Q1 2021 Piedmont Office Realty Trust Inc Earnings Call
Ladies and gentlemen, thank you for your patience. Please remain on the line and conference call will begin momentarily. Thank you.
[music].
Good day, ladies and gentlemen, and welcome to the Piedmont Office Realty Trust, Inc. First quarter 2021 earnings call all lines have been placed on a listen only mode and the floor will be open for your questions and comments. Following the presentation. If you should require assistance throughout the conference.
Please press star zero on your telephone keypad to reach a live operator at this time. It is my pleasure to turn the floor over to your host Eddie Gilbert.
Sir the floor is yours.
Thank you operator, and good morning, everyone. Thank you for joining us today for Piedmont's first quarter 2021 earnings Conference call last night, we filed our form 10-Q, and an 8-K that includes our earnings release and on and our unaudited supplemental information for the first quarter of 2021. This information is available on our website at <unk>.
Piedmont REIT dot com under the Investor Relations section.
During this call you'll hear from senior executives and Piedmont and they may make and they may refer to certain non-GAAP financial measures such as <unk> core SFO and peso and same store NOI and <unk>.
Definitions and reconciliations of these non-GAAP measures are contained in the earnings release and in the supplemental financial information on.
Also on today's call the company's prepared remarks and answers to your questions will contain forward looking statements as defined in the private Securities Litigation Reform Act of 1095.
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 and these forward looking statements are discussed in detail and our press release as well as our SEC filings, we encourage everyone to review the more detailed discussion related.
The risks associated with forward looking statements and our SEC filings.
Examples of forward looking statements include those related to Piedmont future revenues and operating income dividends and financial guidance.
Future leasing and investment activity and.
And the impacts of the COVID-19 pandemic 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 speak only as of the day they are made and.
At this time, our president and Chief Chief Executive Officer, Brent Smith will provide some opening comments and discuss our first quarter results and accomplishments.
Brent.
Good morning, everyone and thank you for joining us on today's call as we review, our first quarter financial and operating results on.
On the call with me. This morning are George Wells, our executive Vice President of operations, Eddie Guilbert, Our executive Vice President of Finance, and Treasurer, and Bobby Bowers, Our Chief Financial Officer, as well as other members of our senior management team.
First and foremost I hope that everyone is and continues to be healthy and safe.
This quarter, we reached a dubious milestone having been in the midst of the pandemic for over a year now.
While it has been highly disruptive to the office sector in general and Piedmont leasing pipeline, specifically, we are fortunate that the vast majority of our customers are current on rent and building utilization continues to improve now approaching and average of 25% across the entire portfolio, primarily led by a return to the workplace.
But by our small to medium sized tenants.
While overall daily utilization for the portfolio remains far below pre COVID-19 levels that percentage is improving and is expected to continue to ramp up and the second half of the year, but I will note the daily utilization still varies greatly based on tenant characteristics and geography.
With vaccines, becoming widely available for all we continue to see incremental gains and local economic activity week by week, particularly on our sunbelt markets as I noted on our last earnings call. However, this quarter, we track and increase and activity for our northern markets as well, our first and as the pandemic began and.
In addition, we're beginning to see medium size space requests and a 15% to 25000 square foot range and starting to conduct tours with these tenants.
We're encouraged that our leasing pipeline and strengthen and we feel positive about our ability to generate some leasing momentum headed into the rest of the year.
And while we saw consistent upticks and tour activity across the portfolio as the first quarter progressed, a 30% increase actually from January to March.
We still anticipate it will take two to three more quarters for Piedmont leasing volumes to approach pre pandemic levels.
With a USD GDP expected to grow six 2% and 2021 per Bloomberg's April economists survey.
Feels like it's getting back to a new normal.
And with this backdrop, we're encouraged for our tenants our employees and our stockholders as corporations and large businesses begin to plan their return to the office with most targeting the early fall for their workforce to reenter and mass.
Even more tangible evidence of this improving outlook is the fact that we experienced a sizable uptick and the number of executed leases for the first quarter of 2021 the.
The company completed approximately 678000 square feet of leasing with new tenant leasing accounting for approximately one quarter of that activity.
Had it not been for one large tenant new leasing would have actually outpaced renewals.
Also note that the weighted average term and leases entered into during the quarter was approximately seven years.
Comparing the first quarter of this year to the first quarter of last year, both the number of leases and the overall square footage related to new tenants exceeded the first quarter of 2020 pre pandemic levels.
Through this leasing activity and customer dialogue, we continue to better understand tenant space needs and design requirements I would characterize the majority of new leases as having a space plan matching pre pandemic levels of square feet per employee, but with a greater focus on creating collaboration space and integration of technology to <unk>.
It will take work from home and in office employee communication.
That said, we believe a vast number of firms are still trying to understand what worked from home truly means for the organization.
We are finding that medium sized enterprises are having the greatest difficulty and reaching conclusion.
And as such these customers typically requiring 15% to 25000 square feet.
Are those most often and requesting shorter term renewals of two to three years.
One positive note is that these customers are requiring very little tenet and incentive or capital to transact on these shorter renewals.
As I noted on our last call. We continue to see the smaller user market defined as those being less than 10000 square feet remain rather resilient on.
Almost approaching pre Tim dimock levels of activity and.
And then the large user segment defined as those eating more than 50000 square feet. We continue to see companies, who know their business well use this market disruption as an opportunity and negotiate more favorable terms from their landlords.
While the larger segment has not recovered to the extent of small users. We are still experiencing elevated levels of activity from large tenants and Dallas, Atlanta, Orlando and Boston.
I am pleased to share that one example of this phenomenon has resulted in an early seven year renewal of Raytheon's, approximately 440000 square foot lease comprising the entirety of our 225 and $2 35 presidential way assets and Boston.
The lease required only a modest level of tenet incentives and leasing commissions equating to approximately $2 60 per square foot per year of term with a modest adjustment to the current rental rate, which we noted and our earnings release had a disproportionate effect on our lease mark to market for the quarter.
On a more complete lifting and the larger leases executed during the first quarter of 2021 is included and the subtle information that we published last night and is available on our website.
Looking ahead, our only exploration of any significance over the next 18 months is the city of New York's lease of approximately 313000 square feet, there remains and hold over at 60 Broad Street.
We are pleased to welcome approximately 20% on the various agencies workers back to the building next week.
I'm also excited and share that Piedmont has executed a five year interim lease extension and the department of citywide administrative services has informed us that the public hearing and final approvals are in process.
As a reminder, on all government tenant transactions the landlord is required to execute documentation and prior to the tenant.
Assuming things move forward as anticipated we expect a conclusion to this interim renewal around the end of the quarter very much in line with the economics and terms we've shared in the past.
Finally, following our playbook on the state and New York's lease and 2019, we continue to work with D cash on a potential 20 year extension at the building beyond this extension.
Taking a step back I would like to share three trends, which are benefiting almost all our operating markets first and accelerating population migration to the sunbelt along with other secondary cities, which offer businesses and employees are lower cost higher quality experience. We believe this great affordability migraine.
<unk> will constitute a decade long trend that in conjunction with the second trend, which is millennial family formation and a movement to the suburbs.
Well placed well and <unk> offices and mixed use environments located along as cities primary ring road and higher demand and finally, as we have dialogue with our tenants and tracked leasing activity. We're witnessing a third trend a flight to quality with a focus on and <unk> buildings with unique environments owned and operated by risk.
<unk> service oriented landlords.
On Piedmont portfolio is well positioned to be the beneficiary of all three of these themes a concentration of well and monetize buildings located near strong housing communities and highly regarded education systems with easy accessibility and a major highway thoroughfares and airports and with more than half the portfolio and the Sun belt, where population growth is expected.
And to surpass national averages.
But today as tenants are not only focused solely on location and neighboring amenities. The physical attributes of a building I've never been more important the building's indoor air and light H Hvac's fresh air intake elevator capacity and outdoor collaboration space are all critical in addition to our high quality building and environment vibrant environment customers are demanding a higher.
Quality landlord as well and by that we mean and and attentive operator that focuses on ESG initiatives, and which has the capital base and scale to provide tenant offerings and engagement.
Office space is no longer just a real estate product our customers view, our offering as a service, which excites us and gives us the opportunity to provide a differentiated product one that we believe will allow us to achieve greater occupancy and real rates and the prevailing submarket.
Yeah.
Touching briefly on transactional activity.
Although we did not complete a capital transaction during the first quarter. The Raytheon lease extension will likely provide a catalyst. This is the first time that that tenant is ex Peter renewal that provides a total of 10 years of remaining lease term at the buildings as the two assets represented by this renewal are now a 100% leased to a single credit worthy tenant with significant term we believe that.
<unk> has been maximizing the properties and we have a unique opportunity to realize that value debt, which has been created.
Therefore, we began marketing our $2 25, and $2 35 presidential way properties for sale late in the first quarter and we received a good deal of interest.
We therefore anticipate recycling the proceeds from the sale and the high quality and monetized assets would fit strategically into one of our core markets.
Finally, I want to highlight the recent progress that we've made on several key ESG initiatives.
ESG has gained more widespread investor and Tim and attention here and the U S. Over the past few years and Piedmont management team has made it a priority to establish a best in class ESG platform.
Getting involved to help to make our communities and plan and a better place to live while ensuring our employees tenants and vendors are treated with respect and given equal opportunities.
I would like to take a moment and point out a few recent achievements on the sustainability front out of thousands of participants and the U S. Energy Star program. Piedmont was recently named one of 70 companies designated as a 2021 energy star partner of the year and Piedmont is the only office REIT headquartered in the southeast U S to receive this designation.
I'm also very pleased with energy Star is recognition of our ongoing commitment to reducing our portfolio as carbon footprint, including lower energy consumption and in addition to water and water conservation efforts and reduced landfill waste from our buildings.
Approximately three quarters of our portfolio is currently energy Star certified and we continue to make significant progress towards our goal of reducing the overall energy consumption by 20% at our properties over a 10 year period ending in 2026.
Additionally, during the first quarter or five Atlanta, Galleria properties were awarded the well health and safety rating by the International well building Institute.
And the well health safety rating is a new evidence based third party verified rating for all new and existing buildings. It focuses on operational policies maintenance protocols stakeholder engagement and emergency plans to address the post COVID-19 environment now and into the future.
Our Atlanta, Galleria properties, representing over $2 1 million square feet of rentable space, where the first properties on our portfolio as well as the first for all office buildings in Atlanta to receive this new rating and we're actively working to expand this program across our portfolio.
Additionally, Piedmont recently party was Morehouse colleges division of business, and economics, and Atlanta, and with Howard University School of business, and Washington D. C to introduce the Piedmont Office Realty Trust scholarship program.
The program provides scholastic support to rising sophomore students seeking degrees and economics finance accounting engineering or real estate with a renewable scholarship for the Piedmont scholars sophomore junior and senior years.
Along with access to and executive Shadowing program. The scholarship offers each recipient the opportunity entering with Piedmont and.
And acquire a firsthand Inc.
Experience in commercial real estate and participate in a board level mentoring program.
It is our hope that this program will provide need based aid to ambitious students and exposed and more diverse applicant pool to a career and the commercial real estate industry.
Our ESG efforts are overseen by a board level ESG Committee, which is chaired by Barbara Lang, the former President of Washington, Dc's Chamber of Commerce, Ms. Lang joined our board six years ago, and immediately began making a positive impact helping to lead the company's environmental objectives, and social involvement and our communities.
For additional information on our overall ESG program I encourage you to review our annual ESG report that's available on our website.
With that I'll turn it over to Bobby to walk you through the financial high for the quarter and guidance for 2021 Bobby.
Bobby.
Thanks, Brett.
Ill briefly discuss some of our financial highlights for the quarter I encourage you to please review the earnings release and supplemental financial information, which were filed last night for more complete details.
For the first quarter of 2021, our reported net income increased to $9 $3 million up seven 3% from the same period a year ago.
We also reported 48 cents per diluted share of core <unk> up one set over the first quarter of 2020.
<unk> was almost $39 million for the first quarter well in excess of our current quarterly dividend level.
Rent roll ups roll downs on executed leases during the first quarter of 2021 were largely influenced by the significant renewal with Raytheon that Brent mentioned earlier.
Accrual based rents increased on average approximately 7% while cash rents decreased approximately 2.8%.
However, excluding the strategic Raytheon renewal cash and accrual rents for the remainder of the leasing activity rolled up 8% and.
And 10, 1% respectively.
Same store net operating income increased almost 4% on a cash basis and was down slightly on an accrual basis. The increase in cash basis same store NOI was primarily attributable to the burn off of significant abatements at 11, 55 perimeter Summer center West and Atlanta.
And Arlington Gateway and Washington D C.
Along with income associated with we works termination and Orlando.
These increases were partially offset by reductions and transient parking and retail revenues as a result of the lingering effects of the pandemic and by <unk>, 8% decrease and portfolio occupancy during the first quarter of this year.
We continue to believe that same store NOI on both the cash and accrual basis, we'll end the year positively between three and 5% and.
And the economic occupancy is also expected to improve with the burn off of over 400000 square feet of abatement during the second quarter.
Our overall lease percentage is estimated to end the year around 87% to 88%, but this estimate is before any capital transactions.
Turning to the balance sheet.
Our average net debt core EBITDA ratio improved during the first quarter of 2021 to five six times.
And our debt to gross asset ratio at the end of the first quarter remained relatively flat compared to 2000, twenty's year and at approximately 34, 9%.
Our tenant rent collections have returned to near pre COVID-19 levels at over 99% collections, and we know and we have approximately $3 million of previously deferred.
2020 rents remaining to be paid during 2021.
We currently have approximately 90% of our $500 million line of credit available for strategic capital transactions.
Along with proceeds expected later this year from the sale of the two presidential way assets and Boston.
We plan to repay the only secured debt remaining on our balance sheet, a small $27 million mortgage once the loan allows for prepayment without yield maintenance later this quarter we.
We also plan to go to the public debt markets. Later this year to refinance a $300 million term loan debt matures at the end of November.
At this time I'd like to reaffirm our 2000 and 'twenty, one guidance and the range of $1 86 to $1 96 per diluted share for core <unk> for the year.
Also as a reminder, this is annual guidance and results vary by a penny or two by quarter due to a lease commencements and explorations and as a result of.
A seasonal expenses and other such items.
Further to this guidance is before any significant capital transactions and we'll adjust our guidance range when such transactions occur.
As Brent mentioned earlier, we are cautiously optimistic regarding our leasing pipeline.
Please be reminded there is typically a six to 12 month lag between the time, a new tenant lease is executed and.
And what occupancy physically occurs.
With that I'll now ask our operator to provide our listeners with instructions on how they can submit their questions and we'll attempt to answer all of your questions now.
And we will make appropriate later public disclosure if necessary.
Operator.
Thank you and the floor is now open for questions.
You do have a question. Please press star one on your telephone keypad at this time questions will be taken and the order they were received.
And you kind of question and.
You can't remove yourself from the queue by pressing one.
And ladies and gentlemen, if you do have a question. Please press star one on your telephone keypad at this time, please hold on and poll for questions.
Okay. Our first question comes from Anthony Prolong Please state your question.
Hi, Thanks, good morning.
And so my first question is with regards to the leasing pipeline and I think last quarter you provided a number that was real strong and all of this included Raytheon.
And it now right.
Just curious how that looks now to give us some color as to what you're seeing there.
Good morning, Tony Thank.
Thank you for joining happy.
We're happy to provide a little bit more color around the pipeline I'd say and as we've tried to characterize coming through the pandemic. We were obviously pre pandemic doing about 200000 square feet of new leasing a quarter roughly.
And that went to near zero as did most companies leasing pipelines during the pandemic and the early days as we've continued to get into the third and fourth quarter, we've seen that trajectory go higher.
We're doing call it and the high double digits in terms of thousands and then up to around 100000, and the most recent quarters and now continuing that trajectory, even greater and this quarter and we continue to see the pipeline build more so quarter over quarter. So I'd say that trajectory continues to be very positive and as I noted in my prepared remarks.
Being the northern markets actually start to have tour activity and person.
And is a very positive sign and actually getting requests for proposals.
Our prior leasing was almost predominantly in the Sun belt with a little bit sprinkled throughout the other northern markets, mostly on renewals and a few new deals, but we're seeing that creep up as well as as I noted by Premier prepared remarks that medium sized enterprise. It takes 15 to 25000 square feet at least submit rfps.
And we are scheduling tours and so I'd say incrementally it's nice to see those two user segments come in further into the market, but still clearly we're not going to get back to those pre pandemic pipeline levels into in terms of new leasing activity I think until third and fourth quarter of the year, it's really going to take.
A little bit more positive momentum behind the vaccine and people getting a little bit more comfortable and returning the workplace, which we're seeing I think to really see full activity get back to where it was.
If you want to think about market by market, though we still see good activity and all our sunbelt markets Boston.
To a lesser extent and northern Virginia, and Minneapolis, but New York still trails overall in terms of that new leasing pipeline and activity I'd say it's.
And that's how I'd characterize it anything else more specific.
Yeah that's helpful.
86% lease that you had at the end of the first quarter.
Quarter, and Bob you had mentioned 87 to $88 per year, and any big puts or takes and either direction to watch out for it by market or buildings.
I think <unk> been mostly put on are well known to the market. We work is the one that will be coming out that's of size in Orlando and.
Other than that no I don't think theres anything dramatic and nothing of size for quite some time, if you look on our.
Large tenant list there really the next larger tenant is not until the end of 'twenty two.
So we feel pretty good about having low expirations limited kind of big hits and the opportunity to capture what we think is going to be continuing to focus on landlords that prior to provide a high quality product and a service with a focus on.
Initiatives that are important to both corporations and their workers as well as I noted in my remarks, So all things that we see with only four 7% of our own ALR rolling and the rest of 'twenty, one and once we conclude the New York City lease 22 also gets a lot shorter we feel very good about our runway to achieve those.
And C levels by the end of the year.
So we work being the more notable drag but then.
And good positives to get to the 80 788, just being a little more spread out or is that fair characterization.
Absolutely.
Okay, and then on on Boston from a capital markets point of view.
Now that you're putting right here on a per se on I think last quarter, you talked about Cambridge being.
And being a potential sale candidate.
What are the prospects or thoughts around just your exposure to Boston and at this point.
Yes, and maybe I'll take an opportunity here, Tony and take a step back and and explain a lot of how we thought about our really entrance into that area and that market 10 years ago and has a good maybe illusion to what we might do if we were to ever enter a market elsewhere or even a submarket and and that was to say, we like the dynamics and Burlington.
<unk> was an adjacent market and we were building a platform and Burlington, but saw an opportunity to get an asset that was frankly, we thought a good way to create value.
And use our market knowledge use that platform, but knowing all along we were going to build our core base around Burlington and so we were able to get raytheon to extend to a level, where we are able now to push them into the market. We think create a lot of value on the cap rate and in that process.
Moving to the tune of maybe 125 to 150 basis points.
And we will see.
And so we were then able to kind of think about our opportunities to recycle that.
Now and Cambridge, We've also got great assets and we've continued to have a great relationship with Harvard We don't feel on a rush to sell those necessarily I think that market is quite strong that tenant.
Well known that at the right time, we will.
I coined that use those as our piggy bank.
But we're still very committed to the Boston market. We think there's a lot of great opportunity to continue to provide good office space, particularly as competitive office space has continued to use from pulled into other uses.
And really creating the need for tenants that are more and the urban core looking for as we've talked about in other calls a more reasonable rate and more space for their employees. So we continue to see very positive things and that market. I would also note maybe a credit upgrade from our nuanced tenant and that market, which is potentially being acquired by Microsoft.
Soft and a full building user there, but thats, a core holding again and our Burlington and market I would anticipate disposing of that one but with Raytheon, we saw a chance to really harvest the value created and.
We launched it.
Got it that's helpful. And then just last question. The industrious lease is that a straight we expect and shine there or is that a like a revenue sharing operating type deal.
Yes, I'll take a step back and that just to be clear is it really a replacement of an existing co working operator as we've talked about on prior calls we've taken and our our operating risk or counterparty risk, if you will and spread it across a number of operators, we work being one but also some local operators.
However, the disruption in that sector has been meaningful and as time has gone on the quality operators, we think being primarily industrial and we work are we think it's going to drive incremental tenancy.
And then it's not and additional exposure to co working and so co working and still comprises only 2% of our MLR we replaced.
A company called make offices with industrious. It is a lease with a revenue sharing component, but it is lease.
Okay, great. Thank you.
Okay and our next question comes from Dave Rodgers with Baird. Please state your question.
Yes, good morning, everybody wanted to touch on the Raytheon and sales it sounds like there hasn't been in the market and maybe 30% to 45 day, Brian can you give us some color on kind of the appetite and maybe the timing of closing something and then the flip side of that question is you obviously want to reinvest and you mentioned that and your comment can you talk about what the reinvestment pipeline looks like today and as they are.
<unk> and opportunity in your mind to then bring more assets to market this year to pursue that pipeline of activity.
Good morning, Dave.
Yes, so sorry, yes, again touching on Raytheon.
We kind of had a unique situation, where we can we're able to extend that tenant and get that 10 years of term, which as I noted before we felt really created a lot of value.
On top of that it was a low capital deal.
And so we're able to keep a lot of that.
Down and our metrics for the quarter.
But I would note it was a slight rollback on the rate.
Modest mid single digits, and we felt like that was more than made up for what the cap rate might achieve and the market as you know we've been and the market now not even 30 days really.
And it takes a little bit of time to get people under Cae's et cetera. So at this point and be a little bit early overall to comment, but I would say as you can imagine Boston is a very hot market. It's got a credit worthy tenant with long term lease.
It should do very well we think.
But I think it would be too early to tell in terms of timing that's also a little bit tough.
Tough to pinpoint and the reason being is this is a very strategic asset for the user.
And as I would anticipate this may require some government approvals and as dictate exactly how long that might take depends on the ultimate buyer.
And and ultimately, we'll be able to share a little bit more light on towards that.
On the next call.
But in terms of and redeploying that capital and how we think about things we're looking at it several acquisitions both off market and.
And then a few on market most off market, but theyre, all strategic opportunities and our core markets and sub markets and as we've thought about and the past seen today, we think of initial yields and the 6% to 7% range, where we can create value.
And we feel like we're in a good position to pursue acquisitions.
And we've got a pipeline for potential deals and we think that's growing I would say at this point in time as we think about capital allocation probably developments further down the list, we feel pretty good about where the stock trades today and see some opportunities that are better and assets for growth.
And then of course, we always have the alternative to pay down debt, if we needed to with a little bit on the line currently but I think youll find us be able to marry that disposition well as we have done and the past with an acquisition. There is a modest gain there we think that would be a taxable gain that we can.
Handle appropriately, but ideally, yes, you'd like to 10 31 if possible.
That helpful on it.
Appreciate that color Brent I guess I wanted to ask on the life and asset like enclave, where maybe the credit isn't as good as that something that you could foresee and bringing to the market and redeploying as well or is the market not strong enough for that type of tenancy just yet.
Yes, I think Dave as we think about the noncore portfolio.
We've got realistically a little bit of maybe a few months on two pierce place in terms of trying to get a tenant thats in tow.
And if will land that but in any case, that's the non core asset I think that I would like to definitely get out the door. This year.
Think about the two Houston assets, given the credit in Schlumberger, and maybe that one's a little bit more primed, but as we continue to see oil recover and transocean is paying rent now.
On a cash rent it is an opportunity to potentially monetize that asset, but I think it's more likely to be a next year event than a this year event.
As we think about that specific one with T O.
Very helpful. And then last for me on the New York City renewal it sounds like that it would be mid year and you did make the comment that it would be consistent with terms and the past I guess I just wanted to go back and reconcile are we talking about kind of terms on this would look like a long term deal and a shorter form until youre done or would this look like the holdover rent so.
And I guess I just wanted a comparison between kind of hold over and kind of where we go there the impact of this year's financials.
Yes.
And maybe.
I would say take a step back and lets talk about the New York City process and lease and whole I'd say overall, all the incremental progress, we're seeing and New York City opening up is a great thing for the state and New York and the country, frankly, and and 60 broad.
New York City employees themselves are actually returning next week and I saw this morning to Bozzi opened up the city and 100% starting July one so all very positive things, but unfortunately as we we've taken through this process. It's certainly been more protracted than we anticipated.
But rightfully so given what that region has dealt with and had to contend with the pandemic. So as I noted in my prepared remarks, all government leases require we signed <unk>, which we've done so and then followed through with the various agencies that occupy the next step will be a citywide hearing and.
And then it will be put on the calendar the mayor office and still have to approve so there are a few more steps, but we still think that gets executed sometime around the end of June that interim lease.
And so that initial lease was really designed to provide the time required to complete their swing space design plans and cover what would be a construction period. So once that construction is complete that longer term 20 year lease that we're still negotiating would commence.
And both Piedmont and the state and city are engaged on that longer term lease.
So that's how we kind of think about that overall process now and getting to your initial question, which is what's that mean from an economic standpoint, you're exactly right. We've thought about the current rate that they pay today and holdover as being what I've called market for unimproved space and so roughly what theyre, signing that interim leases and that market rate.
And with a modest annual escalation as anticipated.
And so there's very little capital associated with lease and all.
All of that kind of significant build out would be triggered once that 20 year leases executed and again, we're working on that but we obviously needed some time and neither group wanted to have this continued to be and a holdover status.
I appreciate it I would notice.
Note that the term of five years from the date of execution by all parties.
Got you. Thank you.
Okay. Our next question comes from.
Michael Lewis Trust Securities. Please state your question.
Thank you.
When I think of work from home threat and I don't really think of city of New York are Raytheon, but Raytheon has been a company that debt has talked publicly about reducing square footage.
Maybe maybe in their case, because they're reducing head count and certain areas.
But is there any change in either of those renewals in the way that the companies intend to utilize the space or their philosophy on hybrid work.
Anything else like that or have you seen anything else tangible anywhere else and your portfolio yet.
And.
And good morning, and I appreciate the time today Michael.
It's surprising and we're still learning more day by day, and as you talked to more and more tenants more and more architects and more and more Ceos thinking about their business longer term.
And it's surprising that I think people are coming back to a very similar design space that existed and.
And many obviously not everyone, but bench style seating is definitely fallen by the wayside more perimeter office is open areas, but exorbitant of life from the window line, which is why the window line is imported into the center portion of the core of the building, but overall space planning and space needs has not materially changed for those two tenants.
<unk>.
Raytheon will continue to operate and very much the same footprint and the New York City is going to need a refresh given its 20 year old now a 22 year old space, but it's very much and the same vein as to what it was designed to be beforehand and similar.
Similar within New York City, though pre pandemic.
<unk> went to a design that was utilizing a little bit more average space that they had before per employee, but utilizing team building space and conference room space more efficiently we created their own little we work area on about 20000 square foot floor print and one of the floors that we share and conference just for the various agencies, so theyre getting <unk>.
Dave and their own way I think you're just going to continue to see that and the design process and focus on collaboration space, but we're not seeing at this point I can point to them I could point to Lux here in Atlanta, which is a subtenant, but redoing a 170000 square feet no material change right now, which is a little surprising and are our minds, but as I talked about on the <unk>.
Call a much greater focus on the service.
And the physical characteristics of the building and the quality of the landlord more than ever before.
Yeah. Thanks, that's interesting too on it.
And we finally have a 10 year renewal to look at and.
It sounds like not a lot of changes at least for them.
My second question is kind of a two parter.
That kind of share as a theme though.
You talked about the expectations for selling the Raytheon asset.
It did Raytheon and no you might market that property for sale and.
Does that impact low lease negotiation at all and.
I've mentioned there was a second part the second part would be.
The city of New York.
Care or does it enter into the talks at all weather.
You may not be the long term landlord for them at that property. If you decided to sell that after after a long term lease with science.
Good question.
Let's take them and each and in separate part.
I think and the instance, with Raytheon given it's the sole tenant and the building.
And as we've had a deep relationship with that firm at that location for 10 years now I personally negotiated the last renewal prior to this new range.
<unk> on team and their representatives very well.
And I know there are various too I think it would be.
Naive to think that they didn't understand that there was that potential and that we were had always asked to do more than a five year renewal and they always had robust.
But in this instance, we saw an opportunity and I think they did too and I and Thats. The only reason why there was a modest roll back and the rate just because there is very little capital and we felt like we were creating a lot of value and obviously, they probably wanted to distract a little bit of that value as well, but again that was not really a significant part of the negotiation, but obviously you had to play and in their minds.
I would think.
But thats speculation and I do not know.
Okay and then.
And the city of New York care at all what you do with the building and I guess I could even ask the same question about two per day.
And what you just said right.
Does that complicate leasing that asset up.
I would say no and that is.
Not proved to be a point and the current interim lease that we just executed but also.
And also not a single tenant building and it is also provides us the city with the various I've talked about on prior calls it's very unique building within a building their own elevator bank. It fits their uses very well, particularly at that value price point. So I don't think in that regard it's going to be.
A lever on their minds at all versus with Raytheon and I would suspect.
They were aware.
Okay alright, thank you.
Again, ladies and gentlemen, if you do have a question. Please press star one on your telephone keypad at this time again, ladies and gentlemen, if you have a question. Please press star one on your telephone.
And at this time.
Our next question comes from Daniel Ismail with Green Street. Please state your question.
Great. Thank you.
Similar to the question and ask about work from home and previously I'm curious how youre thinking about Minneapolis is a market long term I know the closure to the CBD is limited, but with the target sublease and Sublease News recently I'm curious, how you would rank debt markets relative to your other core markets.
Good morning, Dani I appreciate you joining and.
In regards to Minneapolis, specifically I think we've been a long term operator and that market and we enjoy being one of the 800 pound gorilla in terms of being a major player and deep relationships with a lot of corporations that operate within that market.
So we still view our platform and capability there as being.
One that gives us an advantage and we're still committed to the city.
As we continue to talk very closely with the tenants that we have both downtown and in the suburbs I would say theres, obviously more disruption downtown given.
What's been going on with the pandemic and also with the social unrest. The good news is to some degree the city's moving forward and continue things continue to open up from the pandemic.
And things continue to move forward from the social reform aspect it within the city. So businesses are getting more constructive and returning back to the workplace, which is a positive we're starting to see some of that tour activity pickup, particularly in the suburbs I think it's still to come and downtown but overall, we're still very optimistic about the <unk>.
<unk> provides a great.
And kind of work life balance that we've talked about the ability to attract large corporations.
<unk> Airport.
Good education systems and neighboring markets that feed into it a location advantage for our asset downtown right next to targets headquarters.
And very little competitive sublease space that would I would could see deem superior to ours and the downtown market and as I note. The suburban market continues to kind of perform as I would've expected any of our other northern markets.
At this point.
And then moving I would note that we use low expiries and that market for the next two years sorry.
No that's helpful. Appreciate it.
And I am curious on the on your land bank and with the rising construction cost I'm curious how you proceed that's impacting the attractiveness of development. These days.
I am sorry was that last point and the Choppiness of the web.
And that would be attractiveness of developments opening day.
Attractiveness.
Yes, yes, it's interesting we've been watching commodity prices continue to accelerate and certainly right. Now there is I think a supply chain constraint that is going to continue to keep those materials for construction and elevated for probably at least the next 12 24 months. So.
As you think about that impact on your ability to start a construction project. It's got obviously impact is going to be very difficult to get G&P pricing, but most leases with perspective tenants typically have some sort of flex component to it related to the cost.
So youre able to to some degree cushion against that if you were to found the right opportunity, but at this point and time I think we're going to be continuing to focus on redevelopment. That's what we feel is.
Great and better risk adjusted return.
On the right bones, and what we're accomplishing and some of our larger scale projects I think that's a better use of capital and ground up development that said, we have seen more inbound inquiries on the opportunities we have potentially.
Atlanta, and Orlando, but it all is centered around that and creating that right compelling environment and right now I think that's probably going to be better done through redevelopment and ground up.
And just last one from me.
Are you viewing the mark to market opportunity across the portfolio I know thats a hard question to answer.
Depending on certain markets price I'm, just curious how far above or below and you think the portfolio is portfolio rents are these days relative to market.
Good question.
A question, we get regularly and and I'd say the one thing through this disruption has been a positive is the resiliency and face rates.
Now don't get me wrong, and we felt the pain, particularly on the capital and is where most of the tendency is trying to beat up their landlords if their scale and credit.
And not on rate and so that's been a positive so right as held for most part through our portfolio prior to the pandemic, we were saying we were 5% to 10% mark to market.
And I'd say, that's still the range that we gave and point to specifically, even this quarter ex Raytheon, which we've explained not a lot of capital and so there was another lever there on rate.
But elsewhere, if you exclude that we were and 8% roll up and I think that's very indicative of where we stand today and the portfolio and will continue for the near term.
Great. Thanks, everyone.
Yes.
Okay. Our next question comes from Dave Rodgers with Baird. Please state your question.
And just a couple of follow ups, maybe for Eddie and Bobby three question, specifically, one any changes and the general reserve. This quarter two could you give us a little more detail maybe on the sequential change and parking revenue and that component and then lastly, the $3 million that you have left to collect from last year's deferrals and what's the timing on that.
Hey, Dave This is Bobby.
Trying to take the first and last one.
Some of the information.
You asked about the bad debt reserve.
And you might remember that we recorded.
$5 million bad debt General reserve last year at the onset of the pandemic.
5 million came from basically seeing a reduction and collections.
And 1% of our annual revenues, so $500 million, 1% $5 million.
The balance is still right at $5 million for tenant receivables and related assets and just think of that including straight line rent things like that.
We still have tenants primarily retail customers that are on our watch list that we're still trying to track.
And we still have that reserve is I'm going to try to bring and nearer deferral answer.
Outstanding of about little over $3 million related to the workout agreements we enter.
Good about 70 of them 6 million and total and deferrals collected about half of it.
And our reserve is.
And as protection against that.
So thats the status.
I imagine I think you asked me a couple of core growth quarters ago. When we established this Dave.
Some of them have come back to you, yes it could.
But I believe that would take place over several quarters and that pace and the amount and certainly indeterminable at this point.
That answer to the questions.
And I forgot the third one.
Yes.
Working.
And basically Q1 was in line with Q4.
We're continuing from that.
And Q4.
And.
And so hopefully that answers that question I think we would expect as we see more people will return and the office.
On the latter half of the year, we're going to see an increase there.
Parking Doe day remember is only a small percentage of our revenue 1%.
Got you yeah. Thank you.
Okay, I would like to turn it back over to Mr. Smith for closing remarks.
Well I appreciate everyone joining us today.
Our positive first quarter for Piedmont, we look forward to continuing the dialogue next quarter is hopefully continue to build and see the pipeline build.
And build on the momentum that we've garnered so far this year, we still remain optimistic.
And on overall, how the year will pan out and perform and we're excited to talk to you net I would say if you have an interest and meeting with the company during NAREIT and June please reach out to Eddie or just in Colorado.
Formations in the supplemental thank you everyone.
Thank you. This concludes today's conference call. We thank you for your participation you may disconnect. Your lines at this time and have a great day.
Okay.
Okay.
Okay.
Okay.