Q4 2022 Piedmont Office Realty Trust Inc Earnings Call
Piedmont Office Realty Trust incorporated fourth quarter 2022 earnings call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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I'll now turn the call.
Over to your host.
Oh great.
You may begin.
Thank you operator, and good morning, everyone. We appreciate you joining us today for Piedmont's fourth quarter 2022 earnings conference call.
Last night, we filed an 8-K that includes our earnings release, and our unaudited supplemental information for the fourth quarter as it is available for your review on our website at Piedmont REIT Dot com under the 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 1995.
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.
We encourage everyone to review the more detailed discussion related to risks associated with forward looking statements in our SEC filings exam.
Examples of forward looking statements include those related to Piedmont future revenues and operating income.
Dividends and financial guidance future leasing and investment activity and 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 are based upon the information and estimates we've reviewed as of the date the statements were 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.
Provide some opening comments regarding the fourth quarters of operating results and the results for the year 2022.
Brent.
Good morning, and thank you again for joining us on today's call as we review our fourth quarter and annual 2022 financial results.
Provide details on several recent leasing and capital transactions as well as outline our 2023 business plan.
In addition to Eddie on the line with me. This morning are George Wells, our Chief operating Officer, Chris <unk>, our EVP of investments and Bobby Bowers, Our Chief financial Officer as well as other members of the senior management team.
Despite the headwinds.
The office sector faced during 2022, including remote work interest rate increases and recession fears.
<unk> continued to execute on its leasing and capital recycling objectives.
Ultimately driving our sunbelt concentration is 67% of our annualized lease revenue at year's end with the goal to reach 70% by the end of 2023.
Highlighting a few of 2020 twos achievements.
Piedmont completed approximately $2 2 million square feet of leasing which was similar to our achievement. In 2021. This included 763000 square feet of new tenant leasing.
The largest annual amount of retail leasing we've completed since 2018 and the second consecutive year at pre pandemic levels.
Our tenant retention ratio was over 70%.
Among the highest of our peers and a testament to the service and value our in house property management construction and asset management teams are delivering to our customers. So despite the sectors challenges, we leased almost 13% of the portfolio during the year with an average cash rental rate roll up of approximately 10%.
Atlanta was our strongest leasing market followed by Dallas together, the two markets represented roughly two thirds of the year's total leasing volume.
Atlanta Galleria project had the greatest leasing velocity within the portfolio with approximately 25, new tenant leasing transactions totaling roughly 250000 square feet.
In a moment George will provide more additional operational details and fourth quarter performance.
In spite of the challenging that and transactions market.
<unk> completed over $310 million of dispositions exited our last remaining Chicago asset and in just over one year Peabody went from having no presence in the Midtown Atlanta Submarket to becoming its largest office landlord on Peachtree Street with the acquisition of 11 80 this past summer.
Piedmont was named an energy star partner of the year for the second year in a row at all our properties received will help certified designations in the spring. We also submitted our operating data to grasp for the initial rating.
Giving an overall four star designation and Green Star recognition.
One of the highest results from Graysby for an inaugural assessment.
We also substantially increased our balance sheet liquidity raising over $575 million in incremental proceeds since our last earnings call, including $160 million through our previously announced Cambridge portfolio sale, which Chris will touch on later as well as $450 million of unsecured debt raised from seven of our relationship.
Lenders it terms similar to our line of credit.
Bobby will provide more color on these financing shortly.
I would highlight as of this call <unk> has the full availability of our $600 million unsecured line of credit and over 185 billion of cash and marketable securities on hand.
Which in conjunction with potential asset dispositions will address our 2023 debt maturities.
As we look ahead into the new year, we believe several strategic themes will play out.
Sunbelt markets will outperform with leasing and operating fundamentals continuing to lead the country as a result of inbound population migration.
More office minded business culture, and continued pro business policies.
These market characteristics will drive Piedmont leasing volumes in Atlanta, Orlando, Nova in Dallas during 2023, where approximately 70% of our vacant space reside and where 60% of the year's explorations reside.
The broader economic environment will continue to pose challenges for the commercial real estate sector. Despite this our current leasing pipeline remains healthy with numerous leases actively in advanced negotiations.
And I am pleased to share that over 230000 square feet of leasing has already been executed thus far in 2023.
Of which over 100000 square feet is for new tenant space.
The flight to quality mindset will continue to drive our customers leasing decision.
Businesses are consistently upgrading from class b space as well as transitioning away from commodity class a space to higher quality buildings with a compelling amenity base place, making common areas.
Hospitality service minded experience.
I would note that we are not seeing the deteriorating fundamentals currently impacting class b product weigh on compelling class a office buildings in our core markets.
But we will continue to closely monitor this dynamic.
Small businesses will continue to drive the market at large corporations and big Tech rationalize their real estate footprints. The majority of our absorption over the last two years has come from small businesses seeking less than 15000 square feet.
In fact transition volumes from this customer segment are up 60% versus pre pandemic levels.
We strategically target this key demographic utilizing our service first model.
He built office suite program, and well design collaboration spaces and amenities.
Anecdotally the small customers, we're targeting appear to be more resilient to current economic conditions.
The Wall Street Journal reported in January that small businesses establishments with less than 250 employees.
Had been responsible for all of the net job growth in United States.
Onset of the pandemic.
And that larger companies have cut a net 800000 jobs during that time.
I would also remind investors that Piedmont is limited tech tenant exposure that the recently announced layoffs should impact office demand primarily in select tech heavy market.
In addition, while we have seen an uptick in blocks of sublease space and surrounding markets. The drilling did not replicate the quality level of the Piedmont building do not come with landlord capital to improve the space do not provide the same level of service or amenities and did not offer extension rights to the subtenant.
The capital markets will continue to be challenging with limited availability of secured and unsecured debt.
As a result of.
Office transactions will be limited to high quality buildings with limited near term risk Andrew are assumable debt.
The major lending banks have pull back substantially from the office market.
And along with a select group of regional banks will only extend debt capital to their highest priority relationships.
As a result, we expect very few if any new construction starts within our submarkets.
And Furthermore, we anticipated assets with near term debt maturities will face increased pressure as the year progresses to sell or recapitalize due to a suboptimal capital structure.
In this environment, we will remain patient with our capital deployment and continue to focus on ensuring ample liquidity in advance of any strategic acquisitions.
Corporate ESG topics, including sustainability wellness and ethical practices will continue to influence tenant decision relate.
Related to that I want to take a moment to publicly welcome Mary Hager to our board as a new member of the nominating and corporate governance Committee.
For those of you could go ahead, Mary She's an executive director and head of Gray starts commercial real estate business and a member of its global investment Committee.
Previously Barry was a cofounder and CEO of factory partners, which was acquired by Gray Star in 2021.
Mary's based in Dallas is active in the urban Land Institute, most recently as a board member and chairwoman of the investment Committee could you ally Foundation.
And brings to the board a wealth of real estate investment knowledge and contacts.
She's the second director at Piedmont has recently added to the board in preparation for the anticipated transition of two long standing directors, reaching their term limits over the next two years.
With that I'll turn this call over to George with Chris and Bobby to follow to provide further details in the quarters operations capital transactions and our outlook for 2023.
George.
Thanks, Brent good morning, everybody.
The uncertainties in the macroeconomic environment Piedmont continues to post solid operational results as it has since the post Covid recovery began in late 2021.
And we're cautiously optimistic that this will continue in 2023.
This quarter, we completed 42 lease transactions were approximately 433000 square feet of total overall volume.
Of this amount 40% of these leases totaling approximately 164000 square feet related to new.
Tend to lease activity and expansion.
This new deal activity is near our pre Covid quarterly average of about 175000 square feet and our leasing pipeline activity is very good.
For the year, we signed $2 2 million square feet of total leases and new tenant leases represented 760000 square feet as Brad noted earlier, the most new tenant leases executed by the company in 2018.
Continue with operational metrics, our lease economics were very favorable with six 5% and 11, 5% roll up or increase in rents for the quarter on a cash and accrual basis respectfully.
And our weighted average lease term achieved on new lease activity for the quarter was approximately nine years.
Our lease percentage at the end of the fourth quarter was approximately 87% up 150 basis points from the end of 2021 and largely unchanged from the close of the previous quarter. Despite the sales of two Cambridge assets.
In the fourth quarter that were 94% leased.
While the majority of our new tenant lease activity emanating from the sunbelt portfolio, where over 70% of our vacancies reside we experienced good leasing activity at all of our core markets during the fourth quarter.
And I'd like to highlight a few key announcements and accomplishments which occurred in some of our operating cities this quarter.
Beginning with Atlanta, our largest market at almost 5 million square feet and generating 20% of the company's ALR Gail.
<unk> reported another quarter of positive absorption during the fourth quarter with the market ending 2022 with 1.1 million square feet told absorption for the year.
<unk> annual absorption since 2015.
Direct rents in the Midtown submarket, increasing 10% year over year.
For the fourth quarter, our Atlanta portfolio experienced the most volume of new tenant activity with 10 years with 95000 square feet, which were evenly split between our Midtown presence and our suburban holdings.
Atlanta has been piedmont's, most consistent performer for the past four quarters, capturing 46% of all new kind of transactions and the pipeline continues to be quite robust.
Most notable this quarter was securing a full floor headquarters requirement for a private equity firm consolidating its operations in Buckhead, Atlanta, and Silicon Valley to our Atlanta Galleria properties.
Looking back at the full year 2022, with a stellar time for Galleria is the captured 38% of leases signed in the Galleria Covenant Submarket. According with J O L.
Post quarter end, we also signed a well known local operator, who relocated its white tablecloths seafood and steak restaurants of the Galleria further expanding on our food and beverage roster.
Since 2021, a gallery of holdings have captured 50, new lease deals were approximately 400000 square feet, including four full floor headquarter requirements validating the vibrant well monetize working environment, we're creating here at the Galleria.
It is also noteworthy to mention Cobb County's exhibition redevelopment authority now has plans to expand the Gallery Convention Center, which is adjacent to our five gallery office buildings and two the brace Truest Baseball Park in the battery.
Adding additional hotel food and beverage and entertainment facilities, which we believe will continue the momentum we see in this northwest Atlanta micro market.
We anticipate 2023 will continue to be very productive Atlanta, just as it has the past two years.
Moving down to Midtown we've completed our extensive design phase and we have begun construction of the redevelopment of 999 Peachtree.
As you May recall, we acquired this prominent LEED gold asset in late 2021 for approximately 360 Bucks a square foot.
Well below the replacement cost of $700 per square foot.
We anticipate spending approximately 35 Bucks a square foot to completely re envision the first two floors of the building, adding amenities and improve into buildings intersection at street level and with the fabric of the Midtown Atlanta community.
Customers have responded favorably here with rental rates up 10% and 129000 square feet leased since acquisition and.
In this quarter, we signed our newest tenant cadence bank to a full floor deal.
<unk> headquarters relocation from Bakken.
Redevelopment is a key component of Piedmont value creation strategy and we favored this approach of a ground up development, particularly in this economic environment because of faster times to deliver the product typically between 12 months versus 36 months.
And dramatically less risk associated with the cost financing and lease up of the project and while we have a number of sites for ground up development.
For capital deployment into development is much higher and no construction starts are planned for 2023.
Instead, we expect to continue to focus on more modest scale redevelopment projects and buildings, where we can drive near term occupancy and rental rates, which we believe will deliver a better risk adjusted return in today's market.
Moving onto our other markets Boston continues to deliver solid results as well.
Starting off with a headquarters relocation for robotics designing company into our eighth Central Avenue asset.
This 25000 square foot user is upgrading to nearby class a facility doubling in size from organic growth and maintaining its 100% work in the office policy.
As an aside salesforce, which fully leases, our 182000 square foot LEED gold five wall building until 2029.
It's a reversal of its work from everywhere workplace policy to one with more in office mandates.
We're hearing across our portfolio more of this in office sentiment with its more days per week or simply enforcing an existing hybrid policy.
Including many of our top 20 tenants such as U S Bank, New York State, New York City, Microsoft and others.
Our utilization rates are increasing and with the mentally as well at approximately 50% today up 2% in January from the previous month.
Circling back into Boston, our recently Redeveloped twenty-five mall asset which included.
Full lobby renovation new coffee lounge.
David the art fitness facility and cafe expansion with the outdoor workspace.
It was awarded by BOMA, Boston Regional Outstanding building of the year or Toby Award for buildings that are highly competitive 250 to 500000 square foot segment, recognizing this buildings position as one of the top buildings in suburban Boston.
I would note our second largest expected tenant move out of the year is at this building where it.
Health care and medical Enterprise will vacate approximately 77000 square feet at the end of the first quarter result of a corporate merger.
At this time, we have activity that would backfill approximately a quarter of that space.
Dallas, our second largest market with approximately 19% of ALR continue the challenge Atlanta is our most active leasing market in 2022.
We recently completed three leases three gallery asset, which also attain LEED gold status during this quarter.
Increasing our overall portfolio lead designation to approximately 50% with more buildings in process and a goal of reaching 60% lead designation by the end of the year.
The Dallas Galleria complex has good leasing momentum with tours and proposals increasing as we started the new year.
I'm also pleased to share that Dallas is the first of our market for land a large tenant in 2023 and.
In January we executed a new 70000 square foot headquarters lease for 11 years at the recently Redeveloped Las Colinas Corporate Center.
This new tenant is an energy company experienced substantial growth and is relocating from 52000 square feet at nearby William Square. This.
Leaf is projected to commence in early 2024.
As we carry over into 2023 customer activity continues to be resilient across most of our other operating markets, including Orlando suburban Minneapolis, and the RB corridor.
Staying in the RB corridor for a moment our local team here executed a 15000 square foot expansion for one of our largest tenants at Arlington Gateway, while also extending the existing 44000 square at least in square foot lease for another 10 years at this LEED Gold project.
New York and downtown Minneapolis continue to improve incrementally well I would say the toughest market for US remains of the district of Columbia, where demand is likely to stay sluggish as federal workers the primary occupancy driver.
Do you need to work remotely also affecting downstream demand from organizations that support federal agencies.
The Piedmont Formula continues to drive leasing success and as Brent noted, particularly with small companies. The most active customer segment across all our markets.
These tenants are attracted to our projects starting their needs with accessibility.
Amenity base unique 10 engagement programming best in class conference facilities in conjunction with the sustainability minded operator.
Building on the color that <unk> provided earlier in the fourth quarter poor activity did soften modestly, which we attributed to the unusually severe cold weather and heightened macroeconomic uncertainty.
But activity has rebounded in January .
We have approximately 2 million square feet of outstanding proposals, which is roughly equivalent to what we've seen in the past four quarters.
Looking into 2023, we remain positive with a cautious eye towards the market and leasing opportunities across our portfolio.
We're forecasting new leasing volumes in line with our performance last year.
We only have 7% of the rent roll expiring <unk>.
1% of which is Cargill and we now expect will vacate at the end of the year.
With this modest amount of exposure.
Combined with our historically high retention rates.
And the fact that the average size of our expiring tenants within Cargill is around 8000 square feet matching well with the deepest and most active demand segment of the market.
We are forecasting positive net space absorption during the year, resulting in anticipated year end lease percentage and our portfolio of between 87% 88%.
Up modestly from year end 2022.
I'll now turn the call over to Chris called Me to review, our fourth quarter investment activity Chris.
Thank you George at the time of last quarter's earnings call. We have agreed to terms for the sale of our two assets in Cambridge, Massachusetts.
And as we disclosed in December we close both transactions during the fourth quarter generating a total of approximately $160 million in proceeds and combined book gains of a little over $100 million.
Recall, we earmarked these proceeds as a funding source for the 11 80 Peachtree acquisition in Midtown Atlanta, which Brent mentioned earlier.
We had previously signaled this exit from the Cambridge, Submarket and in light of the market challenges in the fourth quarter.
Very pleased with the execution on the portfolio achieving pricing at sub 5% cash cap rates.
Looking ahead to 2023, we have a list of mature and noncore assets and we would like to monetize as we do every year.
Realistically in order for us to execute against this plan macroeconomic conditions, namely the availability of debt financing need to improve.
While we don't have any specific commentary to provide today, we are cautiously optimistic and being able to dispose of two or three assets during the year.
As we execute dispositions, we anticipate initially paying down debt.
That said our balance sheet is in good shape with ample dry powder in the event that a rare and highly strategic opportunity becomes actionable.
On the new investment front. However, we will continue to be pragmatic and disciplined as market conditions remain extremely unclear for both buyers and sellers.
In this market, we believe patience is prudent and we will have a high bar to clear as we think about new capital deployment.
With that I'll turn it over to Bobby to walk you through the financial results for the quarter balance sheet highlights and address guidance for 2023.
Bobby.
Thanks, Chris.
I'll call your attention to some of our financial highlights for the year and 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.
We anticipate filing our annual report on Form 10-K.
Later this month.
Reviewing our quarterly results Piedmont was able to achieve core <unk> 50 per diluted share for the fourth quarter of 2022 versus 51 cents per diluted share during the fourth quarter of 2021.
The fourth quarter of 2022 included approximately six cents per diluted share increase in interest expense on a quarter over quarter basis.
From an annual perspective core <unk> was $2 per diluted share a three cents per share increase over 2021, despite an over $14 million or 12 cents per diluted share increase in interest expense.
We're able to overcome this rise in interest expense for the year due to successful leasing efforts rising rental rates and fruitful asset recycling that have all been previously discussed this morning.
<unk> generated during the fourth quarter was approximately $47 million, which continues to be well above our current $26 million quarterly dividend level.
And we do not foresee any change in our current dividend level of 2023.
As disclosed in our quarterly financial supplement filed last night core earnings before interest taxes, depreciation and amortization EBITDA.
Increased approximately $16 million for the year in.
In property net operating income on an accrual basis increased approximately $20 million year over year.
Similar to the last several quarters, we continue to experience improving lease economics and rental rate roll ups for the year, our overall rent roll ups and leasing transactions for 2022 were up over the previous year, approximately 10% and 17%.
On a cash and accrual basis, respectively.
Same store NOI cash basis increased almost 2% for the year and same store NOI accrual basis increased a little over 1% per year.
Turning now to the balance sheet as Brent alluded to.
We made excellent progress during the fourth quarter, returning to a more normalized debt to gross asset ratio of 37, 6% at year end.
Our finance team was very busy extending the final maturity to mid 2025 on a $200 million unsecured term loan.
<unk> did a just a sofa plus 100 basis points.
Additionally, during the fourth quarter, the $160 million of proceeds from sale of our two Cambridge assets allowed us to pay off the entire balance outstanding on our $600 million line of credit. So that we have a full capacity of the line available as of year end.
And subsequent to year end in January .
We entered into an additional $250 million unsecured term loan priced at a gesture sofa plus 105 basis points with a final maturity of January 2025.
The proceeds from this facility combined with cash on hand, and potential proceeds from select non core dispositions and or draws on our line of credit will be used to pay off our $350 million bonds that mature later this year.
In short we fully addressed all of our 2023 debt maturities at relatively attractive rates, given today's economic environment and returned to debt levels equal to where we began 2022.
And we believe we will further lower our leverage levels in 2023 is a likely net seller of assets as a result of a few noncore dispositions, which Chris mentioned.
Finally, I'd like to turn to our 2023 annual core <unk> guidance.
Due to the uncertain nature of the capital markets environment.
This guidance will be without any disposition or acquisition activity.
We'll adjust guidance throughout the year.
At the time any such transactions occur however, I.
I do want to point out that we currently believe that 2023 annual results will be within the guidance range, we provided today.
We have taken great pride for many years and generating consecutive years of core <unk> per share growth.
And frankly, it pains me to introduce guidance that will break that streak.
We do expect however property net operating income on an accrual basis on our current portfolio of properties will continue to grow during 2023.
Nonetheless, with over 400 basis points of increases in fed fund rates during 2022 and further increases projected during 2023.
Along with two new floating rate term loans, replacing our $350 million 10 year, 343% bonds that are maturing this year.
Negatively impacting incrementally 2020, threes core F O financial results by 22 cents per share.
While certainly not unique to Piedmont or our peers.
We are introducing core <unk> guidance for the year 2023, which includes this higher interest expense.
Higher expenses offset partially by increased income from our property operations are.
Our core <unk> guidance for 2023 is in the range of $1 80 to $1.90.
Per diluted share.
We anticipate overall executed leasing activity for 2023 to be in the range of 1.6% to 2 million square feet.
And although our lease percentage will fluctuate between quarters, given our relatively low amount of expirations for 2023.
We believe our year end lease percentage will be between 87, and 88% before the impacts of any acquisition and disposition activities.
Same store NOI cash basis, an accrual basis should both be in the low single digit range with a 1% to 3% increase in G&A expenses are anticipated to be flat for the year at approximately $29 million.
We began the year with approximately 1.14 million square feet of executed leases.
From 800000 square feet a year ago.
That were yet to commence for existing vacant space or that are in abatement, which should contribute additional cash revenues.
$33 million in cash NOI of approximately $20 million over the next 12 to 24 months.
Looking out forward interest rate curves interest expenses or interest rates are currently forecasted to flatten out by the end of this year to begin to decrease next year.
It is our hope and our plan to return to the long term unsecured debt markets when the credit markets have normalized.
With that I'll turn the call back over to Brent for closing comments.
Thank you George Chris and body the Piedmont team made significant progress along our strategic objectives in 2022, and the real estate portfolio continues to perform well in 2023.
Management expects modest space absorption and operational growth in the coming year paired with manageable capital expenditures.
Be selective with capital deployment for acquisitions, and anticipate being a net disposer of assets to deleverage the balance sheet and enhance our already ample liquidity resources.
However, as Bobby outlined due to the continued rise in interest rates increased interest expense will continue to weigh on earnings in <unk> for the year.
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 your questions now or we'll make appropriate later public disclosure if necessary.
Operator.
Thank you at this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue and you May Press Star two if you would like to remove your question from the queue prepare.
<unk> using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we pull for questions.
Thank you.
Our first question is coming from Anthony Powell loan with J P. Morgan. Please go ahead.
Great. Thanks, good morning.
My first question just you gave a lot of details on the numbers, but just trying to tie something together here.
You're talking about straight in the portfolio. This year picking up I guess about 80 basis points at the mid point compared to where you ended the year, but I'm just wondering how the commenced number might change in terms of whats baked into your <unk> forecast so youre at 84.6.
Percent I guess at the end of the year.
Do you think that moves in parallel with the 80 bps on the lease rate or is there something different there.
Tony This is Brent good morning. Appreciate you taking the time to join US a good question I think that's pretty fair to say that it should kind of fall in line with roughly that 80 bps increase in the leased percentage.
We continue to CAD and the burn off of free rent in that process.
Hey, Tony This is Bob.
It really depends on the leasing and what happens this year we had.
Almost 400000 square foot increase in leases yet to commence.
Leases in abatement.
Certainly impact that so it really does depend on the leasing so.
I agree with you Brad.
Not really predict.
Sure.
Okay and then.
Just another question more specific to to Dallas, you talked about it being really one of your top two market. So yes.
And you've got about 360000 square feet of expirations. This year, so it's a little bit on the heavier side.
With regards to your market. So just wondering if you think there is enough demand to kind of.
Keep all that leased and absorb space, there or if there's anything that might.
Get kicked back.
Thank you Tony good follow up.
Question, two Dallas continues as you noted.
Actually it was a very strong market, we do continue to see larger users, particularly from the relocation groups and energy companies continuing to kind of feed that maybe more so than our other markets, but we also continue to see good depth in that 8000 square foot type tenants that we do have generally rolling.
Overall in Dallas, we feel pretty good about our ability to at least maintain kind of backfill what might expire during the year of roughly 360000 square feet of course, we'll keep some of that as well with historical retention ratio right now around 70%.
And we will continue to update you as the year goes on but I think we feel pretty good about those prospects in Dallas, we'll have more to share in regards to that on our next call.
Okay. Thank you.
Thank you.
Our next question is coming from Dave Rodgers with Baird. Please go ahead.
Yes. Good morning, everybody George you talked about a 2 million square foot kind of activity are outstanding pipeline and proposals is that pretty consistent at that 10000 square foot average size or are you seeing some larger tenants start to move in there and then maybe a follow up question to throw and before I turn it back to you guys as you talked about Lord large Corp.
Users and big Tech, just not engaging as well and so I wanted to make sure. We can talk about U S bank as well just given that that's coming up next year.
Sure Good morning, Dave Thanks for joining our call. This morning, and I look back over the past several quarters.
Average around 2 million square feet in overall proposals, which which is a great sign for the overall strength of our pipeline.
And I would say looking back several quarters I would say about 40% 40, human close to 45% of that.
It has been new activity the storage thats been pretty consistent as Brent alluded to we expect more out of the Sun build a nice couple of quarters and dig deeper into our overall market. So I'll start with Atlanta, and I would like to clarify one of my prerecorded comments about Atlanta, I've mentioned that are a lower number.
It should be more than 27% range.
So with that being said, let me dive back into our pipeline.
Pipeline, but Atlanta continues to be very strong the depth of the market ranges from I would say, 20% to 25 prospects per quarter.
I would say Dallas as we talked about a minute go still seems to be trailing pretty heavily we've seen about 20% of our new activity to come out of that particular, submarket and surely I mean, I would say from a small tenant perspective, because that seems to dominate the marketplace.
But it is not surprising for us to do two to three users or between one to two even three floors come along each quarter I think we've already mentioned in one of those.
Being in Dallas, and we have a couple more of those in our pipeline.
Yes.
And then David This is Brent in regards to your question on U S Bank as we've mentioned before we have a very deep relationship with the firm.
And both as a tenant but also in a lending relationship and banking relationship as a trusted advisor.
That asset in Minneapolis, and particularly their headquarters asset stripe, there maybe LEED gold building really the best amenity package in Minneapolis in the 31st floor, but great 18 foot windows over the city.
In terms of assets, it's really far down in terms of what it can provide U S bank, which we think bodes well for the renewal there.
Big ticket large corporates are pulling back I would say in terms of decision, making I think what is positive those we see financial services firms continue to lean into the office model.
Think of themselves as continue to bring a substantial number of their employees back now over 50%.
Since the beginning of the year.
So when you look at Jpmorgan building, a massive headquarters in New York or mild prior firm Morgan Stanley continue to maintain their footprint. We continue to see financial services companies utilize the office particular for customer facing executive roles, which is what resides in U S Bank I would remind you too that lease does expire at the end.
May and 24, so we're actively in those discussions would probably have more clarity on that sometime around the early part of the silver and the suburbs that location is also being increased in terms of its utilization.
It is geared towards more towards a portion of that is.
Got it.
They continue to increase again that incremental use as they completed the merger now with the West Coast Bank.
That integration is in process Thats also part of the delay until the early part of the summer I think we continue to see that integration and again that decision, making process overall positive, but I think our mindset right now to guide the market would be to say, we expect a renewal somewhere between 50% to 100% in both locations I know, that's a wide breadth, but I think the firm itself is still getting into.
Orange around its hybrid policy, but I do think the body language and what theyre doing in terms of bringing their employees back.
<unk>.
Sure.
Great last for me go into either Chris or Brent on dispositions, what do you have in the market today I know, it's not in the guidance, but are you able to kind of transact on assets. Today, you are going to be able to purchase last year and sell us the Cambridge portfolio are there other assets that you believe that you can easily transact on based on.
On either the asset or the tenant in place and the term of the lease is that still doable in this market today.
Hey, Dave Good morning, it's Chris.
On Houston this is not going to be an incredibly satisfying answer but there is really nothing new to report there.
We remain I would say cautiously optimistic that we can move those two assets and in 2023.
We remain in dialogue with one or two groups there on those assets, but we really can't comment any further we'll obviously keep you posted if and when a transaction materializes. There in terms of other assets that we might sell I don't think we want to get into any specifics and named particular assets I do think you should.
Do you expect that it will be very consistent with our history. These will be assets, where we think we've either maximize value and or have slower growth profile than we might like but as I said in my prepared remarks conditions really need to settle and stabilize a bit before we feel extremely confident about asset sales.
But you know recycling assets is certainly not a new initiative for us and we'll continue to try to do so in 2023.
As markets allow and Thats, a little bit of a great answer.
But it is extraordinarily difficult.
It's Tom.
Alright, Thanks, Chris Thanks, everyone.
Thank you. Our next question is coming from Michael Lewis with Truest Securities. Please go ahead.
Thank you.
It sounds like Youre expecting maybe slightly positive same store NOI growth for 2023 are you able to say anything about some of the components.
Expected rent spreads are maybe expense growth.
Michael It's Brad I appreciate you, taking the time to join today.
Yes, we do believe we will continue to have kind of in line with what we were able to accomplish this year in terms of same store NOI growth again guiding no.
We did this year at 2%, we're guiding to 1% to three.
That's really a component of continuing to be able to obviously get the incremental bumps in the existing leases, but we do have a number a good bit of continued rent burn off during the year that will continue to fuel that as well as what we anticipate additional leasing and some activity that we have in the pipeline is not signed but would be more near term starts that will continue.
Can be able to contribute to that anything else you might add Bobby in terms of just those specific components.
No I think in particular markets and George covered we're seeing and meeting our pro forma on a lot of our last acquisitions.
But two or $3. So, yes, we're continuing to see rental rate growth.
I think it's a good fair characterization as well and then I think youll continue to see Michael.
US being able to drive some absorption overall in the portfolio for the year.
Okay, Great and then you talked about this a little already and I know you don't have a lot of.
Tech tenant exposure in your portfolio, but do you are you seeing any impact on any of your markets in terms of that.
Big Tech layoff announcements I think.
People immediately think of some of the markets, where you don't have exposure like the bay area and Seattle.
But we've heard a lot about how these jobs are actually much more spread out across the country that in past cycles. So I don't know if youre seeing anything yet or you expect to see anything in Boston D C or any of your other markets.
Good morning, Michael This is George I'll tell you that all the announcements that you've seen over the past. So I would say three to six months, we've kept a close eye on those users that lease space in our building and at this point, we're just not feeling much of an impact at all at our portfolio.
If I had to dig deeper into where we could have the most exposure and I'm, taking a leap here would be in our Burlington portfolio up in Boston and when you Peel.
Peel the onion, a little further of what we have there you've got salesforce or Microsoft and those large leases that don't have an expire until sometime at the end of the decade. So I think we're pretty good from that perspective.
Our only goal really to deal with in Burlington.
Is that are Toby award, winning building, which is 25 mall road and we feel really good about the fact that third.
We have one award for the renovation that was just completed there we have a decent pipeline in tow in that place and so we feel pretty good about our prospects for that particular sub market.
George I would add to cycle.
Overall, we only have about 1% of our ALR and explorations in 'twenty, three 'twenty four or with that Tech Kinney group. So we have very limited exposure more near term.
That market.
Okay, and you Havent seen anything more broadly in the market that may be create.
Competing.
Competing vacancy in any of those markets I assume it's probably too early to be able to tap.
No we haven't seen material sublease space.
Other kind of competitive space to this point I think Midtown Atlanta continues to be a market that does attract the tech tenancy.
And as you have heard anecdotally that they have also pulled back from that market, but again our buildings in that market are more geared towards professional services and we've actually.
Kind of akin to the most recent jobs report seeing very good depth from that tenant, particularly as they continue to move from bucket to Midtown just like our announcement recently here this quarter with cadence bank.
Okay sounds good thank you.
Thank you once again, if you have any remaining questions. Please press star one on your phone at this time.
Our next question is coming from Phil and Brzezinski with Green Street. Please go ahead.
Hey, guys. Good morning, and thanks for taking the question. Just curious you guys touched on you know focusing on dispositions and should those closes to hear maybe doing some debt paydowns, but just curious how share repurchases might fit into that plan, given where the stock currently trades today.
Hi, Julian spread again, thanks for joining US yes, great question I think obviously no office REIT I think is currently pleased with where their stock trades today.
And evaluating our own kind of historical program on the buyback we continue to utilize that same framework.
First and foremost we need disposition proceeds we would want to lever up particularly in liquidity constrained environment like we are in this moment.
And then I think we look towards again outsized underperformance, both on an absolute and relative basis.
And I think frankly, we've continued roughly trade in line with the sector.
I do think Youre also seeing just very limited overall private level transactions and I'm talking about risk has been repriced in the market stability and cash flow less so, but it's certainly been impacted by rates, but that risk that does exist.
Uncertain pricing and as a result, I think youre going to continue to see a dearth of transactions and frankly, a little bit of uncertainty around what it truly is.
For ourselves and for our peers. So within that context, I think we're going to continue to be very pragmatic with our available capital.
Look to probably not buyback shares in the more near term continue to focus on operating the business and maintaining liquidity is being paramount paying down debt more near term it would be a better use of that capital in our minds.
That's helpful and I think that makes sense and then you guys commented on sort of rental rate growth across your markets, but just curious.
On a net effective basis are you guys anticipating growth in net effective rents in 2023 across your geographic footprint.
Hi, Neil.
In this environment.
Its different by market and all those different by sub market and building.
So I think we're going to continue to see I can take a market by market, but Atlanta, yes. The market. We will continue to see good absorption and great activity, where we have assets I think you have to believe to grow net effective rents in that market in Dallas I think it will not have nearly the amount of growth in Atlanta, but probably be a positive side I think Orlando suburban Minneapolis.
Robin Boston, probably just hold water. If you will kind of flat I do think we continue to see deteriorating fundamentals in D C, particularly in the district and Thats, where you are probably likely to see negative net effective rent growth and then we don't have much exposure in terms of the leasing market in New York, given those long term leases, but that might be another.
Market that I would say it would be flat to slightly down from a net effective rents just given some of the weight. There hopefully that covers the markets and give you a little bit of color I would remind investors as well the general mark to market as a whole portfolio is roughly 5% to 10%.
That's a good indication of what we would expect in terms of the 23 numbers as well.
Awesome that's extremely helpful. Thanks for the time today guys.
Thank you.
Thank you.
As they repair to be no further questions in queue. At this time I will hand, it back to Mr. Brent Smith for closing comments.
First I wanted to take the opportunity to acknowledge the incredible effort. The Piedmont team has put forth in 2022.
We're really fortunate to work alongside some very highly knowledgeable and high caliber individuals who are experts in their field.
Thank you.
Also want to remind investors that we're going to be attending the wells Fargo conference in about two weeks and the Citigroup conference in early March if you're interested in sitting down with management. Please reach out to Eddie and again. Thank you everyone for joining we appreciate the time and look forward to talking further on our next quarter earnings call in early May and late April . Thank you.
Thank you. This concludes today's call you may disconnect your lines at this time and we thank you for your participation.
Okay.