Q2 2022 Piedmont Office Realty Trust Inc Earnings Call
Good day, ladies and gentlemen, and welcome to the Piedmont Office Realty Trust second quarter 2022 earnings call.
At this time, all participants have been placed on a listen only mode and we will open up the floor 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 second 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 second quarter is available for your review on our website at Piedmont REIT Dot.
Com under the Investor Relations section.
During this call you 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 $19 95.
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.
I encourage everyone to review the more detailed discussion related to risks associated with forward looking statements in our SEC filings. Examples of 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.
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 represents 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 were filed last night.
At this time, our president and Chief Executive Officer, Brent Smith.
I will provide some opening comments Brent.
Good morning, and thank you again for joining us on today's call as we will review our financial and operating results for the second quarter of 2022.
In addition to Eddie on the line with me. This morning are George Wells, our Chief operating officer.
Chris Coleman, our EVP of investments and Bobby Bowers, our Chief financial Officer, as well as other members of the senior management team.
During the second quarter, we continued to experience strong leasing momentum that we've witnessed the last several quarters, marking our fourth quarter in a row of new tenant leasing that is more than 200000 square feet.
As a reminder, this level of new tenant leasing is above our pre pandemic levels and I believe it validates our strategy over the last few years of investing in premier assets within targeted sunbelt growth market.
Assets with great amenities, and walkable infill environment, and with sustainability and wellness place top of mind.
To that end during the quarter, we laid the groundwork for our second Midtown Atlanta acquisition in less than 12 months we.
We anticipate closing on 11, Adp's <unk> Street during the third quarter, which will make Piedmont the largest single owner of Midtown office space on this iconic street.
Chris will discuss more about this strategic transaction that a minute.
And to round out the quarter, we continued to deliver consistent financial results with core <unk>.
<unk> 50 per share.
And cash same store NOI growth on trend with guidance.
At this time Im going to turn the call over to George Wells, Our COO to review this quarter's leasing activity with you in greater detail.
George.
Thanks, Brent and good morning, everyone. Our operational teams delivered strong second quarter results on many fronts and leasing momentum continues to be very encouraging piedmont's well located modernized assets continue to attract and resonate with today's discerning office users seeking a highly monetized environment.
And then one that embraces wellness and sustainability best practices.
This quarter, we completed over 50 lease transactions totaling approximately 724000 square feet, surpassing last quarter's volume.
Of this amount 233000 square feet was related to new leasing activity.
Our lease economics were favorable with approximately 3% and 12% roll up or increase in second generation rents on a cash and accrual basis, respectively with an average lease term of six five years. If you exclude one large short term renewal or.
Our lease percentage at the end of the second quarter was 87% up approximately 150 basis points from the end of 2021.
While I will note that the majority of our new lease activity continues to emanate from our sunbelt portfolio, where most of our vacancy resides we are experiencing improved leasing activity in all of our select markets, including our non sunbelt markets.
If you'll allow me I'd like to take a few minutes to discuss a few key events that occurred during the second quarter in our operating markets.
First in Orlando, we completed four deals for 71000 square feet, including the largest new tenant transaction for Piedmont, This quarter, which was with keenly horn for 61000 square feet at our trophy LEED Gold South Orange Avenue project.
It is worth noting a few things about this lease relocation transaction.
That it was a 20000 square foot expansion from Kimberly <unk> current location.
There are newly spaces on the fifth and sixth floors of our 30 storey tower and the lease partially addresses a substantial portion of a four floor contiguous block of vacancy.
With a 12 and a half year term.
We were told this lease was a flight to quality decision that will enhance kimberly horns recruiting and retention efforts.
Also south Orange, we sign a lease with a new to market West coast inspired restaurant expanding further our onsite amenity offerings 200, South Orange is a prime example of our core operating strategy of offering a modern highly amortize office setting at rental rates well below new construction rates.
We acquired this asset in 2015 for approximately 261 Bucks a square foot with average asking rents were in the mid twenties.
Although there is still a little bit more work to be done after completing most of the repositioning of this asset for a cost of less than 30 Bucks a square foot, we've been able to push asking rental rates to the mid <unk>, while improving overall occupancy rates steadily over the last several quarters.
Most market participants.
<unk> 200, South Orange, the preeminent office complex in downtown Orlando and is now achieving the highest rents in the marketplace along with our <unk> centers, one and two.
We are optimistic in our ability to create more organic income from the asset and from other downtown Orlando positions for the foreseeable future.
Our Dallas portfolio experienced solid leasing production this quarter with a total of 17 deals for 103.
Square feet more.
More than half of that was for new lease activity accounting for nine deals for approximately 76000 square feet and majority of that coming from our assets in Las Colinas Irving.
With less clean servings office market being known as a prominent home for large corporate hubs in headquarters Caterpillar's recent announcement to relocate its global headquarters to the sub market from Illinois reinforces that reputation.
According to Costar Caterpillar, which is ranked 73 on the Fortune 500 list of largest publicly traded U S companies by revenue.
Expected employees transitioned to Irving overtime.
<unk> was mentioned.
Las Colinas Irving is now home to 10 Fortune 500 companies. According to the Irving economic development partnership.
More growth is projected for this MSA, we are seeing more tour activity in this market and the Dallas Regional Chambers currently tracking over 200 corporate relocations up for 90 in 2020.
As I discussed Dallas I also want to update you on our largest near term lease exposure in Dallas, which is with Hawaiian tax who leases and fully occupies nearly a 170000 square feet at <unk> Galleria through February of 2023.
We are in discussions with Ryan and we believe we will extend at least for a substantial portion of that space for up to five years, an in market deal on this block with yield a cash roll up of approximately 25%.
Moving outside the Sunbelt Minneapolis is beginning to see more deal flow at our legal Crescent Ridge asset, which last year underwent a lobby renovation and an enhancement of our amenity set we completed two small new deals during the quarter with several other deals that are progressing favorably.
Elsewhere in the suburbs and as part of a longer term lease negotiation, we negotiate a short term extension with U S bank on its entire 330000 square feet and Meridian crossing.
While we wish the terminal longer we remain deeply engaged with the bank on executing a longer term deal both that dislocation and that Theyre HQ location downtown. We also believe that negotiations will accelerate once <unk> completed its merger with Union Bank later this year.
And lastly, we are feeling pretty good about a couple of transactions.
We are close to executing a will be executed here in the next couple of days, which would be a great way to start with third quarter in that market.
While I've highlighted second quarter leasing results, thus far it's worth looking back over the past 12 months, we've reached pre COVID-19, new leasing levels and achieved strong and almost 5% cash and 12% accrual roll ups.
Furthermore, nearly 70% of new deal activity over that time was derived from our recently completed redeveloped assets.
Our strategy of concentrating assets in targeted growth Submarkets, and then modernizing and monetizing. These well located buildings has resonated with office users leading to a new tenant leasing success.
Looking forward in the near term, we continue to be optimistic about the performance of our office portfolio. Despite what is typically a summer vacation slowdown our tour activity remained strong and consistent we have nearly 2 million square feet of outstanding proposals slightly more than we've had the past two quarters with about 40% of those proposals.
Weighted to new tenant space with.
With few leases expiring for the remainder of 2022, we continue to expect positive space net space absorption for the year, resulting in an anticipated year end lease percentage between 87 and 88%.
I'll now turn the call over to Chris Coleman to review, our second quarter investment activity and our investment strategy going forward Chris.
Thank you George as disclosed last night in our earnings release, we are extremely excited to have entered a binding contract to purchase 11, Adp's III Street in the heart of Midtown Atlanta.
Those of you familiar with Atlanta, this asset needs no introduction for those less familiar $11 80, as the most iconic differentiated office building in Atlanta and is certainly among the most recognized properties across the entire sunbelt.
Encourage you to review the acquisition materials, which we posted on our website earlier. This morning for more complete details, including its unique location amenity set tenant roster sub market fundamentals and our acquisition rationale, but here's a quick snapshot of what we consider to be an exceptionally rare and.
<unk> acquisition opportunity.
<unk> hundred 80, <unk> is an almost 700000 square foot LEED Platinum 41 story office tower located at the epicenter of Midtown Atlanta, the corner of 14th in Peachtree Street.
It is 95% leased with a weighted average lease term of over seven years at Sterling tenant roster includes king installing work capital Bain, <unk> company, and Cushman and Wakefield among others.
Global headquarters of King installing and Am law top 25 law firm comprises about 38% of the building and the lease runs through early 2031.
We believe in place rents are approximately 20% below current market rents and this asset certainly goes toe to toe with any new construction due to its unmistakable physical profile, Florida ceiling full glass facade, rich amenity base, including a 10000 square foot fitness facility.
<unk> thousand square foot tenant Sky Park, all in an irreplaceable location.
<unk> hundred 80 is located directly across the street from colony square affectionately called Midtown Atlanta is living room, offering almost 200000 square feet of experiential retail, including restaurants, Paulson ROE, which has been called one of the best food halls in the country and I think theater and significant green space.
Importantly, we are acquiring 11 ADP Sri for approximately $675 per square foot, which is modestly below replacement cost.
As part of the transaction, we will assume a $197 million secured loan and a four 1% interest rate, which runs through October of 2028.
We've projected year, one accrual yields of approximately six 3% with initial cash yields of approximately 100 basis points below accrual levels.
This is arguably Atlanta's premier business center, and we will be acquiring this prolific asset without the risk of construction and without the risk of lease up.
The acquisition of $11 80 is entirely consistent with our stated strategic objectives to accelerate our rotation to the sunbelt invest only in the most dynamic submarkets tend to elevate the overall quality of the portfolio to match the needs of our tenants.
Coupled with last year's acquisition of 999, Peachtree located just four blocks away Piedmont.
Position in Midtown Atlanta growth to over one 3 million square feet and Piedmont will become the largest landlord on Peachtree Street in Midtown.
And at a blended acquisition basis of approximately $525 per square foot.
We believe we now on the two best existing assets and one of the nation's most vibrant submarkets and an exceptionally compelling basis.
We expect the acquisition of $11 80 to be completed by the end of the third quarter.
Moving to sources of funding we have set for two to three years that we would not sell our two assets in Cambridge until and unless we had identified a truly strategic transformational acquisition as a paired replacement.
$11 80, certainly fits the bill and accordingly, we have already begun the marketing of our two Cambridge assets.
We expect the proceeds from the low cap rate, Cambridge sales to be accretive and to cover most of the estimated initial $268 million cash portion of the purchase price.
In order to return to a relatively leveraged neutral position, we anticipate selling another $250 million or more of assets over the next 12 months.
Identified disposition assets will likely be non strategic assets, primarily outside of the sunbelt.
As for the balance of 2022, given current market conditions and our objective to return to our normalized leverage levels. Our capital markets efforts will be extremely focused on disposition activities over the coming months.
I would note that we mentioned on last quarter's call that we were also considering the disposition of our two assets in Houston.
We believe both the current disruption in the debt markets and attributes unique to these two assets create a very difficult backdrop for their sale. So while we remain committed to exiting the Houston market. We believe the prudent decision today is to delay these transactions until the capital market environment further stabilizes.
With that I'll turn it over to Bobby to walk you through the financial highlights of the quarter and our updated guidance for 2022.
<unk>.
Thanks, Chris.
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 second quarter was 50 cents per diluted share, that's <unk> <unk> or 4% increase over the second quarter of 2021.
This increase is primarily due to accretive recycling activity since the second quarter of last year rising rental rates and the continued space absorption throughout the portfolio.
<unk> generated during the second quarter was approximately $49 million well above our current $26 million quarterly dividend level.
I do want to point out that we have previously discussed during the last two earnings calls that our board would review our current dividend level the summer.
Given the disruption in the fixed income markets and the potential for near term recession.
The board decided yesterday to maintain our current dividend rate of 21.
Per share per quarter for the time being.
I would note that the company still maintains ample <unk> coverage of the dividend and the board will continue to reevaluate its dividend policy.
Clothing potential for a dividend increase is further economic data becomes available.
The quarterly dividend Declaration was disclosed in our press release last night.
As George alluded to in his comments with the improved lease economics in rental rate roll ups.
Last few quarters, our quarterly same store cash NOI and accrual basis NOI for the second quarter of 2022 increased approximately 2% and 3% respectively compared to the second quarter of 2021.
Now turning to the balance sheet.
Annualized quarterly net debt to core EBITDA ratio as of the end of the second quarter of 2022.
At five five times.
And our debt to gross assets ratio was 34, 6%.
These debt metrics, obviously will be impacted during the third quarter with the anticipated close of 11, ADP <unk> Street acquisition and the assumption of the related four 1% mortgage note temporarily increasing our leverage ratios to the upper end of our targeted debt operating ranges.
Until offsetting dispositions are completed.
As typical for US we will be acquiring the <unk> property in a reverse 10, 31 exchange and protecting the significant gain of approximately $100 million.
We anticipate upon the sale of our two Cambridge assets.
Ahead of this acquisition activity.
During the second quarter, we recast our revolver, increasing the line capacity by $100 million to a total of $600 million and pushing the final maturity out to 2027.
Despite the increased capacity, we do not believe it would be prudent to utilize a significant portion of our aligned capacity to effectuate. The 11 ADP Street Street acquisition.
In order to maintain financial flexibility, we disclosed in our filings last night.
We entered into an additional $200 million delayed draw bridge loan priced at adjusted terms sulfur plus 1%, which we anticipate using to fund the majority of the initial cash funding requirements for the <unk> acquisition.
We.
Fate repaying the bridge loan with proceeds from the property sales that Chris mentioned.
We have no other scheduled debt maturities until mid 2023.
Finally at this time I would like to update our annual guidance for 2022.
As <unk> seen with many of our peers.
We've been surprised by the rate of inflation hitting nine 2% annually in the U S. At the end of June and.
And obviously then the need for the fed to make significant interest rate increases and an attempt to get inflation under control.
The pace of these rate increases thus far has exceeded anything most of us imagined our budgeted for 2022.
Therefore, we are adjusting the midpoint of our previous guidance because of the continued rise in acceleration or short term LIBOR and sofa rights.
And also due to delays in the completion of certain new tenant controls space build outs, which consequently delay the start of our gap or accrual basis revenue recognition on these related to leases.
These interest rate increases and delays in revenue recognition offset the expected accretion from the $11 80 Peachtree Street acquisition.
We currently estimate core <unk> per diluted share for 2022 will be in the range of $1 99 to $2 in <unk>.
And we are maintaining same store guidance in the 1% to 4% range on both a cash and accrual basis.
Now these revised estimates incorporate the acquisition of $11 80, Peachtree by the end of the third quarter of 2022, and the subsequent disposition of non strategic assets totaling approximately $200 million around the end of the third quarter.
And another $200 million to $250 million over the next 12 months.
The guidance does not include any additional acquisitions or disposition activity.
As such activity occurs we will obviously update our guidance at this time alternatives discussion back over to Brent Smith.
Thank you George Chris and Bobby I appreciate your partnership along with the rest of our Piedmont colleagues as we serve our investors customers and other constituents and our communities.
As you've heard in the leasing report I believe we are capturing more than our fair share of new leasing activity where.
We're aggregating our investments in strong growth markets and sub markets, primarily in the sunbelt and have chosen high quality assets that contain a necessary amenities that will aid our tenants in attracting or retaining their workforces, making.
Making these capital allocation decisions, we believe is more effective and ground up development with far less risk and has allowed us to compete effectively at a reasonable cost basis, well be able to continue to grow rental rates.
Certainly we're in a period of headwinds from rising interest rates to slower than expected return to the office.
To inflate inflationary development costs and the potential for an economic recession.
However, we remain optimistic about our leasing prospects are prudent investment strategy and targeted growth markets and our overall operating performance.
We will continue to seek transformative acquisition opportunities to elevate the quality of the portfolio and earnings trajectory of the company and Thats exactly what we accomplished with the acquisition of 11 ADP Street.
Skyline in defining project the most active quarter in Midtown Atlanta with an impressive tenant roster comprised of professional services and financial firms with in place rents, 20% below market and limited near term lease expiration the ability.
To purchase this iconic building and recycle expected to 31 exchange proceeds where I, Cambridge properties, along with other non strategic asset is an outstanding execution for the Piedmont team.
Finally, this quarter, we've made continued progress on our ESG initiatives.
We're proud to be recognized as a 2022 energy star partner of the year and the only office REIT headquartered in the southeast to receive such a designation and our second consecutive year with the honored.
In addition, we've been recognized as a 2022 green lease leader demonstrating our continued commitment to maintaining a sustainable portfolio and to enact new green initiatives.
Finally, we're seeking <unk> certification across the entire portfolio later this year.
And on the social front.
We're very much delighted that we now have four students attending either Howard University in Washington DC.
<unk> House College in Atlanta that are recipients of our need based Piedmont scholarship.
It's our hope through these scholarships and related <unk> programs that will bring more diversity in the real estate industry and my last comment relates to corporate governance.
Our board adopted many years ago, a 15 year term limit for our independent directors.
Due to this turn limitation Mr. West Cantrell wrote off the <unk> Board in May of this year.
I want to express my sincere gratitude to Mr. Cantrell for his 15 years of service to Piedmont are.
A great mentor for the board and for me personally he will be missed and his contributions to the management of our firm are greatly appreciated.
And as it relates to the board seat vacated by Mr. Cantrell.
I am pleased to announce that our board voted yesterday to invite Mr. Tesh service Hulu.
Onto our board.
The accepted effective August one 2022.
Mr. <unk> is the former CEO of Cyrusone and approximately $10 billion data Center REIT recently acquired by KKR and Gi P.
And current CEO of Africa data centers.
Approximately $1 5 billion datacenter firm focused on Pan Africa, digital and solar infrastructure.
He brings tremendous experience within our industry and with running a REIT Sigma.
Significant knowledge of publicly entity regulations and experience working with large scale clients and the investor community.
With two more board members approaching term limitations.
We anticipate adding another director to our board before the end of the year.
With that I'll now ask our conference call operator to provide our listeners with instructions on how they can submit their question. We will attempt to answer all of your questions now, but we 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 if we're sitting on speaker phone to probe.
<unk> optimum sound quality.
Please hold while we poll for questions.
Your first question for today is coming from Michael Lewis. Please announce your affiliation and pose your question.
Thank you this is Mike Lewis from <unk> Securities.
My first question about the $11 80.
Acquisition, the six 3% cap rate actually sounded a little bit high to me considering the quality of the asset.
The mortgage that Youre able to assume could you maybe just talk a little bit about the bidding process or anything any other information.
Related to the to the pricing of that asset and maybe if that cap rate what that implies for for other assets in the market.
Morning, Michael I appreciate you, taking the time to join US This morning, and happy to and excited to talk a lot more about eliminating transaction. So thank you for the question in terms of.
The <unk> III accrual cap rate I would say that.
As we've noted that asset has roughly 20% below market rent. So a lot of embedded growth which is great.
In place rents right now are probably.
And then call it mid <unk> on a gross basis, and so that really has afforded us the opportunity to be able to.
Be able to.
That growth and be able to drive it out over the next few years. It does have a long term weighted average lease, but we do have about call. It 75000 square feet Rolling in the next two years, which gives us a little bit of opportunity more near term to continue to drive that cash cap rate closer to the accrual cap rate as you probably know most of our cash cap rates.
Or generally about 100 basis points behind the accrual and I think Thats fair to say in this instance, it was in that neighborhood.
And a fair assessment of where cash would be on a cap rate basis in terms of the bidding process I think it was a competitive process certainly it's been.
Choppy capital markets, but an asset of this quality as we continue to see in a number of comparable trades since call. It the June timeframe when when we started to really see some of this disruption.
Was.
While competitive we still felt like we were the.
Kind of optimal group given the quality of the asset our previous acquisition call. It nine months ago, with 999, and being able to really create a beachhead here with one 3 million square feet.
But it would add the usual names you would have expected in terms of other REIT competition and those looking for core core plus type returns.
I think what.
Probably separated as apart from that is just a continued a bird dogging on this asset we've continued to search a lot as you've heard me talk about an off market basis assets. This was one we were looking at now since last year and continued to really move ourselves forward in terms of that process and being able to have diligence <unk>.
<unk> in a very timely manner and be able to move quickly and assume be a group that could assume that note proceed to be very efficiently in a choppy market. So I think those all kind of led us to get what we thought was very good pricing with embedded upside low risk a.
A little bit of near term expiries to get some uplift.
Okay. Thanks, and then on the on the disposition side.
Cambridge, we knew was coming when you found an acquisition target.
Talked about Houston that kind of pausing on that.
I was wondering if you could give any more detail on.
What you kind of look to neck in that whats behind Cambridge, which Bob alluded to.
My guess is maybe New York City isn't quite ready yet youre looking to get a long term lease there.
The rest of these markets all the kind of core to me.
There is always a bottom I always have.
There's always a bottom, 5% or 10% of the portfolio, but where do you kind of look for the rest of those disposition proceeds that you talked about.
Good question to Mike on the flip side in terms of the additional dispositions beyond Cambridge, and we continue to see good depth in the market in terms of better pools for a high quality well leased long term assets.
We feel like we've got a bucket of those assets that certainly kind of fit that profile that we that we can transact on.
I would say in a matter of Houston, we felt like we had the pricing, but obviously just given the disruption in the debt capital markets when that Vale pools in we hope to be able to execute on those but I would remind you we probably sold about over $400 million of assets four out of the last six years, despite COVID-19 and the unusual dip.
<unk> that our industry has faced more near term. So we've been effective at continuing to recycle that capital and feel very confident on both Cambridge and then the additional 250 roughly million dollars behind that and dispose over the next 12 months, but it would have much more of a I would say at core plus.
Profile, but good tenancy, but long term not part of our strategic operational plan.
And then.
Lastly for me.
I'm just wondering should we think of U S Bancorp short term renewal.
Should that scare us or make us feel good right because you mentioned going through the merger and.
It sounds like you are still deep in negotiations for a longer term deal and so from that respect it feels good from the broader environment.
We know about companies that wanted to short term deals because they don't know how much space. They ultimately need in this kind of hybrid work world that we're in now.
Whats kind of the ceiling on U S. Bancorp is that short term deal is that is that a good thing or are.
Is there some hesitancy there because maybe the.
Figuring out how much space they ultimately need.
Okay.
Yeah. Good question too there, Mike I would say, we have a long history of.
Finding win win situations and solutions with tenants that have difficulties or long vacated processes I point to the New York State.
<unk> situation, where we did an interim lease or a situation like we talked about our project in Boston with Microsoft doing a kind of a unusual wrap around lease and letting them get into a campus situation that evolved over time and continue to kind of come back and forth or even get our Galleria project, where we've had a number of those situations here in Atlanta.
And I would say that generally I would see that as a positive because you're continuing to find that win win solution with a tendency I would note that as we did in the prepared remarks. The U S Bank is in the midst of that merger, but like many financial services firms. They are still trying to figure out what that work from home hybrid strategy ultimately.
It looks like but we feel very confident that new development is not an option that would be for them in terms of their locations downtown and I would remind everyone that that asset that theyre located in as their headquarters and on the 31st floor has by far the best amenity set overlooking the city of any office building in that market.
So we still feel very good about keeping them for majority of this space downtown and then out in the suburbs that is a well located certainly very accessible right off the highway great signage.
Location and they continue to utilize that space and the fact that they wanted to extend for 18 months in that location I think bodes to the desire to do something there longer term.
And again for what we think would be probably the majority of the space out there, but it is going to take some time as they continue to work through those.
Areas and we saw.
Sorry, the merger and we continue to work with them and figuring out their ultimate head count in Minneapolis in this space plans that best suit that and how they should designer space any corrected me too here I'll. Just note that was a 16 month extension not 18 apologies.
Great. Thank you.
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 re song. Please announce your affiliation then pose your question.
Hi, Good morning, everyone. This is Rachel from Tony's alone here at Jpmorgan.
First congrats on the acquisition just wanted Ken a little bit.
Color on it in terms of strategy lies I think you guys mentioned previously on a value add acquisition strategy.
Compared to 90 99 Peach Street.
One.
He will slide correct me, if I'm wrong like it's more on the mark to market size.
And then IP Street was more on potentially lease up opportunity.
Just wanted to get a sense of is that indicative of the <unk>.
Strategy kind of just focus on high quality asset loans from these programs.
Mark to market opportunity or you.
You guys are still looking at.
Assets that have decent opportunity as well.
Great question and I appreciate you joining us today Ray I would say.
Each asset our acquisition is a little bit unique in their own right and we've as we mentioned I think in our NAREIT.
Meetings were generally kind of 70% core core plus and 30% value add in terms of that pipeline and I think thats fair to say, how we think about acquisitions and being mindful of a couple of different <unk>.
Ponant not all of it given our balance sheet and being able to make sure you have ample cash flow, we want to increase the dividend as we've talked about watching that.
Markets for that regard, but you can't take on too much value add too much redevelopment at any one time in that 999 project is a pretty meaningful in terms of scale call it about $25 million redevelopment.
And the 11 80 profile, though is very different much more stable as we think about it is $2 31 partner. If you will in Cambridge that was a long term lease.
<unk>.
Hi, credit and really.
A high quality asset and we wanted to pair that trade with us.
A similar profile of the asset to continue to have that mix within the portfolio.
But what's unique about this I think that other acquisitions that we've continued to see roll off in our sector for these types of high quality deals is that this one will compete with new construction full glass window line beautiful 10 foot plus finished ceilings.
Really unique building and location wise could not be more at the corner of main and main in Midtown Atlanta.
Got that below replacement cost and ability to continue to drive rents higher and the building is the way we will continue to create value you probably heard me mentioned, we've got about 75000 square feet roll in the first few years, but.
But a good Walt overall at seven plus years and given the potential for a recessionary environment. We also felt very pleased with pairing this with Cambridge, keeping our occupancy up within the portfolio because those buildings are also well leased.
Excited overall to continue to grow our presence in Midtown now, having one 3 million square feet.
And it's a great combination with our 999 asset once we stabilized both buildings, we feel like we will still be around $550 a foot on a b.
<unk> versus construction costs now for replacement would be $700 a foot plus.
So that's a little bit around the strategy I could talk more for hours on Midtown itself and the benefits there.
We'll kind of pause.
Hand, it back to you I think last point, though on the strategic side is the fact that this will continue to move our percentage in the sunbelt to 67% and we continue to stay at a targeted goal of getting to 75% by the end of next year.
Gotcha. Thank you. Thank you for the color on you.
You guys mentioned.
The number correctly 2 million square footage in the pipeline a little bit higher than previous quarters any chance, we can have a little bit color on the pipeline on a landfill in Midtown Atlanta.
China look at nighttime.
Free from quarter to quarter just.
Trying to see if the lease rate has gone up or are.
Anything just any color on the leasing pipeline.
In that market.
I'll handle that and then hand it over to George Ray in terms of 999, I think we've been very pleased with receptivity in the marketplace.
Been working on a repositioning we've completed plans for that and then sharing that with the market I think near term, we're going to have some success to share both on the.
Leasing side and the office tower, but also on the retail side as well as the base of the building continuing to create that environment.
And I think the exciting thing there will be we've continued to see rental rates achieved at or above our initial underwriting I'll, let george talk to a little bit about.
More around that and maybe some of the pipeline as well and what we're competing against George Thank you, Brad and good morning Ray.
We didn't talk a lot about Atlanta in the script, but I will tell you that there has been a fair amount of activity dominant player for the past couple of quarters. The news is all about $11 80. This time around but look we're still enthusiastic about what's happening in Atlanta and the overall, we've got about 25 deals in the pipeline today for over 350000.
Where fee so that really that really brings a lot of optimism about what we're doing in Midtown at.
At 999 itself, we've got over 40000 square feet in the pipeline there too so with all of the relocations that are happening in migration of new companies coming into Atlanta.
That would really makes us excited about what's happening there.
I would add too to get more specific I think what's unique about Atlanta overall versus say.
Charlotte or a Dallas is that we don't have a competitive city and incentive Raleigh, and Austin that are taking the technology firms. So what we're seeing in Midtown as we've talked about is not only the technology companies that are coming into the market for the high quality software and hardware engineers and diverse talent, but also the companies that we continue to see from a professional service.
His standpoint move from Buckhead into the Midtown market, particularly on the legal side.
And some of these other firms. So we've continued to see absorption in Midtown pulling from other submarkets as well is that out of market corporate and Tech company.
I think what continues to really separate Midtown from the rest of the Atlanta is that just mixed use environment and what we've continued to see success leasing wise are those projects that are very successful accessible by transportation and very walkable amenities restaurants, retail et cetera, and certainly that Midtown.
Market is probably barn on I think it's in our presentation into the second most dense city in the southeast.
Sorry area of the city in the southeast.
Got you. Thank you that's all.
Okay.
There are no further questions in queue I would now like to turn the call over to Brent Smith for any closing remarks.
Thank you.
Just to remind everyone who's joined us on the call today, if you haven't had a chance to look at the presentation materials on our website around 11 80 acquisition. Please do so youll find additional detail in pictures et cetera about the asset, but I would just reiterate that while we still remain optimistic about our performance for the rest of the year.
Our cautiously continuing to watch for uncertainty given the uncertain economic environment, but I think overall very pleased with Piedmont execution in the second quarter and look forward to talking again in October . Thank you.
Everyone and as we get closer to October reminder, to reach out to our bodies to get on the NAREIT calendar for november's meetings.
Thank you.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you.
You for your participation.
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