Q3 2022 Piedmont Office Realty Trust Inc Earnings Call
[music].
Good day, ladies and gentlemen, and welcome to the Piedmont Office Realty Trust third quarter 2022 earnings Conference call.
At this time, all participants have been placed on a listen only mode.
The floor for your 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 third quarter 2022 earnings Conference call last night, we filed our 10-Q and an 8-K that includes our earnings release and our unaudited supplemental information for the third quarter. That's available for your review on our website at Piedmont REIT Dot com under the <unk>.
Investor 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 $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.
Risks and uncertainties. These forward looking statements are discussed in our press release as well as our SEC filings.
We 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's future revenues and operating income dividends and financial guidance future leasing and investment activity and the impacts of this activity on the company's financial and operational results.
You should not place any undue reliance on any of these forward looking statements and these statements 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 were filed last night.
At this time, our president and Chief Executive Officer, Brent Smith will provide some opening comments.
Brent.
Good morning, and thank you again for joining us on today's call as we review our financial and operating results for the third quarter of 2022.
In addition to Eddie on the line with me. This morning are George Wells, our Chief operating Officer, Chris.
Chris <unk>, our EVP of investments and Bobby Bowers, our Chief financial Officer, as well as other members of the senior management team.
During the third quarter Piedmont executed over 440000 square feet of leasing at meaningfully higher rental rates.
Almost a third related to new tenant leasing in.
In addition, the company delivered solid financial results in line with the quarter as consensus estimate.
Also we completed a very strategic acquisition and laid the groundwork for two important dispositions.
Notwithstanding these accomplishments the broader economic environment continues to pose numerous challenges to the commercial real estate sector. This results from a number of factors, including the impact of remote work rapidly rising interest rates and inflation as well as concerns regarding a recession.
Despite these headwinds we remain optimistic and realistic about our leasing prospects are.
Our prudent investment strategy and targeted growth markets and our overall operating performance. Our current leasing pipeline remains stable with over 300000 square feet currently in documentation and over 150000 square feet of leasing already executed in the fourth quarter.
Positioning us to close 2022 with over 2 million square feet of completed leasing in the portfolio approximately at eight 7% leased.
In short, we believe Piedmont focus on high quality assets and amenity rich working environments will allow us to continue to attract and retain tenants and our well capitalized balance sheet provides us with the operating flexibility to successfully navigate these challenging times.
With that I'll turn it over to George Chris as Bobby to provide further details on the quarter.
George.
Thanks, Brent and good morning, everyone.
Despite the usual summer travel impact along with the growing macroeconomic uncertainty that Brett alluded to.
Our operational teams delivered solid third quarter results on many fronts and leasing momentum remains solid.
Still seeing demand from a broad range of industries, particularly the financial legal health care and business services sectors.
Workspaces utilization and our portfolio continues to increase incrementally and it's up to 50% and September nationally. There is a growing course of companies setting the stage for greater office participation.
Moving vaccine mandates increase in the number of required in person days or enhancing the office experience with additional incentives or amenities.
We believe our operating strategy, providing a highly monetized modern working environments is a critical component and meeting today's corporate flight to quality objectives, which is not only appealing to leasing prospects with new space needs.
Also to attracting and retaining employees for existing tenants and for drawing employees back into the office.
And we believe the merits of this strategy is showing up in our leasing results.
Workforce priorities have shifted post COVID-19.
There is a much higher concern for quality of life.
Ownership work life balance and shorter commute times are premier assets complement these needs and are located in growth areas.
Which are easily accessible suburban infill submarkets.
This quarter, we completed over 50 transactions for approximately 444000 square feet of total overall volume.
This exactly half or 25 of these leases totaling 124000 square feet were related to new tenant lease activity and expansion.
While the volume of new deal activity was good the total square foot lease did not reach the levels of the past few quarters.
We largely attribute this the first part of this summer when historically, we have seen some slowdown in general business activity due to vacation travel season, and that smaller businesses continue to make corporate decisions quicker and larger corporations.
As Brent already noted our pipeline activity is strong and we anticipate that new leasing in the fourth quarter will be back at pre pandemic levels.
I will note our leasing economics were very favorable with approximately 33% and 38% roll up or increase in rents for the quarter on a cash and accrual basis respectfully.
Our weighted average lease term at the end of the third quarter is approximately six years.
Our lease percentage at the end of the third quarter was approximately 87% up 150 basis points from year end and largely unchanged from the close of the previous quarter.
While the majority of new lease activity continues to emanate from our sunbelt portfolio, where over 70% of our vacancies reside we are experiencing good leasing activity in all of our markets.
Now I'd like to highlight a few key accomplishments that have occurred in some of our operating markets this quarter.
Beginning with Atlanta, our portfolio experienced the most fun with new activity with 10 deals for nearly 35000 square feet.
Atlanta has been piedmont's, most consistent performer for the past four quarters, capturing 43% of all new tenant transactions and the pipeline continues to be quite robust.
In fact, we've already signed six new deals in October for another 57000 square feet, including a well known Atlanta, a financial services firm, which is relocating their regional headquarters into our LEED Gold 999, Peachtree property from the Buckhead Submarket.
I would add that our building was selected by that tenant over a newly completed development in the Midtown submarket proudly because of its superior location and sustainability designation.
Adding to Atlanta is already well known pro business reputation was money magazine's recent ranking of best places to live in the United States with the Atlanta, taking the top spot.
We are excited to be growing here with the recent acquisition of our LEED Platinum 11 to ADP Street double a trophy tower, and which Chris call me with touch on in just a moment Atlanta.
Atlanta is our largest market accounting for 26% of our ALR at the end of September and the flight to quality is very evident here and.
We anticipate continued strong lease production in the quarters ahead.
Coming to Dallas, we're happy to announce the extension of the entire Orion lease that are LEED certified three Galleria office tower. The economics of this 178000 square foot deal were strong with significant rental rate roll ups on both a cash and accrual basis.
No free rent.
And no tenant improvement allowances.
That extension will expire in phases over the next two to five years.
Also noteworthy is the completion of nine new lease deals totaling 32000 square feet spread amongst the remainder of our Dallas assets.
One of those deals wasn't that approximate 9000 square foot expansion of an existing tenant.
Evidenced businesses in this dynamic market are continuing to grow despite the cloudy economic environment.
Our Minneapolis holdings were quite active this quarter with three new teller transactions for 50000 square feet.
Including our largest new tenant leasing deal for this quarter, a headquarter relocation into our lead go.
<unk> asset for 35000 square feet.
That new user a financial services firm will double in size from its existing location and interestingly, we will have all staff working in person 100% of the time.
Our monetization efforts at Crescent ridge or paying off having completed four new lease transactions in the past few quarters and a robust pipeline that should stabilize occupancy there so move.
Moving downtown so our LEED Gold Trophy Tower U S Bank core center.
Our team there sign a new lease with a white tablecloth seafood restaurant for a 10 year term, adding to our already robust set of onsite amenities.
Lease extension conversations are ongoing with our anchor tenant there U S, Spain, and we believe negotiations with the bank at this downtown asset and it moving crossing in the suburbs will accelerate the bank once the bank completed its merger with Union Bank anticipated at year end, the Piedmont Formula continues to demonstrate leasing success.
Particularly with smaller tenants the most active customer segment across all of our markets. These tenants are driven to our office projects cited in their ease of accessibility.
Amenity base unique tenant engagement programming.
And class conference facilities, along with the sustainability minded operator.
As noted in our recent CBRE report.
<unk> are witnessing increased demand for lead designated assets, which are also generating a meaningful rental premium on average of 4% with a difference even more substantial and suburban markets. Looking ahead to the remainder of 2022 and into 2023, we remain optimistic about the leasing performance of our poor.
Polio tour activity continues to be strong and consistent.
We have approximately 2 million square feet of outstanding proposals, which is in line with the past four quarters.
With only a few leases expiring for the remainder of the year, we expect positive net space absorption in the fourth quarter, resulting in an anticipated year end lease percentage around 87%.
Additionally, explorations our load next year with only one lease larger than 100000 square feet that will not expire until December of 2020.
In conclusion, I do want to mention that Piedmont has invested a number of our assets over the last few years improving amenity offerings.
And modernizing lobbies and elevators and the like to compete in an attractive basis with any new build.
A large portion of this redevelopment has now been completed and we have no exposure to inflation associated with ground with development and we will focus on redevelopment, which we believe is a better risk adjusted return.
Now I'll turn the call over to Chris called Me to review, our third quarter investment activity.
Chris.
Thank you George as we disclosed on last quarter's call we entered into a binding contract to purchase 11, ADP Street Street in the heart of Midtown Atlanta for a purchase price of approximately $465 million, including the assumption of an approximately $200 million four.
Four 1% fixed rate secured mortgage which matures in 2028.
I am pleased to report that we have closed on the acquisition of what we believe is the highest quality most differentiated office setting in Atlanta, and almost 700000 square feet, eliminating peachtree is a LEED platinum skylawn defining asset with a weighted average lease term of over seven years and in place rents at <unk>.
<unk>, 20% below market rates.
It'll accrual basis NOI yield for the transaction is six 3%.
Piedmont is now one of the largest owners in Midtown accumulating a position of over one 3 million square feet within just the last 12 months.
If you haven't already done so I'd encourage you to review the materials on our website, which offer more complete details about this acquisition.
We anticipate ultimately funding the <unk> acquisition using sale proceeds generated from non core asset dispositions.
And after quarter end, we have agreed to terms for the disposition of our two assets in Cambridge, Massachusetts to two separate buyers.
These groups are nearing completion of their diligence periods. These.
These transactions are on an all cash basis with no financing contingencies.
We anticipate recognizing an approximate nine digit book gain on a consolidated basis.
As for the balance of 2022, given current market conditions, and our temporary leverage levels, our capital markets initiatives will be principally concentrated in evaluating additional dispositions of noncore assets.
We will be patient and we will be disciplined as today's market environment is certainly challenging for both buyers and sellers.
With that I'll turn it over to Bobby to walk you through the financial highlights of the quarter and address guidance for the remainder of 2020 to Bobby.
Thank you Chris.
I'll discuss some of our financial highlights for the quarter, but I encourage you to please review the entire earnings release and supplemental financial information, which will filed last night.
More complete details, including additional interest expense incurred during the current quarter.
Driven by rising interest rates as well as interest expense from additional debt associated with the <unk>.
11, 80 Peachtree acquisition.
Piedmont still achieved our operational and financial goals for the quarter.
The successful leasing year to date.
Rising rental rates.
Asset recycling.
The company was able to maintain core <unk> up 50 cents per diluted share consistent with the third quarter of 2021.
<unk> generated during the third quarter was approximately $43 million, which is well above our current $26 million quarterly dividend level.
We continue to experience improving lease economics in rental rate roll ups during the quarter.
Similar to the last several quarters.
Our same store cash NOI, however decreased marginally as expected.
During the third quarter due to successful prior leasing activity and the commencement of these leases, resulting in a 60% increase in leased square footage under abatement as of September 32022, compared to September 30 of 2021.
Our guidance for same store NOI on a cash on accrual basis remains the same for the year and is still anticipated to increase approximately two 3%.
As several abatements burn off during the fourth quarter.
Turning to the balance sheet our.
Our debt to gross asset ratio was 39, 8%.
This temporarily elevated ratio is due to the debt related to the acquisition of 11, Adp's tree that Chris mentioned.
I say temporarily elevated because as with all of our acquisitions, we intend the recycling of assets to be leverage neutral.
And we anticipate reducing our current floating debt outstanding with the proceeds from property sales over the next few quarters.
Clothing or to Cambridge assets, which are currently expected to close around the end of the year.
We also anticipate selling other noncore and non strategic properties during 2023, which will ultimately allow us to return to a more normalized leverage level. The mid 30% range no development projects outstanding.
As is often the case, we acquired 11 ADP Street property in a reverse 10 31 exchange in order to protect the significant tax gain we anticipate recognizing in conjunction with the sale of our two Cambridge assets.
During the third quarter.
Our average net debt to core EBITDA ratio was five nine times on a trailing 12 month basis.
In addition to assuming the $197 million mortgage in conjunction with the 11 AVP Street acquisition.
During the third quarter, we also entered into a $200 million bridge loan.
Just a sofa plus 1%.
Which covered the majority of the initial cash funding requirements for the 11 ADP Street acquisition.
Additionally, I would note that adding financial planning team continually run capital financing models.
That regard debt maturing through the end of next year includes a $350 million bond maturity in June of 2023.
And the $200 million term loan maturing during the third quarter.
A majority of the term loan will be paid down with disposition proceeds that we have previously discussed and a $350 million bond we pay it off with either a five to 10 year new bond issuance.
More likely with a bank term loan, which we've already begun having discussions about with our lenders.
I will note that Piedmont has only one mortgage outstanding therefore, the option of an additional mortgage debt.
Also available to us.
Finally.
After considering year to date results and our updated 2022 annual leasing forecasts.
Including higher interest expense, resulting from the rising interest rates.
We are narrowing our 2020 to annual core <unk> guidance per share to between $1 99.
With $2.01 per diluted share.
This revised guidance is almost exclusively attributable to increased interest expense.
This concludes my prepared comments, so I'll turn it back over to Brent at this time.
Thank you George Chris and Bobby.
As George mentioned Piedmont operates a portfolio of class a assets predominantly in the Sunbelt, where continued population migration and job formation trends provide a mitigate the remote work headwinds the office sector faces.
We have refined our portfolio over the last several years to create differentiated building that offer premier Middleby and hospitality driven collaboration spaces in conjunction with local food and beverage operators.
At Piedmont, we go beyond the building to provide unique services and offerings, including our tenant engagement platform published sustainability initiatives and concierge experiences, it's a dynamic workplace environment that our competitors and frankly, the employees house can't easily replicate the flight to quality has helped.
Our customers to attract retain and increase their employees overall productivity.
In fact over the last two years, 70% of our executed leases have taken place at properties that we've redeveloped within the last five years.
These asset level investments are what's garnering more than our fair share of leasing activity.
Our balance sheet is slightly elevated in terms of leverage due to a key strategic acquisition, but we will address the majority of the floating rate debt related to this acquisition with our anticipated Kingsbridge disposition.
We will focus on a few other dispositions into 2023 patiently managing our balance sheet, but committed to get our leverage ratio down a few percent.
Finally, I would note that we recently published our annual ESG report and it is available on our website.
I would encourage you to please take a look when you have a moment as there is a lot of good information and we're proud of the work we're doing in these areas, reducing GHT emissions energy and water consumption and curtailing waste production we.
We are again, the energy star partner of the year 2022, Green lease leader with 50% of the portfolio now LEED certified.
100% of our portfolio will help created an 88% bonus certified.
At Piedmont unfortunate to work alongside colleagues, who were good caretakers of the planet and good citizens within our community.
Along those lines as I conclude I want to thank each of my Piedmont colleagues, with whom I've had the privilege to work alongside each day.
The impact of a work ethic creative tenant offerings and the drive to provide best in class service to our customers.
With that I'll now ask 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 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 will posing your question you. Please pickup your handset 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 then pose your question.
Baird Hey, guys, it's Nick on for Dave I, just wanted to touch on the leasing pipeline I think George went over it in great detail kind of some of the key factors or youre looking at but as we're looking at the 150000 square feet signed in the fourth quarter in the 300000 square feet and documentation I guess, they would want a little more color on what.
Whats that new versus renewal and then whats like the average deal size Youre seeing.
Sure Nick Good morning, Great question, and I'm delighted to talk about our pipeline continues to be pretty pretty robust I would say that in terms of how much we have a new activity bucket I would say about a third of that.
That's already been signed is new.
I would say I'm looking forward to what's in the documentation stage I would say again, it's about a third or so is in the new bucket list and I think we have a couple of other transactions that were chasing that we hope to convert into the legal stage pretty soon as well.
In terms of average size.
It's been a small set of markets for the most part I would say the last quarter I think 24 of our 25 deals were under 10000 square feet.
I would say looking at what we're doing so far for November October and November .
A couple of full floor transactions that were completed which is pretty typical for us I think we see between one and three deals that are about a full floor or larger.
But after that I would say it ranges a little under 12000 square feet across the board.
I'd add there too George this is Brittany, thanks for joining us this morning.
Yeah.
As George alluded to we really have seen that smaller tenant call. It a half a floor 12 to 15000 scripts or less.
Really be the strongest part of the market and frankly, we are probably in terms of number of deals in volume for that segment above where we were pre pandemic I think that's what gives us some positive.
I guess as we think about the exploration for the remainder of this year and into next year, given the fact that we have.
Ex the cargo exploration the average tenant size will be expiring is about 8000 square feet and so we really most of that caught up 60% to 65% just sunbelt markets. So we really feel like the portfolio is positioned to continue to get good leasing traction and good pipeline volume.
Yes, all very helpful. And then maybe touching on your guys resolved Ryan kind of for the intermediate term looking at your larger tenant roster. What are the chances we kind of see similar activity per se like an Amazon looking forward at Galleria towers.
Just looking at like for potential Holdovers are you have even begun discussions on something as far away as 2024.
I think this is Brent again.
We were really pleased to renew Ryan as we noted about.
Kind of a phased period over time with a weighted average term of a little bit about three five years now.
Really I think an example of the success we've had a LEED certified building as we look to Amazon I think it's pretty early given that in 25 exploration I will say that they are.
Our active in this space you can do or other Dallas tenants.
At this point I think it's a little early to think and know whether or not their longer term plans are.
I think as we look towards other larger tenant role.
Carville towards the end of 'twenty three as I've noted on the last earnings call. We continue to be engaged with them that lead goal building is a phenomenal asset into 2010 vintage and if youll recall, we bought it for about 185 Bucks a foot and a 10 cap. So what's really interesting areas and I think will continue.
To attract cargo and other tenants that we do have looking at the building because of our potential there.
He is in the market now.
<unk> got a 300 seat auditorium, a 13000 square foot fitness center with lockers Cafe coffee coffee shops, it's really got everything we think about in terms of the middle East at 48, the complex and it is one building part of a larger complex great parking ratio five per thousand is right down the street from the New light rail stop is being built as we speak.
Operational sometime we think in 'twenty fours, but the city, saying, so great positioned asset where hopefully they will stay but again, we are marketing that space and so we will provide continued update as we think about cargill as you get closer to their expiration, which again is at the end of 'twenty three.
I would say as well U S Bank, we continue to stay very engaged with them also in Minneapolis, both their location downtown as well as the extension and the space that we did last quarter and for their suburban locations. As you May recall, we noted are working through a sizeable merger with West Coast Bank that has federal.
The approval now and hopefully should close by the end of the year and as we continue to work through with them.
Has come into the picture as well as their final approach to hybrid and work strategy I think the good news. There is we see most financial services doing it predominantly in office hybrid model. So.
I think overall that bodes well, obviously still very close to the U S bank given our relationship both on the banking side and on the customer.
Relationship side to the test.
Thanks, Brent very helpful. Maybe last one for me maybe for Chris kind of touching on the asset sales. It sounds like the Cambridge assets are going to trade relatively soon.
Wondering on pricing, how how it has changed relative to your underwriting when you were looking at selling those assets and then maybe touch on kind of the bidder pool out there. It sounds like all cash deal maybe debt financing is a little tough out there. So how does that bode for like other assets. So you said that you have in the market right now.
You guys get that.
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Okay.
We have the speakers line connected Dave if you can please repeat your question.
Hey, guys.
Just last question was kind of for credit.
Asset sales and kind of Cambridge, it sounds like that was going to close relatively soon just wanted to touch on.
Where that's coming in relative to your underwriting for potential sale of men as we're looking at potential other sales such as Houston is one of the pressure points here financing about that's part of the reason we see in Cambridge trade. Its just theres all cash buyers are a little more color on that.
Helpful.
Good morning, Matt Good question.
Sorry, again for the technological challenges got to be a little guarded with our commentary on Cambridge.
We like where we sit but in this market.
We're not done until the wire hits.
We did run a fully marketed process demand there was not surprisingly very robust. These are generational assets I think we had over 80 confidentiality agreement signed in the first couple of weeks.
We launched it back in July shortly after we went non refundable on 11.
Through a very wide net we wanted to Minneapolis as we could get on these two assets, we certainly approached domestic investors international investors as well as a couple of dozen ultra high net worth individuals who have ties to Harvard <unk> had been investors in Cambridge.
For years, the debt markets as you mentioned and the economic uncertainties certainly did have some impact on some potential buyers, but the.
The uniqueness of Harvard square and the uniqueness of Cambridge as well is remember these are two long term leased.
Assets to Harvard and Bank of America, There certainly was ample demand.
That was engaged on the assets we have two highly qualified all cash buyers.
Two others.
Certainly others that are waiting in the wings and we expect to close later in the quarter. So on Cambridge, we like what we said again, we're not done yet, but we've been pleased with the execution so far on Houston.
We mentioned back in the summer that we had talked to some potential buyers on those two assets I would like to remind everybody knows it's only two assets and a 600000 square feet. Those conversations are still ongoing.
But it's really difficult to predict when or if those assets are going to trade, but we will certainly keep you informed.
As in if we make progress there.
David.
I would add I think overall clearly the market is re pricing risk the lower the risk to let the price impact and obviously, our Cambridge assets, Chris mentioned generational. So I think we've been fortunate to probably see less of an impact there.
With regards to Houston I think as you noted in your question and I think thats pretty accurate great assets and frankly, as we've had discussions with potential buyers valuations have been where we felt would be reasonable, but the financing markets have not been there.
That's been probably the bigger hang up as we continue to talk to those groups that are interested I think we are hopeful that the market will open back up but we're also deep and creatively as ways to monetize and you'd be out of Houston and the longer term.
Very helpful. Thanks, guys.
Your next question for today is coming from Daniel Ismail. Please announce your affiliation then pose your question.
Great with Green Street.
Curious on.
Conversations with tenants with new in their space.
Has there been any.
Conversations around.
Changing lease terms are on a renewal or new lease with respect to early termination rights have you seen tenants, taking less space when they renew or taking up more space I'm. Just curious if you can speak any of those trends.
Thank you Dan This is George wells here.
We've taken a look back at renewal and retention rates that we've had over the past couple of years and they've held pretty steady I would say in that 70% plus range and we also dug further into how many of those were looking for contractions versus expansions that we pleasantly surprised to note that 40 of our deals were had some expansion.
Element to them versus 27 of those deals had contractions in and that's still what we're seeing today in terms of where the dynamics of our tenants are going.
What's more space.
And somewhat less in fact, this past quarter I think we had six expansion.
Versus three contractions for 15000 square feet net positive.
So yes.
It still seems to be evolving I don't think that.
All the macro noise that you're hearing is fully being reflected in our pipeline. We don't want to be naive to think that it won't but at this point our properties continued to resonate with demand. That's in the marketplace I will say that flexibility is always a key for tenants that are looking at entered to any building in the marketplace today and I would say the big.
Just asking that realm is basically termination rights somewhere to I would say two thirds of the way into a lease term, but that would not say thats universal I think on the Cajun that's something that's asked for but we're not seeing a lot of contraction options.
Or contractions in our existing pipeline today.
I think I'd add there too.
Well, yes.
Usually those termination right.
Pretty heavy penalties.
So I think thats a positive overall I'd say.
We continue to see that small tenant market and I mentioned before having the most that also be the portion of the market, where theyre not giving back space.
Is that kind of continued to understand and talk to Ceos, how they're thinking about real estate, we've kind of come to the realization that smaller organizations offices that are generally up floor or less are typically renewing for that portion that same amount of space or potentially expanding the business is growing it has been downsized.
<unk> had been predominantly around larger corporate situations for instance, I know a quarter or two ago, where are you in line New York gave back basically went from 800000 square feet to the new asset went down to 400000 square feet, but what we've also seen some instances of that.
Suburban locations pop up where they are used to we work to continue to proliferate office space further out into the suburbs. So we continue to really focus and feel like the risk is more associated with those larger scale tenant and why we feel good about the average tenant size rolling through 'twenty three are being around 8000 square feet continue.
Just to give us pretty good.
The patient of new positive renewal rates and less shrinkage, if you will apart.
Great I appreciate the color there and then just last one for me.
Can you give us an update on the current mark to market on the portfolio and.
In place rents versus market rents.
Absolutely Danny I think as we continue to kind of reiterate.
For the past few quarters. That's generally are in the neighborhood of 5% to 10%. Obviously, we had a stellar quarter of this year with a significant sorry, this quarter with a significant roll up.
On a number of tenants, but even if you remove the largest tenant with a massive rollout we were still above that that tie into that range of 5% to 10% I think as we also look forward to the role I think thats representative of kind of the more near term roll that we have in the portfolio as well so I think thats still a fair barometer.
Great. Thanks, Brian .
Your next question for today is coming from Anthony Powell one. Please announce your affiliation then pose your question.
Thanks, J P Morgan.
Just first first question is as it relates to like asset sales and thinking about our earnings over the next year or so I think historically, you've tried to pair dispositions with acquisitions and you've tried to match those in a way where it's actually been accretive but in your commentary it seem like the focus has shifted a bit.
More towards the balance sheet, and maybe reducing debt. So should we think about maybe dispositions next year like do you think that will be dilutive or do you still intend to to kind of match that up in and mitigate.
The earnings impact.
Yeah.
I appreciate you joining this morning Toni this is Brent.
As we continue to really as an operating business model, we continue to be big Recyclers of capital we've sold about 400 million.
Four out of the last six years. Despite COVID-19, we still manage to continue to to be able to recycle assets that we didn't anticipate a cambridge disposable achieve about $300 million this year in dispose.
But overall I think we feel like the asset sales market is going to give us the opportunity to see.
Sell Cambridge, which would be accretive relative to 11 80, and then have the additional dispositions that will come in so that net net when we sell everything we will get back to the leverage neutral and roughly earnings neutral on <unk>.
That was a trophy quality asset that we're trading trophy quality asset for in Cambridge.
And so I think overall the net net applauded the portfolio certainly advances the strategy of continuing to bolster and high growth Submarkets like Midtown Atlanta. So we feel very positive about the ultimate end game and maintaining the level of earnings and not diluting earnings as we look forward to continuing our recycling strategy.
It's always our objective to improve the quality of the portfolio and had the acquisition to be accretive to earnings. So I would not say anything has changed in that regard.
But we'll be continuing focus.
That in 'twenty three.
Okay got it and then just just one other item just thinking about the inflationary environment and if the portfolio stays kind of in this mid eighty's.
Occupied level does does inflation on the cost structure for <unk>.
The other 15% that youre not getting reimbursed on.
Is that something we should be thinking about as potentially notable working into next year or can you kind of control that.
I guess the first thing I'd say is the majority of our leases you have clauses that insulate us from immediate price increases.
And now Dan as you pointed out the portfolio a little bit under lease we took on some vacancy knowingly.
The it really ends up 19 number of acquisitions that we add and I feel like we're at the trough related to the vacancy in those acquisitions with great traction at those assets. So I think we feel like we can continue to maintain the occupancy level that we have in the portfolio. It is a little under lease, but overall I don't feel like the inflationary pressure.
Or is that we're seeing are going to come to the bottom line materially to the landlord.
Kind of I would say above the occupancy level, where most of the costs are being passed through to the tenants.
And I don't think Thats a meaningful exposure.
To be shareholders should be focused on.
Okay, great. Thank you.
Once again, if there are any remaining questions or comments. Please press star one on your phone at this time.
There are no further questions in queue I would like to turn the floor over to Brent Smith for any closing comments.
Thank you and again I want to.
Thank you everyone for joining the management team. This morning as a reminder, we are going to be at the NAREIT conference in San Francisco in two weeks so reach out to just under 80, if you'd like to sit down with management, we certainly like an opportunity to tell the story and continue to to share. What we think is a very exciting transition that Piedmont as you continue.
To have strong leasing activity and recycling.
Transactions.
Again, I hope everyone has a wonderful holiday season, and we look forward to continuing the dialogue on the fourth quarter call in January .
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 for your participation.
Hi.