Q3 2023 Piedmont Office Realty Trust Inc Earnings Call
Greetings.
Speaker 1: Creed.
Speaker 2: and welcome to the Piedmont Office Realty Trust Incorporated third quarter 2023 earnings
And welcome to you.
Piedmont Office Realty Trust incorporated third quarter 2023 earnings call.
Speaker 2: At this time, all participants are on a listen only mode.
At this time, all participants are on a listen only mode.
Speaker 2: and the flow of the open for questions and comments following the presentation.
And the floor will.
Be opened for questions and comments following the presentation.
Speaker 2: If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note this conference is being recorded.
Speaker 2: I will now turn the conference over to your host, Laura Moon. Mom, you may begin.
I will now turn the conference over to your host Laura Moon, Ma'am you may begin.
Speaker 3: Thank you, operator, and good morning, everyone. We appreciate you joining us today for Piedmont's third quarter 2023 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 third quarter that is available for your review on our website at piedmontreit.com under the investor relations section.
Thank you operator, and good morning, everyone. We appreciate you joining us today for Piedmont's third quarter 2023 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 third quarter that is available for your review on our website at Piedmont REIT Dot com under the Investor.
That section.
Speaker 3: During this call, you will 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.
During this call you will 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.
Speaker 3: The risks and uncertainties that these forward-looking statements are discussed in our press release as well as our SEC file.
Speaker 3: We encourage everyone to review the more detailed discussion related to risk associated with four looking statements in our SEC filing.
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 future revenues and operating income dividends and financial guidance future financing leasing and investment activity and the impacts of this activity on the company's financial and.
Speaker 3: Examples of forward-looking statements include those related to PIMOT's feature revenues in operating income, dividends and financial guidance, feature financing leasing and investment activity, and the impacts of this activity on the company's financial and operational results.
<unk> 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 have 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 S. F. L. A S. A boe in the same.
Speaker 3: You should not place any undue reliance on any of these board looking statements and these statements are based upon the information and estimates we have reviewed as of the date the statements are made.
Speaker 3: Also on today's call, representatives of the company may refer to certain non-GAAP financial measures such as FFO, Core FFO, AFFO, 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.
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 regarding third quarter operating results Brent.
Speaker 3: At this time, our President and Chief Executive Officer Brent Smith will provide some opening comments regarding third quarter operating results.
Speaker 4: Thanks Laura and good morning everyone. Before we get into the call, I would be remiss if I did not acknowledge that you all heard a different voice reading the introduction this morning. As most of you know, Eddie Gilbert, our EVP of finance and treasure, and someone we all proudly call a friend and esteemed colleague, has voluntarily resigned from his position at Piedmont.
Thanks, Laura and good morning, everyone.
Before we get into the call I would be remiss, if I did not acknowledge that you all heard a different voice reading the introduction this morning.
As most of you know Eddie Guilbert, our EVP of finance and Treasurer, and so when we all probably call a friend and esteemed colleague has voluntarily resigned from his position at Piedmont.
Speaker 4: Eddie has been one of our most trusted, dependable, and dedicated teammates for over 16 years, and he made immeasurable contributions towards the advancement of Piedmont. He will be sort of...
And he has been one of our most trusted dependable and dedicated teammates for over 16 years and he made immeasurable contributions towards the advancement of Piedmont.
He will be sorely missed by all of Us Eddie.
Speaker 4: Eddie will stay on as consultant for a period of time to ensure seamless transition.
Eddie will stay on as a consultant for a period of time to ensure a seamless transition.
Speaker 4: And Laura Moon, our Chief Accounting Officer and Jennifer Henderson, our VP of Financial Planning and Analysis, will be taking on most of Eddie's responsibilities. OK.
And Laura Moon, our Chief Accounting Officer, and Jennifer Henderson, our VP of financial planning and analysis will be taking on most of <unk> responsibilities.
Okay. So now on with the quarterly call.
Speaker 4: I want to thank everyone for joining us today as we review our third quarter results.
I want to thank everyone for joining us today is to review our third quarter results.
Speaker 4: In addition to Lauren the line with me this morning or George Wells, our chief operating officer, Chris Coleman, our EVP of investments, and Bobby Bowers, our chief financial office.
In addition to Laura on the line with me. This morning are George Wells, Our Chief operating Officer, Chris Call Me, our EVP of investments and Bobby Bowers, Our Chief Financial Officer.
Speaker 4: We also have the usual full complement of our management team available to answer your question.
We also had the usual full complement of our management team available to answer your questions.
Speaker 4: I'd like to start with our leasing results, both what was completed during the quarter as well as some significant activity that was completed during October .
I'd like to start with our leasing results. Both what was completed during the quarter as well as some significant activity that was completed during October.
Speaker 4: Total leasing for the third quarter was approximately 302,000 square feet and included roughly 170,000 square feet of new tenant leasing. Our 11th consecutive quarter of new tenant leasing at or above pre-COVID levels, resulting in net absorption during
Total leasing for the third quarter was approximately 300 in 2000 square feet and included roughly 170000 square feet of new tenant leasing our 11th consecutive quarter of new tenant leasing at or above pre COVID-19 levels, resulting in net absorption during the third quarter.
Speaker 4: The average size lease executed was approximately 13,000 square feet with a way to average lease term of approximately seven years and reflected double digit rollups on renewals on both a cache and a cruel base.
The average size lease executed with approximately 13000 square feet with a weighted average lease term of approximately seven years and reflected double digit roll ups on renewals on both a cash and accrual basis.
Speaker 4: As anticipated, same-story NOI on a cash and accrual basis continued to strengthen during the third quarter as new leases commencing and or those with expiring abatements began to outweigh expirations that occurred earlier in the year.
As anticipated same store NOI on a cash and accrual basis continued to strengthen during the third quarter as new leases commencing and or those with expiring abatements began to outweigh explorations that occurred earlier in the year.
All in all it was another solid quarter of leasing and perhaps the most exciting news occurred just after the end of the quarter and that is the execution of over 600000 square feet of leasing thus far in October.
Speaker 4: All in all, it was another solid quarter of leasing. And perhaps the most exciting news occurred just after the end of the quarter. And that is the execution of over 600,000 square feet of leasing thus far in October . The bulk of that leasing related to the renewal of the largest of the upcoming US bank lease expiration.
The bulk of that leasing related to the renewal of the largest of the upcoming U S Bank lease explorations that being U S banks renewal with the entire 447000 square foot headquarters location or a LEED gold U S Bank quarter Center asset in downtown Minneapolis, We're very pleased with the outcome with our largest.
Speaker 4: We were very pleased with the outcome with our largest tenant and strategic financial partner.
Tennant and strategic financial partner.
Speaker 4: While it was a lengthy process, we were grateful as the bank, which has been an anchor tenant the building for the past 20 years, has chosen to renew with us for another 10 years.
While it was a lengthy process, we were grateful that the bank, which has been an anchor tenant the building for the past 20 years has chosen to renew with us for another 10 years.
Speaker 4: George will give some additional color on this outstanding lease in a moment.
George will give some additional color on this outstanding lease in a moment.
Speaker 4: In addition to the US bank, the October Activity also included a sizeable newton at least the GE Vernova at Gallery on the Park in Atlanta. Continuing to fill the vacancy of the project and taking the least percentage at our gallery of 600 building from a low of 34% in 2021 to approximately 93% least today.
In addition to the U S Bank. The October activity also included a sizable new tenant lease with GE ever Nova a gallery of the park in Atlanta.
We need to fill the vacancy of the project and taking the lease percentage at our Galleria 600 building from a low of 34% in 2021 to approximately 93% leased today.
Speaker 4: I want to pause here for a moment and take note for investors that the Atlanta Galleria project is a great example of our strategic operating formula at work. While the buildings were initially 1980 and 1990 vintage assets, we have reimagined, remodeled, and redeveloped the 2.1 million square foot project over the past several years and generated a substantial amount of lease.
I want to pause here for a moment and take note for investors that the Atlanta Galleria project is a great example of our strategic operating Formula at work. While the buildings were initially 1980, a 1990 vintage assets, we have re imagine remodeled and redevelop the $2 1 million square foot project over the past several years in general.
There's a substantial amount of leasing at.
Speaker 4: At the project, we've experienced approximately 250,000 square feet absorption and rental rate growth of more than 10% in the last 18 months, and now stand at roughly 90% least, I would add that we have about 200,000 square feet of vacancy remaining at the project with continued strong demand.
That's a project we've experienced approximately 250000 square feet absorption and rental rate growth of more than 10% in the last 18 months and now stand at roughly 90% leased I would add that we have about 200000 square feet of vacancy remaining at the project with continued strong demand.
Speaker 4: It's an example of how our miniatized, well-located, high-quality assets continue to lead the respective submarkets and leasing activity. I believe public investors need to understand that the top five to ten office assets in any given submarket continue to perform very well despite the market malaise.
It's an example of how our many ties well located high quality assets continue to lead their respective submarkets in leasing activity.
I believe public investors need to understand that the top five to 10 office assets in any given sub market continued to perform very well despite the market malaise.
Finally, the strong start to the fourth quarter leasing reinforces our optimism to reach our goal of approximately 87% leased at year end and demonstrates the continuing demand for highly of many ties well located office space owned by a sustainability focused and financially stable landlord.
Speaker 4: Returning to our operating results, we continue to experience growth in property operating income as compared to the prior period. However, that growth was offset by continued elevated interest costs, which Bobby will discuss further.
Turning to our operating results, we continue to experience growth in property operating income as compared to the prior period.
However that growth was offset by continued elevated interest costs, which Bobby will discuss further.
Speaker 4: In summary, we continue to be optimistic about our value proposition for our customers and our ability to garner outsize demand from small and medium sized businesses, as well as larger non-tech corporate tenants.
In summary, we continue to be optimistic about our value proposition for our customers and our ability to garner outsized demand from small and medium sized businesses as well as larger non tech corporate tenants.
We also continue to be encouraged by large corporations, increasing there will return to office stands.
Speaker 4: We're starting to see many larger, primarily technology-related tenants that initially seized upon the hybrid FlexWorks model, now beginning to realize the productivity and collaboration lost outside the office.
We're starting to see many larger primarily technology related tips than initially seized upon the hybrid flex works model now beginning to realize the productivity and collaboration lost outside the office.
Speaker 4: One of the most notable return to office announcements being made this quarter is by Zoom. In addition to other announcements and comments from Salesforce, Amazon, and Google to bring team members back to the office to collaborate.
One of the most notable returned to obviously announcements being made this quarter was about zoom. In addition to other announcements and comments from Salesforce, Amazon and Google to bring team members back to the office to collaborate so.
Speaker 4: So while fundamentals will continue to remain challenging in select submarkets, high quality assets are performing well. The lack of leasing is being witnessed predominantly at lower quality BNCS.
So while fundamentals will continue to remain challenging in select Submarkets high quality assets are performing well the lack of leasing is being witnessed predominantly at lower quality B and C assets, which are experiencing the majority of the reported vacancies and sub leasing availabilities.
Speaker 4: As JLL recently reported, after analyzing its vast data set of office buildings comprising over 2.7 billion rentable square feet across the top 25 MSAs,
As J O L recently reported.
After analyzing its fast dataset of office buildings, comprising over $2 7 billion rentable square feet across the top 25 msas.
Speaker 4: 50% of the sector's vacancy is concentrated in the bottom 10% of the office stock. I wanna say that again. 50% of the sector's vacancy is concentrated in the bottom 10% of the office stock.
50% of the sectors vacancy is concentrated in the bottom 10% of the office stock I want to say that again.
Ft per cent of the sectors vacancy is concentrated in the bottom 10% of the office stock.
Speaker 4: So while some of Piedmont's assets may incur temporary vacancy as some larger tenants right size their space, would you not own assets positioned in this lower tier of the market?
So while some of Piedmont assets may incur temporary vacancy as some larger tenants rightsize their space, we do not own the assets positioned in this lower tier of the market.
Speaker 4: And after leasing almost 7 million square feet since the pandemic, I believe we've demonstrated an ability to backfill vacancy with new tenants despite the difficult market backdrop.
And after leasing almost 7 million square feet since the pandemic I believe we've demonstrated an ability to backfill vacancy with new tenants despite the difficult market backdrop.
Switching topics I want to note that we received our new grid scores during the quarter. This was only our second submission and I'm very pleased to report received the highest sustainability rating of five stars and our second Green Star rating based on 2022 performance.
Speaker 4: Switching topics, I want to note that we received our new GRESB scores during the quarter. This was only our second submission.
Speaker 4: And I'm very pleased to report received the highest sustainability rating of five stars and our second green star rating based on 2022 performance.
Speaker 4: At this time, I'll hand the call over to George, who will go into more details around the corner.
At this time I'll hand, the call over to George who will go into more details around the corner.
Thanks, Brent good morning, everyone.
Speaker 5: Thanks, Brent. Good morning, everyone. Demand for PMI's high-quality assets has produced another quarter of solid operational results. As we've seen for the past two years, small users from a broad range of industries are fueling our leasing success. Outside of one full-floor new deal in Minneapolis that I'll highlight in just a moment, the average size of new deal activity was around 6,500 square feet.
Demand for Piedmont high quality assets has produced another quarter of solid operational results as we've seen for the past two years small users from a broad range of industries are fueling our leasing success outside of one full floor new deal in Minneapolis, but I'll highlight just the Malvern <unk>.
Average size of new deal activity was around 6500 square feet.
Speaker 5: These tenants are attracted to our competitively priced offerings, citing their ease of accessibility, vast amenity-based, unique tenant engagement programming and best in class conference facilities.
These tenants are attracted to our competitively priced offerings, citing their ease of accessibility Bath amenity base unique tenant engagement programming and best in class conference facilities.
Speaker 5: Overall, it's quarter. We had another strong leasing performance with 45 least transactions completed for just over 302,000 square feet of total overall volume.
Overall this quarter, we had another strong leasing performance with 45 lease transactions complete there for just over 300 in 2000 square feet of total overall volume.
Speaker 5: As Brent noted earlier, 170,000 square feet, or more than half of that total was related to new tenant lease activity and in line with our pre-COVID quarterly average and represents 7% of our overall direct vacancy.
Brent noted earlier 170000 square feet or more than half of that total was related to new tenant lease activity.
And in line with our pre Covid quarterly average and represents 7% of our overall direct vacancy.
Speaker 5: Continuing with operational metrics, our lease economics were also quite favorable with 11.7% and 10.3% roll-up or increase in rents for the quarter on a cash and an accrual basis respectively.
Continuing with operational metrics, our lease economics were also quite favorable with 11, 7% and 10, 3% roll up or increase in rents for the quarter on a cash and accrual basis, respectively.
Speaker 5: A weighted average lease term achieved on new lease activity for the quarter was over nine years.
Our weighted average lease term achieved on new lease activity for the quarter was over nine years.
Speaker 5: Due to our leasing success and low-level expirations, our lease percentage increased by 50 basis points to end the quarter at 86.7%. Nearly 80% of new tenant lease activity occurred in our Sunvale portfolio, where almost 70% of our vacancies reside. Retention rates remain consistent, coming in at 70%. No doubt a reflection of both our customer-centric service approach and high-quality, commute-worthy portfolio.
Due to our leasing success and low level explorations, our lease percentage increased by 50 basis points to end the quarter at 86, 7%.
Nearly 80% of new tenant lease activity occurred in our sunbelt portfolio were almost 70% of our vacancies reside.
Pension rates remained consistent coming in at 70% no doubt a reflection of both our customer centric service approach and high quality commute worthy portfolio.
Speaker 5: Leasing capital spend for the quarter with approximately $6.00, first square foot per lease here in line with the ravage for the past several quarters.
Leasing capital spend for the quarter was approximately $6 per square foot per lease year in line with the average for the past several quarters sublease.
Sublease availability has stayed steady for the past three years and today sits at four 6%.
Speaker 5: Lastly, in 11 of our customers expanded this quarter for a total of 38,000 square feet compared to four contractions of 20,000 square feet yielding a net gain of 18,000 square feet.
Lastly, 11 of our customers expanded this quarter for a total of 38000 square feet compared to four contractions of 20000 square feet, yielding a net gain of 18000 square feet.
Speaker 5: Now I'd like to highlight a few accomplishments and announcements which occurred in some of our operating markets this quarter.
Now I'd like to highlight a few accomplishments and announcements which occurred in some of our operating markets this quarter.
Speaker 5: Starting off with Minneapolis, home to our largest customer in Piedmont, Fort Folio, US.
Starting off with Minneapolis onto our largest customer and piedmont's portfolio U S Bank.
Speaker 5: Our downtown LEED Goal U.S. Corp Center, which was just recognized as a 2023 international COBE award-winning building, serves as the bank's global headquarters, and we're very pleased that a long-term relationship will continue under a 10-year lease extension for all of its space, or 447,000 square feet. As Brent noted, this lease was signed after quarter end.
Our downtown lead go U S Corp Centre, which was just recognized as a 2023 International Toby Award winning building.
Serves as the bank's global headquarters and we're very pleased with a long term relationship will continue under a 10 year lease extension for all of its space were 447000 square feet as Brent noted this lease was signed after quarter end.
Speaker 5: So this feels flat on a cash rollup basis. It represents a positive rollup on a girl basis and a strong commitment to downtown by one of many apps of largest employers.
So this deal was flat on a cash flow basis. It represents a positive roll up on accrual basis, and a strong commitment to downtown but one in Minneapolis largest employers.
Speaker 5: Unfortunately, and as we foreshadowed in past earnings calls, the bank will be moving its 340,000-square-foot suburban hub from our Lee and Meridian Gold Crossing complex and moving it a few miles away into its Excelsior Crossings location.
Unfortunately, and as we foreshadowed in past earnings calls the bank when removing is 340000 square foot sub urban pulp from our lean Meridian gold crossing complex and move into a few miles away into its Excelsior crosses location.
Speaker 5: As you may already know, we also know building within this well-planned three building complex, which was developed around a one acre park.
As you May already know, we also own a building within this well planned rebuilding complex, which was developed around a one acre park with a full range of onsite market competitive amenities and is easily accessible and highly visible from the highway.
Speaker 5: full range of on-site market competitive amenities and is easily accessible and highly visible from the highway.
Speaker 5: So the bank is still in planning stage. We've made it very clear to them that should they need additional space, our Excel sheur building will soon be vacated by a large building user there and become available to the first quarter of next year.
So the bank is still in the planning stage, we've made it very clear to them that should they need additional space. Our Excelsior building will soon be vacated by a large building use it there and become available during the first quarter of next year.
Speaker 5: As an aside, we currently plan to take our Excelsior building offline in the first quarter of 2024 to modestly reposition this asset for a multi-tenant lease-up strategy as small users continue to upgrade into high-quality availabilities vacated by large corporate users.
As an aside we currently plan to take our Excelsior building offline in the first quarter of 'twenty 'twenty four for modestly reposition this asset for a multi tenant lease up strategy is small users continue to upgrade into high quality availabilities vacated by large corporate users.
Speaker 5: And lastly, it's worth highlighting that the largest third quarter new deal in our portfolio is executed right here in the Minneapolis Metro.
Lastly, it's worth highlighting that the largest third quarter new deal in our portfolio was executed right here in the Minneapolis Metro.
Speaker 5: Our lead goal, Crescent Ridge asset security, 32,000 square foot headquarters lease with a financial services company. Needless to say, we're excited about the increase in momentum we're experiencing in this market.
Our lead go Crescent Ridge asset Securities 32000 square foot headquarters lease with a financial services company.
Operator: and welcome to the Piedmont Office Realty Trust Inc. 3rd quarter 2023 earnings call. At this time, all participants are on a listen only mode, and the flow will be open for questions and comments following the presentation.
He loves to say, we're excited about the increased momentum we're experiencing in this market.
Speaker 5: Atlanta, our largest market at almost 5 million square feet and generate 28% of our company's ALR, captured the most activity this quarter with 22 deals accounting for 150,000 square feet, of which nearly half were new lease.
Atlanta, our largest market at almost 5 million square feet and generated 28% of our company's ALR captured the most activity this quarter with 22 deals accounting for 153000 square feet of which nearly half were new leases.
Operator: If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded.
Speaker 5: Gallery on the Park, located in Northwestern Submarket, again was the main driver this quarter. And with the post-quarter execution of GE Vernova Southeast U.S. Hub, its lease percentage now is up in the low 90s, giving us the confidence to continue pushing rental rates.
Yes, Laurie on the park located in northwestern Submarket again was the main driver this quarter and what the post quarter execution of GE or know the southeast. She was hub is leased percentage is now is up in the low nineties, giving us the confidence to continue pushing rental rates.
Laura Moon: I will now turn the conference over to your host, Laura Moon. Mom, you may begin. Thank you operator. Good morning, everyone. We appreciate you joining us today for Piedmont 3rd quarter 2023 earnings conference call. Last night, we filed our form 10Q and an 8K that includes our earnings release and our unaudited supplemental information for the third quarter that is available for your review on our website at piedmontread.com under the investor relations section.
Speaker 5: Our next largest market, Dallas, also experienced strong demand. Second, most within our portfolio. A total of 15 deals are completely completed for almost 100,000 square feet with over half-recognized new deal activity.
Our next largest market Dallas also experienced strong demand.
Most within our portfolio a total of 15 deals were completed for almost 100000 square feet with over half representing new deal activity.
Speaker 5: According to the CBRE Research third quarter report, Dallas continues to outperform the U.S. and other large metros in employment growth, posting an oppressive 4.3% annual growth rate.
According to CBRE research third quarter report Dallas continues to outperform the U S and the other large metros in employment growth posting an impressive 4.3% annual growth rate.
Laura Moon: During this call, you will 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 Security's 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 that these forward looking statements are discussed in our press release as well as our SEC filings.
Speaker 5: Our project here, a well-positioned capture of Dallas, is growing appetite for high quality space.
Ah projects here are well positioned to capture Dallas is growing appetite for high quality space.
Speaker 5: Coming back to our overall portfolio, we remain positive about our future near-term leasing trends and operational performance.
Coming back to our overall portfolio, we remain positive about our future near term leasing trends and operational performance.
Speaker 5: Our leasing pipeline remained healthy with over 600,000 square feet already signed as
Our leasing pipeline remains healthy with over 600000 square feet already signed this month.
Laura Moon: We encourage everyone to review the more detailed discussion related to risk associated with forward looking statements in our SEC filings. Examples of forward looking statements include those related to Piedmont's feature revenues and operating income, dividends and financial guidance, feature financing 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 are based upon the information and estimates we have reviewed as of the date the statements are made.
Speaker 5: With the new 77,000 square foot lease with G Bernova and the 447,000 square feet renewal with UASPEG being the material transaction.
With the new 77000 square foot lease with GE for Nova and the 447000 square feet renew with you This bank b and a material transaction.
Speaker 5: Also this quarter, leasing activity continues to be at the same healthy pace we've seen for the past several quarters.
Also this quarter leasing activity continues to be the same healthy pace, we've seen for the past several quarters.
Speaker 5: activity as well as in line with our trail in 12 months coming in around 2 million square feet.
Proposal activity as well as in line with our trailing 12 months coming in around 2 million square feet.
With a limited amount of rent roll expiring during the fourth quarter, we expect positive that space absorption for the rest of the year, resulting in an anticipated year end lease percentage of around 87%.
Laura Moon: Also on today's call, representatives of the company may refer to certain non-gap financial measures such as FFO, Core FFO, AFFO and St. Store NOI. The definitions and reconciliation that these non-gap measures are contained in the earnings release and in the supplemental financial information which were filed last night.
Speaker 5: I now turn the call over to Chris Coleman for any comments on the Desmond Activity. Chris.
I'll now turn the call over to Chris Conway for any comments on investment activity.
Chris.
Speaker 6: Thank you George. I'll be brief as generally speaking, market activity remains muted, given the extraordinarily challenging financing environment.
Thank you George I'll be brief as generally speaking market activity remains muted given the extraordinarily challenging financing environment.
Speaker 6: However, I did want to provide a quick update on our two assets in Houston, which have been under control.
Brent Smith: At this time, our president and Chief Executive Officer Brent Smith will provide some opening comments regarding third quarter operating results. Brent? Thanks, Laura, and good morning everyone. Before we get into the call, I would be remiss if I did not acknowledge that you all heard a different voice reading the introduction this morning.
However, I did want to provide a quick update on our two assets in Houston, which had been under contract.
Speaker 6: Both sides made every effort to execute, but at the end of the day, the buyers were unable to secure a suitable capital structure, and we recently agreed to terminate the transaction.
Besides made every effort to execute but at the end of the day. The buyers were unable to secure a suitable capital structure and we recently agreed to terminate the transaction.
Speaker 6: We'll continue to explore other alternatives for the potential disposition of these assets at a later date.
We'll continue to explore other alternatives for the potential disposition of these assets at a later date.
Brent Smith: As most of you know, Eddie Gilbert, our EVP of finance and treasure, and someone we all proudly call a friend and esteemed colleague has voluntarily resigned from his position at Piedmont. Eddie has been one of our most trusted, dependable and dedicated teammates for over 16 years and he made immeasurable contributions towards the advancement of Piedmont. He will be sorely missed by all of us.
Speaker 6: As for the balance of our activity, we continue discussions on select non-core assets, including some of our non-strategic land parcels, but it is far too early to speculate given the current market backdrop.
As for the balance of our activity, we continue discussions on select non core assets, including some of our non strategic land parcels, but it's far too early to speculate given the current market backdrop.
Brent Smith: Eddie will stay on as a consultant for a period of time to ensure seamless transition. And Laura Moon, our Chief Accounting Officer and Jennifer Henderson, our VP of Financial Planning and Analysis, will be taking on most of Eddie's responsibilities.
Speaker 6: As always, we'll keep you informed of any material activity on the front.
As always we will keep you informed of any material activity on this front.
Speaker 6: As we have said now for several quarters, any resulting sale proceeds will be earmarked for the reduction of debt.
As we have said now for several quarters, any resulting sale proceeds will be earmarked for the reduction of debt.
Speaker 6: With that, I'll turn the call over to Bobby to review our financial results. Bobby?
With that I'll turn the call over to Bobby to review our financial results Bobby.
Thanks, Chris.
Speaker 6: While we'll be discussing some of this period's financial highlights today, I encourage you to please review the entire earnings release, the 10-Q, and the accompanying supplemental financial information, which were filed yesterday, for more complete detail.
Brent Smith: Okay, so now on with the quarterly call. I want to thank everyone for joining us today as review our third quarter results. In addition to Laura and the line with me this morning, our George Wells, our Chief Operating Officer, Chris Coleman, our EVP of Investments, and Bobby Bowers, our Chief Financial Officer. Officer. We also have the usual full complement of our management team available to answer your questions.
We will be discussing some of this period's financial highlights today.
I encourage you to please review the entire earnings release, the 10-Q and the accompanying supplemental financial information, which were filed yesterday for more complete details.
Speaker 7: 4FFO, per deluded chair for the third quarter of 2023, was 43 cents per share versus 50 cents per deluded chair for the third quarter of 2022. With the current quarter reflecting approximately 8 cents per share of increased interest expense as compared to the third quarter of last year.
Core <unk> per diluted share for the third quarter of 2023 was 43 cents per share versus <unk> 50 cents per diluted share for the third quarter of 2022 with.
Brent Smith: I'd like to start with our leasing results, both what was completed during the quarter, as well as some significant activity that was completed during October. Total leasing for the third quarter was approximately 302,000 square feet and included roughly 170,000 square feet of new tenant leasing, our leavens consecutive quarter of new tenant leasing at or above pre-COVID levels, resulting in net absorption during the third quarter. The average size lease executed was approximately 13,000 square feet with a way to average lease term of approximately seven years and reflected double digit rollups on renewals on both a cash and a cruel basis.
With the current quarter, reflecting approximately eight cents per share of increased interest expense as compared to the third quarter of last year.
Speaker 7: The delusion related to the higher interest cost was partially offset by the operational growth that Brent alluded to, resulting from successful leasing efforts, rising rental rates, and asset recycling over the past year.
The dilution related to the higher interest costs was partially offset by the operational growth that Brett alluded to resulting from successful leasing efforts rising rental rates and asset recycling over the past year.
Speaker 7: As previously announced, given the significant increase in interest costs that we're all currently experiencing,
As previously announced given the significant increase in interest costs that we're all currently experiencing.
Speaker 7: We reduced our annual dividend from 84 cents per share to 50 cents per share beginning with the third quarter of 2023, which approximates our forecasted taxable income over the next year or two.
We reduced our annual dividend from 84 cents per share to 50 cents per share beginning with the third quarter of 2023, which approximates our forecasted taxable income over the next year or two.
Brent Smith: As anticipated, same store NOI on a cash and a cruel basis continued to strengthen during the third quarter as new leases commencing and or those with expiring abatements began to outweigh expiration that occurred earlier in the year.
Speaker 7: This reduction in dividend will lower the usage of AFFO and increase available cash by approximately $42 million on an annual basis.
This reduction in dividend will lower the usage of a F F O and increase our available cash by approximately $42 million on an annual basis <unk> generated during the third quarter of 2023 was $40 million or 160 million on an annualized basis.
Brent Smith: All in all, it was another solid quarter of leasing and perhaps the most exciting news occurred just after the end of the quarter. And that is the execution of over 600,000 square feet of leasing thus far in October. The bulk of that leasing related to the renewal of the largest of the upcoming US bank lease expiration that being US banks renewal its entire 447,000 square foot headquarters location at our lead gold US bank quarter center asset in downtown Minneapolis.
Speaker 7: AFFO generated during the third quarter of 2023 was $40 million or $160 million on an annualized basis, adequately providing for dividend coverage and foreseeable capital needs.
Adequately providing for dividend coverage and foreseeable capital needs.
Speaker 7: Turning to the ballot sheet. As we've mentioned many times, the key component of our leasing formula is that our ballot sheet and liquidity remain strong. A differentiating factor as prospective tenants scrutinize the capital structure of a potential future office building and the landlord. We believe this differentiation among office product is driving increased market share for the highest quality place making assets and will capitalize landlord.
Turning to the balance sheet.
As we've mentioned many times a key component of our leasing formula is that our balance sheet and liquidity remains strong a differentiating factor as prospective tenants scrutinize the capital structure of a potential future office building and the landlord. We believe this differentiation among office product.
Brent Smith: We were very pleased with the outcome with our largest tenant and strategic financial partner. While it was a lengthy process, we were grateful as the bank, which has been an anchor tenant, the building for the past 20 years has chosen renew with us for another 10 years George will give some additional color on this outstanding lease in a moment. In addition to the US bank, the October activity also included a sizeable new tenant lease with GE vernova a gallery on the park and Atlanta continuing to fill the vacancy of the project and taking the least percentage at our gallery at 600 building from a low of 34% in 2021 to approximately 93% lease today.
It's driving increased market share for the highest quality place, making assets and well capitalized landlords.
Speaker 7: We covered the five-year $400 million financing activity that occurred early in the third quarter in detail in conjunction with last July's quarterly call, which addressed a majority of our 2024 final debt maturity.
We've covered the five year 400 million dollar financing activity that occurred early in the third quarter in detail in conjunction with last July's quarterly call.
Which address the majority of our 2024 final debt maturities.
Brent Smith: I want to pause here for a moment and take note for investors that the Atlanta gallery project is a great example of our strategic operating formula at work. While the buildings were initially 1980 and 1990 vintage assets, we have reimagined remodeled and redeveloped the 2.1 million square foot project over the past several years and generated a substantial amount of leasing. At the project, we've experienced approximately 250,000 square feet absorption and rental rate growth of more than 10% in the last 18 months and now stand at roughly 90% least.
Speaker 7: Through a bond tender offer, we utilize the majority of the new financing proceeds to repurchase approximately 350 million of the maturing 400 million 2024 bonds.
Through a bond tender offer we utilize the majority of the new financing proceeds to repurchase approximately 350 million album.
Maturing 400 million 2024 bonds.
Speaker 7: And the remaining $50 million in proceeds was used to pay down our $600 million revolver.
And the remaining $50 million in proceeds was used to pay down our $600 million revolver.
Speaker 7: We currently anticipate repaying the untendered $50 million balance of the 2024 bonds that mature in March of next year using either disposition proceeds, if available, or our line of credit, which currently has around $450 million of capacity today.
We currently anticipate repaying the untendered $50 million balance after 2020 for bonds that mature in March of next year using either disposition proceeds if available or our line of credit, which currently has around $415 million of capacity today.
Brent Smith: I would add that we have about 200,000 square feet of vacancy remaining at the project would continue strong demand. It's an example of how our miniatized well located high quality assets continue to lead the respective submarkets and leasing activity.
Looking into 2024, we anticipate exercising extension options, where applicable on outstanding Bank term debt and therefore, we don't anticipate having any final debt maturities in 2024.
Speaker 7: Looking into 2024, we anticipate exercising extension options where applicable on outstanding bank term debt. Therefore, we don't anticipate having any final debt maturities in 2024. That said,
Brent Smith: I believe public investors need to understand that the top 5 to 10 office assets in any given sub market continue to perform very well despite the market malaise. Finally, the strong start to the fourth quarter leasing reinforces our optimism to reach our goal of approximately 87% lease at year end and demonstrates the continuing demand for highly miniatized well located office space owned by a sustainability focused and financially stable land.
That said, we will remain flexible any proceeds generated from dispositions or other financings will be used to pay down our bank term debt.
Speaker 7: Any proceeds generated from dispositions or other financings will be used to pay down our bank term debt.
Speaker 7: In regard to our outlook for 2023, as we've seen in all the headlines, the general expectation in the market is that interest rates will remain now higher for longer.
In regard to our outlook for 2023.
As we've seen it all the headlines the general expectation in the market is that interest rates will be.
Remain now higher for longer.
Brent Smith: We're turning to our operating results. We continue to experience growth and property operating income as compared to the prior period. However, that growth was offset by continued elevated interest costs, which Bobby will discuss further. In summary, we continue to be optimistic about our value proposition for our customers and our ability to go on our outsize demand from small and medium sized businesses, as well as larger non-tech corporate tenants. We also continue to be encouraged by large corporate operations, increasing their return to office stance.
Speaker 7: Therefore, although we still feel good about the Core FFO per share range that we've previously provided, that being $1.74 to $1.80 per share, interest rates have not declined as previously anticipated on Ford yield curve.
Therefore, although we still feel good about the core <unk> per share range that we've previously provided they're paying $1 74 to $1 80 per share interest rates have not declined as previously anticipated on forward yield curves.
Speaker 7: With these higher interest rates, we anticipate ending up at the lower end of our previously provided core FFO per share guidance range for the year, which is in line with FACSET's consensus estimates.
With these higher interest rates, we anticipate ending up at the lower end of our previously provided core <unk> per share guidance range for the year, which is in line with Factset consensus estimates.
Brent Smith: We're starting to see many larger primarily technology related tenants that initially seized upon the hybrid flex works model, now beginning to realize the productivity and collaboration lost outside the office. One of the most notable return to office announcements being made this quarters by zoom in addition to other announcements and comments from Salesforce Amazon and Google to bring team members back to the office to collaborate. So while fundamentals will continue to remain challenging and select submarkets, high quality assets are performing well. The lack of leasing is being witnessed predominantly at lower quality B and C assets, which are experiencing the majority of the reported vacancies and sub leasing availability.
Speaker 7: As most of you know, we typically publish annual guidance after we've completed the budget cycle during the fourth quarter each year and announce our core FFO guidance for a new year in early February during our quarterly earnings call.
As most of you know we typically publish annual guidance. After we've completed the budget cycle during the fourth quarter, each year and announce our core <unk> guidance for a new year in early February during our quarterly earnings call.
Speaker 7: We expect to follow this same process for 2024 guide.
We expect to follow the same process for 2020 for guidance.
Speaker 7: As George and Brent noted, our core business, that is leasing, has been strong throughout the year with over two million square feet of executed leases completed thus far for this year, including what we expect to be the highest amount of new tenant leasing since 2016.
As George and Brent noted our core business that is leasing has been strong throughout the year with over 2 million square feet of executed leases completed thus far for this year, including what we expect to be the highest amount of new.
New tenant leasing since 2016 I.
Brent Smith: As JLL recently reported, after analyzing its vast data set of office buildings comprising over 2.7 billion rentable square feet across the top 25 MSAs, 50% of the sector's vacancy is concentrated in the bottom 10% of the office stock. I want to say that again, 50% of the sector's vacancy is concentrated in the bottom 10% of the office stock. So while some of P-month assets may incur temporary vacancy as some larger tenants to right size their space, would you not own assets positioned in this lower tier of the market?
Speaker 7: I couldn't be more proud of the team having eclipsed 2022's new leasing volumes with two months still remaining in the year.
I couldnt be more proud of the team, having eclipse 2020, twos, new leasing volumes with two months still remaining in the year.
Speaker 7: While we have a few known move outs in 2024, we've addressed our largest lease renewal with U.S. banks.
While we have a few known move outs in 2024, we've addressed our largest lease renewal with U S Bank.
Brent Smith: And after leasing almost 7 million square feet since the pandemic, I believe we've demonstrated an ability to backfill vacancy with new tenants despite the difficult market backdrop.
Speaker 7: and we are seeing good activity on most of the other available spaces.
And we are seeing good activity or most of the other available spaces.
Speaker 7: Excluding now known the known outcome of US bank.
Excluding now known they know the outcome of U S Bank.
Speaker 7: We have approximately 10% of the portfolio remaining to expire between now and the end of 2024.
We have approximately 10% of the portfolio remaining to expire between now and the end of 2024.
Speaker 7: Offsetting this, we currently have also 1.1 million square feet of leases in abatement or yet to commit.
Offsetting this we currently have also 1.1 million square feet of leases in abatement are yet to commence.
Speaker 7: That said, higher interest rates, the possibility of a few small dispositions to pay down debt, and downtimes between a handful of lease expirations and corresponding new lease commitments will weigh on 2024 results.
Brent Smith: Switching topics, I want to note that we received our new GREZB scores during the quarter. This was only our second submission, and I'm very pleased to report received the highest sustainability rating of five stars and our second green star rating based on 2022 performance.
That said.
Interest rates the possibility of a few small dispositions to pay down debt.
And downtime between a handful of lease explorations and corresponding new lease commitments will weigh on 2024 results.
George Wells: At this time, I'll hand the call over to George, who will go into more details around the corner. Thanks, Brent.
Speaker 7: We expect to provide complete guidance for 2024 in early February .
We expect to provide complete guidance for 2024 in early February.
Speaker 7: With that, I'll turn the call back over to Brent for closing comments.
George Wells: Good morning, everyone. Demand for P-month high quality assets has produced another quarter of solid operational results. As we've seen for the past two years, small users from a broad range of industries are fueling our leasing success outside of one full-floor new deal to Minneapolis, but I'll highlight in just a moment. The average size of new deal activity was around 6,500 square feet. These tenants are attracted to our competitively priced offerings, citing the ease of accessibility, vast amenity base, unique tenant engagement programming and best in class conference facilities.
With that I'll turn the call back over to Brent for closing comments.
Speaker 4: Thank you, George Chris and Bobby. At Piedmont, we continue to be encouraged by the resiliency of our leasing pipeline. As we've talked about today, the success we've had your today is tremendous. Having now eclipse 2022 in new leasing volumes and with two months still remaining in the year and given our strong start to the final quarter, we feel confident in achieving the annual lease percentage and same store goals that we've outlined previous.
Thank you George Chris and Bobby.
At Piedmont, we continue to be encouraged by the resiliency of our leasing pipeline as we've talked about today. The success. We've had year to date is tremendous having now eclipse 2022, new leasing volumes and with two months still remaining in the year and given our strong start to the final quarter, we feel confident in achieving the annual lease <unk>.
<unk> in the same store goals that we've outlined previously.
Speaker 4: Same story NOI is expected to be between 0 and 4% up with Caction OI at the heart end of the range and a cruel basis in the NOI near the lower end.
Same store NOI is expected to be between zero and 4% up with cash NOI at the higher end of the range and accrual basis NOI near the lower end.
George Wells: Overall, this quarter, we had another strong leasing performance with 45 lease transactions completed for just over 302,000 square feet of total overall volume. As Brent noted earlier, 170,000 square feet or more than half of that total was related to new tenant lease activity and in line with our pre-COVID quarterly average and represent 7% of our overall direct vacant. Continuing with operational metrics, our least economics were also quite favorable with 11.7% and 10.3% roll-up or increase in rents for the quarter on a cash and on a cruel basis respectively.
Speaker 4: Certainly, the elevated interest rate environment will weigh on earnings and FFO and the financing environment continues to mute transactional activity.
Certainly the elevated interest rate environment will weigh on earnings in <unk> and the financing environment continues to mute transactional activity. Despite these headwinds we believe that the flight to quality occurring in the market combined with P bought strategy of providing premier workspaces at meaningfully lower rental rates versus new construction will continue to resonate with.
Speaker 4: We believe that the flight to quality occurring in the market combined with P-Mont's strategy of providing premier work spaces at at mainly lower rental rates versus new construction will continue to resonate with the market and lead the leasing success.
The market and lead to leasing success with that I will now ask the operator to provide our listeners with instructions and 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.
Speaker 8: With that, I will now ask the 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 will make appropriate later public disclosure of necessary operator. Thank you.
Thank you.
At this time, we will be conducting a question and answer session.
Speaker 2: If you would like to ask a question, please press star 1 on your telephone keypad.
If you would like to ask a question. Please press star one on your telephone keypad.
George Wells: 10 of new, 10 at least activity occurred in our Sun Belt portfolio. We're almost 70% of our vacancies reside. The pension rates remain consistent coming at 70%. No doubt a reflection of both our customer-centric service approach and high quality commute worthy portfolio. Leasing capital spend for the quarter was approximately $6 per square foot per lease year in line with a ravage for the past several quarters. Sub-lease availability has paid steady for the past three years and today sits at 4.6%. Lastly, 11 of our customers expanded this quarter for a total of 38,000 square feet compared to four contractions of 20,000 square feet yielding a net gain of 18,000 square feet.
Speaker 2: confirmation tone will indicate your line is in the question.
A confirmation tone will indicate your line is in the question Keith.
Speaker 2: You may press star 2 if you would like to remove your question.
You May press Star two if you would like to remove your question from the queue.
Speaker 2: for participants using speaker equipment and maybe necessary to pick up your handset before pressing the star keys. One moment please.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Thank you our.
Speaker 2: Our first question is coming from Ray Zhang with JP Morgan. Your line is.
Our first question is coming from raise young with J P. Morgan Your line is nice.
Speaker 9: Good morning guys, thanks for taking my question and congrats for the downtown beast with US bandcorp. On that, that's my first question. Any color you guys can give on a catpacks on the renewal for that space? I think you guys gave it range historically, but I just want to, you know, get a little more color on this specific one if you guys can.
Good morning, guys. Thanks for taking my question and congrats for the downtown lease with U S. Bancorp on that that's my first question any color you guys can give on the capex on the renewal, whereas space. I think you guys gave a range historically, but just want to get a little more color on this specific one if you guys can.
George Wells: Now I'd like to highlight a few accomplishments and announcements occurred in some of our operating markets this quarter. Starting off with Minneapolis, home to our largest customer in Piedmont, Fort Folio, U.S. Bank, our downtown lead goal U.S. Corp Center, which was just recognized as a 2023 International Toby Award-winning building serves as a bank's global headquarters and we're very pleased that a long-term relationship will continue under 10 years, lease extension for all of its space for 447,000 square feet.
Speaker 10: This is George Wells, and good morning.
Certainly raise this is George wells and good morning.
Speaker 5: That transaction, which, as you've been following, has been going on for multiple years, and that user has also been going through a fair amount of space planning and trying to reimagine what the work space is going to look like.
<unk> action, which as you've been following this has been going on for multiple years and that users ultimately go into a fair amount of space planning and trying to re imagine what the workspace is going to look like so.
Speaker 10: So that being said, we ended up having, I would say more of a new type of tenant improvement so they could redesign their space and encourage their employees to come back to the office. But it certainly was well within the range of market that you would expect on a year-per-year basis, and not too far off and we'll be purported in ourselves.
So that being said it is.
We ended up having I would say more of a new type of tenant improvements or they can redesign their space and encourage our employees to come back to the office, but it certainly was well within the range of market that you would expect on a year over year basis, and not too far from what we reported in ourselves.
George Wells: As Brent noted, this lease was fine after quarter-end. Though this field is flat on a cash roll-up basis, it represents a positive roll-up on a grow basis and a strong commitment to downtown by one of many apps of largest employers. Unfortunately, and as we foreshadowed in past earnings calls, the bank will be moving as 340,000 square foot sub-urban pubs from our lean-ridden goal crossing complex and moving a few miles away into its excelsior crosses location.
Speaker 5: I would add to that Ray and thanks for joining this morning. Again, as we've talked about previously on a cash basis, it was basically flat, which was positive, but there was no free rent in the transaction.
I would add ray and thanks for joining us this morning.
Again, as we've talked about previously on a cash basis. It was basically flat, which was positive but there was no free rent and the transaction. So as George alluded to kind of I would consider at market level.
George Wells: As you may already know, we also own a building within this well-planned three-building complex which was developed around a one-acre park with a full range of onsite market competitive amenities and is easily accessible and highly visible from the highway. Though the bank is still in planning stage, we've made it very clear to them that should they need additional space, our excelsior building will soon be vacated by a large building user there and become available in the first quarter of next year.
Approaching that triple digit figure. However, there was no free rent in the transaction and so I think that was ultimately a positive also taken a step back as we think about kind of what we had guided to the street on that we had thought initially it would probably be 50 50 in each location. It turns out that it was 100% downtown in it.
Speaker 11: So I was thinking of step back as we think about kind of what we had guided to the street on that. You know, we had thought initially of probably 50-50 in each location. Turns out that it was 100% downtown and, and unfortunately, a gift back in the suburbs. But I think as we think strategically about the market, there is much greater depth from a tenant need, if you will, in the suburbs than downtown right now and demand is much stronger as we witness just this quarter getting a 32,000 square foot lease in that market and seeing continued good demand. So if we were going to get back space, I think that's overall the positive spin to the ultimate outcome there. And we feel pretty great about keeping US Bank deep relationship strategic financing partner of ours as well. And they're going to be really supporting downtown Minneapolis, which is important right now as the city recuperates from that. But great news is we're also going to have that best building in that sub market, certainly from existing build top three with a phenomenal amenity set at the top, which US Bank loves. And a light refresh on the lobby just to continue to improve and enhance the retail experience, which we think is going to continue to be able for us to, to garner the best asset and good demand downtown as well. So what we may be musical chairs, they'll be coming to our building, which is often what we're seeing now across the country in our markets. I'll pause there. Any other follow-up questions? Yeah. Just to follow up. On that on a suburb stage. So it sounds like you wouldn't be out.
Fortunately I give back in the suburbs, but I think as we think strategically about the market. There is much greater depth from a tenant.
George Wells: As an aside, we currently plan to take our excelsior building offline in the first quarter of 2024 to modestly reposition this asset for a multi-tenant lease of strategy. The small users continue to upgrade into high-quality availability, vacated by large corporate users. And lastly, it's worth highlighting that the largest third quarter new deal in our portfolio was executed right here in the Minneapolis Metro. Our lead goal, Crescent Ridge asset security, 32,000 square foot headquarters lease with a financial services company.
Need if you will in the suburbs in downtown right now and demand is much stronger as we witnessed this quarter getting a 32000 square foot lease.
Suburban market and is seeing continued good demand. So if we were going to get back space I think that's overall the positive spin to the ultimate outcome, there and we feel pretty great about keeping U S bank deep relationship strategic financing partner of ours, as well and theyre going to be really supporting downtown Minneapolis, which is important.
Right now as the city recuperate from that.
George Wells: Needless to say, we're excited about the increase momentum we're experiencing in this market. Atlanta, our largest marketer, almost five million square feet and generate 28% of our companies, ALR, captured the most activity this quarter with 22 deals accounting for 150,000 square feet, of which nearly half are new leases. The confidence to continue pushing rental rates. Our next largest market, Dallas also experienced strong demand, second most within our portfolio, a total of 15 deals are completed for almost 100,000 square feet with over half representing new deal activity.
We're also going to have the best building in that sub market and certainly from the existing build top III.
With a phenomenal many said at the top which you would think luvs in a light refresh on the lobbyist to continue to improve and enhance the retail experience, which we think is going to continue to be able for us to garner the best asset in good demand downtown as well. So what we may be musical chairs there'll be coming into our building, which is often what we're <unk>.
Seeing now across the country.
In our markets.
Speaker 4: I'll pause there. Any other follow-up questions?
Pause there any other follow up questions.
Speaker 9: Yeah, just to follow up on that on the suburb space. So it sounds like you wouldn't be out of service and kind of just in the market and getting new tenants that's the plan for the suburb space for now, or maybe I missed it, it would be out of service a bit.
Yeah, just to follow up on that on a suburb stage. So it sounds like.
You wouldn't be out of service and kind of just in the market and getting new tenants.
Planning for the suburb space for now or is it or maybe I missed it it will be out of service like that.
George Wells: According to the CBRE Research Third Quarter Report, Dallas continues to outperform the U.S, and other large metros in employment growth, posting an oppressive 4.3% annual growth rate. Our projects here are well positioned to capture Dallas' growing appetite for high quality space.
Speaker 4: That's a great question and follow-up, Ray, and thanks for letting me tag-team on that. The Cargill building, or as we call it, Excelsior Crossings, as you know, they're going to be vacating the first day of next year. That space will likely be put into redevelopment in 24. It's a, I'd call it a little bit larger floor plate than the Meridian Crossings building, which is smaller, which suits the Meridian building a little bit better. We think it may have a little bit more lease-up velocity. So the Excelsior building we're going to put into redevelopment. It needs a light refresh, call it maybe $5 to $10 a foot, and then we'll start to market the building more fruitfully into the market. And we've already seen, actually, good traction at our Meridian Crossings building. Obviously, we're planning for a little bit more of an amenity set guided towards one user. We're pivoting on that, so we're not really certain exactly if we will or will not put it in the redevelopment pool. But we're in the mindset of making more of a multi-tenanted amenity set. The good news is we've actually already seen good traction at that property, and we've signed a 10,000 square foot backfill lease already with a user as part of our October total that you've seen. So overall, again, we think that building is really well positioned at the corner of 494 and 35 West.
That's a great question and follow up thanks.
Thanks for letting me tag team on that the Cargill building or as we call. It Excelsior crossings as you know they are going to be vacating first day of next year.
That space will likely be put into redevelopment in 'twenty four it's a I'd call it a little bit larger floor plate in the meridian crossings building, which is smaller which Susan the meridian building a little bit better. We think it may have a little bit more lease up velocity. So the Excelsior building, we're going to put into redevelopment it needs a light refresh call. It maybe five to 10.
George Wells: Coming back to our overall portfolio, we remain positive about our future near-term leasing trends and operational performance. Our leasing pipeline remains healthy, with over 600,000 square feet already signed this month, with the new 77,000 square foot leased with Jebrenova and the 447,000 square feet renew with U.S. Bank being the material transaction. Also this quarter, leasing activity continues to be in the same healthy pace we've seen for the past several quarters, proposal activity, as well as in line with our trillion 12 months, coming in around 2,000,000 square feet. With the limited amount of rent-rolled expiring during the fourth quarter, we expect positive net space absorption for the rest of the year, resulting in an anticipated year at least percentage of around 87%.
A foot.
And then we'll start to market the building more fruitfully into the market and we've already seen actually good traction at our ingredient crossings building, obviously, we're planning for a little bit more of a minute. He said guided towards one user.
We're pivoting on that so we're not really certain exactly if you will or will not put into the redevelopment pool, but we're of the mindset of making more of a multi tenanted amenity said the good news is we've actually already seen good traction at that property and we've signed a 10000 square foot backfill lease already where the user is part of our October total that you've seen.
Chris Coleman: I'll now turn the call over to Chris Coleman for any comments on investment activity. Chris. Thank you, George.
Chris Coleman: I'll be brief, as generally speaking, market activity remains muted, given the extraordinarily challenging financing environment. However, I did want to provide a quick update on our two assets in Houston, which have been under contract. Both sides made every effort to execute, but at the end of the day, the buyers were unable to secure a suitable capital structure, and we recently agreed to terminate the transaction. We'll continue to explore other alternatives for the potential disposition of these assets at a later date.
So overall, we think that building is really well positioned in the quarter of 494 at <unk> 35, West for signs very I'd say accessible right off the highway walkable to the number of restaurants and more importantly, probably in the Minneapolis market. It's a five to 10 minute drive to France Avenue in pretty much any restaurant you can imagine.
Speaker 4: four signs, very, you know, I'd say accessible right off the highway, walkable to the number of restaurants, more importantly, probably the Minneapolis market, is a five and 10 minute drive to France Avenue and pretty much any restaurant you could imagine. So ultimately, we think that gets great traction in the marketplace along with our Excel Sierra building, but at least for now, we know the Excel Sierra building will be going into the 24 redevelopment.
So ultimately we think that gives great traction in the marketplace, along with our Excelsior building, but at least for now and we know the Excelsior building will be going into the 'twenty four redevelopment pool.
Chris Coleman: As for the balance of our activity, we continue discussions on select non-core assets, including some of our non-strategic land parcels, but as far too early to speculate, given the current market backdrop. As always, we'll keep you informed of any material activity on this front. As we have said now for several quarters, any resulting sale proceeds will be earmarked for the reduction of debt.
Speaker 9: Got it. And if I may, just one follow up, since we touch on US bank and cargo, any update on the Amazon lease, any incremental color you can provide, I know they have a couple of different leases and different spots and just any, you know, early conversation color you can provide will be helpful.
Got it and then if I may just one follow up since we touch on USA and cargo.
Any update on the Amazon lease any incremental color you can provide I know there are a couple of different pieces in different spots and just just any.
Early conversation color you can provide will be helpful.
Speaker 4: Absolutely. You know, just like our Meridian buildings, which are LEED Gold, our Amazon buildings in Northern Virginia is also LEED Gold. That's where Amazon takes about 60,000 square feet. And as we've noted, they will be vacating at the end of the first quarter.
Absolutely.
Just like our meridian buildings, which are LEED gold or Amazon buildings in Northern Virginia is also legal that's where Amazon takes about 60000 square feet and as we've noted they will be vacating at the end of the first quarter.
Bobby Bowers: With that, I'll turn the call over to Bobby to review our financial results. Bobby. Thanks, Chris. Well, we'll be discussing some of this period's financial highlights today.
That said, we do have actually good.
Bobby Bowers: I encourage you to please review the entire earnings release, the 10Q, and the accompanying supplemental financial information, which were filed yesterday for more complete details. For FFO, Perdiluted Chair for the third quarter of 2023 was 43 cents per share versus 50 cents per diluted share for the third quarter of 2022, with the current quarter reflecting approximately 8 cents per share of increased interest expense as compared to the third quarter of last year.
Cindy if you will tour activity.
Traction to backfill that including a number of your large users for all the space. So I think thats something we continue to feel we see decent activity in Nova and that building is really well positioned on top of the metro walkable to Ah ballston quarter on a hockey rink and a lot of the retailers sits around there and lunch options located.
Within the building as well, so really well positioned there on the LEED gold building in Dallas.
Occupy the Galleria Amazon larger position, there about 270000 square feet.
Bobby Bowers: The dilution related to the higher interest cost was partially offset by the operational growth that Brent alluded to, resulting from successful leasing efforts, rising rental rates, and asset recycling over the past year. As previously announced, given the significant increase in interest costs that were all currently experiencing, we reduced our annual dividend from 84 cents per share to 50 cents per share beginning with the third quarter of 2023, which approximates our forecasted taxable income over the next year or two.
They're very active in this space, it's a little early to tell there is no new development in the Submarket for them to go to and they really prefer to keep their workforce in that sub market. So we feel pretty good about our renewal in place, but exactly how much unclear and we'll probably expect to get more engaged here over probably towards the end of the first quarter of next year.
Speaker 4: So we feel pretty good about a renewal in place, but exactly how much unclear and we'll probably expect to get more engaged in here over and probably towards the end of the first quarter of next year.
Bobby Bowers: This reduction in dividend will lower the usage of AFFO and increase available cash by approximately $42 million on an annual basis. AFFO generated during the third quarter of 2023 was 40 million or 160 million on an annualized basis, adequately providing for dividend coverage and foreseeable capital needs.
Got it thank you that'll be it.
Thank you.
Speaker 2: Our next question is coming from Nick Philman with Baird. Sir, your line is live.
Our next question is coming from Nick Woodman with Baird.
Your line is life.
Speaker 5: Hey, good morning guys. Maybe starting with George, just talking about overall demand of the market. It seems as though Minneapolis is picking up a little bit of lossy, that might just be a little bit more of just vacancy in the market that you guys have in the portfolio now, but just ranking across the market, it seems like Atlanta and Dallas are most active, but just maybe get some color on with activity on the ground on some of the other markets. Sure, good morning, Nick.
Hey, good morning, guys, maybe starting with George just talking about overall demand in the market. It seems as though Minneapolis was picking up a little bit of velocity that might just be a little bit more just vacancy in the market that you guys have in the portfolio now, but just ranking across the markets. It seems like Atlanta.
Atlanta, and Dallas are most active but just maybe some color on what the activity on the ground on some of the other markets.
Sure Good morning, Nick Thank you for joining us.
Bobby Bowers: Turning to the ballot sheet, as we've mentioned many times, the key component of our leasing formula is that our ballot sheet and liquidity remains strong. A differentiating factor as prospective tenants scrutinize the capital structure of a potential future office building and the landlord. We believe this differentiation among office product is driving increased market share for the highest quality, place making assets, and well-capitalized landlords. We covered the five-year $400 million financing activity that occurred early in the third quarter in detail in conjunction with last July's quarterly call, which addressed a majority of our 2024 final debt maturities.
Speaker 5: I would say, you know, you mentioned Minneapolis first, I mean, we've been, that portfolio has been very stabilized for many years, it being 90% leased or better for several years, we're pretty ecstatic about it, so we're finally getting a chance to come back to the marketplace.
Say you mean.
Mentioned Minneapolis first I mean, we've been in that portfolio has been very stabilized for many years of being 90% leased or better for several years been pretty ecstatic about it or for filing and a chance to come back to the marketplace.
Speaker 10: I would say the brokerage community and tenant prospects are certainly taking a close look at our portfolio. We're excited about the large transaction that we landed at another, I would say another headquarters location there on one of our properties known as Crescent Ridge.
I would say the brokerage community intended tenant prospects are certainly taking a close look at our portfolio. We're excited about the large transaction that we land. Another it's another headquarters location to one of our prop just noticed Crescent ridge.
Speaker 5: But that being said, you know, you don't have a lot of space available. It's hard to see a lot of deals flow. However, we've made announcements in terms of changes that are happening in our board of lawyers from a tentative perspective. Certainly the word is out about where US bank is heading from a reading crossing perspective, where it's hard to see field activity just as Brent mentioned a minute ago. So it's, it certainly is picking up. That being said, you know, most of our banks, they continue to be in Atlanta and Dallas.
Bobby Bowers: Through a bond tender offer, we utilized the majority of the new financing proceeds to repurchase approximately 350 million of the maturing $400 million in 2024 bonds, and the remaining 50 million in proceeds was used to pay down our $600 million revolver. We currently anticipate repaying the untendered $50 million balance of the 2024 bonds that mature in March of next year using either disposition proceeds available, or our line of credit, which currently has around $450 million of capacity today.
But that being said you don't have a lot of space was available as part of Ceylon deal flow. However, we've made announcements in terms of changes that are happening in our portfolio from a <unk> perspective, certainly the word is out of our U S. Bank is heading from a ratings crossing perspective, we're starting to see deal activity just as Brendan mentioned a minute ago. So it's early.
Picking up that being said most of our rigs there continues to be in Atlanta, and Dallas, where we have the bulk of our activity and it's been a story that we've seen from quarter to quarter.
Speaker 5: We have the bulk of our activity. It's been a story that we seen from quarter to quarter. I will tell you though we do have some expressions happening in 2024 in Orlando but we're really excited about some of the back-to-lap opportunities that we're seeing there.
I will tell you, though we do have some explorations happening in 2024 in Orlando, but we're really excited about some of the backfill opportunities that we're seeing there.
Speaker 10: Heading up to Boston, again, we're fairly stabilized up in that marketplace. The largest block of space that we have up there is our 25-mile road, which Juana and Toby warned recently for a building in its size.
Heading up the Boston, where again, we're fairly stabilized up in that marketplace. The largest blocks of space that we have out there that are 25 Mall road, which wanted a total reward recently for a building in its size.
Speaker 5: It's been reimagined and renovated. It's been well received in the marketplace. And while I would say the large users are not really active in that marketplace, we've received a fair amount of velocity from small users. And we've decided to make some announcements there with the next few weeks.
As Ben.
<unk> the renovated it's been well received in the marketplace. So while I would say the large users are not really active in that marketplace. We're seeing a fair amount of velocity from small users and we're excited about making some announcements here in the next few weeks.
Bobby Bowers: Looking into 2024, we anticipate exercising extension options were applicable on outstanding bank term debt, and therefore we don't anticipate having any final debt maturities in 2024. That said, we will remain flexible. Any proceeds generated from dispositions or other financing will be used to pay down our bank term debt.
Speaker 4: I can pick up from there and continue on to New York. What are we seeing? Actually, the sickity broad, our vacancy fits the top of the building at 12,000 square foot floor plate. Again, we've got a lobby that's going to be completely remodeled and completed in about two months or so. So we're always showing off the new finishes, the new stones in place, looks fabulous. But as we've talked about that small, the inside of the tenant, that floor plate fits it perfectly. And we're seeing good lease interaction. As I noted last quarter, we actually took a 10 out of 55 broad. It's going to convert to Rezi and put them in our building and we continue to speak of velocity there. DC is probably the district. Our most challenged market by far is George noted. And I think that's going to continue just given the vast amount of space. I think that's why we continue to be, I think, out and more optimistic on our velocity and Minneapolis is because there's a large, one of the largest landlords there. We're well equipped from a capital standpoint and we really can bring a fresh, different appearance, hospitality, focus, and you've talked, you've heard us talk about tenant engagement. And we're really light years ahead of most other office operators in that market. So we really can compete effectively. DC is a little bit more of a difficult market to compete in. There's a lot of products.
I can pick up from there and continue on in New York or are you seeing.
Actually the 60 broad our agency sits at the top of the building, it's 12000 square foot floor place again, we've got.
Bobby that's going to be completely remodeled and completed in about two months or so so we're already showing off the new finishes the new stones in place looks fabulous, but as we've talked about that small medium sized tenants that floor placements. It perfectly and we're seeing good leasing traction as I noted last quarter, we actually took a hit it out of 55, rod it's going to convert to resi.
Bobby Bowers: In regard to our outlook for 2023, as we've seen in all the headlines, the general expectation in the market is that interest rates will remain now higher for longer. Therefore, although we still feel good about the core FFO per share range that we've previously provided, that being $1.74 to $1.80 per share, interest rates have not declined as previously anticipated on forward yield curves. With these higher interest rates, we anticipate ending up at the lower end of our previously provided core FFO per share guidance range for the year, which is in line with fact sets, consensus estimates.
And put them in our building and we continue to see good velocity there D C. Probably the district, our most challenged market by far as George noted and I think that's going to continue just given the vast amount of space I think thats why we continue to be I think.
More optimistic on our philosophy in Minneapolis is because there's a large one of the largest landlords there were well equipped from a capital standpoint, and we really can bring a fresh different appearance hospitality focus and you've talked you've heard us talk about tenant engagement and were really light years ahead of most other office operators in that Mark.
Bobby Bowers: As most of you know, we typically publish annual guidance after we've completed the budget cycle during the fourth quarter each year, and announce our core FFO guidance for a new year in early February during our quarterly earnings call. We expect to follow the same process for 2024 guidance. As George and Brent noted, our core business, that is leasing, has been strong throughout the year with over 2 million square feet of executed leases completed thus far for this year, including what we expect to be the highest amount of new tenant leasing since 2016.
So we really can compete effectively D. C is a little bit more of a difficult market to compete in and Theres a lot of products are tougher to differentiate so we do think it's probably our most challenged market.
Speaker 4: We've covered it to differentiate, and so we do think it's probably our most challenged more.
I'll pause there Nick any other follow ups.
Speaker 12: I'll pause there, Nick. Any other follow-ups? Yeah, that's helpful. Brandon, maybe just like an overall strategy going forward, or maybe longer term because it seems like investment sales market is a little locked up here, but it seems like Houston's an exit. I mean, what percentage of this portfolio do you view as core on the longer term basis? Maybe if you look five, seven years out, like would be a long-term hold. Are you viewing like Minneapolis, New York, or Boston as core to the Piedmont strategy going forward, or do you think those would be eventually ones that you would like to exit over time?
Yeah, that's helpful, Brian and maybe just like an overall strategy going forward or maybe longer term because it seems like investment sales market is a little locked up here, but it seems like Houston and exit I mean, what percentage of the portfolio do you view as core on the longer term basis, maybe if you look five seven years out like where you are like would be a long term holder.
Are you viewing like Minneapolis, New York or Boston is core to the Piedmont strategy going forward or do you think those would be eventually ones that you would look like to exit over time.
Bobby Bowers: I couldn't be more proud of the team having a clip, 2022's new leasing volumes, with two months still remaining in the year. While we have a few known move outs in 2024, we've addressed our largest lease renewal with US bank, and we are seeing good activity on most of the other available spaces. Excluding now, known the known outcome of US bank, we have approximately 10% of the portfolio remaining to expire between now and the end of 2024.
Yeah, Great question, Nick and I think we're always trying to improve the portfolio incrementally to what we've historically done selling call it $300 million to $500 million a year on average obviously, the disruption, particularly in debt capital markets make the transactional activity more challenging, but I think as we look further out district strategy that we've continue.
Speaker 4: Great question, Nick, and I think we're always trying to improve the portfolio incrementally. That's what we've historically done, selling, call it, $300 million to $500 million a year on average. Obviously, the disruption, particularly in the debt capital markets, has made the transactional activity more challenging.
Speaker 4: But I think as we look further out, the strategy that we've continued to have to focus on the sunbell, likely lend itself as we've also talked about some sort of disposition at some point for our New York building, which would be great proceeds to redeploy. And as I've also talked about on prior calls, given some of the good leasing activity we've seen at the buildings that are more occupied and many acts of urban Minneapolis, if we were to get a little bit more leasing success there, I think that would be a mark that we compare back to the exposure, as well as we have continued discussions.
To add to focus on the sunbelt likely lends itself as we've also talked about some sort of disposition at some point for our New York building, which will be great proceeds to redeploy and as I've also talked about on prior calls given some of the good leasing activity. We've seen at the buildings that are more occupied and many at suburban Minneapolis.
Bobby Bowers: Offsetting this, we currently have also a 1.1 million square feet of leases and abatement are yet to commence. That said, higher interest rates, the possibility of a few small dispositions to pay down debt, and downtimes between a handful of lease aspirations and corresponding new lease commitments will weigh on 2024 results.
If we were to get a little bit more leasing success. There I think that would be a market, where we compare back some of the exposure as well as we have continued discussions.
Speaker 13: on just mature assets.
Just mature assets and bounds some of it in the sunbelt, but most of it in the northern markets and we'll continue to look to redeploy that he wanted me to put a percentage of what portion of the portfolio was core today I'd probably put it in the 80, 85% range and we've got a little bit of work to do and we acknowledged that in the north and when the markets come back.
Speaker 4: and bounds, so I'll go ahead and this fun belt, but most of it in the North and markets, and we'll continue to look to redeploy that. If you wanted me to put a percentage of what proportion of the portfolio is core today, I probably put in the 80, 85% range. We've got a little bit of work to do, and we acknowledge that in the North, and when the markets come back, we'll be effective at continuing to redeploy into this fun belt.
Bobby Bowers: We expect to provide complete guidance for 2024 in early February.
Brent Smith: With that, I'll turn the call back over to Brent for closing comments. Thank you, George, Chris, and Bobby. At PMO, we continue to be encouraged by the resiliency of our leasing pipeline. As we've talked about today, the success we've had today is tremendous. Having now eclipsed 2022 new leasing volumes and with two months still remaining in the year, and given our strong start to the final quarter, we feel confident in achieving the annual lease percentage and same-store goals that we've outlined previously.
<unk> will be effective and continuing to redeploy into the sunbelt.
Very helpful. Thanks for the time.
Speaker 2: Thank you. Once again ladies and gentlemen if you have any questions please press star one on your telephone
Thank you once again, ladies and gentlemen, if you have any questions. Please press star one on your telephone keypad.
Speaker 8: Our next question is coming from Dylan Brzezinski with Green Street. Your line is live.
Our next question is coming from doesn't brzezinski.
With Green Street your line is nice.
Brent Smith: Same-store NOI is expected to be between 0 and 4% up with Caction OI at the higher end of the range and a cruel basis to NOI near the lower end. Certainly, the elevated interest rate environment will weigh on earnings in FFO, and the financing environment continues to mute terms of actual activity. Despite these headwinds, we believe that the flight to quality occurring in the market combined with Piedmont's strategy of providing premier work spaces at meaningfully lower rental rates versus new construction will continue to resonate with the market and lead to leasing success.
Speaker 9: Hey, guys. Thanks for taking the question. I guess just going on portfolio percentage lease today versus how you guys think about it moving into 2024, I think you guys alluded to only 10 percentage points of rent expiring over the next 18 months, and given the strong leasing activity thus far, I guess do you think it's safe to say that leasing percentage has maybe bottomed here, or I guess given the U.S. bank news in the suburban location that there may be some pressure here as we look at the 2024? Great.
Hey, guys. Thanks for taking the question I guess, just going on portfolio percentage lease today versus how you guys think about it moving into 2024, and then you guys alluded to only 10 percentage points of rent expiring over the next 18 months and given the strong leasing activity, thus far I guess.
Do you think it's safe to say that leasing percent ourselves, maybe bottomed here or I guess, given the U S Bank news in the suburban location that there should there may be some pressure here as we look out to 2024.
Operator: With that, I will now ask the 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 will make appropriate later public disclosure of necessary operator.
Great question doing I think thats.
Speaker 13: Always a difficult thing with office companies is the ins and outs attendance is complicated and of course when they commence You don't necessarily always start cash paying. I think if we focus on occupancy as you pointed out We do have cargill vacate Beginning of next year and then middle of next year the US bank vacate We've got a great backlog of of leases that are about half a million square feet of yet to commence another half a million square feet That's not cash paying but has commenced
Always a difficult thing with office companies as the ins and outs of tenants is complicated and of course when they commence you don't necessarily always start cash paying I think if we focus on occupancy as you pointed out we do have cargill vacate at the beginning of next year and then middle of next year in the U S Bank vacate we've got a great backlog of lead.
Operator: Thank you.
Operator: At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question key. You may press star two if you would like to remove your question from the key. And for participants 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.
Operator: Thank you.
Is that are about half a million square feet of it yet to commence another half a million square feet, that's not cash paying but as commence so that will flow in and kind of if you will backfill some of them from an <unk> perspective, and depending on what assets, we put into the redevelopment pool that would obviously impact lease percentage, but let's assume for now that everything stays.
Speaker 13: So that'll flow in and kind of, if you will, backfill someone from an FFO perspective.
Speaker 13: And depending on what assets we put in the redevelopment pool, that would obviously impact lease percentage. But let's assume for now that everything stays in the current portfolio operation pool. I would expect you see occupancy reach its bottom, middle of 24. And we'll continue to fight that with great leasing that we continue to have in the pipeline that George and the team have talked about. But I would anticipate that's probably where the trough lies for the portfolio.
In the current portfolio operation Oh pool, I would expect you see occupancy reaches a bottom middle of 'twenty four.
Ray Zhang: Our first question is coming from Ray Zhang with JP Morgan. Your line is live. Good morning, guys. Thanks for taking my question and congrats for the downtown beast with US bandcorp. On that, that's my first question. Any color you guys can give on a cat-packs on the renewal for that space. I think you guys gave a range historically, but I just want to get a little more color on this specific one if you guys can.
We will continue to fight that with great leasing that we continue to have in the pipeline that George and the team has talked about.
But I would anticipate that's probably where the trough lies for the portfolio.
That's helpful detail really appreciate that and then I guess just going back to the comment on the on the Houston transactions and the buyers not really being able to get comfortable with the capital structure, but were there any discussions of possibly offering seller financing to them.
Speaker 9: that's helpful to you, so I really appreciate that. And then I guess just going back to the comments on the Heast and Transactions and the buyers not really being able to get comfortable with the capital structure. But were there any discussions of possibly offering seller financing to them? No.
George Wells: Sure, Ray. This is George Wells and good morning. That transaction, which, as you've been following, has been going on for multiple years, and that user has also been going through a fair amount of space planning and trying to re-imagine what the work space is going to look like. So that being said, we ended up having, I would say, more of a new type of tent improvement so they could redesign our space and encourage their employees to come back to the office, but it certainly was well within the range of market that you would expect on a year-per-year basis and not too far from what we've reported in our cell.
Speaker 4: Good question as well, and I think in this market, we continue to see the very limited transaction activity that can occur often requires that type of financing. To your point, we did provide seller financing up to about 50% LTV at a market rate. We were not in a position, we felt, to go higher than that, and frankly, didn't make economic sense in our mind. The buyer obviously is not able to come up with the equity given that amount of debt proceeds.
Good question as well and I think in this market. We continue to see the very limited transaction activity that can occur often requires that type of financing.
We did provide seller financing up to about 50% LTV at a market rate.
Not in a position we felt to go higher than that.
And frankly didn't make economic sense in our mind the buyer, obviously does not able to come up with the equity given that amount of debt proceeds. So we parted ways. What we are going to continue to canvass the market and offer seller financing on the asset. This go round at roughly 50 call it 55% LTV again at market rates.
George Wells: I would add to Ray and thanks for joining this morning. Again, as we've talked about previously on a cash basis, it was basically flat, which was positive, but there was no free rent in the transaction. So as George alluded to, I would consider it market level TI's approaching that triple-digit figure. However, there was no free rent in the transaction, and so I think that was ultimately a positive. Also thinking of step back as we think about kind of what we had guided to the street on that.
Speaker 13: So we parted ways, but we are going to continue to canvass the market and offer seller financing on the asset. This go-round at roughly 50, cost 55% LTV, again, up market rates. And we'll evaluate the receptivity hopefully here as positive over the next few quarters.
And so we will evaluate the receptivity hopefully here is positive over the next few quarters.
And then are you able to share sort of what that market rate was for the Houston asset.
Speaker 9: And are you able to share sort of what that marker rate was for that Houston asset?
Speaker 4: Interest rates typically we've seen from say more gateway markets for celebrating anything in the five to six Presented code we were more in the seven to eight percent Cisco given the the tenure of the asset and frankly the suburban nature and Houston of the quality the asset great buildings Great tenancy and long-term wall, but we felt like that was reasonable leverage profile and that was not able they were not able to close the
Interest rates typically we've seen from say more gateway markets for seller financing in the 5% to 6% ZIP code, we were more in the 7% to 8% ZIP code given the tenure of the asset and frankly, the suburban nature in Houston of the quality of the asset great buildings, great tenancy.
George Wells: We had thought, initially, it would probably be 50-50 in each location. Turns out that it was 100% downtown and, unfortunately, a gift back in the suburbs, but I think as we think strategically about the market, there is much greater depth from a tenant need, if you will, in the suburbs than downtown right now, and demand is much stronger. As we witnessed just this quarter, getting a 32,000 square foot lease in that suburban market, and seeing continued good demand.
He has long term wall, but we felt like that was reasonable leverage profile that was not able they were not able to close the debt level.
Great I appreciate the detail here guys. Thank you so much.
George Wells: So if we were going to get back space, I think that's overall the positive spin to the ultimate outcome there. And we feel pretty great about keeping US Bank deep relationship strategic financing partners as well, and they're going to be really supporting downtown Minneapolis, which is important right now as the city recuperates from that. But great news is we're also going to have that best building in that sub-market, certainly from existing build, top three, with a phenomenal amenity set at the top, which US Bank loves, and a light refresh on the lobby just to continue to improve and enhance the retail experience, which we think is going to continue to be able for us to garner the best asset and good demand downtown as well. So what may be musical chairs, they'll be coming to our building, which is often what we're seeing now across the country in our markets.
Speaker 8: Thank you. We have reached the end of our question and answer, say.
Thank you.
Brent Smith: I'll pause there.
<unk> reached the end of our question and answer session. So I will now turn the call back over to Mr. Brent Smith for his closing remarks.
Speaker 8: So I'll now turn the call back over to Mr. Brent Smith for his closing remarks.
Thank you and I appreciate everyone for joining us today I hope everyone has a happy Halloween, you've heard and receive more trees and tricks for us today, but certainly happy to continue the discussion will be at NAREIT.
Speaker 13: Thank you, and I appreciate everyone for joining us today. I hope everyone has a happy Halloween, and you've heard and received more treats than tricks from us today. But certainly happy to continue the discussion. We'll be at NARIT, at the conference in LA, November 13th to the 15th. If you're interested in sitting down with management, please reach out to Bobby, Laura, or Jennifer. And really again, we look forward to having those further discussions.
The conference in La on November 13th to the 15th if you're interested in sitting down with management. Please reach out Bobby Laura Jennifer.
And really again, we look forward to having those further discussions I do believe the office sector has been oversold were particular name in that and we'd love to engage and help explain why we believe that is in Piedmont is a great opportunity to come into the stock.
Speaker 13: I do believe the office sector has been over so we're a particular name in that and we love to engage and help explain why we believe that is and Piedmont is a great opportunity to come into the stock.
Brent Smith: Any other follow-up Yeah, just to follow up on that on a suburb space. So it sounds like you wouldn't be out of service and kind of just in the market and getting new tenants that's the plan for the suburb space for now, or is it, or maybe I missed it, it will be out of service for a bit. That's a great question, follow up, right? And thanks for letting me tag team on that.
Everyone have a good day. Thank you.
Thank you. This concludes today's conference and you may disconnect. Your lines at this time and we thank you for your participation.
Speaker 8: Thank you. This concludes today's conference and you may disconnect your lines at this time and we thank you.
Okay.
Brent Smith: The Cargill building, we call it exposure crossings. As you know, they're going to be vacating first day of next year. That space will likely be put into redevelopment in 24. It's a, I call it a little bit larger floor plate in the Meridian Crossings building, which is smaller, which suits the Meridian building a little bit better. We think it may have a little bit more lease of velocity. So the Excelsior building we're going to put into redevelopment.
Brent Smith: It needs a light refresh, call it maybe five to $10 a foot. And then we'll start to market the building more freely. Hopefully into the market. And we've already seen actually a good traction at our Meridian Crossings building. Obviously we're planning for a little bit more of a minute. He said, yided towards one user. We're pivoting on that. So we're not really certain exactly if we will or will not put it in the redevelopment pool.
Brent Smith: But we're the mindset of making more of a multi teneted minute. He said, the good news is we've actually already seen good traction at that property. And we've signed to 10,000 square foot back fill lease already with a user as part of our October. Total that you've seen. So overall, again, we think that building is really well positioned in the corner of 494 or 35 West. Four signs, very, you know, I say accessible right off the highway, walkable to the number of restaurants.
Brent Smith: More importantly, probably in the Minneapolis market. It's a five and 10 minute drive to France Avenue. And pretty much any restaurant you could imagine. So ultimately, we think that gets great traction in the marketplace along with our Excelsior building. But at least for now. We know the Excelsior building will be going into the 24 redevelopment pool.
Ray Zhang: Got it.
Brent Smith: And if I may just want to follow up since we touch on US bank and cargo. Any update on the Amazon lease any incremental color you can provide. I know they have a couple of different leases and different spots and just just any, you know, early conversation color you can provide will be helpful. Absolutely. You know, just like our Meridian building, which are lead gold. Our Amazon. Buildings in northern Virginia is also legal.
Brent Smith: That's where Amazon takes about 60,000 square feet. And as we've noted, they will be vacating at the end of the first quarter. That said, we do have actually good. But velocity, if you will, on tour activity and traction to backfill that, including a number of your large users for all the space. So I think that's something we continue to feel we see decent activity in Nova. And that building is really well positioned on top of Metro walkable to.
Brent Smith: Balls in quarter on the hockey ring and a lot of the retail is hits around there and lunch options located within the building as well. So really well positioned there on the lead gold building in Dallas. That they occupy the Galleria. Amazon's larger position there about 270,000 square feet. I'd say they're very active in the space. It's a little early to tell. There's no new development in the stuff market for them to go to and they really prefer to keep their workforce in that stuff market. So we feel pretty good about a renewal in place, but exactly how much unclear and we'll probably expect to get more engaged here towards the end of the first quarter of next year.
Nick Thillman: Thank you.
George Wells: Our next question is coming from Nick Thillman with Baird. Sir, your line is life. Hey, good morning guys.
Nick Thillman: Maybe starting with George, just talking about overall demand of the market. It seems as though Minneapolis is picking up a little bit of lossy. That might just be a little bit more of just vacancy in the market that you guys have in the portfolio now, but just ranking across the market. It seems like Atlanta and Dallas are most active, but just maybe get some color on with activity on the ground on some of the other markets.
Nick Thillman: Sure. Good morning, Nick. Thank you for joining us. I would say, you mentioned Minneapolis first. We've been, that portfolio has been very stabilized for many years. It being 90% at least or better for several years. We're pretty ecstatic about it. We're finding an opportunity to come back to the marketplace. I would say the brokerage community and tenant prospects are certainly taking a close look at our portfolio. We're excited about the large transaction.
Nick Thillman: We land another, I would say, another headquarters location. They're one of our properties, known as Crescent Ridge, but that being said, when you don't have a lot of spaces available, it's hard to see a lot of deal flow. However, we've made announcements in terms of changes that are happening in our portfolio from a tentative perspective. Certainly the word is out about where U.S. Bank is heading from a rating crossing perspective, where it started to see field activity just as Brent mentioned a minute ago.
Nick Thillman: So it's certainly is picking up. That being said, you know, most of our banks, they continue to be in Atlanta and Dallas where we have the bulk of our activity. It's been a story that we've seen from quarter to quarter. I will tell you though, we do have some explorations happening in 2024 or Orlando, but we're really excited about some of the back-to-all opportunities that we're seeing there. Heading up to Boston, we're, again, we're fairly stabilized up in that marketplace.
Nick Thillman: The largest block of space that we have up there is our 25-mile road, which I wanted to award recently for building it in size. It's been reimagined, been renovated, it's been well-received in the marketplace, and while I would say the large users are not really active in that marketplace, we've seen a fair amount of velocity from small users, and we've decided to make some announcements there with the next few weeks. I can pick up from there and continue on to New York, where we're seeing actually, you know, the 60 broad, our vacancy fits the top of the building at 12,000 square foot floor plate.
Nick Thillman: Again, we've got a lobby that's going to be completely remodeled and completed in about two months or so. So we're always showing off the new finishes and new stones in place. Looks fabulous, but as we've talked about that small V-insized tenant, that floor plate fits it perfectly, and we're seeing good lease interaction. As I noted last quarter, we actually took a tinted out of 55 broad. It's going to convert to Rezi and put them in our building, and we continue to see good velocity there.
Nick Thillman: DCs, probably the district, our most challenged market, by far, is George noted, and I would think that's going to continue just given the vast amount of space. I think that's why we continue to be, I think, often more optimistic on our velocity and Minneapolis is because there's a large, one of the largest landlords there. We're well equipped from a capital standpoint, and we really can bring a fresh different appearance, hospitality focus, and you've talked, you've heard us talk about tenant engagement, and we're really light years ahead of most other office operators in that market, so we really can compete effectively. DCs is a little bit more of a difficult market to compete in, there's a lot of product, it's covered in differentiate, and so we do think it's probably our most challenged market.
Brent Smith: Yeah, that's helpful.
Brent Smith: Brandon, maybe just like an overall strategy going forward or maybe longer term because it seems like investment sales market is a little locked up here, but seems like Houston's an exit. I mean, what percentage of this portfolio do you view as core on the longer term basis? Maybe if you look five, seven years out, like you would be a long term holder. Are you viewing like Minneapolis, New York, or Boston as core to the PMO?
Brent Smith: Not strategy going forward or do you think those would be eventually ones that you would look like to exit over time? Yeah, great question Nick. I think we're always trying to improve the portfolio incrementally at what we've historically done selling college 300 to 500 million a year on average. Obviously, the disruption in the particular debt capital markets has made the transaction activity more challenging. But I think as we look further out the strategy that we've continued to have to focus on the sunbell likely lend itself as we've also talked about some sort of disposition at some point for our New York building, which would be great proceeds to redeploy.
Brent Smith: And as I've also talked about on prior calls, given some of the good leasing activity we've seen at the buildings that are more occupied in Minneapolis, if we were to get a little bit more leasing success there. I think that would be a market where we compare back some of the exposure, as well as we have continued discussions on just mature assets and bounds. So I'll get in this fun belt, but most of it in the north and markets and we'll continue to look to redeploy that if you wanted me to put a percentage of what proportion of the portfolio is core today.
Brent Smith: I probably put it in the 85% range. We've got a little bit of work to do and we acknowledge that in the north and when the markets come back will be effective at continuing to redeploy into the sunbell.
Nick Thillman: Very helpful. Thanks for the time. Thank you.
Operator: Once again, ladies and gentlemen, if you have any questions, please press star one on your telephone keypad.
Dylan Brzynski: Our next question is coming from Dylan Brzynski with Green Street. Your line is live. Hey guys, thanks for taking a question. I guess just going on portfolio percentage lease today versus how you guys think about it moving into 2024. I think you guys alluded to only 10 percentage points of rent expiring over the next 18 months and given the strong lease and activity thus far. I guess you think it's safe to say that leasing percentage has maybe bottomed here or I guess given the US bank news in the suburban location that there should there may be some pressure here as we look at the 2024.
Brent Smith: Great question, Dylan. I think that always a difficult thing with office companies is the ins and outs attendance is complicated and of course when they commence they don't necessarily always start cash paying. I think if we focus on occupancy as you pointed out, we do have cargo vacate beginning of next year and then middle of next year the US bank vacate. We've got a great backlog of leases that are about half a million square feet of yet to commence another half a million square feet that's not cash paying but has commenced.
Brent Smith: So that'll flow in and if you will backfield someone from an FFO perspective and depending on what assets we put in the redevelopment pool that would obviously impact lease percentage but let's assume for now that everything stays in the current portfolio operation pool. I would expect you see occupancy reaches bottom middle of 24 and we'll continue to fight that with great leasing that we continue to have in the pipeline that George and the team have talked about but I would anticipate that's probably where the trough lies for the portfolio.
Dylan Brzynski: That's helpful to these people, I really appreciate that. And then I guess just going back to the comments on the Houston transactions and the buyer's not really being able to get comfortable with the capital structure. But were there any discussions of possibly offering seller financing to them?
Brent Smith: A good question as well. And I think in this market we continue to see the very limited transaction activity that can occur often requires that type of financing. To your point, we did provide seller financing up to about 50% LTV at a market rate. We were not in a position we felt to go higher than that. And frankly, it didn't make economic sense in our mind. The buyer obviously did not able to come up with the equity given that amount of death proceeds.
Brent Smith: So we parted ways what we are going to continue to come as the market and offer seller financing on the asset. This goes around at roughly 50 to cost 55% LTV again at a market rate. And we'll evaluate the receptivity hopefully here in positive over the next few quarters.
Brent Smith: And are you able to share sort of what that market rate was for that Houston asset? Interest rates typically we've seen from say more gateway markets for seller financing in the five to six presented code. We were more than seven to eight presented code given the tenure of the asset and frankly the suburban nature in Houston on the quality of the asset. We had great buildings, great tendency and long-term wall. But we felt like that was reasonable leverage profile and that was not able, they were not able to close at that level.
Dylan Brzynski: Great.
Dylan Brzynski: Appreciate the detail here, guys. Thank you so much.
Operator: We have reached the end of our question and answer session.
Brent Smith: So I will now turn the call back over to Mr. Brent Smith for his closing remarks. Thank you and I appreciate everyone for joining us today. I hope everyone has a happy Halloween you've heard and received more treats than tricks from us today. But certainly happy to continue the discussion will be a may read at the conference in L.A. November 13th to the 15th. If you're interested in sitting down with management, please reach out to Bobby, Laura or Jennifer.
Brent Smith: And really again, we look forward to having those further discussions. I do believe the office sector has been oversold. We're a particular name in that and we love to engage and help explain why we believe that is. [inaudible]