Piedmont Office Realty Trust Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 31, 2023

There are 11 speakers on the call.

Operator

Greetings, and welcome to the Piedmont Office Realty Trust Incorporated Third Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode and the floor will be open for questions and comments following the presentation. Please note, this conference is being recorded. I will now turn the conference over to your host, Laura Moon. Ma'am, you may begin.

Speaker 1

Thank you, operator, and good morning, everyone. We appreciate you joining us today for Piedmont's Q3 2023 earnings conference call. Last night, we filed our Form 10 Q and an 8 ks that includes our earnings release and our unaudited supplemental information for the Q3 that is available for your review on our website atpiedmontreit.com under the Investor Relations section. 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.

Speaker 1

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 of 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 risk associated with forward looking statements in our SEC filings. Examples of forward looking statements include those related to Piedmont's future revenues and operating income, Dividends and financial guidance, future 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 1

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 then the supplemental financial information, which were filed last night. At this time, our President and Chief Executive Officer, Brent Smith, will provide some comments regarding Q3 operating results. Brent?

Speaker 2

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 Treasurer 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 Eddie made immeasurable contributions towards the advancement of Piedmont. He will be sorely missed by all of us.

Speaker 2

Eddie will stay on as a consultant We'll be taking on most of Eddie's responsibilities. Okay. So now on with the quarterly call.

Speaker 3

I want

Speaker 2

to thank everyone for joining us today as we review our Q3 results. In addition to Laura on the line with me this morning are George Wells, our Chief Operating Officer Chris Colmey, our EVP of Investments and Bobby Bowers, our Chief Financial Officer. We also have the usual full complement of our management team available to answer your questions. 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 Q3 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 atorabovepre COVIDlevels, resulting in net absorption during the Q3.

Speaker 2

The average size lease executed was approximately 13,000 square feet with a weighted average lease term approximately 7 years and reflected double digit roll ups on renewals on both a cash and accrual basis. As anticipated, same store NOI on a cash and accrual basis continued to strengthen during the Q3 as new leases commencing and or those with expiring abatements began to outweigh expirations 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 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 U. S.

Speaker 2

Bank lease expirations. That being U. S. Bank's renewal of its entire 447 1,000 Square Foot headquarters location at our LEED Gold U. S.

Speaker 2

Bank Quarter Center Asset in Downtown Minneapolis. 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 at 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 U.

Speaker 2

S. Bank, the October activity Also included a sizable new tenant lease with GE Vernova at Gallery on the Park in Atlanta, continuing 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. 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 1990 vintage assets, We have reimagined, remodeled and redeveloped the 2,100,000 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% leased.

Speaker 2

I would add that we have about 200,000 square feet of vacancy remaining at the project with continued strong demand. It's an example of how our amenitized well located high quality assets Continue to lead the respective submarkets and leasing activity. I believe public investors need to understand that the top 5 to 10 office assets in any given submarket Continue to perform very well despite the market malaise. Finally, the strong start to the 4th quarter leasing reinforces To reach our goal of approximately 87% leased at year end and demonstrates the continuing demand for highly amenitized well located office space owned by sustainability focused and financially stable landlord. Returning to our operating results, We continue to experience growth in property operating income as compared to the prior period.

Speaker 2

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 garner outsize 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 their return to office stance. We're starting to see many larger One of the most notable return to office announcements being made this quarter was by Zoom. In addition to other announcements And comments from Salesforce, Amazon and Google to bring team members back to the office to collaborate.

Speaker 2

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 subleasing availabilities. As JLL recently reported, After analyzing its vast data set of office buildings comprising over 2,700,000,000 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.

Speaker 2

So while some of Piedmont assets may incur temporary vacancy as Some larger tenants right size their space. We do not own the assets positioned in this lower tier of the market. And after leasing almost 7,000,000 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 GRESB scores during the quarter. This was only our 2nd submission and I'm very pleased to report received the highest sustainability rating of 5 stars and our 2nd green star rating based on 2022 performance.

Speaker 2

At this time, I'll hand the call over to George, who will go into more details around the corner.

Speaker 4

Thanks, Brent. Good morning, everyone. Demand for Piedmont's high quality assets has produced another quarter of solid operational results. As we've seen for the past 2 years, small users from a broad range of industries are fueling our leasing success Outside of 1 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. These tenants are attracted to our competitively priced offerings citing their ease of accessibility, vast amenity base, Unique tenant engagement programming and best in class conference facilities.

Speaker 4

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, 100 and 70,000 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. Continuing with operational metrics, our lease economics were also Our weighted average lease term achieved on new lease activity for the quarter was over 9 years. Due to our leasing 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 Sunbelt portfolio where almost 70% of our vacancies reside.

Speaker 4

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. 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 availability has stayed steady for the past 3 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 4 contractions of 20,000 square feet yielding a net gain of 18,000 square feet. Now I'd like customer in Piedmont's portfolio, U. S.

Speaker 4

Bank. Our Downtown Lead GOL U. S. Corp. Center, which was just recognized The 2023 international COBie award winning building serves as the bank's global headquarters and we're very pleased that our long term relationship will continue Under 10 year lease extension for all of its space were 447,000 square feet.

Speaker 4

As Brent noted, this lease was signed after quarter end. Though this deal is flat on a cash roll up basis, it represents a positive roll up on a accrual basis and a strong commitment to downtown by 1 of Minneapolis's largest employers. Unfortunately, and as we foreshadowed in past earnings calls, the bank will be moving its 340,000 square foot suburban hub from our Lea Meridian Gold Crossing complex and moving a few miles away into its Excelsior Crosses location. As you may already know, We also own a building within this well planned 3 building complex, which was developed around a 1 acre park with a full range of on-site market competitive amenities and is easily accessible and highly visible from the highway. Though the bank is still in its 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 during the Q1 of next year.

Speaker 4

As an aside, we currently plan to take our Excelsior building offline in the Q1 of 2024 to modestly reposition this asset for a multi lease up strategy as small users continue to upgrade into high quality availabilities 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. Needless to say, we're excited about the increased momentum we're experiencing in this market. Atlanta, our largest market at almost 5,000,000 square feet and generated of which nearly half are new leases.

Speaker 4

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 US Hub, its lease percentage now is up in the low 90s giving us the confidence to continue pushing rental rates. Our next largest market, Dallas also experienced strong demand, 2nd most within our portfolio. A total of 15 deals were completed for almost 100,000 square feet with over half representing new deal activity. According to the CBRE Research 3rd quarter report, Dallas continues to outperform the U. S.

Speaker 4

And other large metros in employment growth, posting an impressive 4.3% annual growth rate. Our projects here are well positioned to capture Dallas' growing appetite for high quality space. 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 Leasing activity continues to be at the same healthy pace we've seen for the past several quarters. Proposal activity as well as in line with our trailing 12 months coming in around 2,000,000 square feet.

Speaker 4

With a limited amount of rent roll expired during the Q4, we expect positive net space absorption for the rest of the year, resulting in an anticipated year end lease percentage of around 87%. I'll now turn the call over to Chris Colmey for any comments on

Speaker 5

Thank you, George. 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 2 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.

Speaker 5

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. As always, we will 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. With that, I'll turn the call over to Bobby to review our financial results.

Speaker 6

Bobby? Thanks, Chris. 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 details. Core FFO per diluted share for the Q3 of 2023 was $0.43 per share versus $0.50 per diluted share for the Q3 of 2022, with the current quarter reflecting approximately $0.08 The dilution related to the higher interest costs 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 we're all currently experiencing, We reduced our annual dividend from $0.84 per share to $0.50 per share beginning with the Q3 of 2023, which approximates our forecasted taxable income over the next year or 2.

Speaker 6

This reduction in dividend We'll lower the usage of AFFO and increase available cash by approximately $42,000,000 on an annual basis. AFFO generated during the Q3 of 2023 was $40,000,000 or $160,000,000 on an annualized basis, adequately providing for dividend coverage and foreseeable capital needs. 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 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 placemaking assets and well capitalized landlords.

Speaker 6

We covered the 5 year $400,000,000 financing activity that occurred early in the Q3 in detail in conjunction with last July's quarterly call, which addressed a majority of our 2024 final debt maturities. Through a bond tender offer, we utilized the majority of the new financing proceeds To repurchase approximately $350,000,000 of the maturing $400,000,000 2024 bonds And the remaining $50,000,000 in proceeds was used to pay down our $600,000,000 revolver. We currently anticipate repaying the untendered $50,000,000 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 $450,000,000 of capacity today. 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 6

That said, we will remain flexible. Any proceeds generated from dispositions or other financings will be used to pay down our bank term debt. 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 FactSet's consensus estimates. As most of you know, we typically publish annual guidance after we've completed the budget cycle during the Q4 each year and announce our core FFO guidance for a new year in early February during our quarterly earnings call.

Speaker 6

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 2,000,000 square feet I've executed leases completed thus far for this year, including what we expect to be the highest amount New tenant leasing since 2016. I couldn't be more proud of the team having eclipsed 20 22's new leasing volumes with 2 months still remaining in the year. While we have A few known move outs in 2024. We've addressed our largest lease renewal with U.

Speaker 6

S. Bank And we are seeing good activity on most of the other available spaces. Excluding now known the known outcome of U. S. Bank, We have approximately 10% of the portfolio remaining to expire between now and the end of 2024.

Speaker 6

Offsetting this, we currently have also 1,100,000 square feet of leases and abatement are yet to commence. That said, higher interest rates, the possibility of 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. We expect to provide complete guidance for 2024 in early February. With that, I'll turn the call back over to Brent for closing comments.

Speaker 2

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 eclipsed 2022 new leasing volumes and with 2 months Still remaining in the year and given our strong start to the final quarter, we feel confident in achieving the annual lease percentage of the same store goals that we've outlined previously. Same store NOI is expected to be between 0% and 4% up with cash NOI at the higher end of the range and accrual basis In Hawaii near the lower end. Certainly, the elevated interest rate environment will weigh on earnings and FFO and the financing environment continues Despite these headwinds, we believe that the flight to quality occurring in the market combined with Piedmont's strategy of providing premier work With that, I will now ask the operator to provide our listeners with instructions on how they can submit their questions.

Speaker 2

We will attempt to answer all your questions now We will make appropriate later public disclosure necessary.

Operator

Operator? Thank you. At this time, we will be conducting a question and answer One moment please while we poll for questions. Thank you. Our first question is coming from Ray Zhang with JPMorgan.

Operator

Your line is live.

Speaker 7

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.

Speaker 7

Any color you guys can give On the CapEx on the renewal for that space, I think you guys gave a range historically, but just want to get a little bit more color on this specific one if you guys

Speaker 3

This is George Wells, and good morning.

Speaker 4

That transaction, which as If

Speaker 3

you could follow us, it's 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 workspace is going to look like. So that being said, we ended up having, I would say, more of a

Speaker 4

new type of tenant improvements so

Speaker 3

they can redesign their 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 Not too far from what we reported in our sub.

Speaker 8

I would add to that, Ray, and thanks for joining us this morning. Again, as we've talked about previously on Cash basis, it was basically flat, which was positive, but there was no free rent in the transaction. So as George alluded to, kind of I would Market level TIs approaching that triple digit figure. However, there was no free rent in the transaction. So I think that was ultimately a positive.

Speaker 8

Also taking a step back as we think about kind of what we've guided to the street on that. We had thought initially it'd probably be fifty-fifty in each location. Turns out that it was 100% downtown and unfortunately I guess 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. 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.

Speaker 8

S. Bank deep relationships, 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. Great news is we're also going to have that best building in that submarket, certainly from existing build top 3 With a phenomenal amenity set at the top, which U. S.

Speaker 8

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 maybe musical chairs, they'll be Going to our building, which is often what we're seeing now across the country and in our markets. I'll pause there. Any other follow-up questions?

Speaker 7

Yes. Just to follow-up on that, on the suburb space. So it sounds like it 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 Baird.

Speaker 8

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 1st day of next year. That space will likely be put into redevelopment in 2024. It's a I call it a little bit larger floor place 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 up velocity.

Speaker 8

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 amenity set guided towards 1 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.

Speaker 8

The good news is we've actually already seen good traction at that And we've signed a 10,000 square foot backfill lease already with a user as part of our October totals that you've seen. So overall, again, we think that building is really well positioned at the corner of 494 and 35 West. Four Steins, Very, I'd say, accessible right off the highway, walkable to the number of restaurants, more importantly, probably in the Minneapolis market. It's a 5 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 But at least for now, we know the Excelsior building will be going into the 'twenty four redevelopment pool.

Speaker 7

Got it. And then if I may, just one follow-up. Since we touched on U. S. Bank and Cargill, any update on the Amazon lease?

Speaker 7

Any incremental color you can provide? I know they have a couple of different leases and different color you can provide. I know they have a couple of different leases and different spots and just any early conversation color you can provide will be helpful.

Speaker 8

Absolutely. Just like our Meridian buildings, which are lead gold, our Amazon buildings in Northern Virginia It's also legal. That's where Amazon takes about 60,000 square feet. And as we've noted, they will be vacating at the end of the Q1. That said, we do have actually good velocity, if you will, on tour activity and traction to backfill that, including a number of large users for all the space.

Speaker 8

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 Ballston Quarter, the hockey rink and a lot of the retail that sits 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 this space.

Speaker 8

It's a little early to There's no new development in the submarket for them to go to and they really prefer to keep their workforce in that submarket. 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 Q1 of next year.

Speaker 7

Thank you. That will be it.

Operator

Thank you. Our next question is coming from Nick Philman with Baird. Sir, your line is live.

Speaker 9

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 velocity that might just be a little bit more of just vacancy see in the market that you guys have in the portfolio now, but just ranking across the markets, it seems like Atlanta and Dallas are most active, but just maybe get some color on with

Speaker 7

activity on the ground on some of the other markets.

Speaker 9

Sure. Good morning, you be on the ground on some of the other markets?

Speaker 3

Sure. Good morning, Nick. Thank you for joining us. I would Say, you mentioned Minneapolis First. I mean, we've been that portfolio has been very stabilized for many years of being 90% leased or better For several years, we've been pretty ecstatic about it.

Speaker 3

So we're finding a chance 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 that we landed another, I would say, another headquarters location there at one of our properties known as Crescent Ridge. But that being said, we 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 That are happening in our portfolio from a Tenemix perspective.

Speaker 3

Certainly, the word is out about where U. S. Bank is heading from a ratings crossing perspective. Starting to see deal activity just as Brent has mentioned a minute ago. So it certainly is picking up.

Speaker 3

That being said, most of our maintenance continues to be in Atlanta In Dallas, we have the bulk of our activity and it's been a story that we've seen from quarter to quarter. I will tell you though, we do have some Exploration is happening in 2024 in Orlando, but we're really excited about some of the backfill opportunities that we're seeing there. 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 Mona and Toby Ward recently for a building It's been reimagined and renovated. It's been well received in the marketplace.

Speaker 3

And 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 making some announcements there over the next few weeks.

Speaker 8

I can pick up from there and continue on to New York where we've seen actually the 60 Broad, our vacancy sits at the top of the building. It's 12,000 square foot floor plate. Again, we've got a lobby that's going to be completely remodeled and completed in about 2 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 tenant, that floor plate fits perfectly and we're seeing good leasing traction.

Speaker 8

As I noted last quarter, we actually took a tenant out of 55 rod. It's going to convert to resi I put them in our building and we continue to see good velocity there. D. C. Is probably the district our most challenged market by far As George noted, and I would think that's going to continue just given the vast amount of space.

Speaker 8

I think that's 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. 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. D. C. Is a little bit more of a difficult market There's a lot of product, tougher to differentiate, and so we do think it's probably our most challenged market.

Speaker 8

I'll pause there, Nick. Any other follow ups?

Speaker 9

Yes. 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 5, 7 years out, like would be a long term hold?

Speaker 9

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 look like to exit over time?

Speaker 8

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, dollars 300,000,000 to $500,000,000 a year on average. Obviously, the disruption in particularly the debt capital markets has made the transactional activity more challenging. But I think as we look further out, the Strategy that we've continued to have 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 would be great proceeds to redeploy.

Speaker 8

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 suburban 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, inbounds, some of it in the Sunbelt, but most of it in the north are markets And we'll continue to look to redeploy that. If you wanted me to put a percentage of what portion of the portfolio is core today, I'd probably put it 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 the Sunbelt.

Speaker 9

Very helpful.

Speaker 7

Thanks for the time.

Operator

Thank you. Our next question is coming from Dylan Brzezinski with Green Street. Your line is live.

Speaker 10

Hey, guys. Thanks for taking the question. I guess just going on portfolio 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 Maybe bottom here or I guess given the U. S.

Speaker 10

Bank news in the suburban location that there should there may be some pressure here as we look out to 2024?

Speaker 8

Great question, Dylan. I think that's always a difficult thing with office companies is the ins and outs of tenants 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 U. S.

Speaker 8

Bank vacate. We've got a great backlog of leases that are About 500,000 square feet of yet to commence, another 500,000 square feet that's not cash paying, but has commenced. So that will flow in and kind of, If you will backfill some of them 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 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.

Speaker 10

That's helpful, Dijao. I really appreciate that. And then I guess just going back to the comment 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 8

Good question as well. And I think in this market we continue to see the very limited transaction activity that can occur often Acquire that type of financing. To your point, we did provide seller financing up to about 50 Percent LTV at a market rate, we were not in a position we felt to go higher than that, 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, but we are going to continue to canvas the market and offer seller financing on the asset this go round At roughly 50%, call it 55% LTV again at market rates.

Speaker 8

Hence, we'll evaluate the receptivity hopefully here as positive over the next few quarters.

Speaker 7

And are you able to share

Speaker 10

sort of what that market rate was for that Houston asset?

Speaker 8

Interest rates typically we've seen from, I'd 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 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.

Speaker 10

Great. Appreciate the details here guys. Thank you so much.

Operator

Thank you. We have 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

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 We'll be at NAREIT at the conference in LA, November 13 to 15. 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.

Speaker 8

I do believe the office sector has been oversold. We're a particular name in that. We'd love to engage and help explain why we believe that is and Piedmont is a great opportunity to come into the stock. Everyone have a good day. Thank you.

Operator

Thank you. This concludes today's conference and you may disconnect your lines at this time. And we thank you for your participation.

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Earnings Conference Call
Piedmont Office Realty Trust Q3 2023
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