Piedmont Office Realty Trust (PDM) Q2 2025 Earnings Call July 29, 2025 09:00 AM ET Speaker0Greetings, and welcome to the Piedmont Realty Trust Incorporated Second Quarter twenty twenty five Earnings Call. At this time, all participants are on a listen only mode and a question and answer session will follow the formal presentation. And please note, this conference is being recorded. I will now turn the conference over to your host, Laura Moon, Chief Accounting Officer for Piedmont Realty Trust. Ma'am, the fl ...

Core Insights - The article posits that the value of shopping centers is expected to rise significantly due to low vacancy rates and high incremental demand for retail space [1][25][38] - Current construction costs are prohibitively high, making new developments unfeasible until rental rates increase substantially [12][24][27] Vacancy and Demand - National shopping center vacancy is at 4.1%, close to historical lows, indicating near full occupancy [3][6] - Incremental demand for retail space remains high, with strong lease signings reported at industry conferences [7][11] - Existing shopping centers are experiencing minimal vacancy, necessitating new space for additional demand [8][11] Construction Costs - The cost to build new shopping centers ranges from $300 to $500 per square foot, with an average reported cost of $394 per square foot [12][17][18] - Current net operating income (NOI) per square foot is insufficient to support these construction costs, with average rent at $20.33 per square foot [20][22] Rental Rate Dynamics - Shopping center REITs are experiencing rental rate increases of over 20% on new leases, indicating a strong upward trend in rental rates [26][27] - The estimated rental rate needed to justify new construction is around $45 per square foot, which is approximately double the current rates [26][27] Valuation and Investment Opportunities - The average shopping center REIT trades at 15.9 times the current year estimated adjusted funds from operations (AFFO), suggesting the sector is undervalued [28][30] - Shopping center REITs are trading at a significant discount to replacement costs, which are estimated between $400 and $450 per square foot [37][36] - There is strong private investor demand for shopping centers, as new construction is not viable, leading to potential acquisitions of existing properties [39]

Financial Data and Key Metrics Changes - Camden Property Trust reported core funds from operations (FFO) for Q1 2025 of $189.8 million, or $1.72 per share, which was $0.04 ahead of the midpoint of prior guidance [17] - The company increased the midpoint of its full-year core FFO guidance by $0.03 per share from $6.75 to $6.78, primarily due to lower projected interest expenses [19] - The annualized net turnover rate for Q1 2025 was 31%, one of the lowest in the company's history, indicating strong resident retention [12] Business Line Data and Key Metrics Changes - Same property revenue growth in the top five markets ranged from 1.3% to 4.5%, compared to an overall portfolio growth of 0.8% [10] - Effective new leases were down 3.1%, while renewals were up 3.3%, resulting in a blended rate of negative 0.1% for the quarter [10] - Camden's customer sentiment score reached 91.1, the highest since measurement began in 2014, reflecting strong resident satisfaction [12] Market Data and Key Metrics Changes - New supply in Camden's markets has peaked, with apartment absorption remaining strong; new starts are at a 13-year low, down 80% in Austin and 65-80% in several other markets [6] - The Sunbelt markets are 50% to 60% less expensive for residents compared to high-cost coastal markets, contributing to job and population growth [7] - Occupancy for Q1 averaged 95.4%, showing slight improvement from 95.3% in Q4 2024, with expectations for stability throughout the year [11] Company Strategy and Development Direction - Camden is focused on expanding its presence in high-demand markets like Nashville and Austin, with plans for acquisitions and developments in these areas [14][83] - The company aims to maintain a geographically diverse portfolio to weather economic uncertainties, emphasizing the importance of the Sunbelt region for growth [7] - Camden is actively marketing older, capital-intensive assets for sale while pursuing new acquisitions to enhance its portfolio [16] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the current economic uncertainty but expressed confidence in the company's strong position and operational performance [22] - The company is cautious about guidance changes due to market volatility but remains optimistic about future performance as supply-demand dynamics improve [30] - Management noted that while Nashville and Austin face challenges, they are expected to recover quickly once market conditions improve [31] Other Important Information - Camden completed two acquisitions totaling $199 million and commenced construction on a new development community with an estimated cost of $184 million [14] - The company entered into a $600 million commercial paper program to supplement its existing line of credit, allowing for lower interest rates [16] - Camden's development pipeline is being rebuilt, with a focus on disciplined underwriting amid rising construction costs [88] Q&A Session Summary Question: Maintaining same store guidance amid macro uncertainty - Management indicated that the current uncertainty has influenced their cautious approach to guidance changes, but they feel confident about the business's performance [22] Question: Stabilization of deliveries in Sunbelt markets - Nashville and Austin are expected to remain challenged, but improvements are anticipated in the latter half of 2025 as supply decreases [29] Question: Impact of oil prices on Houston market - Management believes that lower oil prices will not significantly affect Houston's market due to the consolidation and efficiency of the energy sector [110] Question: Projections for A and B assets in Sunbelt markets - Class A urban assets are currently performing slightly better than Class B suburban assets, reflecting changing supply-demand dynamics [68] Question: Insights on bad debt levels - Bad debt improved to 60 basis points, nearing the normalized level of 50 basis points, with significant improvements in previously problematic markets [95]

Financial Data and Key Metrics Changes - Core FFO per share for Q1 2025 was $0.27, flat compared to the prior year, reflecting the impact of the final stages of the portfolio optimization and deleveraging strategy completed last year [15][19] - Same store NOI grew by 2.7%, driven by a 2.3% increase in same store revenue and a 1.6% increase in operating expenses compared to the prior year [15][19] - Average occupancy increased by 100 basis points year over year, contributing to the same store NOI growth [8][15] Business Line Data and Key Metrics Changes - Value add renovations completed during the quarter included 275 units with a weighted average return on investment of 16.2% [8] - The company has 28 communities with over 4,600 units in the ongoing value add program, expecting to complete between 505,000 units this year [8] - The company sold its final asset in Birmingham, Alabama for $111 million and acquired a 280-unit community in Indianapolis for $59.5 million at a 5.6% economic cap rate [9][15] Market Data and Key Metrics Changes - In 2025, new apartment deliveries are expected to decrease to 32,000 units, representing only 2% of existing supply, down from 6.1% in 2020 [11][64] - The company anticipates positive net absorption of 8.5% in its submarkets, significantly higher than the national average of 1.5% [12][65] - Homeownership costs in the top 10 markets are 94% higher than the company's average monthly rent, indicating strong demand for rental properties [12] Company Strategy and Development Direction - The company is focused on executing its long-term investment strategy, with a strong acquisition pipeline and ample liquidity for accretive investments [10][18] - The company expects to continue benefiting from strong demand and significant declines in new supply, leading to ongoing rental rate gains without sacrificing occupancy [13][19] - The company is cautious about macroeconomic uncertainties but remains confident in its market fundamentals [13][19] Management's Comments on Operating Environment and Future Outlook - Management believes that the fundamentals of supply and demand in their markets will continue to dominate operations, with expectations for improving rental rates and occupancy [13][19] - The company is optimistic about the trajectory of leasing spreads improving in the second half of the year due to waning supply pressures [24][30] - Management noted that they have not yet seen significant stress from macroeconomic factors such as tariffs or deportations [25][26] Other Important Information - The company ended the quarter with a net debt to adjusted EBITDA ratio of 6.3 times, with plans to achieve a mid-five ratio by year-end 2025 [18] - The company has nearly $750 million in liquidity available for investments [18] - The company is not expecting to exit any additional markets beyond Birmingham at this time [81] Q&A Session Summary Question: Can you walk through the leasing spreads for the first quarter? - New leases were down 4.6%, while renewals were up 4.8%. The company did not experience the same level of decline in rental rates as some peers due to its predominantly Class B portfolio [22][23] Question: Have you seen any evidence of stress from tariffs or macro uncertainty? - The company has not felt significant effects from tariffs or deportations and has seen a reduction in bad debt [25][26] Question: Can you speak to trends in leasing traffic and conversion? - Demand is up 25% compared to the same period last year, with conversion rates remaining stable [30] Question: What are your expectations for new lease rates and renewals? - The company anticipates positive trends in blended rental rates and expects to see upward momentum in leasing rates as the year progresses [34][35] Question: How are you thinking about the full-year revenue guidance? - The company expects job growth and population growth to remain steady, with a significant drop in new supply contributing to revenue growth [63][64] Question: Can you discuss the impact of insurance renewals on expenses? - The company expects a net decrease in insurance premiums despite initially assuming a 10% increase [73][75]