Q3 2024 Piedmont Office Realty Trust Inc Earnings Call
Greetings welcome to the Piedmont Office Realty Trust incorporated third quarter 2024 earnings call.
Speaker Change: At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to your host Laura Moon, you may begin.
Laura Moon: Thank you operator, and good morning, everyone. We appreciate you joining us today for Piedmont's third quarter 2024 earnings Conference call last night, we filed our Form 10-Q, and 8-K that includes our earnings release and our unaudited supplemental information for the third quarter of 2024 that is available for your review on our web.
Laura Moon: Site at Piedmont, REIT Dot com under the Investor Relations section. During this call you will hear from senior officers at Piedmont are prepared remarks, followed by answers to your questions will contain forward looking statements as defined in the private Securities Litigation Reform Act of 1095.
Laura Moon: These forward looking statements address matters, which are subject to risks and uncertainties and therefore actual results may differ from those we anticipate and discuss today the risks and uncertainties. These forward looking statements are discussed in our press release as well as our SEC filings, we encourage everyone to review the more detailed discussion related to risks.
As stated 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 impact of this activity on the company's financial and operational results you should not place any angie rely.
Laura Moon: So 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.
Laura Moon: Also on today's call Representatives of the company may refer to certain non-GAAP financial measures, such as <unk> or SFO, a SFO and same store NOI the definitions and reconciliations of these non-GAAP measures are contained in the earnings release and supplemental financial information, which were filed last night at this time, our president and chief.
Speaker Change: Give officer, Brent Smith will provide some opening comments regarding third quarter operating results Brian.
Brian: Thanks, Laura.
Brent Smith: Good morning, everyone and thank you for joining us today as we review our third quarter results.
Brent Smith: In addition to Laura on the line with me. This morning are George Wells, Our Chief operating Officer, Chris Coleman, our EVP of investments.
Bobby Bowers, our Chief Financial Officer, and Jerry Rexroad, our new EVP finance.
Brent Smith: We also have the usual full complement of our management team available to answer your question.
Brent Smith: And our business. There is no doubt name of the game is leasing leasing drives occupancy, which drives earnings and ultimately cash flow and here at Piedmont were undoubtedly experiencing great leasing success with our momentum heading into next year.
Brent Smith: The third quarter, we executed over 461000 square feet of total leasing which brings our total leasing year to date to approximately 2 million square feet, which is the most leasing we've done in the first nine months of a year in over a decade.
Brent Smith: Importantly, this leafy success helps lift the overall lease percentage of our in service portfolio to 88, 8% the highest level. It's been since the first quarter of 2020, which marks the beginning of the COVID-19 pandemic.
Brent Smith: Incidentally 2 million square feet of leasing on an annual basis is what we would normally call a great year and we still have another quarter to go with a robust pipeline of approximately 3 million square feet of potential leases in the proposal stage.
I'd also note that the activity is broad based across industries and exhibiting growth in all of our Submarkets, Excluding Washington D C, which has its own unique set of challenges.
Brent Smith: Furthermore, the leases we have signed so far this year have resulted in double digit rental rate growth of 12% on a cash basis and almost 20% on a real cruel basis once those leases begin.
Brent Smith: George will provide market specifics and details on the leasing pipeline in a moment, but we believe that the investments that we've made in our portfolio combined with our relentless focus on best in class service and a sustainability mindset are resonating with both existing and prospective tenants alike, and demonstrating the growing demand for highly of many.
Brent Smith: Ties well located work environments operated by a financially stable landlord.
Brent Smith: The headlines reinforce our belief that the macro environment is improving.
Brent Smith: <unk> third quarter Office report is entitled High beginning to shift for U S office as availability rate declines for the first time in five years.
Brent Smith: Well known industry, leading companies like Salesforce three M and Amazon continue to require greater in office attendance, which will likely influence others to follow suit.
Brent Smith: A recent KPMG survey of 400 U S. Ceos revealed that 80% of this he owes expect corporate employees to be present in their offices full time within three years.
Brent Smith: It's a substantial increase from the 34% expectation and this group's April survey.
Brent Smith: More widespread it opposite attendance is surely contributing to positive trends.
Brent Smith: Like four straight quarters of decreasing sublease availability in three straight years of declining downsize rates.
Brent Smith: We witnessed this phenomenon firsthand in our own portfolio with a number of tenant expansions, including a large e-commerce tenant in Dallas.
Brent Smith: And from the supply side J O L. Also seen favorable trends as new construction starts are dropping to new lows and obsolete commodity office is rationalized and repurposed.
We're seeing positive absorption.
Brent Smith: To your assets through though the overall market continues to experience negative absorption. However that train two is improving.
Brent Smith: As I've noted on prior calls the top five to 10 assets in a sub barker gaining market share and demonstrating positive absorption.
Brent Smith: It is this improving macro backdrop combined with the leasing success that we have experienced in our own portfolio. Thus far this year and our robust pipeline that buoys, our optimism as we look to the remainder of this year and beyond.
Brent Smith: Although it is true that it will take a few quarters for leasing success to translate to cash flow. We currently have a backlog of $1 5 million square feet of leases.
Brent Smith: Is any approximately $48 million of additional annual revenues and our contractual expressed explorations through the end of 2025 are very manageable at less than 11% of annual revenue.
Brent Smith: Although there will always be one or two vacancies in any given year, we have proven over the past several years that our strategy has been very effective in maintaining and attracting new customers and an extraordinary narrowly competitive environment and we believe that our prospects for future growth with promising is the overall office environment improves.
Brent Smith: Shifting gears I want to recognize the Peabody team for once again, achieving five star and Green Star recognition from Graysby based on 2023 sustainability performance.
Brent Smith: Furthermore, our scores ranked in the top decile for participating listed American companies.
Brent Smith: Huge accomplishment for Piedmont, and one that takes daily focus from not only our property management team, but many other team members throughout the company.
Brent Smith: If you have a moment I hope that you would check out our recently published annual ESG report, which is available electronically on our website.
Speaker Change: With that I will hand, the call over to George who will go into more details on third quarter operational results.
Brent Smith: George.
George Wells: Thanks, Brent good morning, everyone, our well a monetized portfolio generated another quarter of strong operational results.
Not only do our existing customers appreciate our teams' hospitality high touch service and vibrant environment with new customers. We're also recognizing our value proposition is new leasing transactions were completed all of our core market.
George Wells: During the third quarter, we completed 65 lease transactions, where overboard and 60000 square feet of total overall volume, which is on the high end of our typical quarterly range of 300 500000 square feet nearly 45% of that volume is related to new tenant lease activity accounting for 32 transactions.
George Wells: There were 205000 square feet and contributing.
George Wells: Positive net absorption in each of our core markets with the exception of D C Metro.
George Wells: Weighted average lease term achieved was approximately eight years and five new food and beverage operators were signed this quarter.
George Wells: The new attractiveness of our many rich portfolio.
George Wells: Continuing with the operational metrics for the quarter. These economics were favorable as well with a 4% and eight 5% roll up or increase at rents for the quarter on a cash and accrual basis, respectively.
George Wells: As anticipated our lease percentage moved up a 150 basis points to end the quarter at 88, 8%.
George Wells: We have experienced for several quarters most of our new tenant lease activity were 60% incurred in our sunbelt portfolio, where much of our vacancy with that.
George Wells: Existing tenant retention rate of 80% was much higher than our long standing retention average at 65%.
George Wells: Stingley and perhaps another sign of an improving macro environment. We recorded seven tenants based expansion during the quarter and no contractions for a net increase of 60000 square feet and representing an 11% expansion from existing footprint lease.
George Wells: Leasing capital spend was approximately $5 $5 per square foot per lease year and in line with our average for the past several quarters.
George Wells: Sublease availability continues to hover around 5% and none of that space expiring in 2024 or early 2025.
That said I'd like to point out a few highlights and some of our operating markets this quarter.
George Wells: Our 60 broad Street tower in New York captured nearly 20% of overall volume and landed the largest new transaction this quarter with a full floor.
George Wells: Our expansion with the state and New York, which is also our largest tenant in our entire Piedmont portfolio now occupied roughly half a million square foot building.
George Wells: This transaction brings the total leasing to execute his ability to roughly 100000 square feet in the last 12 months with the asset now almost 96% leased.
George Wells: We continue to have an active those slow moving dialogue with New York City to renew substantially all of its 313000 square feet, which expires in the second quarter of 2026.
Prospective new tenant interest is very active at 60 broad with a limited vacancies remain with some of that demand emanating from office to resi conversions or distressed assets and their 60 broad.
George Wells: More broadly.
George Wells: Recently reported that Manhattan office demand has returned to pre pandemic level.
George Wells: Leasing velocity at $9 5 million square feet with a strongest quarterly volume since the three months ending December 2019, a five year high.
Speaker Change: Other market notables Atlanta, our largest market had another impressive performance with 13 transactions for 120000 square feet and represents 20%, 26% or the largest there but overall.
Speaker Change: Total lease volume and remains our most consistent performer in attracting new business.
Speaker Change: Gallery on the Park again land is another pool for headquarters operation The night and the past four years.
Speaker Change: Dallas, Our second largest market also stood out was 17 transactions were 16% of the company's quarterly leasing volume in every project theater experienced positive net absorption, except for law school and the center, which stayed flat.
Speaker Change: On the recognition front, our properties and service teams continue to be awarded market recognition as Piedmont won several Toby Awards recently.
Speaker Change: Tobey is an acronym for the outstanding building of the year and it earned by BOMA, a widely known international Real estate Association that sets the standard for operational best practices.
Speaker Change: In Orlando the exchange warm the high rise category in the southern region.
Speaker Change: Also in Orlando Town Park, one the low rise category in the southern region.
Speaker Change: In Minneapolis Crescent Ridge, one the Midrise category in the Midwest Northern region.
Speaker Change: And in Boston Wayside Office Park worn in a low rise category at the highest award tier the international level.
Speaker Change: Let me take a moment to translate these rewards into our leasing success.
Speaker Change: Each of these building share many of the same characteristics, including a preeminent location, that's walkable and easily accessible by car. They also offer great conference fitness and food and beverage option.
Speaker Change: Great Air and light and highly functional floor plates and they commented discount to new construction.
Speaker Change: And these factors are why we continue to see an increase in proposal across our portfolio and we remain positive about the future near term leasing Trump.
Speaker Change: Our leasing pipeline activity is exceptionally strong with approximately 450000 square feet already in late stage activity.
Rent noted outstanding proposals at the end of the quarter stand at a record of approximately 3 million square feet, a strong indicator of future leasing activity.
Given the strong pipeline and a limited amount of lease expirations remaining for the fourth quarter for the second quarter in a row, we will be increasing our projected lease percentage by 50 basis points for in service portfolio to be in the 88% to 89% range at year end.
Speaker Change: I'll now turn the call over to Chris Coleman for any comments on investment activity.
Speaker Change: Yes.
Chris Coleman: Thank you George well there are no material updates this quarter regarding piedmont's portfolio. We do have a couple of small noncore assets currently on the market we.
Chris Coleman: We don't expect any additional dispositions to close this year and as you all know the transaction market remains choppy and highly uncertain broadly.
Chris Coleman: Broadly speaking I would note that we are seeing financing conditions, Paul just a bed and a modest improvement in transactional activity in some of our markets.
Chris Coleman: And while there is a long road to recovery ahead for obsolete office inventory tenant demand for high quality assets is being validated and we'd expect pricing for those assets to reach an inflection point and to stabilize in 2025.
Chris Coleman: Anecdotally there does appear to be growing conviction that we are at or very near the bottom from a pricing perspective.
Chris Coleman: As we have signaled for several quarters, we are more focused on dispositions and acquisitions, but we do remain in active dialogue around targeted potential opportunities, we will remain patient and highly selective with our capital.
Speaker Change: With no other material updates at this time I'll pass it over to Bobby to cover our financial results.
Chris Coleman: Hi.
Gross well, we will be discussing some of this quarters financial highlights today. Please.
Chris Coleman: Please review the entire earnings release the 10-Q.
Chris Coleman: Accompanying supplemental financial information, which were filed yesterday.
Chris Coleman: For more complete details.
Chris Coleman: Core <unk> per diluted share for the third quarter of 2024 was 36% versus 43 cents per diluted share for the third quarter of 2023.
Chris Coleman: Approximately three sets of the decrease is due to increased net interest expense from our successful refinancings over the past year with the remaining decrease attributable to lower reported rental income due to the sale of two properties this year as well as the downtown.
Chris Coleman: Between the exploration of a few large leases earlier this year before newly executed leases commence.
As we've indicated throughout the year, we believe that we've reached the bottom of the trough for the company's quarterly <unk> per share for this real estate cycle.
Chris Coleman: And that results will improve in 2025 as leases come up, particularly in the second half of the year.
Chris Coleman: I guess Oh generated during the second quarter of 2024 was approximately $30 million, providing ample coverage of the current quarterly dividend and funding for our foreseeable capital needs.
Chris Coleman: As we've previously mentioned Capex for 2024 was elevated as we wrap up four major building redevelopment projects before the end of the year, leaving us with much lower redevelopment requirements for next year.
Chris Coleman: Turning to the balance sheet.
Chris Coleman: Proactive refinancing activity over the last 18 months is complete was 1.4 billion of maturing debt address.
Chris Coleman: Our current liquidity position is strong comprised of the full capacity on our 600 million dollar line of credit and over 130 million of cash and cash equivalents, representing the remaining unused proceeds from our last bond offering in June.
Chris Coleman: We've temporarily invested these proceeds accretively, but intend to use them along with funds received from any potential dispositions and available bank credit to repay the $250 million term loan that matures during the first quarter of next year.
Chris Coleman: Absent this maturity, which is largely pre funded the hell. We currently have no other final debt maturities until 2027.
Chris Coleman: Obviously with the successful refinancing activity that took place in 2023 and 2024, we've repeatedly proven our access to capital in the debt markets.
Chris Coleman: At higher rates, which has temporarily impacted our credit ratios and earnings with interest expense more than doubling over the last two years.
Chris Coleman: <unk> all unsecured debt maturing in 2027 and for that matter for the rest of this decade is expected to be refinanced at lower interest rates given the current yield curve and thus be a tailwind to <unk> per share growth.
Chris Coleman: We remain committed to the investment grade bond market and will note that our outstanding bonds are all investment grade rated.
Chris Coleman: With our large backlog of executed yet unconvinced leases or leases in abatement, we're modeling an improvement in our credit ratios next year as these leases began.
Chris Coleman: Our confidence in a return to a F F O and <unk> growth as well as improving debt metrics is increasing.
Chris Coleman: Currently experiencing historically wide 820 basis point gap between our current reported lease percentage of 88.8%.
Chris Coleman: In our space currently paying rent or economically leased at only 86%.
Chris Coleman: This over 8% GAAP is normally in four to four 5% range.
Chris Coleman: For more information regarding the specific leases contributing to this gap.
Chris Coleman: Please refer to page 39 of the supplemental information filed last night for details of major leases that have not yet commenced or are in abatement, which will largely commenced and begin generating cash by the end of next year.
Chris Coleman: At this time I'd like to narrow our previously provided 2024 annual core <unk> guidance to $1 48 to $1 50 per share with no change in our midpoint.
Chris Coleman: As a reminder, this guidance does not include any acquisition or disposition activity for the remainder of the year as such transactions occur we will update this guidance.
Chris Coleman: Our same store NOI guidance for 2024 remains between 2% to 3% for the year.
Chris Coleman: The current quarterly trends are part of that guidance impacted by downtime between no lease explorations earlier this year and the commencement of executed leases in our backlog.
Chris Coleman: As we've typically done we'll be providing guidance for next year. After the end of the current fourth quarter.
Chris Coleman: After we've completed our budget process and presented it to our board for approval in December.
Chris Coleman: We expect improving quarterly results next year, particularly in the second half of 2025.
Chris Coleman: Significant newly executed leases commence this.
Chris Coleman: This year's quarterly results have slowly declined primarily due to higher interest expense from recent refinancing.
Chris Coleman: And due to lease space down times.
We expect the inverse of this trend next year.
Chris Coleman: With our low lease expiration schedule, which is anticipated to be less than a million square feet.
Chris Coleman: And as already executed leases commence generating F O growth followed by improving cash flow.
Speaker Change: With that I'll turn the call over to Brent for closing comments.
Thank you, George Chris and especially Bobby because.
As we announced a few weeks ago, Bobby will be stepping down as our CFO this quarter and I want to take a moment to thank him for his two decades of leadership at Piedmont and his invaluable contributions to our business values and culture here.
Speaker Change: He has left an indelible legacy on the employees of Piedmont, and I will personally Miss our daily interaction and strategic collaboration.
Speaker Change: We do however wish him well as he focuses more time on his family and all those other interest outside of Piedmont.
Speaker Change: If you haven't already had a chance.
Speaker Change: Please reach out and wish him well.
As we turn this page we look forward to hearing more on our next call from Sherry Rexroad as our new CFO.
Speaker Change: Sherry, who was formerly with store Blackrock and CBRE and joined Us about a month ago.
It's been working alongside Bobby and we look forward to her capable leadership.
Speaker Change: As for the rest of US we're still very much focused on <unk> core business designing managing and leasing great places, whether that'd be a place to work for a place to meet relax eat or drink the.
Speaker Change: The investments we've made in our portfolio combined with our customer centric place, making mindset continues to resonate with existing and prospective tenants alike.
Speaker Change: We have no immediate refinancing need until 2027 and continue to be selective with capital deployment.
Speaker Change: Our customer service and leasing strategy targeting small and medium sized enterprises is driving portfolio leasing volumes and rental rates to new highs.
Speaker Change: And we're also starting to experience increased demand from large corporates.
Speaker Change: We believe these trends will be long lasting and Piedmont is extremely well positioned to compete and gain market share in this next office cycle.
Speaker Change: With that I will now ask the operator to provide our listeners with instructions on how they can submit their question. We will attempt to answer all of your questions now or we will follow up with appropriate public disclosure if necessary.
Speaker Change: Operator.
Speaker Change: Certainly at this time, we will be conducting a question and answer session.
Speaker Change: If you would like to ask a question. Please press star one on your telephone keypad.
Speaker Change: Confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Your first question for today is from Anthony Powell long with J P. Morgan.
Anthony Powell: Great. Thanks, Good morning, and welcome Sherry and.
Speaker Change: Thank you Bobby for everything and all the best first of all.
Anthony Powell: My first question is on the 3 million square foot leasing pipeline can you maybe talk a bit more about where some of that might be concentrated.
Anthony Powell: And you know what might be a bit more nearer term, maybe nature of the tenants or any any other context around that would be great.
Speaker Change: Good morning, Tony and George Wells here and thanks for joining us this morning.
Speaker Change: Tell you what we're quite excited considering what we've been the past several quarters around little over 2 million square feet CHF 3 billion square feet can just imagine how excited we're about our near term prospects.
Speaker Change: Take a look at the markets that these matters emanating in.
Speaker Change: Not surprising the Minneapolis is rising to the top as a second quarter in a row.
Speaker Change: They've captured 2020% to 25% of our overall proposal volume in terms of new activity.
Speaker Change: Was it Dallas, Atlanta, and Boston is about 50% of that new deal activity, so going back to the 3 million I'm, sorry, I shouldn't speculate upfront as I mentioned upfront, 70% of that is for new activity.
Speaker Change: So we're pretty pleased with that ratio in terms of sector that we're seeing it from it's not unlike what we've seen in the past several quarters, we're seeing that come out of financial distress.
Speaker Change: Health care associations insurance.
Speaker Change: But surprisingly again no technology firms that really stepped up at this point.
Speaker Change: When you take a look at.
Speaker Change: The reason for this spike in overall proposals. It's it's really the result of the fact that we just haven't had many blocks of over 100000 square feet available for the past several quarters.
Speaker Change: Now we're getting that one of those we're getting is in Dallas with Ryan's, leaving their 112000 square foot lease here in the first quarter of 2025, and we have a fair amount of deal activity to take care of that and.
And as you know Minneapolis, we lost Excelsior, So we've lost Cargill that Excelsior and U S Bank as our iridium crossing asset.
Speaker Change: And the market is really coming around and appreciate what we're doing with those particular assets. In fact, we've got over 12 prospects that are over 50000 square feet or more.
Speaker Change: That's really what's caused the bulk of our spike in overall proposals. So I mean, when you look at proposals you look we have late stage activity and also the overlay here end of tour activity for the last quarter and hit a record number and just continues to just give us a positive outlook of what we can do it here in the near term and certainly the medium brand is <unk>.
Speaker Change: Resonated with customers that are looking for that differentiated workplace offering where we have vibrant environments and exceptional customer service.
Speaker Change: Yeah.
Speaker Change: Do you have a second question maybe Tony.
Speaker Change: Yeah, sorry, I was on mute I appreciate that.
Anthony Powell: So you mentioned the one tenant and I think <unk> 25 per 125000 square feet. It sounds like that's a known move out can you just note any other.
Larger items to watch for 2025 that we should have on rate or radar.
Brent Smith: Hi, Toni this is Brent good morning, thanks for joining us.
Brent Smith: As you know the 100 110000 square feet will get back with Brian in Dallas at our gallery of project there.
Brent Smith: George Great traction, we really you know last quarter it put to bed the larger expirations that we have in 2025.
Brent Smith: Again, I think that gives us a lot of I.
Brent Smith: I guess.
Brent Smith: Certainty I guess around the projection of what we can accomplish calling this the trough and then looking ahead to next year with limited role.
Brent Smith: We think we'll add probably less than 1 million square feet of renewal activity to accomplish next year of expirations. Once we get to next year, just given what's in the pipeline.
Brent Smith: So we continue to see really no big exposure that gives us concern and particularly as that $48 million backlog of revenue starts to bleed into the portfolio next year really over the next call it.
Brent Smith: Six to 18 months and it really does start to accelerate in the second half of next year.
Brent Smith: As well so no no major move out that we see indoor impediments to continuing to drive occupancy through next year.
Speaker Change: Okay, and then just last one more specific to D C and northern Virginia, If my Maths right. If you take that.
Speaker Change: Part of the portfolio out your you're like 91% leased and so I guess question is with that market like do you think you start to see some subtraction in occupancy pick up there in the next few quarters or do you think a recovery there is a bit further in the offing.
Speaker Change: Yes, great Great point, Tony and I think as we alluded in our prepared remarks, we are seeing a broad based increase in deal flow X D. C and I think as I noted Dcs its own set of challenges without U S government coming back.
Speaker Change: Fully to the office I would say that really impacts the district and northern Virginia.
Speaker Change: But it is an overall malaise in the market.
Speaker Change: So I think we continue to be cautious about our overall approach to D C and we see good activity in Nova.
Speaker Change: Again very cautious in what we think we can accomplish next year the district in 'twenty five.
Speaker Change: We've got great product in Boston and clarity, it's highly walkable to rightsize floor plates and good transactional activity in terms of trading proposals in that part of the market and I would note that the district itself only represents about four and a half.
Speaker Change: Call It maybe at most 5% of the portfolio.
Speaker Change: So really that's the most challenged market.
Old portfolio and again, Nova we think there'll be good activity next year.
Speaker Change: Okay, great. Thank you.
Speaker Change: Your next question is from Michael Lewis with <unk> Securities.
Michael Lewis: Great. Thank you.
Michael Lewis: I wanted to ask about the you know the.
Michael Lewis: Strong leasing activity and the surge in the pipeline as well.
Michael Lewis: This is kind of a theme throughout the office Reits right now, there's there's kind of a renewed enthusiasm.
Michael Lewis: You know not to throw cold water.
Speaker Change: I have a little bit of a hard time wrapping my head around that there's a surge in demand because of the return to office, where the economy is so strong and so I wonder kind of what you attribute the increase to an activity is it maybe some of it is you know theres more exploration because there were a lot of short term leases signed during the pandemic maybe this.
Speaker Change: There's really a REIT phenomenon you know you talked about the the growing share for the best properties in the best landlords.
Speaker Change: I guess I'm, just asking why do you think the pipeline.
Speaker Change: Has gotten so strong.
Speaker Change: Uh huh.
Fred: Great question. This is Fred.
Fred: I think continuing to follow similar high quality landlord owners are seeing.
Fred: A couple of different things, specifically for our portfolio, but for that upper portion of the call. It the top again five to 10 buildings and a submarket is call it the top 20% of the market.
Fred: See a couple of different factors AFR portfolio, we own a little bit of a.
Fred: More approachable price points got bigger addressable market and we've seen those are looking to move up from beef to as really gravitate to high quality, but not necessarily new development. You've heard me talk about definitely for more value price point for that type of environment that their workforce wants to be and I also so that's one leg of this tool and thats.
Fred: Continued migration.
Fred: Floating to again.
High quality landlords typically are well capitalized and they are able to invest in their assets and also ranked commissions and ti and et cetera.
Fred: This tool is we have seen bigger users on non tech I would point out start to make a little bit more decision activity and I do think that is a component of the return to office phenomenon.
Fred: Embedding Lee we continue to see utilization still hover around 70%, but there is a different feeling in the air in terms of people expecting their workforce to come back to the office through mandates through other initiatives and we've seen it also gravitate toward that tenant engagement and creating unique environment to the building as we've talked about.
Fred: It really captured teams of two 510, 5100, plus and allow that collaboration environment and we're seeing more and more of those corporates, who said my workforce can be remotely realized culture creativity and collaboration has to occur around an office building an in person whether that three days a week or five days a week they need.
Fred: That space and it's not overall changing the demand profile I think a lot of the industry has gone through the pain you now have either seen space come back and those are obviously buildings go from 70% leased down at 30% lease and you can tell what part of the market needs to be pulled out of the denominators.
Fred: But overall youre going to continue to see the focus on the upper end of the market.
Fred: That's where the demand is and as that has occurred youre seeing vacancies shrink now in that segment.
Fred: 10%, sometimes even tighter levels of vacancy and so that's also in creating a sense of urgency from big users to say, okay, I want high quality space at a reasonable price I need to take a hold of it now in some of these markets because once I factor out the <unk> product the landlords that have no capital I'm only left with a certain subset.
Fred: So I think that's but again, that's small medium enterprise looking to uplift into a better quality assets have been the two big drivers for our pipeline.
Fred: And I think again for high quality landlords, they would echo that sentiment.
Speaker Change: Okay. Thanks.
Speaker Change: You sold the one Dallas asset I was going to ask about the two Houston assets. I know you had a buyer I think several quarters ago that wanted to sell their financing until you pass it sounds like from Chris's comments, maybe that's more of a 2025.
Speaker Change: Okay.
Speaker Change: Activity.
Speaker Change: Also you know Chris that something interesting about.
Speaker Change: Maybe a bottom in office pricing right now, but you guys are more focused on being a seller versus a buyer.
Speaker Change: Maybe just elaborate on that right. So like at a high level very simple right. You would think when prices are low maybe youre not a seller. Maybe you are a buyer. If you can be and you kind of wait this out a little bit.
Speaker Change: So maybe just kind of what are your thoughts on the right timing to sell some of these noncore assets.
Speaker Change: Versus you know when the time is to play offense.
Speaker Change: Great question, Michael on the capital markets and I think first of all point out a couple of things we've sold two assets in Dallas This year roughly about $77 million.
Speaker Change: First one the first quarter was to a user group second one was more of a private equity smaller shop, but I think it's indicative of what we see overall in the market is that those users who are.
Speaker Change: Those groups that are either users and having no kind of need for building and are those who are local private equity and have a conviction around just the return to office or where we see a lot of the transactional activity, but overall if you take our one Lincoln Park asset it was.
Speaker Change: Really a different profile than.
Speaker Change: 750, <unk>, John Carpenter freeway, which we felt just wasn't going to have a be positioned well in it.
Speaker Change: Modern age going forward.
Speaker Change: And so that was both of those transactions is $50 million or less which is where we see the demand right now, but I think as Chris alluded to in his prepared remarks, really where we're seeing liquidity return it's modest.
Speaker Change: We've just started turning the corner, but it is for those higher quality assets and so I think theres still a men's distress at the bottom part of the market, but we are seeing firming of pricing.
Speaker Change: Call It higher end of the market called the top 25% of the quality of the assets.
Speaker Change: <unk> has moved meaningfully let's be clear over the last three years, but youre seeing at least some convictions and transactional trades.
Speaker Change: Around some of those.
Speaker Change: Assets and so that's what gives us the thought or the at least the perspective that we're starting to see further liquidity come into the market.
Speaker Change: Pricing start to be discovered.
Speaker Change: We still think there'll be amidst distress in this sector for the next couple of years and that does provide us with an opportunity.
Speaker Change: To consider recycling capital.
Speaker Change: Playing continuing to move the portfolio towards our targeted sunbelt markets.
In terms of Houston, specifically.
Speaker Change: Continue to have the assets quote unquote in the market very light slightly we've talked to a few user groups. They are well leased but we do have the attention and they are non core to sell them in the targeted is next year.
Speaker Change: I'd say again, we're starting to see a little bit of return of capital for core and so that's what gives us the hope that we can execute on that next year.
Speaker Change: Okay, Great and then just lastly, lastly for me.
Speaker Change: I kind of asked the question about D C.
Speaker Change: That I was going to pose but I do ask this question every four years and every four years I forget the answer does does the election.
Speaker Change: And a change in administration does that drive leasing activity in D C or do you expect that or are.
Speaker Change: I'm just wondering since the elections right around the corner.
Yeah, I think broadly speaking, we haven't seen the election impact decision, making across the portfolio for D. C. Specifically.
Speaker Change: You know, it's anybody's guess, but I would say both.
Speaker Change: Group's Republicans and Democrats there is a bipartisan bill look forward that yearly is trying to accelerate decision, making by the U S government around the space. So I guess I might call that an incremental positive and I think both sides of the aisle or considering that I think overall, though again I don't see a clear path to breathe in federal.
Speaker Change: Workforce necessarily back with either side, maybe more so with the Republican or Democrat, but overall I think that demand is going to be diminished in the district for some period of time and as we've talked about it's really hard to differentiate an asset in that market. So we still remain very cautious.
Speaker Change: About our long term leasing at success in that market.
Speaker Change: Yeah.
Speaker Change: Will turnaround over time I, just think it's going to take a lot longer than the rest of the U S.
Speaker Change: Got it thank you.
Speaker Change: Your next question is from Nick Fillman with Baird.
Nick Fillman: Hey, good morning, guys, maybe touching a little bit more on leasing just some clarification on the 450000 square foot late stage pipeline can you give the breakdown renewal versus new I think the 70% was sort of a 3 million square feet and then just on that 70% renewal on a.
Nick Fillman: Hosel outstanding I guess, you guys mentioned no no downsizing on that but just curious on kind of what those tenants are thinking about aerospace is currently.
Speaker Change: Certainly Nick good morning Aldo.
Nick Fillman: The late stage activity that we're seeing which is around 450000 square feet, 25% of that is related to new activity.
Nick Fillman: Again, it's it's happening in all of our markets. So in.
Nick Fillman: And the sectors are pretty familiar of similar as well as from what we've seen in the past couple of quarters.
Nick Fillman: Getting back to the larger deals the 70% of the $3 million.
Nick Fillman: Yeah.
I'm not sure that we're seeing a lot of downsizing and those large users that we're.
Nick Fillman: We're chasing.
Nick Fillman: We are seeing is that those are more inter market lose those are not migrations from other cities. So far although there are some.
Nick Fillman: And down activity occurring in Dallas, and Atlanta, but those are not the deals that we're seeing there more inter market moves at this point.
Nick Fillman: And then two just in terms of that renewal probability I think we continue to look back look forward in that 60% to 70% annual range still feels right.
Nick Fillman: Mike.
Speaker Change: <unk> landing, we're seeing again, George noted less contraction than expansions meaningfully this quarter. In fact, we had no contraction in the third quarter only expansions.
Nick Fillman: But we.
Nick Fillman: We feel that that's a conservative but achievable level in that 60% to 70% renewal rate.
Speaker Change: And you guys have had like strong kind of spread this year I guess on you are having your discussions on these renewals.
Speaker Change: Early stages are you still seeing roll up in rents or like do you think this is a common trend we could see for 25 and 26.
Speaker Change: Yes, yes.
Speaker Change: We've actually looking interesting stat, we lease now almost 80% of the portfolio is just the pandemic with an average cash roll over 7% to 8%.
Speaker Change: I think that is very indicative of what we see across the portfolio in terms of in some instances last quarter. We did 1 billion square feet and it was a roll up on a cash basis I believe in the low teens, yes about 12% 12, 13% so.
Speaker Change: Again, I think the demand for and our addressable market is very strong.
Speaker Change: And so that's leading to our ability to push rate pretty meaningfully across definitely the sunbelt markets, but even we're seeing.
Speaker Change: Some ability.
Speaker Change: Our northern markets as well to push rate New York as an example, where we did a 100000 square feet. There this year alone up in the tower.
Speaker Change: And then maybe a question for Chris on the dispositions in the three to four smaller buildings are these more stabilized assets or is there. Some vacancy with these assets and then just kind of whats like a rough range of kind.
Speaker Change: Kind of proceeds do you expect from these sales and 25.
Chris Coleman: Morning, Nick.
Chris Coleman: I don't know that we wanted to necessarily get into expected proceeds out deferred upfront and Bobby and Sherri on that but.
Chris Coleman: As you know we've closed about $75 million year to date.
Chris Coleman: To get those two deals done given the environment.
Chris Coleman: In terms of what we have out in the market again, they're mostly smaller assets in our portfolio they've been on our disposition list for some time.
Chris Coleman: If we're able to move any of them I don't think youll be surprised with the decision of the rationale.
Chris Coleman: These are typically either Brent.
Speaker Change: Brent mentioned, one or two land opportunities.
There is another asset that's about 80% leased.
Chris Coleman: And I want to get into too many details on the balance but.
Speaker Change: Yes. These are these are to get our assets that are noncore assets had been on our disposition list for some time, we do feel cautiously optimistic that conditions are improving and we will be able to move them certainly won't be in 2024, but hopefully first half of 2025 and I just add.
Add to that.
Speaker Change: We probably think we can accomplish maybe 60% to $50 million in sales in the next 612 months or so.
Speaker Change: Given what we have in the market and some traction I would characterize it as core plus these are well leased.
Problematic assets, we left a little bit of meat on the bone, but they are what we would consider to be towards the lower end of the quality spectrum for our portfolio and against smaller in size. So we do think there's demand there but in both of these situations. We've actually shown really good lease up or sorry, the ones that are in the market that our asset.
Speaker Change: Good lease up over the last call it year and so we think that we've proven that they again meet the demand for today's modern workforce and we're hopeful we can execute.
Speaker Change: That's very helpful. And then I'd be remiss, if I didn't ask Bob a question on his last conference call. So.
Speaker Change: On the redevelopment, what's the remaining spend for those three assets and I assume most of that is planned for the fourth quarter.
Speaker Change: Yeah actually year to date, we have about five projects.
Speaker Change: In total were about 10 million left to complete.
Those are projects that totaled a 100 million. So you can see the vast majority of that's done with very little rolling into next year.
Speaker Change: Very helpful. Thank you all.
Speaker Change: I would just add on top of that.
Speaker Change: We feel like we've touched a lot of the portfolio and given it.
Speaker Change: Piedmont place, making as we characterize it and that means.
Speaker Change: Really investing in the assets, creating the chin engagement programs.
Speaker Change: Creating that environment again that we call the modern office environment.
Speaker Change: And so we're reaping the rewards of that we think next year in terms of just increased leasing velocity and getting through some heavier construction periods as we know that I've seen.
Speaker Change: What we're seeing in Minneapolis is when Youre deepen construction, it's tough to get to where activity and demand, but youre about three months away from completion things.
Speaker Change: Things really start to pick up in the vision starts to take hold and that's when we start to really see a pickup in demand and proposals et cetera. So.
Speaker Change: Again, I think we've touched a lot of that redevelopment capital Youll see a wind down here at the beginning of next year and then I think we will be reaping the rewards of that for years to come.
Speaker Change: Thanks for the added color Brent I appreciate it.
Speaker Change: Yes.
Speaker Change: As a reminder, if you would like to ask a question. Please press star one.
Speaker Change: Yeah.
Speaker Change: Your next question for today is from Dillon Burzynski with Green Street.
Speaker Change: Okay.
Dillon Burzynski: Good morning, guys hope, you're all doing well.
Dillon Burzynski: Just a just a quick one Brian you mentioned being able to push rents across the portfolio, but just sort of curious how the concessionary environment is trending are we starting to see relief on that front as you guys start to approach the 90% lease percentage within your portfolio.
Dillon Burzynski: Hmm.
Speaker Change: Great question, gentlemen, and thanks for joining us today.
Speaker Change: As we continue we have noted we have pushed base rent and we have seen net effective rents grow in the sunbelt I think it's been mostly flat kind of in the north maybe even a little bit negative in D. C.
Speaker Change: But again.
Speaker Change: <unk> is around increasing base rents. We've finally seen concessions level off I think thats fair to say.
Speaker Change: But it is.
Speaker Change: A pretty meaningful movement over the last couple of years, where you've seen it go from call. It six to $8 per square foot per year of closer to eight to 10, depending on the circumstances.
Speaker Change: So the good news here.
Speaker Change: T. I think has leveled off we've continued to try to rein in free rent.
Speaker Change: And we have continued to push that lower all as we talk about and negotiate transactions, but capital. Unfortunately is paramount and it is expensive and so that is what tenants focus on in terms of negotiations.
Speaker Change: Our ability that we also can drive lower concessions is through a modest spec suite program in which we build out the space first for some of the smaller users say for instance, we're building out of it.
Speaker Change: 18000 square foot space on a on a <unk>.
Speaker Change: 22000 square foot floor and economies of scale will go ahead and pre build the remaining space of the floor and then utilize that in our leasing program. It's been very successful strategy keeps costs down and more importantly.
Speaker Change: He keeps costs down on the Ti front and more importantly, we get earlier starts in terms of commencement and we're also able to really drive free rent lower in those instances as well. So in short concessions are probably <unk> capital has increased 20% over the last two two and a half years free rent is now starting to come down and we are continuing to.
Speaker Change: Our strategy to reduce the overall concession package.
Speaker Change: And continue to drive better economics, and higher <unk> going forward.
Speaker Change: That's helpful. Thanks, Brian and then I guess, just pivoting over to your comments on acquisitions and not necessarily likely doing anything on that front over the near term but.
Speaker Change: As you sort of think about the opportunity set and obviously piedmont's portfolio is high quality. So I assume so your investable universe is going to be smaller than one might expect but we've seen some of your peers sort of go at this right now through the dealt angle of the mortgage angle is that sort of an avenue or a path that Piedmont is looking at today.
Speaker Change: Yeah.
Speaker Change: Great question delighted and I would say, we continue to focus very much on our sunbelt markets for opportunities really primarily Atlanta Dallas at the moment and we know that 10 to 15 assets in each market, we'd like to own. So we stay very close to those groups.
Speaker Change: We're very comfortable playing up and down the capital stack.
Speaker Change: In instances, we bought a note coming out of the last crisis in Chicago, we foreclosed on that asset and we sold it for about a $70 million to $80 million gain.
Speaker Change: And 2019.
Speaker Change: Part of our exit out of Chicago. So we're very comfortable we consider that we have looked at notes we've looked at direct equity and talk to groups, but again I think right now we're focused on continuing to position the balance sheet executions in 'twenty five and so that means looking to continue to deleverage modestly through noncore asset sales.
Speaker Change: And continuing to get EBITDA into the portfolio as well with all of this backlog of leasing to uplift our credit metrics.
Speaker Change: It put us in a position to play a stronger offensive.
Speaker Change: <unk> next year.
Speaker Change: And thinking about acquisitions and as Chris noted, we're looking to try to find unique opportunities that we can create value for.
Speaker Change: For shareholders that would be accretive to earnings.
Speaker Change: And really be a logical acquisition.
Speaker Change: Logical to bring into the portfolio.
Speaker Change: I would note that if we were to go after note. We're looking for a way to get to the asset I think we would probably view that as a hospital strategy, but it's something that we would consider for the right asset.
Speaker Change: Great I appreciate that detail Brian.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: We have reached the end of our question and answer session and I will now turn the call over to Brent Smith for closing remarks.
Brent Smith: I want to thank everybody for joining us today, if you haven't kind.
Brent Smith: Got the feeling I think management has exceeds extremely excited about the track record of leasing that we've accomplished year to date 2 million square feet as of record and more importantly, though the operational growth that we seem to be positioned given the platform and the activity that we're seeing across the portfolio as we do see increases from return to office.
Brent Smith: I would encourage investors.
Speaker Change: Have you had time to please schedule a meeting with management at NAREIT conferences, the 19th and 20th in Las Vegas.
Speaker Change: But more importantly, I'd also encourage investors and you've got the time youre coming through Atlanta.
Speaker Change: We have management with really appreciate the opportunity to tour you threw in two hours you can cover probably about $1 billion for real estate and really see the strategy that we're putting forth as we'd love to host you and then I would be remiss if I didn't one last time say, how much myself and all of the Piedmont employees women is working.
Speaker Change: With body.
Speaker Change: Contributions and impact of left an indelible impression on the third myself.
Speaker Change: All of my fellow colleagues, Bobby I want to congratulate you for what you've accomplished.
Speaker Change: Luxury is career and for what lies ahead.
Speaker Change: And with that thank you everyone have a good day.
Speaker Change: This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
Speaker Change: Okay.