Piedmont Office Realty Trust Earnings Call Insights: NOI Adjustments, Acquisition Disposition Outlook
On Friday, Piedmont Office Realty Trust, Inc. (NYSE:PDM) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what the C-suite revealed.
Anthony Paolone – JPMorgan: Bobby, recognizing the variances in quarterly earnings this year as you mentioned, can you help us maybe with any NOI adjustments we should make to the first quarter as we roll into 2Q?
Robert E. Bowers – CFO: Well, the one thing you need to remember, Tony is that the Santa Fe lease is the one that rolled off right at the end of this quarter. So, you’ll have the full impact of that lease in the second quarter, but then as you move into the third and fourth quarter you start picking up those replacement leases that we’ve talked about Page 7. You get the commencement on the KPMG lease, you get the United Healthcare lease beginning, you get Savient, and a couple of the other leases at Bridgewater.
Anthony Paolone – JPMorgan: No other though, large things we should think about in NOI as we roll into 2Q?
Robert E. Bowers – CFO: No, I don’t think so.
Anthony Paolone – JPMorgan: Then just my other question is on National Park Services. Can you give us a sense as to just how the hold over process works like how long you think they can stick around just from a practical point of view?
Donald A. Miller – CEO: Tony, this is Don. I’m not sure there’s a great answer to that. The Federal Government actually in their leases through the GSA, typically have a fair amount of I’ll call it leverage for a lack of better term in their ability to stay in the space if they need to. However, they have to stay in the entire space if they want to continue holdover. So, given that we don’t formally have an FFO in front of us, and we don’t know other than what’s been issued or what’s been approved by Congress, which is a 15-year, a 160,000 foot lease, beyond that, we don’t know what their goals are going to be. It could range anywhere from them holding over for a short period of time, six months to a year and a half and doing something else to holding or asking to come back for a two or three year lease from us to give them more flexibility to all the way to signing a 15-year renewal with us. And then of course we have talked about other strategies in the past about how we loved it encouraged them to maybe move over to our OCC space, but any or all of those were still options. Frankly we – they haven’t formally issued SFO they have only gotten it approved by Congress, so until they do that and start to engage with us it will be hard to know.
Anthony Paolone – JPMorgan: It sounds like more than a month or two or something like that?
Donald A. Miller – CEO: I don’t know how they would even physically get out. There is a conventional wisdom, I don’t know if this is always true, but we have seen in a number of times in the past that from the time they make a decision to move out of a building, quite often it’s a year to a year and a half before they can actually physically get out, even if they are moving at fairly good pace.
Acquisition Disposition Outlook
Dave Rodgers – RBC Capital Markets: Don, on the acquisition disposition outlook for the year, it sounds like, as you said in your comments, expecting to maybe that seller of asset. Is there an ability to maybe start to accelerate some of these non-core dispositions? I know in the past there hasn’t been a lot of capital in those targets, but are we seeing a little bit better flow of capital into the secondary markets that would allow you accelerate that and how does that make you feel about the guidance for this year, if you were to be a bigger seller within the range?
Donald A. Miller – CEO: Good question, Dave. I think could of comments more broadly about the capital markets which I think will answer your question and if it doesn’t I’ll get more specific. Clearly in the concentration markets we’re seeing an improvement in pricing and around the shop or even using the B word, which I know nobody wants to hear. For those of you who do not know what I am talking, I am talking about a bubble. But that’s typically sort of confined to the super core assets in those markets, whether it’s just really strong rent rolls, good quality assets, because what’s happening is you’re seeing a lot of people trolling for very cheap financing. I consistently hear people bragging about getting five year financing at 3.5% or at 4% or less on deals that you would think are long-term holds, and so, my natural reaction is to believe that they are mismatching assets and liabilities again, which we’ve seen in previous cycles, but what it ends up doing is encouraging them to bid these cap rates down to levels that they don’t make any sense from either an income yield standpoint or just a basis standpoint. You know how much we abhor paying too much for piece of real estate. So, as a result what we’re seeing is more and more of those people who can’t find good deals in those markets are spinning out into super core deals in the secondary markets and so some of things that we’re bringing to market right now are fairly longer term lease, reasonable quality assets that we think can take advantage of that and most of those were already on our 2012 lift. So, they don’t really change anything about our business from 2012. In the even we got some more leasing done on a couple of other assets. It could encourage us to bring others to market, but I don’t think it will be flat. It will be more of a trickle of the non-strategic assets to come to market beyond what we’re currently planning. So, if that was to happen, it would likely be later in the year and as a result it probably wouldn’t have a big impact on 2012 even if we were to execute it. The one thing I will say is notwithstanding sort of the strengthened pricing in the super core assets. We are still seeing a deal here or a deal there that because it’s got a little bit of dislocation in the rent roll has some interest to us, and so there is still a deal or two out there that could be interesting to us from an acquisition standpoint, right now, but by and large, you’d still see us continue to err on the side of discipline, versus not.
Dave Rodgers – RBC Capital Markets: Follow-up to that maybe on the flipside, have you looked at other forms of investments, maybe structured investments across the country that might make sense for Piedmont?
Robert E. Bowers – CFO: Yeah. We may have talked about this in the last call as well, Dave, but the – we are seeing better relative value in mez loans today particularly on deals that either had some problems in the past and need to be recapitalized or somebody who is buying something leasing it up, and you’ve got sort of a low going in basis and some protection, because they’ve got to spend a lot of capital to go forward and those are actually pricing. In some cases, I feel like we’re getting a better return than the equity is getting on the same deal. So, it’s kind of fascinating given that you’re lowering the capital structure and getting better returns. So, that is encouraging us to look at a few of those kinds of deals, but those are always hard, because you got to line up a lot of different things, you got to line up the right sponsorship, the right real estate. Obviously, we wouldn’t do one on something that wasn’t a piece of real estate that we’d otherwise want to own, it’s got to be in markets that we want to do, et cetera, et cetera. So, those are even a little hard to do than just pure equity deals.