our maturity ladder. As Brent noted in his remarks, with year-to-date performance and visibility into second half lease commencements, we are increasing our 2026 annual core FFO guidance to a range of $1.50 to $1.55 per diluted share, an increase of $0.025 per share at the midpoint when compared to our original 2026 guidance and equating to an earnings growth rate of over 8%. We are also increasing our same-store NOI, cash and GAAP guidance range to 5% to 8%, a 200 basis point increase from original 2026 guidance. Please note that consistent with our standard practice, this guidance does not include any speculative acquisitions, dispositions or refinancing activity. We will adjust guidance if and when those types of transactions occur. The most important financial takeaway is that Piedmont's leasing activity is now converting into earnings and cash flow growth. The $39 million of lease revenue still to commence that we discussed earlier will support higher same-store NOI, higher core FFO, lower net debt to EBITDA and continued progress toward a more normalized economic occupancy level. With that, I will turn the call back over to Brent for closing comments.

Thank you, George, Chris and Sherry. To summarize, Piedmont is entering the next phase of the office cycle from a position of increasing strength. The portfolio has been repositioned, leasing demand remains broad and durable, signed leases are converting into cash flow, rents are moving higher with more room to run, new supply is limited and the leasing success will start to improve our balance sheet, providing the flexibility to efficiently recycle capital in improving transactions market. We recognize that the office sector continues to face skepticism, but the data in our portfolio tells a different story. Companies are returning to the office. They are prioritizing high-quality amenitized environments and making long-term leasing commitments. They're choosing Piedmont because our buildings offer the experience and service they demand at a compelling value relative to new construction. Our focus for the remainder of the year is to grow occupancy, increase rents, convert our leasing pipeline into cash flow and continue to optimize the portfolio. If we execute on these priorities, Piedmont is positioned to generate consistent organic FFO and cash flow growth for the remainder of 2026 and beyond. With that, I will now ask the operator to provide our listeners with instructions on how they can submit their questions. Operator?

[Operator Instructions] Your first question is coming from Dylan Burzinski with Green Street.

Maybe if you can just sort of talk a little bit or expand a little bit on the demand environment. Obviously, things continue to remain strong, evidenced by 2Q leasing and leasing to date in July. Maybe you can just talk about sort of in your guys' mind, what is sort of causing this to continue to accelerate here given the sort of, I would say, more uncertainty over the macro backdrop?

Dylan, this is George. Thank you for joining us. Listen, I think the leasing engine really continues to fire on all cylinders, right? And employers are looking for space, want to move into a more compelling and vibrant environment. We can see a lot of collaboration, and space is being made for employees to reconnect from a culture perspective. That trend is there, that trend continues. And when you look at overall demand today, I mentioned earlier that we're around 2 million square feet overall volume. But when you take a look at what's actually new deal activity, that's around 75% of that or 1.5 million square feet. And it's really great to see how that demand permeates over all of our submarkets. And there's an overbalance of activity looking at -- for Atlanta and Dallas, that's kind of where most of our exposure is in the near term.

I would layer on that, we just continue to see a constructive environment for our clients to continue to grow their business. Yes, interest rates are elevated, but the investment in what seems to be productivity gains out of AI are not cannibalizing jobs. And in actuality, we're starting to see it help companies grow in that component. George noted in our prepared remarks, the number of expansions we're seeing versus contractions. I think that's generally fueled by that. But also that our portfolio, in particular, is geared towards right now the sweet spot in terms of industry demand in the professional services realm, financial services, insurance. We've talked about in the past our designs, our floor plates, how we operate the buildings and service them are all geared to provide an elevated experience for those types of users. We don't have a lot of tech exposure in the company where you have seen less job growth. So I think all in all, those factors put the desire to be in the most premium product at a very reasonable price, fit the Piedmont strategy greatly. There are a lot of great buildings at high price points, but that can't be afforded by every tenant, but a Piedmont building can. And that is really a unique point in the market or place in segment that we strive to, and we're seeing increased demand, particularly for that thing.

That's very helpful. Maybe just one more, if I could. Sherry, you mentioned getting to that sort of sub-7x net debt-to-EBITDA range here shortly. Do you guys sort of have a longer-term leverage target goal in mind as you sort of think about '27, '28 and beyond?

So getting below 7 should happen by the end of this year. And then in the intermediate term, we'd like to get closer to the 6.5 range, and in the longer term, closer to 6. So somewhere in the '27 to '28 time frame is what I'm kind of calling the intermediate term of that 6.5 turns.

Your next question is coming from Daniella De Armas Rosales with JPMorgan.

On the demand pickup in Northern Virginia, how competitive is it to get deals done there? And do you think the activity there will persist?

This is Brent. Thank you for joining us. As you point out, NOVA has seen an uptick in transactional activity. We did complete a larger, call it, about 70,000 square foot lease with a defense contractor tenant. What we continue to see in that market are a couple of factors which give us the belief that we can continue to execute uniquely in the market. First one would be that we continue to see less and less lots of space available as there has been a good bit of absorption, particularly for professional services. And then as we noted as well, the components of the increased funding for, I guess, defense contractors continues as well as the difficulties in the Middle East and the war in the Middle East continue to fund growth in those companies that really focus on advanced warfare. This submarket has a large presence of companies that are also in that industry. And so therefore, we continue to see a lot of demand. Very few landlords have the capital right now in that market to really create the environment and provide the necessary funds to build out unique space and in some instances, space, you are familiar what that means. They also really see a lot of demand for the young millennial workforce that resides in the RV corridor in Northern Virginia. So there's a couple of factors. We think that demand continues to play out and bodes well for continuing to drive absorption in our buildings in the RV corridor overall. So I think you'll continue to hear us share positive news in the coming quarters.

That's really helpful insight. And I guess a second question for me. On the acquisition side, what opportunities are you guys seeing there? And what did those deals look like?

Great question. We continue to canvas the market for off-market transactions. There have been a few assets brought to market as well and the focus areas that we'd like to grow the business, that being primarily, as we've talked about in the past, Dallas and Northern Virginia, the reasons we just went through. We do like our other exposure in the Sunbelt, but Atlanta is already our largest market, and we see really good opportunities in Dallas. We continue to focus on assets that are great bones, slightly older vintage, but are really well located. We feel like location is the first amenity. But if it has the air and light, the ceiling clearance heights and the right ground plane interaction, we really look for assets that are, call it, 70%, 80% leased. They haven't been put through our program, so we can create value either through lease-up, roll up in rental rates and putting our Piedmont expertise to work and drive what would probably going in yields in the, call it, 8.5% to 9.5-ish range that would stabilize well north of 10.5% into the 11s in terms of yield on cost. We're looking, again, other profiles of those buildings would have the existing occupancy would be longer term and durable. And we would consider those assets building to recondition and bring back to a trophy level quality and demand the highest in the submarket. So very much what you've seen us accomplish here over the last 5 years in our strategy and portfolio.

Your next question is coming from Michael Lewis with Truist.

So you just answered a question about acquisition pricing for the types of assets you're looking at. I wanted to ask about dispositions, and are the improving fundamentals causing any changes in pricing? I know the New York asset is reliant on a lease, but may still have some upside on some upper floors. I saw the Enclave won a TOBY award. I saw 2 assets in Minnesota did as well. Any change there on potential disposition pricing?

Michael, thanks for joining us. This is Brent. Great question. As I think Chris alluded to in his prepared remarks, we are continuing to see more debt availability in the market as well as good leasing to get better underwriting, better rental rates, absorption, et cetera. So we are seeing the transaction market continue to thaw, if you will. If you think about our dispositions and what we think about in a framework around that, as we've always said, we really want to cull kind of the most mature top 10% of our assets as well as what we would consider the bottom 10% in terms of quality and continuing to harvest value and continuing to grow the overall part of the portfolio and earnings stream. So as we think about not only dispositions here and now in terms of cap rate, but what is the growth profile of those assets going forward. Our dispositions, because those are 2 different buckets, they'll vary, but somewhere between probably the 8% to 10% cap range seems reasonable for most of those assets. The overall desire will be to redeploy those proceeds into the Sunbelt. In terms of pricing, we would say it's probably more stabilized pricing and just getting more transactional activity. I don't think we've seen a material movement in overall pricing in the last 6 months for most of our markets, but Dallas would be one that we've seen a material move, I would say, otherwise. Everything else has been pretty stable. So we think that still is an environment where with more transactions, we can start to recycle more capital. In the past pre-pandemic, we did $300 million to $400 million of recycling. I don't think that's achievable today, but it is positive to see that that is starting to unlock more transactional activity overall.