Piedmont Realty (PDM) Q3 2026 Earnings Call Transcript

Image source: The Motley Fool.

DATE

Tuesday, Oct. 27, 2026

CALL PARTICIPANTS

• Chief Accounting Officer - Laura Moon
• President and Chief Executive Officer - Brent Smith
• Chief Operating Officer - George Wells
• Chief Operating Officer - Alex Valente
• EVP of Investments - Christopher A. Kollme
• Chief Financial Officer - Sherry L. Rexroad

TAKEAWAYS

• Core FFO -- $0.39 per diluted share, representing an increase from $0.35 in the prior year period driven by higher rental rates and the commencement of new leases.
• Rental Revenue -- $119 million, reflecting a 7.4% increase due to improved rental rates and higher commenced occupancy levels across the portfolio.
• Same-Store Net Operating Income (Cash Basis) -- 7.5% growth, as rental rate increases and the expiration of free rent periods on recently executed leases outweighed expiring contracts.
• Total Leasing Volume -- 406,000 square feet, with 194,000 square feet related to new tenant activity and the remainder to renewals.
• Net Effective Rents -- $29.31 per square foot, an all-time high representing an increase of more than 30% over the trailing 12-month average.
• Cash Leasing Spreads -- 26.2%, reflecting the second-highest quarterly rental rate increase in the company's history.
• Accrual Leasing Spreads -- 34.6%, indicating significant positive rental rate growth embedded in the current property portfolio.
• Uncommenced Lease Pipeline -- $29 million in annual revenue, equivalent to 410 basis points of portfolio occupancy expected to be recognized in future periods.
• Exchangeable Senior Notes -- $230 million issuance of 2.875% notes due in 2031, with proceeds used to redeem higher-coupon unsecured debt.
• Weighted Average Cost of Debt -- 4.8%, a reduction of more than 70 basis points following the redemption of 9.25% senior notes due in 2028.
• Core FFO Guidance -- $1.55 to $1.57 per share for the full year 2026, marking a $0.06 increase at the midpoint relative to the original annual outlook.
• In-Service Leased Percentage -- 87.7%, as compared to 88.9% in the prior quarter, reflecting net lease expirations and the acquisition of the 83% leased 4075 Wilson Boulevard.
• Real Estate Acquisitions -- $52 million for 4075 Wilson Boulevard in Arlington, Virginia, an 186,000-square-foot building acquired at approximately $280 per square foot.
• Real Estate Dispositions -- $12 million from the sale of a 10.6-acre land parcel in Dallas, Texas, which generated a gain of approximately $9 million.
• Pending Asset Sales -- $81.8 million for Enclave Place in Houston, with closing anticipated in the fourth quarter and proceeds intended to pay down the line of credit.
• Debt Maturity Profile -- No final debt maturities until October 2028, following the successful refinancing of near-term high-coupon obligations.
• Net Debt to Core EBITDA -- 7.1x on a trailing 12-month basis, with management projecting the ratio to move below 7.0x by the end of 2026.
• Same-Store Net Operating Income (Accrual Basis) -- 6.9% increase, supported by rental rate growth and increased tenant reimbursements.
• Average Lease Term -- 10 years for leases executed during the third quarter, with a weighted average term of nine years for activity since the beginning of 2024.
• Capital Expenditures for Leasing -- $5.21 per square foot per year of lease term, staying slightly below the nine-month average of $5.44.
• Common Stock Repurchases -- 5.4 million shares at an average price of $9.20 per share, executed in coordination with the exchangeable notes offering.
• ATM Equity Issuance -- 4.1 million shares at an average price of $9.72 per share, providing capital used for debt reduction.

Need a quote from a Motley Fool analyst? Email pr@fool.com

RISKS

• Christopher A. Kollme stated, "Although the market has been unsettled over the past few weeks, we continue to actively weigh the disposition of mature and or noncore assets which lack the growth profile of the balance of our portfolio," noting potential headwinds in the asset sales market.
• Brent Smith stated, "I would say some markets where we are not seeing as much robust pricing power would be, as we noted, D.C and Boston," indicating geographic disparities in rental rate growth.

SUMMARY

Piedmont Realty Trust, Inc. (NYSE:PDM) reported third-quarter 2026 results highlighted by record leasing metrics and active capital recycling. Management stated that portfolio performance was supported by sustained demand for premium office space and limited new construction in core Sunbelt and Eastern U.S. markets. The company completed a transformative $230 million exchangeable notes offering, which facilitated the redemption of its highest-coupon debt and significantly lowered interest expenses. Strategic focus remains on optimizing the portfolio through the disposition of noncore assets and reinvestment in higher-growth properties in markets such as Atlanta, Dallas, and Northern Virginia.

• Management noted that existing customers are prioritizing space retention, with Brent Smith stating, "Existing customers with renewal dates as far as 2030 are seeking early renewals."
• The company reported that for the 10th consecutive quarter, tenant expansions exceeded contractions, primarily driven by law, financial, and engineering firms.
• George Wells indicated that market fundamentals are shifting in favor of landlords, noting that Dallas asking rates have increased 20% to 30% over the past 12 months.
• Management reported that artificial intelligence technology has had minimal impact on leasing demand, particularly among the small and medium-sized enterprises that form the company's target customer base.
• Piedmont is monitoring office-to-residential conversions in its core submarkets, noting that approximately 12% of the overall office market in the Ballston submarket is expected to be removed through residential conversion.
• The company confirmed that dividend levels will be evaluated by the board in early 2027, though management does not currently forecast taxable income through 2028.

INDUSTRY GLOSSARY

• Core FFO: A non-GAAP financial measure that adjusts NAREIT FFO for one-time items such as debt extinguishment costs and gains or losses on real estate sales to better reflect recurring operational performance.
• Same-Store NOI: A metric that measures the operating performance of properties owned for the full duration of the current and prior year periods, excluding acquisitions and dispositions.
• Net Effective Rent (NER): The total rent due over the lease term, minus concessions such as free rent and landlord-funded capital for tenant improvements and commissions.
• AFFO: Adjusted Funds From Operations, which subtracts non-incremental capital expenditures and straight-line rent adjustments from Core FFO to measure cash available for distribution.
• ROFO (Right of First Offer): A contractual right that requires a landlord to offer a specific space to a tenant before marketing it to third parties.
• SOFR (Secured Overnight Financing Rate): A benchmark interest rate for dollar-denominated loans and derivatives that has replaced LIBOR.

Full Conference Call Transcript

Operator: Good morning, and welcome to Piedmont Realty Trust Inc. Third Quarter 26 Earnings Call. At this time, lines are in a listen only mode and we will open the floor for your-- you can press *1. Should you wish to remove yourself from the queue, press *2. It is now my pleasure to turn the floor over to your host, Laura Moon, chief accounting officer. The floor is now yours.

Laura Moon: Thank you, operator, and good morning, everyone. We appreciate you joining us today for Piedmont's third Quarter 26 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 third quarter of 2026. 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. Prepared remarks followed by answers to your questions will contain forward looking statements as defined in the Private Securities Litigation Reform Act of 2 thousand.

These forward looking statements address matters which are subject to risk and uncertainties, and therefore, 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 risk 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 time. At this time, our president and chief executive officer, Brent Smith, will provide some opening comments regarding third quarter 26 operating results. Brent?

Christopher Brent Smith: Thanks, Laura. Good morning, and thank you for joining us today as we review our third quarter 26 results. In addition to Laura, on the line with me this morning are George Wells and Alex Valente, our chief operating officers. Christopher A. Kollme, our EVP of Investments and Sherry L. Rexroad, our chief financial officer. We also have the usual full complement of our management team available to answer your questions. Piedmont had a phenomenal third quarter in operations. Portfolio repositioning, and capital markets activity. First, customer demand for Piedmont PLACES remained robust. Fueling record level leasing metrics. Second, capital recycling activities improve the quality and strategic positioning of the portfolio.

And last, a $230 million exchangeable notes offering and subsequent redemption of the company's outstanding 2028 unsecured notes accretive to earnings and cash flow. Diving into the quarter's results, Leasing was strong. We executed over 400 thousand square feet of total leasing with almost half related to new tenants. As we have noted for the past several quarters, quality office space, especially large blocks, is becoming increasingly scarce as historically low construction deliveries and ongoing conversions have reduced total office inventory creating increasingly tight availability for high quality space, and supporting broader landlord pricing power. Piedmont's portfolio is directly benefiting from a scarcity of unique, differentiated, premium office environments.

Some trends we are witnessing in our portfolio that emphasize the dwindling availability of high quality office space. First, the number of lease expansions is increasing. Existing customers with renewal dates as far as 2030 are seeking early renewals. And more existing customers are exercising their ROFO rights to block new tenants leasing so they may expand. These are indication that customers are recognizing the current and forecasted conditions the quality office is in high demand, supply is shrinking, and economic terms are shifting to the owner's benefit. Piedmont is taking advantage of these market dynamics.

Pushing net effective rents after CapEx to all time highs, reaching $29 a foot for the first time during the third quarter, an increase of more than 30% over the trailing 12 month average. The growth is top line driven. As we continue to achieve higher rental rates across our properties. Piedmont's differentiated assets, achieved cash and accrual leasing spreads for the third quarter of 26%, 35% respectively. The second highest in the company's history and are further testament to the positive rental rate growth embedded in the portfolio. With our current asking rents in our markets still 40% below those required for new construction we think the growth in rental rates will continue for the foreseeable future.

As a result of the leasing completed over the last 12 months, and substantially higher rental rates, and the subsequent burn off of the associated free rent, same-store NOI continue to trend positively. Growing by approximately 8% on a cash basis, and 7% on an accrual basis during the third quarter. Today, the signed but yet commenced pipeline equates to approximately $29 million of annual revenue equivalent to 410 basis points of portfolio occupancy that will flow into earnings over the next several quarters. The third quarter was also active for asset recycling with the acquisition of 4.08 thousand Wilson Boulevard and the disposition of a land parcel. 4.08 thousand is an outstanding building.

And a strategic addition to the Piedmont portfolio. Please check out the investor relations section of the website for transaction presentation, and Christopher will share additional details in a moment. During the quarter, we also placed 1 of our 2 Houston assets under contract for disposition. With closing expected before year end. Looking ahead, we continue to track a number of acquisition opportunities we would anticipate funding with proceeds from dispositions. Finally, we executed on impact impactful financing activity during the quarter that Sherry will review but the headline is this. We were financed of the last of our high coupon bonds significantly improving our weighted average cost of debt lengthening our remaining debt maturity profile.

With no maturities until late 2028. All of this momentum has led us to raise and narrow our annual outlook for the third quarter in a row. With the midpoint now $0.06 ahead of our original 2026 outlook. Sherry will provide the specifics but I did want to note that we have adjusted our projected year end in service lease percentage to a range of 87.5% to 88.5% to reflect introduction of our Meridian project along with our 222 South Orange Avenue building earlier this year, placing both projects back into the in service population by year end.

The recent acquisition of the 83% leased 4.08 thousand Wilson Boulevard property and the anticipated sale of the 100% leased Enclave Place asset during the fourth quarter. In addition, we are deliberately preserving our larger blocks of space as we believe are amenity-rich, hospitality-driven Piedmont PLACES are Among The Best Assets In Their Respective Submarkets. and these spaces Will Command A Premium As Availability In Our Markets Continue To Tighten. In Summary, The investment thesis in Piedmont is simple. Demand for our differentiated office products is increasing, while supply is shrinking. Leasing fundamentals continue to improve, and it is quickly becoming a landlord's market.

With our portfolio of well located assets designed for the modern workforce, Piedmont is uniquely positioned for success in the marketplace. We are generating among the highest earnings and cash flow growth in the office sector, and trade at a very compelling valuation. With recent net effective rents after CapEx of $29 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, and 10-15% of embedded rental rate growth which will continue to drive core FFO higher in the near term.

With that, I will hand the call over to George for further details on third quarter operational performance. George?

George Wells: Thanks, Brent, and good morning, everyone. We are pleased to see how durable demand for our amenity-rich workplaces has translated into another very productive quarter. We completed 43 leases totaling over 400 thousand square feet with volume evenly split between new business and renewals. The average lease size is approximately 9 thousand square feet, with a weighted average lease term of approximately 10 years. Since the beginning of 2024, our executed leasing activity encompassing both new and renewal transactions has carried a weighted average lease term of approximately 9 years, generating long term reliable future income. For the tenth consecutive quarter, the number of tenant expansions exceeded contractions in our portfolio.

Financial, engineering, and law firms are experiencing substantial organic growth. This quarter, we had 7 firms expand by 100 thousand square feet. And as another example of the power of the Piedmont brand to generate additional business across our markets, I am proud to share that an existing customer with offices in 2 separate locations in our portfolio expanded its footprint with us, adding 2 additional offices. 1 in Orlando and the other in Atlanta, a testament to the effectiveness of our place making approach. As Brent noted, tightening market conditions for high quality space are leading to stronger pricing power.

Cash rents for space vacant 1 year or less increased by 26% while accrual rents increased by 35%, well above the previous 12 month average of 11%, 22%, respectively. We continue to witness a highly inelastic consumer and a meaningful gap between asking rents and the cost for new construction. Which are unlikely to get completed before the end of the decade. Leasing capital spend for the quarter remained stable at $5.21 per square foot per year. And slightly below our 9 month average of $5.44. Capital continues to be paramount in lease discussions. That said, we are seeing a modest decline in free rent for new and renewal leases.

Net effective rent surged by more than 30% from the prior 12 month average to $29.31 per square foot per year. We anticipate maintaining NERs in the mid to upper twenties supported by persistent demand for high quality space and little to no new development in our submarkets. In Dallas, where a quarter of deal volume was completed this quarter, renewals were the dominant theme and a great example of Piedmont's improving pricing power. With few full floors available and a very active pipeline, we increased our asking rates between 20-30% over the past 12 months. Record high rental rates are translating into meaningful rent roll ups of 30% or more.

As Brent noted earlier, some of our customers are advocating for early renewals of lease expirations beyond 2028. Recognizing intensifying demand for a rapidly declining supply of larger blocks of space. For instance, at Galleria Towers, a 2-floor customer expiring a few years out elected to renew a today's record high asking rate with virtually no concessions, generating a substantial 43% cash rent roll up. As we head into next year, we expect that early renewal discussions continue to facilitate a reduction in the capital required to retain our existing customers.

Atlanta was our most active market by a third of overall volume or 120 thousand square feet and majority of that was new business and landed in each of our vibrant submarkets of central perimeter, Cumberland, and Midtown. Galleria on the Park is leading the Cumberland submarket with asking rates now in the mid fifties per square foot up over 20% from just 12 months ago and comparable to in some cases, exceeding Buckhead rental rates. At 60 Broad, we are finalizing the lease document, and are currently expecting a first quarter execution under the same terms we have shared in the past.

Looking ahead, our leasing pipeline is healthy and remains consistent with prior periods and is now approximately 700 thousand square feet either already executed or in the legal stage for the fourth quarter. Outstanding proposals continue to hold steady at approximately 2 million square feet. Assuming a typical quarterly run rate of 175 thousand square feet of new transactions, we are still on track to reach our annual total leasing volume range despite adjusting the New York City renewal to the first quarter of next year. Our hospitality inspired portfolio and elevated service model is unmatched and the formula continues to drive leasing, rent growth, and occupancy gains. I will now turn the call over to Christopher A.

Kollme for investment activity. Christopher?

Christopher A. Kollme: Thank you, George. As Brent mentioned, during the quarter, we closed on the acquisition of 4.08 thousand Wilson Boulevard, 186 thousand-square-foot class a office building located in the thriving Boston submarket of Arlington, Virginia. for a net purchase price of approximately $52 million or $280 per square foot. 4.08 thousand Wilson is 83% leased, and has 5.5 years of weighted average lease term. The property received a Walk Score of 97. it is surrounded by food and beverage, high density residential and retail, and is a 5-minute walk to the metro. The Boston submarket has emerged as a hub for defense and cybersecurity tenants. And 4.08 thousand Wilson is ideally situated in the heart of the submarket.

Just 2 blocks from the defense advanced research Projects Agency and the Office of Naval Research. According to the second quarter JLL report, Boston Class A product is demanding rents 15% higher than the remainder of Northern Virginia, and rental rates in Boston between 2024 and 2026 have grown almost 3 times faster. The class a market in Boston is 3.2 million square feet and Piedmont now controls about 25% of the inventory with no development in sight and several residential conversions expected to remove a little over 1 million square feet of lower quality product. Or 12% of the overall office market.

We believe there is imminent upside with the lease up of currently vacant space and resetting in place rents that are approximately 10% below current market rates. On the disposition side, during the third quarter, we closed on the sale of the Royal Lane land parcel that we have discussed for the last several quarters. This was a 10.6 acre undeveloped land parcel located in the Las Colinas submarket of Dallas, Texas. Which we sold for $12 million generating a gain of approximately $9 million. The planned multifamily development will also provide 20 thousand square feet of retail directly adjacent to our Connection Drive assets.

Our land parcel in Orlando remains under contract and is projected to be a late 27 close. Finally, during the third quarter, we also entered into a binding contract to sell Enclave Place, 1 of our 2 remaining assets in Houston, Texas, for $81.75 million. We have been clear regarding our intention to exit the Houston market and this is a big step towards that goal. The transaction is subject to customary closing conditions, and is anticipated to close during the fourth quarter of 2026. Although the market has been unsettled over the past few weeks, we continue to actively weigh the disposition of mature and or noncore assets which lack the growth profile of the balance of our portfolio.

Our capital allocation priorities remain focused on 1, high return leasing capital. 2, improving balance sheet flexibility and 3, acquisitions that enhance the overall quality of our portfolio are accretive and consistent with our long term growth strategy in the Sunbelt markets. With that, I will pass it over to Sherry to cover our financial results.

Sherry L. Rexroad: Thank you, Christopher. 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 third quarter of 26 was $0.39 per diluted share, $0.04 ahead of the third quarter of 2025. Growth was largely driven by higher rental rates and higher commenced occupancy as many of the leases that the team has executed over the last 12 to 18 months have now begun. AFFO generated during the third quarter of 26 was approximately $30 million Turning to the balance sheet.

I am very pleased to report that during the third quarter, we issued $230 million of 2.875% exchangeable senior notes due in 2031. Enabling the redemption of all of our remaining 9.25% unsecured senior notes due in 2028. The conversion premium for the exchangeable notes is 37.5%, equating to an initial conversion price of $12.65. Which is above street consensus for our net asset value. I would also note that we also issued under our ATM program during the quarter for the first time. Issuing 4.1 million shares at an average price of $9.72 per share and conversely repurchased approximately 5.4 million shares at an average price of $9.20 per share in conjunction with the exchangeable notes offering.

So a lot of moving pieces, but overall, a transformative transaction for the company resulting in a reduction in our overall weighted average cost of debt of over 70 basis points. Which is now 4.8%. As well as an increase in our weighted average remaining maturity to 4.3 years. With no final debt maturities until October 2028.

As a result of this transaction, our line balance at the end of the quarter was $152 million However, as Christopher previewed in his remarks, we are currently under contract to sell Enclave Place during the fourth quarter, and anticipate using the approximately $80 million of net proceeds from that transaction to pay down our line of credit balance, bringing our net debt back to pre transaction levels. We continue to project that our net debt to EBITDA ratio will trend below 7x by the end of the year and is projected to continue to improve in 2027 as cash flow associated with recently executed leases continues to increase.

As Brent noted in his remarks, for the third quarter in a row, we are increasing and narrowing our 2026 annual core FFO guidance to a range of $1.55 to $1.57 per diluted share. An increase of $0.06 per share at the midpoint when compared to our original 2026 guidance. And equating to an earnings growth rate of over 10%. Same store NOI is projected to increase 7.5 to 8.5% on a cash basis and 5 to 6% on an accrual basis for the year. Please note that consistent with our standard practice, this guidance does not include any speculative acquisitions, dispositions, other than Enclave Place. Or refinancing activity.

The most important financial takeaway is that Piedmont's leasing activity is now converting into earnings and cash flow growth. Further, our recent refinancing activity will meaningfully decrease our interest expense in both the fourth quarter of 2026 and in 2027. With that, I will turn the call back over to Brent for closing comments.

Christopher Brent Smith: Thank you, George. Christopher and Sherry. As we step back and take a look at the quarter, the message is clear. Piedmont is benefiting from a powerful combination of improving supply demand fundamentals disciplined execution, and a portfolio that is aligned with what office users want today. Leasing demand remains healthy across our markets. Rental rates continue to move higher, Occupancy is growing. And the significant leasing activity we have generated over the last several years is now translating into meaningful earnings and cash flow growth. The office market continues to evolve, but 1 trend has become increasingly apparent. Companies are prioritizing high quality, well located, amenity-rich workplaces to help attract and retain talent.

That trend plays directly to Piedmont's strengths. Across our portfolio, we are seeing customers make long term commitments expand their footprint, and engage earlier on renewals as quality space becomes more difficult to find. At the same time, we are thoughtfully enhancing portfolio quality recycling capital into higher growth opportunities and strengthening our balance sheet. These actions are creating greater flexibility, while positioning the company to capture the benefits of a market characterized by limited new supply and improved pricing power. Looking ahead, our priorities remain straightforward. Continue growing occupancy, drive rental rate growth, convert our substantial lease commencement pipeline into cash flow, and further optimize the portfolio.

With an embedded earnings backlog, improving balance sheet metrics and strong leasing momentum, we believe Piedmont is well positioned to deliver sustained growth in core FFO cash flow, and shareholder value in the quarters and years ahead. With that, I will now ask the operator to provide our listeners with instructions on how they can submit their questions. Operator?

Operator: Thank you. The floor is now open for questions please press *1. We do ask if listening on speakerphone today please pick up your handset while asking your question to provide optimal sound quality. Once again, please press *1 on your phone at this time to join the queue to ask a First question comes from Michael Lewis at Truist Securities. Please go ahead.

Michael Lewis: Great. Thank you. My first question maybe for Christopher I thought, and I think a lot of investors thought too that maybe as you sold assets, and redeployed proceeds into value add opportunities, that would be initially dilutive. The activity you announced in the quarter was not. It looks like a higher cap rate on the acquisition right out of the box. As you market other assets, right, the other Houston asset, eventually New York, maybe DC, and you look at the opportunities to reinvest, should we expect that maybe future capital recycling may be dilutive initially, or do you think it kind of works the way that it worked this quarter?

Christopher A. Kollme: Hey, Michael. it is Christopher. I will start, and Brent can jump in. I think the question is really can we redeploy disposition proceeds in an accretive manner? it is not easy, but it can be done. And we just showed that, as you pointed out, pairing $40.75 with Houston. I do wanna be clear. We are going to be really picky on what we chase what we try to transact on both on. In terms of quality and risk adjustment returns. We are looking at assets that might have some lease up opportunity that have some short term role. And or may require some modest, repositioning. We proven that we can execute against that profile.

I will also say the bidder pools between that when it gets around 50 to $75 million it then. It sends out pretty dramatically. But these are not your core, profiles with long wall and that are fully leased that trade at 6.5 to 7 caps. But again, they are not easy to find. But to be clear, they are out there. We are also not gonna sacrifice on quality. We are only gonna chase opportunities to deliver that differentiated, experience for the tenants and attractive returns for our investors.

Christopher Brent Smith: And I would only add and just to echo those points. We think about accretion both on the opportunity going in on day 1, but also where you can drive over the next few years. And I think 4.08 thousand was an outstanding acquisition because, 1, the base building work, amenities, in the lobby have all been completed and 2, we can drive going in at roughly a 10 cap on 83 leased up to a 12. And so I think that is emblematic of how we think about accretion both on the buy, but also on the growth profile.

Michael Lewis: Okay. Thanks. And then my second question I could hear the enthusiasm in your voice, Brent, as you described the quarter and of the positioning of Piedmont. I wanted to ask, just in the last few weeks, we have been in this low-hire, low-fire environment. But in the last few weeks, Amex, Barclays, Microsoft, eBay, Amazon, I think Meta and Citi are now. Are laying people off still. All kind of at least partially citing AI as a reason. So, you know, this seemed like a big threat early in the year in the second quarter. Maybe people kind of saw AI driving leasing demand.

You know, are you seeing anything on the margin here that is at all concerning regarding kind of office-using employment? and leasing demand?

Christopher Brent Smith: Great question, Michael. I think the short answer is no. We continue to have a very good dialogue with tenants that are currently in the lease. No 1 has pulled back from the table or reduced their requirement. Probably even more insightful to what is going on, it would be tour activity. And that has not abated or slowed down at all. And I think when we talk to our customers we continue to see and recognize or they do that their workforce is going to evolve.

But the fact of the matter is their team needs to be in an office to collaborate efficiently, This AI technology requires both senior and junior team members to be able to harness it and learn how to use it within their companies. And so that continues to drive office utilization, which is also increasing renewals in demand. I would also point out a couple of statistics within our own portfolio. We have had about 10 straight quarters of expansions that were greater than contractions, and that momentum continues. And then as you pointed out, that list of companies you named were all large corporate users.

And as we have talked about, as we have had rolled throughout the portfolio since the pandemic, we focused a lot more on small and medium businesses. And we have continued to see strong demand from those call it, full floor users or less. And we think AI has less of an impact on those small and medium enterprises, which have been more of our focal point. I would also point out that a lot of these larger corporations have hired an immense number of workers since the pandemic, And so part of this, I do believe, is rightsizing their own organizations and sometimes hiring.

Hiding under the cover of AI But obviously, is going to change the profile of workers particularly for some of these larger companies. And I would also say that we have seen, just like in the pandemic, a lot of the design of space that was done in 2022 and early 2023 shrank too much and was an overreaction. We are seeing those things expand So I would caution, there is a potential for a very similar pattern here is that companies are shrinking too much and may need to hire back as time proceeds.

But I think, overall, we feel like the portfolio is well mitigated from the impact potentially of AI job reductions in large corporates, and we are seeing no impact again in our pipeline, tour activities, or anything else from a discussion with our tenant base. All right. Thank you. Look forward to seeing you soon. Likewise.

Operator: Next question from Anthony Paolone with JPMorgan. Please go ahead.

Anthony Paolone: Yes. Thanks. Good morning. And just to follow-up on that line of questioning, can you maybe go through your major markets and talk about the nature of the demand in your pipeline, the types of industries it represents and just anything else that you are seeing trend wise among different groups of tenants?

George Wells: Good morning, Tony. This is George. I will take that I was. it is it is really gratifying to see that overall demand continues at a pretty strong pace even after that record year of new leasing activity. In 2025. And you know, the characteristics of that demand continues to come pretty much the same legal accounting, insurance, finance. We are seeing a little bit more technology companies, cybersecurity, I would say, you know, the defense industry has been a bright spot for us.

And just to give you an indication, if you look at our NOVA portfolio in the past few years, I think 2023, I think we did 25 thousand square feet and doubled in 2024, doubled again in 2025, and we are on track to even exceed in 2026 what we have done in 2020. 2025. So we are we are pretty excited about that. I would say you know, Brent mentioned expansions. Even to this day, we are seeing deal activity in the legal stage that are coming from the same characteristics, legal, accounting, finance, it is really widespread across the board and where-- but in terms of what people are looking for in terms of expansion.

And so we are pretty excited about that. I will highlight, though, that Atlanta our central perimeter submarket where we have broad comp and Fiserv, which is expiring in the third quarter of next year. Really pleased with how that particular submarket is accelerating in terms of its overall fundamentals. Right? About a year ago, you had about 8 spaces over 100 thousand square feet that were available. Now that shrunk down to 2. 2 or 3. And on top of that, 10% of the market is in some sort of conversion. Right? So you reduce. to reduce some supply, but being converted from office to resi, So that is really.

That combination has really given us some real good confidence in terms of backfilling that space. In fact, we probably got enough proposals today that is double the amount of vacancy that we will see in that particular submarket, and so we are pretty confident about addressing that.

Christopher Brent Smith: I would just add to that. We continue to see the proposal pipeline is around 2 million square foot mark, which is historically what it is been in the quarters. Past. And robust demand in suburban Minneapolis. You asked to look at the markets. Dallas is strong across the entire market. We are very pleased at almost 98% leased at Galleria, but still continue to see immense demand, and it is picking up in Midtown and the Perimeter, as George noted. Northern Virginia and Boston very robust activity. Think the district is probably 1 of our more muted submarkets overall, but it is starting to pick up particularly at the high end of the market.

And then Orlando continues to be strong, both downtown and in the suburbs from engineering, accounting, and financial services firms. And I would say probably Boston is a little bit of a laggard, and that is just not as robust. it is a technology driven market. it is starting to come back. Thankfully, we do not have any role there really near term. And just a little bit of vacancy that we can address. Here as the market picks up.

Anthony Paolone: Okay. Thanks for all of that. And then my second question just relates to where things stand on the dividend and your ability perhaps to keep retaining capital as we start to look into 2027?

Sherry L. Rexroad: Tony, it is Sherry. And, you know, that is a call that our board will make after consultation with us, and, you know, we will review all of the kind of factors with them. Importantly, you know, our. What is our, you know, taxable income? At this point, we are not forecasting a taxable income in 27. And likely not in 2028. So that is 1 factor the board will take into consideration along with what our capital needs which should be going down going into next year. You know? We have had this year and the prior couple years up over $200 million. And we have been guiding people to $160 million to $180 million for a year.

So that. As that capital need decreases, it will allow for greater, you know, capital for distribution. The other factor in our net tax income that you have to take into consideration are transactions. Some of which will have some gains, some will have losses. For this year, we think it is a neutral impact. You also have to factor in the expense to repurchase the 9 and a quarter bond. That is deductible against taxable income, and so that reduced the burden for this year. So all of that said, I think as you as you look forward, you know, those are factors we will be providing the board from our January and February board meeting.

That does not make me feel like a dividend is imminent in 2027 and will be evaluated as we go through 2020 gaining greater visibility into what our taxable situation will be.

Anthony Paolone: Okay. Great. Thank you for that.

Operator: Next question comes from Nicholas Thillman with Baird.

Nick Tillman: Brent and George, wanted to comment a little bit or get your thoughts on the outlook. Obviously, you finally are starting to see what you guys have been mentioning of limited quality blocks, ability to push rate. Just curious on if there is any other markets? It seems as though Dallas and Atlanta were really the standout on these metrics. And driving a lot of performance, but comments on the broader portfolio as we look for 2027 and beyond on the ability to push rate, how you feel at those spreads, and the sustainability of what we saw in third quarter persisting going forward.

Christopher Brent Smith: Thanks for joining us this morning, Nicholas. it is Brent. Great question. You know, I characterize you mentioned Dallas and Atlanta as being the drivers. It is really across a number of markets in our portfolio, beyond Dallas and Atlanta, which are standout. I know our large projects, the Galleria at both cities as well as our midtown product in Atlanta generating 20% to 40% cash roll ups. But Northern Virginia and Orlando are just right behind that. And we are seeing anywhere from, call it, 15 to 30% roll ups in those 2 markets and submarkets. And Suburban Minneapolis, also another sub market where we are a dominant landlord.

We leased about 500 thousand square feet there in the last 18 months, and we have pushed rental rates well into the $30 debt really created our own segment of the market. And we continue to generate nice roll ups, we call it, in the 10% to 20% range for renewals in that. Market. I would say some markets where we are not seeing as much robust pricing power would be, as we noted, D. C and Boston. Again, those 2 make up a call it, maybe about 12% of the portfolio amongst the 2 of them. Combined. So not a large portion of the portfolio is just not experiencing this robust growth.

And what is exciting for us is that each of those markets, Suburban Minneapolis, Orlando, and Northern Virginia, Atlanta, Dallas, to some degree, all have replacement cost rents that are 45% above the rents we are charging. So we see a long runway and no new supply. Think the only place in our portfolio where we are seeing supply would be Uptown Dallas, and they are asking almost a $100 net rent. In that location for that product. So, really, good backdrop. It sets up for us continuing to be able to meaningfully push rate for the foreseeable future, as I noted in my prepared remarks. So it is really across the portfolio.

Again, outside of maybe Boston and DC, the district.

Nick Tillman: Oh, that. that is really helpful. And then as we look toward 2027, you guys commented a little bit about holding back, maybe on leasing some space some larger blocks given the scarcity effect, but just curious on some of the larger vacancies you have pending overall activity and coverage on that space. Then it also looked like US Bank their lease term shrunk a little bit, and they. Expiration for 2 q 26 increased. So maybe just reconciling the changes Is there a termination with their downtown Minneapolis assets and associated activity with that as well.

Christopher Brent Smith: So as you noted, we did say in 2027, we do have a number of. For looking ahead to 2027, a number of larger blocks that are in the market right now, particularly here in the central perimeter in Atlanta, George did note work now have, call it, 2 out of the 3 50 thousand square foot blocks that remain in the submarket. With a lot of corporate activity. So we think that there is rationale and good reason continue to keep that block together, and we have good activity. Our other larger block is in Dallas as we noted, Epsilon renewed for about half their space. So they did give back about 120 thousand square feet.

We had some prospects at the beginning of the year. It did not quite pan out. We put the lower 1st Floor space into a light renovation. it is wrapping up. And for that, about 125 thousand square feet, we currently have about 500 thousand of prospects. In Atlanta, we are currently where we have those 2 blocks for about 150. We have got about 400 thousand square feet of prospects. And really the only other considerably large block that we have in the portfolio, we have a little bit of space in New York in the tower at 60 Broad.

However, with the planned monetization of that event at some point, probably does not make sense to be doing a large lease other than New York City, again, which we have noted we will wrap up. In the first quarter. The. Your question, then, specifically, I think that covers the larger blocks in this in the portfolio. The other question was in US banks, change in their metrics. And so as you kind of alluded to, in Downtown Minneapolis, when we did the lease with U. S. Bank in the middle of the pandemic, they did not know exactly what their long term size needs would be.

They have reduced their space at the building slightly But we continue to see A, they are dedicated to Downtown Minneapolis and the building and B, some good prospects given that is the best asset in the submarket. So they have rightsized, but we have very good activity behind that.

George Wells: Yeah. I mean, if I could add a little bit to that. I mean, that building, because, you know, you have got 7 and 8 kind of retail f and b. It uses directly in our building as really great in that right kind of environment that users want today. So it is very activated. You have got. We did sign a couple of deals this quarter. In that tower for about 20 thousand square feet, and our pipeline actually looks pretty good. We have got several proposals for over a 100 thousand square feet that is out there today. We are seeing that from a wide range of groups, and legal ought to be in this kind of environment.

We are seeing insurance, accounting, real estate. And we are even seeing the target vendors come back to the market because we sit adjacent to Target headquarters and we are really pleased to see that come back to the market. So we are we are feeling pretty good about the near term.

Nick Tillman: No. I appreciate all that commentary. Maybe just the last 1 rounding things out on the disposition side. It seems as though acquisitions are mostly going to be funded via dispositions and likely to be what you guys can sell before you can hit the buy button. But I know you guys have a couple of assets within the market. I guess, how has reception been on the early process of marketing those assets? And then with the recent rise in interest rates, has there been any change in the buyer pool or bidders that you have been seeing on those prospective assets? And anything that is worth highlighting over the last couple of months?

Just as you have been marketing those assets in particular.

Christopher Brent Smith: Yeah. Nicholas, I think it is a fair characterization To say that acquisitions would be right now funded with dispositions given where our stock currently trades. And as we think about dispositions, we have always kind of put the framework out that we always wanna call the top 10%, the bottom 10% of the portfolio. The top 10% being you know, very mature long walled assets, and the bottom 10% just being those that are under performers or just long term, we do not have the conviction to push rates meaningfully higher. As you know, Houston, our building there, Enclave Place, fits kind of fully baked long term walls.

You are gonna not be able to create more value, and we do expect that to close this quarter. Behind that, we do have, as I think we have noted in the past, the land parcel that is under contract in Orlando. that is probably likely to be completed towards the middle to end of next year. Call it maybe third quarter And then we do have a couple of buildings in the market today for sale. cannot get into too much specifics because they are active transactions, but I would say for the assets we are in the market with the district in DC, and then a building in the suburban Boston market.

Receptivity has continued to be very positive. It is still early in that process. But I think we have not seen our buyer pools be discouraged with a slight movement in rates. I think they are up maybe 25 bps since we started the process. But it is early. We have not fully taken round 1 bids. So it is a little tough to say if it is impacted it, but tours and debt availability are still there. it is just debt pricing has maybe gone up a little bit. And I would point out that some of our buyers are unlevered buyers or will look to finance the asset after close. It is not a financing contingency.

Included in that similar to what we had in Houston. So with that, I think that we will take those proceeds. And as we talked about redeploy those into strategic acquisitions that fit within our submarkets. We would not add a dot on the map until we take 1 off. And we continue to see very interesting opportunities to rotate that capital from dispositions accretively both in opportunities near term but growth. As we think about improving the growth trajectory of the overall portfolio.

Sherry L. Rexroad: And Nick, just to clarify, the Houston disposition is the only 1 we project to close in 2026. The other assets we have out in the market to the extent they trade, and as Brent mentioned, it is early. Those are 27 events.

Nick Tillman: Great. that is it for me. I appreciate the time, guys.

Christopher Brent Smith: Thank you. Thank you.

Operator: Ladies and gentlemen, as a reminder, if you have a question, Next question from Dylan Burzinski with Green Street. Please go ahead.

Dylan Burzinski: Good morning, guys. Thanks for taking the question. And appreciate your comments, Brent, on sort of any or not noticing yet any impact on the higher rate environment on your disposition processes that you have in the market. But I guess maybe another way to ask it, as you guys are out there underwriting acquisitions, has your underwriting changed at all from higher rates? As it relates to maybe a higher hurdle rate? Any sort of potential impact as you think about rent growth in years 2, 3, and 4 into the future? Just any thoughts there would be helpful.

Christopher Brent Smith: Great question, and thanks for joining us today, Dylan. The underwriting, certainly, the debt capital markets have a direct influence on underwriting, whether you are public or private, whether you are asset level or corporate level debt, a movement in interest rates is going to have some impact particularly if it remains elevated longer term. Think as we have obviously had a lot of transactional activity this quarter, And particularly towards the end of the quarter with rates moving around, we recognized that let's temper the speed at which we are moving on some of these potential acquisitions. Let's wait to see what the interest rate environment and really capital and fund flows really have will dictate pricing.

And so we have I would not say put the pause button, but I would characterize it as, let's let the interest rate market mature and work things out a little bit. That said, we continue to stay very engaged on probably anywhere from call it, $600 million to $800 million of potential acquisitions. As we have noted, we have got these dispositions in the marketplace. So we are keeping a close eye on it. We have not and we are not in a price change on our Houston asset, which has been in the market during that time period. So we continue to remain optimistic that our other dispositions that are active right now will have a similar outcome.

But at this point, I would say we have not seen direct impact pricing, but I would expect it if rates continue to increase from here. Great. Thanks, Brent.

Dylan Burzinski: And, obviously, maybe switching gears here. You know, cash realization has been very strong year to date. A noticeable uptick. In Q3 versus where the first half was. So as we sort of think about 2027, the next few years, I mean, was there anything, I guess, in a specific lease in Q3 that drove that higher? And I guess, how should we be thinking about how that trends given the strong net effective rent growth that you guys have seen Great point, Dylan.

Christopher Brent Smith: And I would say we continue to tell the story since the beginning of this year and really the end of last year we have moved rental rates continuously and materially through the whole portfolio So, you know, what was $22 net effective rents went up 25 last quarter and now 29 this quarter. There is no specific tenant that drove either of the last 2 quarters in terms of an anomaly. It is driven by good leasing in the Sunbelt. Again, as I noted earlier, that is where we have seen the majority of our rental rate growth but Suburban Minneapolis to contribute to that. As well.

The spreads going forward, you know, as we have noted in the prepared remarks, 25 to $30 NERs is certainly where I would say is what I would expect, and we will direct the street to consider or to evaluate the reality is that we continue to be able to push rents even further in these markets. And so I think saying that the portfolio is 10% to 15% below market and average rates in the Sunbelt, that is probably closer to 20 to 30. but blended through the portfolio, a 10% to 15% mark to market I think you are gonna continue to see releasing spreads in a similar vein. Great. Appreciate the comments, Brent.

Operator: We have no further questions. I will turn the call back over to Brent Smith for closing remarks.

Christopher Brent Smith: I want to thank everyone for joining us today. on the call. It was a phenomenal third quarter And I want to thank the Piedmont team for incredible execution across the entire platform, from leasing, obviously, but financial and continued capital markets transactional activity And everyone who has put forth a lot of effort to get us into the position we are today I also want to highlight we have put out our corporate responsibility report on the website. A recent addition with this year's annual report. Please look into that. It outlines our initiatives around sustainability, social impact and governance. And then finally, we are gonna be hosting meetings in Atlanta for NAREIT.

On the 17th and 18th of November. And on the seventeenth, we are also hosting a tour of our 999 Peachtree Street project. And dinner with management at our Michelin Star restaurant in the building, Lazy Betty. So if you would like to join that, we are hosting that in conjunction with Truist. Please reach out to either Truist and Michael Lewis and team or Sherry and our team if you are interested in attending that event. We would love to host you and show you our recent renovation at 999 Peach Street. Thank you again, everyone, for joining. Have a great day.

Operator: Thank you. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.