Q1 2022 Piedmont Office Realty Trust Inc Earnings Call
Good day, ladies and gentlemen, and welcome to the Piedmont Office Realty Trust first quarter 2022 earnings call.
At this time, all participants have been placed on a listen only mode.
Floor will be opened for questions and comments after the presentation.
It is now my pleasure to turn the floor over to your host Eddie Gilbert Sir the floor is yours.
Thank you operator, and good morning, everyone. We appreciate you joining us today for Piedmont's first quarter 2022 earnings Conference call last night, we filed our Form 10-Q , and an 8-K that includes our earnings release and our unaudited supplemental information for the first quarter is available for your review on our website at Piedmont rate Dot com under the <unk>.
Mr Relations section.
During this call you'll hear from senior officers at Piedmont their prepared remarks, followed by answers to your questions will contain forward looking statements as defined in the private Securities Litigation Reform Act of 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. These forward looking statements are discussed in our press release as well as our SEC filings.
<unk> everyone to review the more detailed discussion related to risks associated with forward looking statements in our SEC filings.
Samples are forward looking statements include those related to Piedmont, and future revenues and operating income dividends and financial guidance future leasing and investment activity and the impact 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 speak.
As of the date they are made.
Also on today's call Representatives of the company may refer to certain non-GAAP financial measures such as <unk> core <unk> <unk> and same store NOI.
The definitions and reconciliations of these non-GAAP measures are contained in the earnings release and in the supplemental financial information, which we filed last night.
At this time, our president and Chief Executive Officer, Brent Smith will provide some opening comments Brent.
Good morning, everyone and thank you again for joining us on today's call as we review our financial and operating results for the first quarter of 2022.
In addition to any on the line with me. This morning are George Wells, Our Chief operating Officer, Chris <unk>, our EVP of investments and Bob <unk>, Our Chief Financial Officer as well as other members of the senior management team we.
We are extremely pleased with the strategic transactions closed during the first quarter and encouraged by the continued momentum we are witnessing across our markets, which led to the strong financial results.
While some U S companies are taking longer than we anticipated to finalize their return to the workplace strategy. We continue to encourage investors to focus on new tenant leasing as an indicator of the strength in the office sector as opposed to individual beautiful building utilization levels, which can vary greatly by region and tenant side.
And on that metric I would note that Piedmont, new tenant leasing activity. This past quarter was the most robust it has been in over three years and marked the third consecutive quarter, we've exceeded pre pandemic levels of new tenant leasing.
This leasing volume was achieved irrespective of the fact that the first quarter of the year historically tends to have the lowest leasing activity due to winter weather.
Furthermore, these leasing transactions continued to demonstrate positive momentum, we're experiencing across our portfolio, particularly in our redeveloped properties.
I would reiterate piedmont's portfolio is long dated and positioned for growth with the average in place rent, 5%, 10% below market and approximately six years of weighted average lease term remaining.
At this time Im going to turn the call over to George Wells, Our CFO to review this quarter's leasing activity with you in greater detail.
George.
Thanks, Brent and good morning, everyone. Our operational teams delivered strong first quarter results on many fronts and the leasing momentum is very encouraging just as exciting is to see our tenants are increasingly communicated with their employees to return to the office.
Our well are monetized and wellness focused portfolio is in an excellent position to support our customers' occupancy goals in fact, our space utilization rate varies by tenant and property and it is approaching pre COVID-19 levels at a few locations and in Submarkets utilization is averaging above 50%.
Lowest utilization levels are at Minneapolis, and Washington, D C, which are at approximately the 30% level at the end of the first quarter.
I'm very excited this year, our leasing results for the quarter. We completed approximately 50 individual leases totaling 552000 square feet with just under half of that activity related to new tenant leases as Brent noted. These results reflect the third quarter in a row of exceeding pre COVID-19 new leasing.
Tenant levels.
And specific to the first quarter of this year. These results include the largest amount of new tenant leasing that we've experienced in the last 14 quarters.
Tenant leasing demand is validating a flight to quality bias in the marketplace and our strategy to aggregate modernize well located class a properties that have an onsite <unk> walkable amenity base continues to drive our leasing success.
These building factors combined with a more robust service offering versus our peers for attributes such as 10 engagement health wellness and sustainability continues to have a meaningful impact on tenant space absorption driving a 30 basis points increase in our lease percentage this quarter alone.
Perhaps the Best example of this phenomenon occurred this quarter at our Atlanta Galleria project.
According to the Bureau of Labor Statistics, Atlanta has not only recovered all the jobs lost during the pandemic, but sits at 103% of pre COVID-19 employment levels. So it should come as no surprise that this market continues to exhibit the strongest fundamentals across our portfolio.
As a reminder, we owned five office buildings at the project spend $2 2 million square feet, which is 84% leased with run rates in the mid <unk> growth the highest in the submarket, excluding new construction at an all in basis of $245 per square foot.
And the last two years, we've redesigned the six acre park experience, we've expanded food and beverage options, we've upgraded the fitness and conference center facilities.
Integrate new outdoor collaboration space and improved access to Atlanta Braves Battery Entertainment complex.
As a result of these repositioning efforts during the first quarter, we signed nine new tenants as Atlanta, Galleria, including three corporate headquarter relocations comprised of 25 to 50000 square foot each and we renewed an additional seven tenants in.
In aggregate. These leases were executed with an average of eight years of term and rent rent rent rental rate roll ups of approximately 10% as many of you are aware of this project is situated at the corner by 75 and $2 85 and is connected directly to Atlanta Braves <unk> Park, creating a unique office environment with prominent signage.
The project exhibits the enhanced workplace strategy that we're employing throughout our portfolio and as a result of these place making efforts leasing has been off the charts.
Since January of 2021, <unk> has signed more than 291000 square feet of new deals with roughly 300000 square feet of leasable space remaining at the complex, it's a fantastic organic growth opportunity for the company.
Atlanta, along with our other Sun belt markets, Dallas, and Orlando helped drive the first quarter's leasing activity in fact, Dallas experienced the most leasing during the quarter led by the renewal of our largest 2022 lease exploration a national pharmaceutical retailer located 750 West John Carpenter.
This approximately 164000 square foot renewal resulted in a positive cash and accrual rent roll ups of approximately 10% and 17% respectively.
Finally, this transaction highlights the increased focus we see from national corporations towards sustainability focused landlords and buildings.
And in this case the buildings LEED gold status was a differentiator.
From a macro perspective, the Dallas economy continues to be a national leader in employment growth. According to the Bureau of Labor Statistics. This metro has remarkably recovered 106% of jobs lost during COVID-19 .
And it is not surprising the Dallas as ranked by CBRE as its 2022 Investor intention survey as the top office market for capital deployment.
It certainly feels like this market is poised to experienced positive absorption in the next few quarters.
In Orlando, we completed 10 leasing transactions this quarter, including six new tenant leases.
Noteworthy our local team successfully completed a lease renewal with a top 100, AML law firm with 40000 square feet under a new 14 year lease and with a high single digit accrual in cash rent roll up.
This renewal and our 775000 square foot South Orange Avenue complex, which is located in the heart of downtown we are completing a multimillion dollar redevelopment project is gaining a fair amount of market recognition and is attracting a number of new tenant prospects.
The redevelopment includes a significant lobby modernization and upgraded two acre outdoor park with collaborative workspaces tenant dedicated balconies expanded food and beverage options and a best in Class Conference Center.
Today, we are pleased to share some exciting news regarding this modernized legal south Orange average project with the announcement of a just signed approximately 62000 square foot new lease with one of the nation's premier planning and design consultants.
Kimberly Horn and associates. This marks the second location for this tenant within our portfolio and demonstrates the frequency in which tenants return to Piedmont for their office space needs.
With the latest Kimberly horn lease new leasing of the South Orange Avenue property now totals approximately 125000 square feet since January of 2021.
Outside of the Sunbelt, new leasing activities occurring our Boston assets, albeit these properties were already relatively well these.
According to Newmark research, a 1 million square feet of office to lab conversions were executed during the past five years within the West Route 128 sub market, which includes our position and Burlington with another 4 million square feet right behind it in various stages of conversion.
That will dramatically reduce the size of that submarket by 19%.
Allowing us to continue to push rental rates higher.
Deal flow was generally slower than our other markets.
In Washington D. C. More return to office announcements gives us renewed confidence that recovery there will gain momentum.
Mastercard and large customer and a $42 50, North Fairfax LEED Gold Trophy office tower in Boston has eliminated its alternating team concept and now requires all employees to be in the office several days a week.
Also Green Street in March highlighted by the administration's recent statement, claiming that federal agencies will lead by example, and returning to the office and since that news to Federal News network is reported at two agencies.
And the Veterans administration, we're returning to the office in the second quarter of the year.
Geopolitical uncertainty could also boost office demand in the near term from defense related industries.
This industry generally sees close proximity to the Pentagon and northern Virginia, where we own three well monetized LEED designated assets sit adjacent to two metro train stations.
We have very limited amount of lease roll in Washington for remainder of the year.
Our sole asset in New York is approximating, 90% leased with virtually no explorations this year.
Deal flow has slowed though as a city in general is still in the early stages of recovery. That's occupancy utilization is over 50% at our 60 broad asset and we continue to make modest progress on a lease with New York City.
Minneapolis is sitting with the largest number of fortune 500 companies per capita in the U S has historically maintained one of the highest stabilized lease percentages in our company and today sits at approximately 90%.
Prospect activity is good and our 2021 Toby award winning asset enormous point and at our LEED gold asset in question rich to where most of our vacancy resides.
In addition, we are in the midst of lease discussions with U S Bank core our largest tenant and we hope to report more progress on this active renewal discussions during the next quarter.
In summary, economics for future leasing look promising as leases executed during the first quarter were quite favorable with an approximately 5% and 13% increase in second generation rents on a cash and accrual basis respectfully and in the first quarter as executed leases average lease term was six points.
Six years.
Our overall portfolio is at 87% leased as of March 31, 2022 up from 85, 5% leased at year end 2021, with only about four 6% of our portfolio's annualized lease revenues expiring during the remainder of 2022.
Our leasing pipeline has not dissipated a record levels of prospective tours and active proposal pipeline and that is an additional 201 million square feet of already executed leases that have not commenced or are still in abatement, which represent approximately $33 million of incremental cash ALR due to comment to the.
Folio over the next 12 to 24 months.
With very few leases expiring for the remainder of the year. We continue to expect net space absorption during 2022, especially since roughly 90% of those explorations and 70% of our vacancy reside in the sunbelt. This bolsters our confidence to reach an anticipated lease percentage around 88%.
Thank you for your time this morning, I am now going to turn the call over to Chris Coleman, who will review with you our property investment transactions completed during the first quarter and our capital deployment strategy Chris.
Thanks George.
On the investments front the team has been very busy and we remain highly optimistic about the deal flow, we're seeing in our pipeline.
Back over the past 18 to 24 months the overwhelming majority of what we've seen marketed through the brokerage channels has been characterized by long Walt good credit newly developed <unk>, 100% leased assets. They are fully baked with little downside and they've traded at plus or minus 5% cash cap.
Rates in 20% to 35% above replacement cost.
As most of you know this has not been the traditional opportunity set for Piedmont, but if these types of opportunities allow us to continue to elevate the portfolio and further advance our sunbelt expansion. We will consider these transactions is highly strategic in nature and accretive to earnings to be <unk>.
We are not abandoning our more traditional investment philosophy of buying well located real estate in great markets and a <unk>.
<unk>, which supports repositioning redevelopment and activation we firmly believe in the flight to quality theme and we think it's here to stay.
But as George outlined at the Atlanta, Galleria 25, Burlington Mall Road in Boston and through the momentum. We're currently seeing in Orlando following our redevelopment efforts their quality is not solely defined by H well placed capital can in fact, reinvent and reinvigorate great real estate.
And I will note while the brokerage community plays an incredibly important role in our acquisition pipeline, we are not dependent on broadly marketed transactions as our only source of investment opportunities.
We have made significant progress tightening our footprint and concentrating in particular nodes, which we believe provide outsized growth and opportunity in our portfolio.
We know where we want to be we know the assets, we want to own and our local teams know the owners of those assets, we can't force them to sell but we can certainly play offense express our interest and try to engage in discussions which is precisely how our acquisition of 999 Peachtree in Midtown Atlanta came about.
And after just five months of ownership, we have already completed approximately 60000 square feet of leasing at the asset.
So our teams are actively engaged with brokers and directly with owners principally in Dallas and Atlanta at the moment and we're optimistic that this heightened focus will continue to generate great results in 2022.
The pipeline for acquisition stands at around $1 5 billion.
And gives us confidence that we can achieve our goal to have at least 75% of our ALR generated by our sunbelt markets by the end of 2023.
On the disposition side, we've already disclosed two completed transactions in 2022, the sale of our presidential way assets in Boston and the sale of two Pierce place in Chicago, both of which closed in late January we.
We also reported that our notes receivable related to the 2020, New Jersey portfolio sale were fully repaid in late March completing our exit from Chicago, and New Jersey as projected and redeploying those proceeds in the Midtown Atlanta through a reverse $10 31 at accretive yields.
Looking forward, we have engaged a brokerage team to market, our two noncore LEED gold assets in Houston.
We are also evaluating market conditions for our two assets in Cambridge, where unprecedented pricing metrics have severely limited our opportunities to grow so as we've said often if and when we cannot grow within a sub market <unk>, we have fully maximize value on a given asset we will consider selling.
In the case of Cambridge, both variables are certainly true and we believe we can redeploy those proceeds in an accretive manner. We.
We will continue to take a close out of the balance of our portfolio and will likely prove select assets. In addition to the activity I just mentioned.
With the intention of reinvesting those proceeds into higher growth markets in the sunbelt.
With that I'll turn the call over to Bobby to walk you through the financial highlights of the quarter and our updated guidance for 2020 to Bobby.
Thanks, Chris while I'll discuss some of our financial highlights for the quarter.
I encourage you to please review the entire earnings release and supplemental financial information, which were filed last night for more complete details.
Core <unk> for the first quarter was 51 cents per diluted share.
That's a 6% increase over the first quarter of 2021, and this increase was primarily due to accretive recycling activities since the first quarter of last year and rising roller rental rates.
That's particularly at our most <unk> locations, such as the Galleria and growing reach islands in Atlanta.
South Orange Avenue in CML Center in Orlando.
The Galleria in one Lincoln Park in Dallas, as well as Wayside Road in Burlington Mall Road in Boston.
Projects, where we are now achieving net effective rents higher than those pre pandemic.
<unk> generated during the first quarter was approximately $39 million well above our current $26 million quarterly dividend level.
As we mentioned last quarter, our board has indicated that given our cash NOI growth over the last few years. The fact that we are approaching the conclusion of our large construction restocking project for the state of New York at 60 broad as well as the tighter since our last dividend increase.
The board will be reviewing our dividend payout amount during the summer of this year.
Also Georgia has indicated.
Our completed new tenant leasing activity during the first quarter of 2022 was the best in several years.
The second generation rents during the first quarter improved, 5% and 13% for cash and accrual basis rents respectively.
On a same store comparative basis cash NOI increased a little over 5%.
And on an accrual basis it increased approximately two 5%.
Turning to the balance sheet, our trailing 12 month net debt to core EBITDA ratio as of the end of the first quarter of 2022 was within our managed range at five eight times.
As noted on our last earnings call, we anticipated and during the quarter. We did receive approximately $119 million in proceeds from the payoff of two notes receivable that were outstanding as of December 31, 2021.
The proceeds were used to pay down our $500 million line of credit.
And as of the end of the first quarter, we had approximately $420 million of unused capacity on the revolver.
And we had a debt to gross asset ratio of 34, 6%.
Now we have no scheduled debt maturities in 2022, other than a $500 million revolver, which our treasurer, Eddie Gilbert and his team are currently in the process of renewing with closing targeted for June of this year.
Finally at this time I would like to update our annual guidance for 2022, raising the low end of the range and the midpoint of our previous guidance.
We currently estimate core <unk>.
Per diluted share for 2022 will be in the range of $1 99 to $2 seven.
This revised estimate incorporates the successful leasing progress year to date.
And an analysis of our existing tour activity and prospective leasing pipeline.
It also includes the current backlog of approximately 1 million square feet of leases yet to commence or in some form of abatement, which will generate new revenues all will offset reimbursable operating expenses.
This guidance also includes an accelerated rise in our projected short term LIBOR interest rates on our debt specifically the 30 day LIBOR, we expect to increase to over 2% by year end.
And we also have several other operational and supply chain considerations that we've included in our new guidance.
As a result of this revised guidance are estimated same store cash and accrual basis NOI for the year are both expected to be positive in the range of one 4%.
I will note the effects of the dispositions that were completed during the first quarter as well as the payout of $119 million notes receivable were already included in our original guidance. However, no acquisition or disposition activity is contemplated in this new revised guidance.
At this time I will turn the discussion back over to Brent Smith.
Thank you George Chris and bought <unk>.
The comments I made at the beginning of the call I am extremely pleased with the operating results achieved thus far in 2022 and I want to express my sincere appreciation to my colleagues working diligently everyday at Piedmont.
We are excited about our leasing pipeline and your organic cash flow growth that can be generated and we're very encouraged with the accretive capital recycling opportunities. We anticipate this year.
Both of which can accelerate improve earnings growth of our portfolio.
That said there will be challenges, particularly in the areas of construction and property management, but our team is closely closely monitoring supply chain issues to minimize the impact on construction projects and tenant services and our finance team will be prudently managing our expenses and balance sheet. During this inflationary environment.
As I talk with other Ceos and business leaders around the country. Many are sharing that as much of a struggle as it was lead the organization through the global pandemic.
It is just as much of a struggle to lead our organization out of it to.
To be more efficient and more productive in this new hybrid environment.
Although workstyle schedules will be different than they were before COVID-19 .
Seems to be a significant agreement from executives on a long term value for most organizations to offer their employees a modernized easily accessible and monetize the office space as part of the organizations hybrid work model.
We've been saying that we believe we position ourselves to capture a significant amount of that evolving tenant demand in a post pandemic world, but it is admittedly gratifying to see it coming to fruition Pete.
Piedmont strategy of offering a premier sustainability and wellness designated monetized office experience at rental rates well below new construction is resonating across our markets.
To that end I want to reiterate our steadfast commitment to be a leader among the commercial real estate industry for environmental social and governance initiatives and call your attention to the fact that our entire portfolio was awarded the well health and safety rating during the first quarter at Piedmont, we are dedicated to enhancing the safety and well being of our portfolio is our 10th.
Fleet, the transition back to the office and the well health safety rating reinforces our market, leading policies and procedures for keeping our tenants employees and visitors safe healthy and productive while bolstering confidence for those who utilize our buildings.
We remain fully committed to exceeding the expectations of our customers staying on the leading edge for space design amenity and service offerings demand in today's competitive workplace, which will help our tenants to attract and retain their employees in a challenging labor market. We are sensibly reinvesting in our portfolio, keeping our assets fresh and modernized and where we did.
Not lead reinvesting in an asset we'll take it to premium levels, we will call. It from our portfolio exceptional quality is crucial and we do not want our own commodity product.
With that I'll now ask for our conference call operator to provide our listeners with instructions on how they can submit their questions. We will attempt to answer all of your questions now or will make appropriate later public disclosure if necessary operator.
Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time.
We ask that while posing your question you. Please pickup your handset is listening on speaker phone to provide optimum sound quality.
Please hold while we poll for questions.
Your first question for today is coming from Dave Rodgers. Please announce your affiliation and then pose your question.
Baird, Hey, guys, it's Nick on for Dave.
First maybe wanted to touch on some comments George made.
On the leasing pipeline I think last quarter, Brian mentioned around 500000 square feet of active negotiation and an additional 1 million square feet like that you are trading otherwise on just wanted to kind of get an idea of like where that pipeline stands now.
Wanted to see if like the strong leasing that we saw in first quarter is going to continue throughout the year and then maybe break that pipeline down between new and renewal leasing.
Sure. Good morning, Nick This is George.
<unk> for your question.
I will tell you momentum continues to be quite strong I mean, just starting out for the things that happened before getting proposals in terms of tour activity. We had a record high number of tours in March that we haven't seen in the past 18 months, So aggregating really happy with where the momentum is from a tour perspective and diving into proposals has been pretty consistent.
Somewhere around 100 deals per quarter.
I'd say a million five 2 million overall in overall transactions and I would say about a little bit more than half of that is for new deal activity.
Great and then maybe on the renewal side, you guys kind of mentioned U S Bank. How soon are you beginning discussions with some of these larger explorations on their spaces.
Hey, Nick this is Brent.
I'd say, we start discussion.
If the government tenant usually about three years out before exploration.
If it's a more traditional corporate tenant it's usually somewhere around 18 months out we try to product and depending on the situation. These days, though usually engaged around 12% to nine months out.
Just depending on how they're thinking about their space and how they plan their work from home approach.
That's usually when we start to really heavily engage if you think about what's really sits before us in terms of those bigger tenants right. Now we've obviously shared a Cvs was the more near term we got that one accomplished which was great which really reduces the amount of 22 exposure everything else would be ended well into 'twenty three and the most near term of those would be Ryan.
As we've discussed in the last call. They have not started construction on that potential site that they've considered moving to so we do feel pretty good about our opportunity for at least a short term renewal, but we'd also remind the market.
Got about 80% of their people back into the space. They are utilizing it and that would equate to just relative to market a high teens roll up on a cash basis. So we feel pretty good about overall the positioning of that asset in the market very prominent signage.
Do think we'll get something short term with them there if they do decide to even go forward with the building that they add up in Frisco.
The land that they are building up.
And regarding to Cargill that is further out but we are in discussions with them. They are still working on their work from home strategy I think thats still stands in that situation, where I think it could go either way, but I think we're still cautiously optimistic U S bank as we've talked about we're a close relationship with U S Bank as they are.
One of our trusted advisors, particularly on the debt side and I have a relationship with the management team there.
Continue to work with them in downtown frankly itself continues to recover and their location out in the suburbs as a critical to their operation. So we're engaged with them and I would say, we feel pretty good about where things are headed but it's still pretty early.
And I think that's really the major ones for 'twenty three as we think about what's on the horizon.
And we feel pretty good about again, where those stand.
Okay.
Very helpful. And then the last one maybe it's on the investment sales side and maybe for Chris.
It sounds like the exit from Houston is pretty eminent.
I mean, you guys mentioned that before you would enter a new market.
You would exit one of the your current markets gets maybe on the $1 5 billion of.
Pipeline for acquisitions is there any new sunbelt markets involved in that or maybe some new submarkets.
Yes.
Yes, it's a fair question Nick.
We have said for some time, we've been evaluating new markets really in the major markets in the sunbelt.
We have said as you point out that we wouldn't add a dot without taking the data off the map. We are certainly trying to further simplify our story not complicated we do intend to be out of Houston sometime this year, it's hard to tell the timing probably circle third quarter early fourth quarter.
And also we've been pretty clear on where we're heading in New York. So we think we could be in a position to plant a flag in a new market over the next 18 to 24 months really hard to put a timeline on it we've been looking at it.
For two to three years and for the moment, we're laser focused on Dallas and Atlanta, but.
Also making sure we're engaged in some of these potential new markets.
Great. Thanks, guys I think I'd add to that this is Brent as we continue to.
Evaluate I think we really want to continue to go deeper into those submarkets, we already have a presence, particularly those we're seeing strong growth in leasing activity and we will look at it a combination of core core plus value add and really what we're looking for though are great assets that are at main and main and may need to be modernized, but once that is.
Is complete they could easily and effectively compete against new construction and I think we continue to focus on those opportunities.
Anything else Negra today, okay.
Your next question. Please go ahead today.
Coming from Michael Lewis Michael Please announce your affiliation then pose your question.
Thank you Amit <unk> securities.
I appreciate all the investment update from Chris I wanted to ask if maybe you could.
Discuss this decision a little bit more it sounds like you.
If you are interested in some lower cap rate assets and.
We estimate the implied cap rate on your shares or have an eight handle.
So maybe just talk about capital allocation, how you got convinced that this is the best way to allocate capital.
You framed it is not really a change in strategy, but it sounds a little bit like it's sort of it.
I wanted to maybe.
I feel like it's putting a little bit of words in our mouth, Michael to say that we're going after the lower cap rate assets. I think we've always said that we're looking for accretive acquisitions and I think if you look at what we have in the pipeline for dispositions, whether it'd be Cambridge long term leased Houston potentially monetization in New York, maybe next year.
Some of the other noncore, but quality assets that will continue to prune that are mature we feel like we can rotate that into accretive acquisitions. I don't think we are feel like we are moving down the spectrum, but we're looking for quality in that regard. So I think when it comes to what we think we can buy I think thats still we feel a very good opportune.
80 to pick up assets that can compete with new construction, we can find leasing velocity or be able to create value in some manner for shareholders over time, if we look at our own stock we have bought back our stock in the past and.
And then we still continue to use that same framework that we trade at significant discounts to NAV and we feel like it's the best use of capital. We will continue to do so I would note that we don't have really any capital coming in the door from a disposition standpoint would not consider levering up to buy back shares at this point, but we do feel that some of these acquisition opportunities.
That are in the pipeline that are more value add and core plus and continuing to tighten the footprint and grow cash flow are going to create value for shareholders certainly and that's what we're going to continue to look for.
We will continue to describe the market with the accretion story is for each transaction that goes forward, but we very much feel like we can maintain that story and continue to improve the quality of the portfolio.
Okay, Great that's helpful and then.
On the leasing side, you've addressed Cvs you talked about Ryan Cargill U S Bank. So I figured why not why not even go out further I wanted to ask about Amazon in Dallas is.
Little less than three years out, but do you have any sense of whether they want new space or if may.
Maybe there is potential for them to stay and expand in place.
It's too early.
Yes.
Page two early we are engaged in.
Discussions with both Amazon and their brokerage representatives.
As you point out that lease is still about three years out. So it is a little early but as we think about our opportunity at Dallas Galleria tower for if we were to think about new development.
And also our relationship with Amazon, who continues to bring their workforce back to our existing assets and we feel very.
Yes, like we have a compelling opportunity for them to continue to grow in that location.
And we'll continue to kind of be engage I would say with them intently on.
There are opportunities at that location to either stay in the existing buildings or move to a newer asset if that's what they would prefer.
Remember if you recall they did sign an expansion shortly after we bought the assets. So we continue to stay very engaged with that team and their space needs.
Great and then.
Lastly for me one for for Bobby.
The next maturity you have the notes expiring in the summer of 2023.
Thought I'd ask the question given what's happened with interest rates lately. How are you kind of thinking about that I don't know if you have a sense of like what you'd be able to refi that at today.
If the cost of capitalized moved up materially or anything like that.
Okay.
Well I'll tell you you are asking the question that all of US are watching as we're looking at interest rates very closely right now.
I've noticed in my comments I indicated we have adjusted our interest rates on our short term debt.
Up from a 100 basis point increase this year to 200 basis points.
Increase taking place Thats, having an impact on us, but I'll tell you. We're currently running the models, we're committed to trying to do public debt offerings and you might note in the last two years, we've done two of them and so we will be evaluating that as we get closer.
We determine what's happening with interest rates.
Okay. Thank you.
Your next question for today is coming from Anthony Pallone, Anthony Please announce your affiliation and pose your question.
Yes, Thank you J P Morgan.
My first question.
It relates to U S Bancorp.
I know when New York City and state leases were expiring, yes, we're pretty transparent about what mark to market and Capex would look like for those can you give us any brackets around.
What what the U S Bancorp situation may look like.
Sure. Tony This is Brent I think the first exploration there are two as our kind of two locations for U S Bank in Minneapolis.
Location that have come to expire should be.
Say, a slight roll up in terms of capital those assets are.
In decent shape I would say so they will need a refresh of capital from the tenant side. So I wouldnt say its equivalent to a new deal, but it's probably a little bit more than a standard renewal, but you would expect and we would have a significant amount of term to offset that capital. So I think overall on a per square foot per year, it would be very favorable.
And I think the downtown location is just kind of early to say is it leasing transactions downtown admittedly have been limited just given what's gone on overall as the city's continued to recover in the CBD, but the good news is the.
Kind of major firms are starting to bring their employees back, including U S Bank, which I think starts to bolster things. So it's tough to tell honestly.
On a mark to market basis, but if I had to peg. It today I would probably say it was roughly flat.
Maybe slightly up but it probably being cautiously.
In that regard so and in terms of capital that is a great asset.
We put in a lot of money into the base building can build a beautiful tenant amenity and hub at the top of the building.
<unk> fluor standings et cetera, So it's really top of market in terms of its amenity set and really don't need to put a ton of capital into the base buildings, but that tenant space itself is also in pretty good shape, but I would kind of characterize it similar to the suburban location and won't require as much capital as the new deal.
Probably more in line with the renewal or maybe just slightly above our standard renewal.
Type because it is a high quality tenant, which we would expect a long term commitment in that regard again, so the first square foot component would be very favorable.
When I say long term generally 10 to 15 years.
Okay, Great. That's very helpful. Thanks for all that.
Color there.
My second question.
For crash in going through some of the capital markets discussion.
Given the change in rates and spreads moving any parts of the market where you've seen.
Quiddity change either for better or worse, either geographically or by product type.
Yes, it's a good question.
As I mentioned in the prepared remarks.
<unk> the true core deals I'd say the market has been pretty paralyzed for the last 18 to 24 months.
For those new assets with long, Walt and great credit with one or two credits.
One or two tenants rather occupy the entire building.
Until very very recently, given the disruption in the debt markets those deals have traded.
At very very high prices I would suggest certainly at pre COVID-19 levels and maybe even through it in some cases.
Again, these are situations, where the buyers aren't having to underwrite through role or lease up and they're really just underwriting the credit.
And putting a cap rate on the income stream. There are a couple of transactions in our market that look and feel a lot like that <unk> got a.
Pristine credit 13, 14 year lease firm lease that have been in the market and we're getting exceptional reception.
Till very recently in a couple of those deals have because of the debt markets have been put on pause. So I do think it is certainly.
The environment has.
As put some buyers on alert and I think some of those trades have been put on pause as a result.
I'd add to that Tony It's Brent if you think about just geographically.
I would say certainly dense CBD assets that rely on mass transit as the primary means of getting to the building may have impaired liquidity I think we're fortunate in that Theres very few of those in our portfolio.
Asset in 60 broad overcomes that because you just had such great long term Walt with good credit tenancy.
That's why we feel pretty good about that but clearly I think there is an increased focus on the sunbelt and some secondary cities. If you note a fire just announced Atlanta with its number one city for the year in terms of foreign investment and then as we noted in our prepared remarks, CBRE noted Dallas with its number one market for investment. So I think youre going to continue to see increased liquidity.
In the Sunbelt and those more CBD locations gateway markets et cetera, probably had a little bit tougher time and Tony one thing I'd just add we do know anecdotally.
Brokers are extremely busy pitching assignments in our healthier markets and our advising sellers to go sooner rather than later given the potentially further rising in rates.
Okay.
Got it.
Then just last question.
It's maybe a little bit for Bobby and everybody.
The occupancy or I guess the commenced number was 83 nine I think at the end of the quarter trying to get a sense as to what you have embedded for that figure.
Come the end of the year, and just where you think that could go.
Again, just given the leasing traction you've had and just fairly limited exploration this year and even next year. If you take I guess U S. Bancorp out of the mix. It's also fairly modest year.
Yes, Tony this is Bob Thanks for the question.
I might note that we had probably 750000 square feet.
Leases yet to commence or.
Eight months at the end of the year and that number's climbed to now Vermilion as we've had more leasing success.
Based upon the leasing, which we think looks very good right now that number could potentially client Tony.
Remember that as good news.
Currently with 1 million square feet of leases yet to commence rent abatements, that's about $33 million.
Revenue, probably translates into a 60% margin, which is about right for us $20 million of additional NOI.
So again based on.
Current estimates I think that number will increase but remember that's good news in terms of revenues coming down the pipeline.
Alright, so some of that million dollars I think is is.
Already in the 83 nine it's just an abatement and so we can add.
Hey.
Can the 83 nine go to 80 588.
How much could that move.
Just ask if he estimates, but it could move.
100, 200000 square feet.
You want to say, Tony just from a modeling standpoint, I would recommend you sort of keep it in sort of lockstep for now so if were projecting somewhere up to 88% leased by year end. Then you had also served to commence lease percentage by an equal amount.
Okay.
Got it or keep that leased and commenced number that that spread about the same.
Yes.
Okay.
Thanks for the help.
Thanks, Tony.
Operator.
Once again, if there are any questions or comments. Please press star one on your phone at this time.
Your next question for today is coming from Daniel is now please announce your affiliation then pose your question.
Great. Thank you Green streets, so I'm, just curious with construction cost rising and supply chain issues are you hearing of any issues on the China and on building out their space.
Any potential problems in terms of revenue recognition.
With respect to tenants not being able to build out their own space.
Yes.
Decent amount of time.
Yes.
Hey, Dan This is George well, so I mean, it's certainly I mean, that's all the news in terms of supply disruptions and potential components certain costs going up but I would say that the impact to our overall portfolio has been modest at this point.
It has affected a few.
Commencement dates for some leases, but I wouldn't say it was dramatic I would probably push it an extra month or two from some of the larger leases, but that's really been the extent of it.
And even though costs have gone up I would say, it's not all of it.
All materials and I think we've done a really good job of trying to find domestic suppliers for long lead items were trying to go ahead and buy those products early so those are some of the mitigating.
Physicians we've taken.
<unk> have a modest impact to our overall commencement dates into our balance sheet.
And I'd add to that I don't think we see anything major from a revenue recognition standpoint.
In that regard Janie and what we just see in terms of the commencement of construction pipeline.
I would add you know thats one of the benefits we do see around redevelopment right. Now is just the fact that we are less impacted by the supply chain, we can easily and more affordably.
Just and find other product et cetera. So that has proven effective as we continue to see leasing momentum pick up again at those projects, where we have.
Refresh the assets and the amenities and modernized it.
Great and maybe as a refresh or Doug.
Revenue recognition starts when you hand, the keys over to the tenants or when that tenant has substantially completed the space for its intended use.
Revenue recognition begins once the spaces expansion of components, so you've got to happen.
The occupancy.
If you look at the lease with US, let's say a commencement, but you've got to have this phase completed first before you can have any revenue recognition.
Yes.
Got it I appreciate it. Thanks, Thanks, Bobby and then maybe just last one for me I'm. Just curious how you mentioned one tenants still trying to figure out there.
Our hybrid strategy, how does co working play in the Piedmont portfolio. These days.
Curious if you guys have any appetite to expands or possibly even just contracts that segment of the portfolio.
Hey, Jamie this is Brent, yes, I think we still kind of see the the overall strategy of co working can be.
Relevant for certain assets in certain locations again, it represents about 2% of our overall ALR. So it's not significant amount and we have spread that counterparty risk across a number of operators, whether it'd be we work our industrious are <unk>.
But overall, we feel very good about those locations, where they are specifically, where we put them into the building they're used it really isn't a minute right.
Flexibility for the tenancy and.
And that has proven to be very good in the locations. We have are all correct.
And we are performing and we continue this option to feed them at a higher utilization rate than the actual building itself, but I think that said, though we're not looking to increase overall exposure to that sector again, we put it into locations that make sense and then kind of evaluate from there, but I feel like we are pretty good and wouldn't look to increase that materially.
We will evaluate new assets as we bring them into the portfolio, but I think we recognized.
You're being prudent with your exposure to that sector.
Got it thanks, everyone.
There are no further questions in queue I would like to turn the floor over to Brent Smith for any closing comments.
Thank you I want to appreciate everyone. Joining today and just remind everyone that we continue to see and be very positive about the momentum on the leasing front with low explorations. We do feel like we're really positioned for absorption and got a great set of opportunities ahead of us for potential capital recycling.
I'd encourage you those to have a chance to sit down with us at NAREIT in June to please reach out to Eddie or Justin.
Range that meeting.
We do look forward to sharing more about what differentiates Piedmont, what's driving our strategy our markets and our operations. That's really helped US grew <unk> nine out of the last 10 years and we will look to continue that momentum. Thank you for joining us today.
Thank you ladies and gentlemen, this does.
Does conclude today's conference call.
May disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.