Piedmont Office Realty Trust, Inc. (PDM) Q4 2022 Earnings Report, Transcript and Summary

Greetings and welcome to the Piedmont Office Realty Trust Incorporated Fourth Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] I will now turn the call over to your host, Eddie Guilbert. You may begin.

Thank you, operator, and good morning, everyone. We appreciate you joining us today for Piedmont's fourth quarter 2022 earnings conference call. Last night we filed an 8-K that includes our earnings release and our unaudited supplemental information for the fourth quarter that's available for review on our website at piedmontreit.com under the Investor Relations section. During this call, you'll hear from senior officers at Piedmont. Their prepared remarks followed by answers to your questions will contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements address matters, which are subject to risks and uncertainties and therefore actual results may differ from those we anticipate and discuss today. The risks and uncertainties 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 risks associated with forward-looking statements in our SEC filings. Examples of forward-looking statements include those related to Piedmont's future revenues and operating income, dividends and financial guidance, future leasing and investment activity and the impact of this activity on the company's financial and operational results. You should not place any undue reliance on any of these forward-looking statements and these statements are based upon the information and estimates we've reviewed as of the date the statements are made. Also on today's call representatives of the company may refer to certain non-GAAP financial measures such as FFO, core FFO, AFFO and same-store NOI. The definitions and reconciliations of these non-GAAP measures are contained in the earnings release and in the supplemental financial information, which were filed last night. At this time, our President and Chief Executive Officer, Brent Smith will provide some opening comments regarding the fourth quarter's operating results and the results for the year 2022. Brent?

Good morning, and thank you again for joining us on today's call as we review our fourth quarter and annual 2022 financial results, provide details on several recent leasing and capital transactions, as well as outline our 2023 business plan. In addition to Eddie, on the line with me this morning are George Wells, our Chief Operating Officer; Chris Kollme, our EVP of Investments; and Bobby Bowers, our Chief Financial Officer; as well as other members of the senior management team. Despite the headwinds that the office sector faced during 2022, including remote work, interest rate increases and recession fears, Piemont continued to execute on its leasing and capital recycling objectives, ultimately driving our Sunbelt concentration to 67% of our annualized lease revenue at year's end with a goal to reach 70% by the end of 2023. Highlighting a few of 2022 achievements, Piedmont completed approximately 2.2 million square feet of leasing, which was similar to our achievement in 2021. This included 763,000 square feet of new tenant leasing, the largest annual amount of retenant leasing we have completed since 2018 and the second consecutive year at pre-pandemic levels. Our tenant retention ratio was over 70% and among the highest of our peers and a testament to the service and value our in-house property management, construction and asset management teams are delivering to our customers. So despite the sector's challenges, we leased almost 13% of the portfolio during the year with an average cash rental rate roll-up of approximately 10%. Atlanta was our strongest leasing market followed by Dallas. Together, the two markets represented roughly two-thirds of the year's total leasing volume. Our Atlanta Galleria project had the greatest leasing velocity within the portfolio with approximately 25 new tenant leasing transactions totaling roughly 250,000 square feet. In a moment, George will provide more additional operational details and fourth quarter performance. In spite of the challenging debt and transactions market, Piedmont completed over $310 million of dispositions, exited our last remaining Chicago asset. And in just over one year, Piedmont went from having no presence in the Midtown Atlanta submarket, to becoming its largest office landlord on Peachtree Street, with the acquisition of 1180 this past summer. Piedmont was named Energy Star Partner of the Year for the second year in a row, and all our properties received well held certified designations in the spring. We also submitted our operating data to GRESB for the initial rating achieving an overall 4-star designation and Green Star recognition, one of the highest results from GRESB for an inaugural assessment. We also substantially increased our balance sheet liquidity, raising over $575 million in incremental proceeds since our last earnings call including, $160 million through our previously announced Cambridge portfolio sale, which Chris will touch on later, as well as $450 million of unsecured debt, raised from seven of our relationship lenders at terms similar to our line of credit. Bobby will provide more color on these financing shortly. I would highlight, as of this call, Piedmont has the full availability of our $600 million unsecured line of credit and over $185 million of cash and marketable securities on hand, which in conjunction with potential asset dispositions, will address our 2023 debt maturities. As we look ahead into the new year, we believe several strategic themes will play out. Sunbelt markets will outperform with leasing and operating fundamentals continuing to lead the country as a result of, inbound population migration, a more office minded business culture and continued pro-business policies. These market characteristics will drive Piedmont leasing volumes in Atlanta, Orlando, Nova and Dallas during 2023, where approximately 70% of our vacant space reside and were 60% of the year's expirations reside. The broader economic environment will continue to pose challenges for the commercial real estate sector. Despite this, our current leasing pipeline remains healthy, with numerous leases actively in advanced negotiations. And I'm pleased to share that over 230,000 square feet of leasing has already been executed thus far in 2023, of which over 100,000 square feet is for new tenant space. The flight to quality mindset will continue to drive our customers' leasing decisions. Businesses are consistently upgrading from Class B space, as well as transitioning away from commodity Class A space, to higher-quality buildings with a compelling amenity base, place-making common areas and hospitality service-minded experience. I would note, that we are not seeing the deteriorating fundamentals currently impacting Class B product, we are on compelling Class A office buildings in our core markets, but we will continue to closely monitor this dynamic. Small businesses will continue to drive the market, as large corporations and BigTech, rationalize their real estate footprints. The majority of our absorption over the last two years, has come from small businesses seeking less than 15,000 square feet. In fact, transition volumes from this customer segment are up 60% versus pre-pandemic levels. We strategically target this key demographic, utilizing our service first model, prebuilt office suite program and well-designed collaboration spaces and amenities. Anecdotally, the small customers we're targeting appear to be more resilient to current economic conditions. The Wall Street Journal reported in January, that small businesses establishments with less than 250 employees, have been responsible for all of the net job growth in the United States since the onset of the pandemic, and that larger companies have cut a net 800,000 jobs during that time. I would also remind investors that Piedmont has limited tech tenant exposure, that the recently announced layoffs should impact office demand primarily, in select tech-heavy markets. In addition, while we have seen an uptick in blocks of sublease space in surrounding markets, they generally did not replicate the quality level of a Piedmont building, do not come with landlord capital to improve the space, do not provide the same level of service or amenities and do not offer extension rights to the subtenant. The capital markets will continue to be challenging, with limited availability of secured and unsecured debt. As a result, office transactions will be limited to high-quality buildings with limited near-term risk and/or assumable debt. The major lending banks have pulled back substantially from the office market. And along with a select group of regional banks, will only extend debt capital to their highest priority relationships. As a result, we expect very few if any new construction starts within our submarkets. And furthermore, we anticipated assets with near-term debt maturities will face increased pressure as the year progresses to sell or recapitalize due to a suboptimal capital structure. In this environment, we will remain patient with our capital deployment and continue to focus on ensuring ample liquidity in advance of any strategic acquisitions. Corporate ESG topics including sustainability, wellness, and ethical practices will continue to influence tenant decision. Related to that, I want to take a moment to publicly welcome Mary Hager to our Board as a new member of the Nominating and Corporate Governance Committee. For those of you who don't know Mary, she's an Executive Director and Head of Greystar's commercial real estate business and a member of its global investment committee. Previously, Mary was a co-founder and CEO of Factory Partners, which was acquired by Greystar in 2021. Mary's based in Dallas is active in the Urban Land Institute, most recently as a Board member and Chairwoman of the Investment Committee for the ULI Foundation and brings to the Board a wealth of real estate investment knowledge and contacts. She's the second Director that Piedmont has recently added to the Board in preparation for the anticipated transition of two long-standing Directors reaching their term limits over the next two years. With that I'll turn this call over to George with Chris and Bobby to follow to provide further details on the quarter's operations, capital transactions, and our outlook for 2023. George?

Thanks Brent. Good morning everybody. Amid the uncertainties in the macroeconomic environment, Piedmont continues to post solid operational results as it has since the post-COVID recovery began in late 2021 and we're cautiously optimistic that this will continue in 2023. This quarter we completed 42 lease transactions for approximately 433,000 square feet of total overall volume. Of this amount, 40% of these leases totaling approximately 164,000 square feet related to new tender lease activity and expansion. This new deal activity is near our pre-COVID quarterly average of about 175,000 square feet and our leasing pipeline activity is very good. For the year, we signed 2.2 million square feet of total leases and new tenant leases represented 760,000 square feet as Brent noted earlier, the most new tenant leases executed by the company in 2018. Continuing with operational metrics, our lease economics were very favorable at 6.5% and 11.5% roll-up or increasing rents for the quarter on a cash and accrual basis respectively. And our weighted average lease term achieved on new lease activity for the quarter was approximately nine years. Our lease percentage at the end of the fourth quarter was approximately 87%, up 150 basis points from the end of 2021 and largely unchanged from the close of the previous quarter despite the sales of two Cambridge assets in the fourth quarter that were 94% leased. While the majority of our new tenant lease activity emanating from the Sunbelt portfolio, where over 70% of our vacancies reside, we experienced good leasing activity at all of our core markets during the fourth quarter. And I'd like to highlight a few key announcements and accomplishments, which occurred in some of our operating cities this quarter. Beginning with Atlanta, our largest market at almost 5 million square feet and generating 20% of the company's ALR. JLL reported another quarter of positive absorption during the fourth quarter with the market ending 2022 with 1.1 million square feet of total absorption for the year, the highest annual absorption since 2015 with direct rents in the Midtown submarket increasing 10% year-over-year. For the fourth quarter, our Atlanta portfolio experienced the most volume of new tenant activity with 10 years for 95,000 square feet which were evenly split between our Midtown presence and our suburban holdings. Atlanta has been Piedmont's most consistent performance for the past four quarters, capturing 46% of all new tenant transactions and the pipeline here continues to be quite robust. Most notable this quarter was securing a full floor headquarters requirement for a private equity firm consolidating its operations from Buckhead, Atlanta and Silicon Valley to our Atlanta Galleria properties. Looking back at the full year, 2022 was a stellar time for Galleria, as they captured 38% of leases signed in the Galleria Cumberland submarket according to JLL. Post quarter end, we also signed a well-known local operator to relocate its white table class seafood and steak restaurant to the Galleria, further expanding on our food and beverage roster. Since 2021, our Galleria Holdings have captured 50 new lease deals for approximately 400,000 square feet, including four full floor headquarter requirements, validating the vibrant well-amenitized working environment, we're creating here at the Galleria. It is also noteworthy to mention Cobb County's exhibition re-development authority, now has plans to expand the Galleria Convention Center, which is adjacent to our five Galleria office buildings and to the Brave's Truist baseball park in the battery, adding additional hotel, food and beverage and entertainment facilities, which we believe will continue the momentum we see in its Northwest Atlanta micro market. We anticipate 2023 will continue to be very productive Atlanta, just as it has the past two years. Moving down to Midtown. We've completed our extensive design phase and we have begun construction at the redevelopment of 999 Peachtree. As you may recall, we acquired this prominent lead gold asset in late 2021 for approximately $360 a square foot, well below the estate replacement cost of $700 per square foot. We anticipate spending approximately $35 a square foot to completely reenvision the first two floors of the building, adding amenities and improving the building's intersection at the street level and with the fabric of the Midtown Atlantic community. Customers have responded favorably here, with rental rates up 10% and 129,000 square feet leased since acquisition. And this quarter, we signed our newest tenant, aided Spain to a full floor deal and the regional headquarters relocation from Buckhead. Redevelopment is a key component of Piedmont's value creation strategy, and we favored this approach over grounds of development, particularly in this economic environment, because of faster times to deliver the product, typically between 12 months versus 36 months and dramatically less risk associated with the cost, financing and lease up of the project. And while we have a number of sites for grounds of development, the bar for capital deployment into development is much higher and no construction starts are planned for 2023. Instead, we expect to continue to focus on a more modest scale redevelopment projects and buildings we can drive near-term occupancy and rental rates, which we believe will deliver a better risk-adjusted return in today's market. Moving on to our other markets. Boston continues to deliver solid results as well. Starting off with a headquarters relocation for robotics designing company into our 80 Central Avenue asset. This 25,000 square foot user is upgrading to the nearby Class A facility, doubling in size from organic growth and maintaining its 100% work in the office policy. As an aside, Salesforce which fully leases our 182,000 square foot lead gold five wall building until 2029, announced a reversal of its work from everywhere, workplace policy to one with more in-office mandates. We're hearing across our portfolio more of this in-office sentiment with there's more days per week or simply enforcing an existing hybrid policy, including many of our top 20 tenants, such as US Bank, New York State, New York City, Microsoft and others. Our utilization rates are increasing incrementally as well, at approximately 50% today, up 2% in January from the previous month. Circling back into Boston, our recently redeveloped 25 mall assets, which included a full lobby renovation, new coffee lounge, state-of-the-art fitness facility, and CAFE expansion with outdoor Workspace was awarded by BOMA, the Boston Regional Outstanding Building of the Year or Tobi Award for building to the highly competitive 250,000 to 500,000 square foot segment, recognizing this building's position as one of the top buildings in suburban Boston. I would note, our second largest expected tenant move out of the year is at this building, where health care and medical enterprise will vacate approximately 77,000 square feet at the end of the first quarter result of the corporate merger. At this time, we have activity that would backfill approximately a-quarter of that space. Dallas, our second largest market with approximately 19% of ALR continued to challenge Atlanta, as our most active leasing market in 2022. We recently completed three leases of our three gallery assets, which also attained lead gold status during this quarter, increasing our overall portfolio lead designation to approximately 50%, with more buildings in process and a goal of reaching 60% lead designation by the end of the year. The Dallas Galleria complex has good leasing momentum, with tours and proposals increasing as we started the New Year. I'm also pleased to share that Dallas is the first of our markets to land a large tenant in 2023. In January, we executed a new 70,000 square foot headquarters lease for 11 years at the recently redeveloped Las Colinas Corporate Center. This new tenant is an energy company experienced substantial growth and is relocating from 52,000 square feet at near by Williams Square. This lease is projected to commence in early 2024. As we carry over into 2023, customer activity continues to be resilient across most of our other operating markets, including Orlando, Alberta Minneapolis and the RB Corridor. Staying in the RB Corridor for a moment, our local team here executed a 15,000 square foot expansion from one of our largest tenants at Arlington Gateway, while also extending the existing 44,000 square foot lease for another 10 years at this Lead gold project. New York and Downtown Minneapolis continued to improve incrementally, while I would say the toughest market for us remains a district of Colombia, where demand is likely to stay sluggish as federal workers, the primary occupancy driver continue to work remotely, also affecting downstream demand from organizations that support federal agencies. The Piedmont formula continues to drive leasing success and as Brent noted, particularly the small companies the most active customer segment across all our markets. These tenants are attracted to our projects, finding with ease of accessibility vast amenity-based unique tenant engagement programming best-in-class conference facilities in conjunction with the sustainability-minded operator, building on the color that Ben provided earlier in the fourth quarter, tour activity, did soften modestly, which we attributed to an unusually severe cold weather and heightened macroeconomic uncertainties but activity has rebounded in January. Today, we have approximately two million square feet of outstanding proposals, which is roughly equivalent to what we've seen in the past four quarters. Looking into 2023, we remain positive with a cautious eye towards the markets and leasing opportunities across our portfolio. We're forecasting new leasing volumes in line with our performance last year, and we only have 7% of the rent roll expiring, 1% of which is Cargill that we now expect will vacate at the end of the year. With this modest amount of exposure, combined with our historically high retention rates and the fact that, the average size of our expiring tenants, using cargo is around 8,000 square feet, matching well with the deepest and most active demand segment of the market, we are forecasting positive net space absorption during the year resulting in anticipated year-end lease percentage in our portfolio of between 87% and 88%, up modestly from year-end 2022. I'll now turn the call over to Chris Kollme to review our fourth quarter investment activity. Chris?

Thank you, George. At the time of last quarter's earnings call, we had agreed to terms for the sale of our two assets in Cambridge Massachusetts. And as we disclosed in December, we closed both transactions during the fourth quarter, generating a total of approximately $160 million in proceeds, and combined book gains of a little over $100 million. Recall, we earmarked these proceeds as a funding source for the 1180 Peach Street acquisition in Midtown Atlanta, which Brent mentioned earlier. We had previously signaled this exit from the Cambridge submarket. And in light of the market challenges in the fourth quarter, we were very pleased with the execution on the portfolio, achieving pricing at sub 5% cash cap rates. Looking ahead to 2023, we have a list of mature and non-core assets that we would like to monetize as we do every year. Realistically, in order for us to execute against this plan, macroeconomic conditions namely the availability of debt financing need to improve. While we don't have any specific commentary to provide today, we are cautiously optimistic in being able to dispose of two or three assets during the year. As we execute dispositions, we anticipate initially paying down debt. That said, our balance sheet is in good shape with ample dry powder in the event that a rare and highly strategic opportunity becomes actionable. On the new investment front, however, we will continue to be pragmatic and disciplined as market conditions remain extremely unclear for both buyers and sellers. In this market, we believe patience is prudent and we will have a high bar to clear as we think about new capital deployment. With that, I'll turn it over to Bobby to walk you through the financial results for the quarter, balance sheet highlights, and address guidance for 2023. Bobby?

Thanks, Chris. While I'll call your attention to some of our financial highlights for the year and for the quarter, I encourage you to please review the entire earnings release and supplemental financial information, which were filed last night for more complete details. We anticipate filing our annual report on Form 10-K later this month. Reviewing our quarterly results, Piedmont was able to achieve core FFO of $0.50 per diluted share for the fourth quarter of 2022 versus $0.51 per diluted share during the fourth quarter of 2021. The fourth quarter of 2022 included approximately $0.06 per diluted share increase in interest expense on a quarter-over-quarter basis. From an annual perspective, core FFO was $2 per diluted share, a $0.03 per share increase over 2021, despite an over $14 million, or $0.12 per diluted share increase in interest expense. We're able to overcome this rise in interest expense for the year due to successful leasing efforts, rising rental rates and fruitful asset recycling that have all been previously discussed this morning. AFFO generated during the fourth quarter was approximately $47 million, which continues to be well above our current $26 million quarterly dividend level. And we do not foresee any change in our current dividend level in 2023. As disclosed in our quarterly financial supplement filed last night, core earnings before interest taxes depreciation and amortization, EBITDA increased approximately $16 million for the year and property net operating income on an accrual basis increased approximately $20 million year-over-year. Similar to the last several quarters, we continue to experience improving lease economics and rental rate roll-ups. For the year, our overall rent roll-ups and leasing transactions for 2022 were up over the previous year approximately 10% and 17% on a cash and accrual basis respectively. Same-store NOI cash basis increased almost 2% for the year and same-store NOI accrual basis increased a little over 1% for the year. Turning now to the balance sheet. As Brent alluded to, we made excellent progress during the fourth quarter returning to a more normalized debt to gross asset ratio of 37.6% at year-end. Our finance team was very busy extending the final maturity to mid-2025 on a $200 million unsecured term loan priced at adjusted SOFR plus 100 basis points. Additionally during the fourth quarter, the $160 million of proceeds from the sale of our two Cambridge assets allowed us to pay off the entire balance outstanding on our $600 million line of credit, so that we had the full capacity of the line available as of year-end. And subsequent to year-end, in January, we entered into an additional $215 million unsecured term loan priced at adjusted SOFR plus 105 basis points with a final maturity of January 2025. The proceeds from this facility combined with cash on hand and potential proceeds from select non-core dispositions and/or draws on our line of credit will be used to pay off our $350 million bonds that mature later this year. In short, we fully addressed all of our 2023 debt maturities at relatively attractive rates given today's economic environment and return to debt levels equal to where we began 2022 and we believe we will further lower our leverage levels in 2023, as a likely net seller of assets as a result of a few non-core dispositions, which Chris mentioned. Finally, I'd like to turn to our 2023 annual core FFO guidance, due to the uncertain nature of the capital markets environment, this guidance will be without any disposition or acquisition activity. We will adjust guidance throughout the year at the time any such transactions occur. However, I do want to point out that we currently believe the 2023 annual results will be within the guidance range we provide today. We have taken great pride for many years in generating consecutive years of core FFO per share growth. And frankly, it pains me to introduce guidance that will break that streak. We do expect however, property net operating income on an accrual basis, on our current portfolio of properties will continue to grow during 2023. Nonetheless, with over 400 basis points of increases in Fed fund rates during 2022 and further increases projected during 2023, along with two new floating rate term loans replacing our $350 million 10-year 3.43% bonds that are maturing this year. Our projected interest expense for 2023 is estimated to increase approximately $27 million over total 2022 interest expense, negatively impacting incrementally 2023's core FFO financial results by $0.22 per share. While certainly not unique to Piedmont or our peers, we are introducing core FFO guidance for the year 2023, which includes this higher interest expense. This higher expense is offset partially by increased income from our property operations. Our core FFO guidance for 2023 is in the range of $1.80 to $1.90 per diluted share. We anticipate overall executed leasing activity for 2023 to be in the range of 1.6 million to 2 million square feet. And although our lease percentage will fluctuate between quarters given our relatively low amount of expirations for 2023, we believe our year-end lease percentage will be between 87% and 88% before the impacts of any acquisition and disposition activities. Same-store NOI cash basis and accrual basis should both be in the low single-digit range with a 1% to 3% increase and G&A expenses are anticipated to be flat for the year at approximately $29 million. We began the year with approximately 1.14 million square feet of executed leases, up from 800,000 square feet a year ago that were yet to commence for existing vacant space or that are in abatement, which should contribute additional cash revenues of $33 million and cash NOI of approximately $20 million over the next 12 to 24 months. Looking out at forward interest rate curves, interest expenses or interest rates are currently forecasted to flatten out by the end of this year and begin to decrease next year. It is our hope and our plan to return to the long-term unsecured debt markets when the credit markets have normalized. With that, I'll turn the call back over to Brent, for closing comments.

Thank you, George, Chris and Bobby. The Piedmont team made significant progress along our strategic objectives in 2022 and the real estate portfolio continues to perform well in 2023. Management expects modest space absorption and operational growth in the coming year, paired with manageable capital expenditures. We'll be selective with capital deployment for acquisitions and anticipate being a net disposer of assets to deleverage the balance sheet and enhance our already ample liquidity resources. However, as Bobby outlined, due to the continued rise in interest rates increased interest expense will continue to weigh on earnings and FFO for the year. I'll now ask our conference call operator to provide our listeners with instructions, on how they can submit their questions. We will attempt to answer all your questions now or we will make appropriate later public disclosure if necessary, Operator?

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] One moment please, while we poll for questions. Thank you. Our first question is coming from Anthony Paolone with JPMorgan. Please go ahead.

Great. Thanks. Good morning. My first question just -- you gave a lot of details on the numbers but just trying to tie something together here. You're talking about the lease rate in the portfolio this year picking up I guess about 80 basis points at the midpoint, compared to where you ended the year. But just wondering, how the commenced number might change, in terms of what's baked into your FFO forecast. So you're at 84.6% I guess, at the end of the year. Like, do you think that moves in parallel with the 80bps on the lease rate, or is there something different there?

Tony, yeah this is Brent. Good morning. Appreciate you taking the time to join us. Good question. I think that's pretty fair to say that it should kind of follow in line with roughly that 80bps increase in the lease percentage as we continue to have the burn off of free rent in that...

Hi Tony, this is Bob. I'm going to dump -- it really depends on the leasing and what happens, this year we had almost 400,000 square foot increase in leases yet to commence and leases in abatement that certainly impact that. So it really does depend on the leasing. So I agree with you Brent, but that's not really predictable.

Okay. And then, just another question more specific to Dallas, you talked about it being really one of your top two markets, I guess. And you've got about 360,000 square feet of expirations this year so it's a little bit on the heavier side with regards to your market. So just wondering, if you think there's enough demand to kind of keep all that leased and absorb space there or if there's anything that might get kicked back?

Hey, Tony, good follow-up question too. Dallas continues, as you noted, to be actually a very strong market. We do continue to see larger users, particularly from the relocation groups and energy companies continuing to, kind of, feed that, maybe more so than our other markets. But we also continue to see good depth in that 8,000 square foot type tenant that we do have generally rolling. So, I think, overall in Dallas, we feel pretty good about our ability to at least maintain and kind of backfill what might expire during the year of that roughly 360,000 square feet. Of course, we'll keep some of that as well, with historical retention ratio right now around 70% and we'll continue to update you as the year goes on. But I think we feel pretty good about those prospects in Dallas. We'll have more to share in regards to that on our next call.

Okay. Thank you.

Thank you. Our next question is coming from Dave Rodgers with Baird. Please, go ahead.

Yes. Good morning, everybody. George, you talked about a 2 million square foot kind of activity or outstanding pipeline and proposals. Is that pretty consistent at that 10,000 square foot average size? Are you seeing some larger tenants start to move in there? And then maybe a follow-up question to throw in before I turn it back to you guys. As you talked about large corporate users in big tech, just not engaging as well and so, I wanted to make sure we could talk about US Bank as well, just given that that's coming up next year.

Sure. Good morning, Dave. Thanks for joining our call this morning. When I look back over the past several quarters, we've averaged around 2 million square feet in overall proposal, which is a great sign for the overall strength of our pipeline. And I would say, looking back several quarters, I would say, about 40 -- close to 45% of that has been new activity. The store has been pretty consistent. And as Brent alluded to, we expect more out of the Sunbelt over the next couple of quarters and digging deeper into our overall market, so I'll start with Atlanta. And I would like to clarify one of my prerecorded comments about Atlanta. I mentioned that our AR number should be more than 27% range, so with that being certainly tied back into our pipeline. But Atlanta continues to be very strong, the depth of the market ranges from, I would say, 20 to 25 prospects per quarter. I would say, Dallas, as we talked about a minute ago, still seems to be trailing pretty heavily. We've seen about 20% of our new activity come out of that particular submarket. And surely, I mean, I would say, from a small tenant perspective that seems to dominate our marketplace. But it's not surprising for us to do two to three users that are between one to two, even three floors, come along each quarter. And I think we've already mentioned one of those being in Dallas and we have a couple of more of those in our pipeline.

And then, Dave, this is Brent. In regards to your question on US Bank. As we've mentioned before, we have a very deep relationship with the firm and both as a tenant, but also in the lending relationship and banking relationship as a trusted adviser. That asset in Minneapolis, particularly their headquarters assets, start there maybe, lead gold building, really the best amenity package in Minneapolis in the 31st floor, but great 18-foot windows over the city. It really -- in terms of assets, it's really bar none in terms of what it can provide US Bank, which we think bodes well for the renewal there. As I noted, big tech and large corporates are pulling back, I'd say, in terms of decision-making. I think what is positive though is, we've seen financial services firms continue to lean into the office model. And US Bank themselves is continued to bring a substantial number of their employees back, now over 50% since the beginning of the year. So when you look at JPMorgan building, a massive headquarters in New York or my old prior firm, Morgan Stanley, continue to maintain their footprint. We continue to see financial services companies utilize the office, particularly for customer-facing executive roles, which is what resides in U.S. Bank. I would remind you too that lease does expire in the end of May in 2024. So we're actively in those discussions would probably have more clarity on that sometime around the early part of the summer. In the suburbs that location is also being increased in terms of its utilization. It is geared more towards a portion of that is their IT group, but I continue to increase again that incremental use. As they've completed the merger now with the West Coast bank and that integration is in process. That's also part of the delay until the early part of the summer. I think we continue to see that integration and again that decision-making process overall positive. But I think our mindset right now to guide the market would be to say, we expect a renewal somewhere between 50% to 100% in both locations. I know that's a wide breadth, but I think the firm itself is still getting its arms around its hybrid policy. But I do think the body language and what they're doing in terms of bringing their employees back is a positive.

Great. Last for me going to either Chris or Brent on dispositions. What do you have in the market today? I know it's not in the guidance, but are you able to kind of transact on assets today you are obviously able to purchase last year and sell the Cambridge portfolio? Are there other assets though that you believe that you can easily transact on based on either the asset or the tenant in place and the term of the lease is that still doable in this market today?

Hi, Dave. Good morning, it's Chris. On Houston this is not going to be an incredibly satisfying answer, but there's really nothing new to report there. We remain I'd say cautiously optimistic that we can move those two assets in 2023. We remain in dialogue with one or two groups there on both assets, but we really can't comment any further. We'll obviously keep you posted if and when a transaction materializes there. In terms of other assets that we might sell I don't think we want to get into any specifics and name particular assets. I do think you should expect that it will be very consistent with our history. These will be assets where we think we've either maximized value and/or have slower growth profile than we might like. But as I said in my prepared remarks conditions really need to settle and stabilize a bit before we feel extremely confident about asset sales. But recycling assets is certainly not a new initiative for us and we'll continue to try to do so in 2023 as markets allow. And that's a little bit of a gray answer, but it's an extraordinarily difficult market.

All right. Thanks, Chris. Thanks, everyone.

Thank you. Our next question is coming from Michael Lewis with Truist Securities. Please go ahead.

Thank you. It sounds like you're expecting maybe slightly positive same-store NOI growth for 2023. Are you able to say anything about some of the components expected rent spreads or maybe expense growth?

Michael, it's Brent. Appreciate you taking the time to join us today. Indeed, we do believe we'll continue to have kind of in line with what we were able to accomplish this year in terms of same-store NOI growth again guiding to -- we did this year at 2%, we're guiding to 1% to 3%. That's really a component of continuing to be able to obviously get the incremental bumps in the existing leases, but we do have a number -- a good bit of continued rent to burn off during the year and we'll continue to fuel that as well as what we anticipate additional leasing and some activity that we have in the pipeline is not signed, but would be more near-term starts that will continue -- be able to contribute to that. Anything else you might add Bobby in terms of just those specific components?

No, I think in particular markets that George covered, we're seeing and meeting our pro formas on a lot of the last acquisitions by $2 or $3. So yes, we're continuing to see run-rate growth.

Yeah. I would think it's a good fair characterization as well. And then I think you'll continue to see Michael us being able to drive some absorption overall in the portfolio for the year.

Okay. Great. And then you talked about this a little already and I know you don't have a lot of tenant exposure in your portfolio. But do you -- are you seeing any impact on any of your markets in terms of the recent big tech layoff announcements? I think people immediately think of some of the markets where you don't have exposure like the Bay Area and Seattle, but we've heard a lot about how these jobs are actually much more spread out across the country than in past cycles. So I don't know if you're seeing anything yet or you expect to see anything in Boston or D.C. or any of your other markets?

Good morning, Michael, this is George. I'll tell you that all the announcements that you've seen over the past I would say three to six months, we've kept a close eye on those users that lease space in our building. And at this point, we're just not feeling much of an impact at all at our portfolio. If I had to dig deeper into where we could have the most exposure, and I'm taking a leap here would be in our Burlington portfolio up in Boston. And when you peel beginning a little further of what we have there you've got Salesforce and Microsoft and those large leases don't even expire until sometime at the end of the decade. So I think we're pretty good from that perspective. Our only goal really to deal with in Burlington is that our Tobi award-winning building which is 25 Mall Road and we feel really good about the fact that we have one award for the renovation that was just completed there. We have a decent pipeline in tow in that place. And so we feel pretty good about our prospects for that particular submarket.

George, I'd add to Michael. Overall, we only have about 1% of our ALR and expirations in 2023 and 2024 are with that tech kind of group. So we have very limited exposure more near term to that market.

Okay. And you haven't seen anything more broadly in the market that maybe creates competing vacancy in any of those markets? I assume, it's probably too early to be able to...

No, we haven't seen material sublease space or other kind of competitive space to this point. I think Midtown Atlanta continues to be a market that does attract the tech tenancy. And I do -- and have heard any gold lead that they have also pulled back from that market. But again, our buildings in that market are more geared towards professional services. And we've actually kind of a candid the most recent jobs report, seeing very good depth from that tenant, particularly as they continue to move from Buckhead to Midtown just like our announcement recently here at this quarter with Cadence Bank.

Sounds good. Thank you.

Thank you. [Operator Instructions] Our next question is coming from Dylan Burzinski with Green Street. Please go ahead.

Hey, guys. Good morning and thanks for taking the questions. Just curious, you guys touched on focusing on dispositions and should those close this year maybe doing some debt paydowns. But just curious how share repurchases might fit into that plan given where stock currently trades today?

Hey, Dylan, it's Brent. Again, thanks for joining us. Yeah, great question. I think office REIT -- no office REIT I think is currently pleased with where their stock trades today and evaluating our own kind of historical program on the buyback. We continue to utilize that same framework. First and foremost, we'd need disposition proceeds. We wouldn't want to lever up particularly in a liquidity-constrained environment like we're in at the moment. And then I think we look towards again outsized underperformance, both on an absolute and a relative basis. And I think frankly, we've continued to roughly trade in line with the sector. I do think you're also seeing just very limited overall private level transactions. As I've talked about risk has been repriced in the market, stability and cash flow less so, but certainly been impacted by rates. But that risk that does exist is just uncertain pricing. And as a result, I think you're going to continue to see a dearth of transactions and frankly, a little bit of uncertainty around what NAV truly is for ourselves and for our peers. So within that context, I think we're going to continue to be very pragmatic with our available capital and look to probably not buy back shares in the more near term, continue to focus on operating the business and maintaining liquidity as it being paramount paying down debt more near term would be a better use of that capital in our mind.

That's helpful. And I think that makes sense. And then, you guys commented on sort of rental rate growth across your markets. But just curious on a net effective basis, are you guys anticipating growth in net effective rents in 2022 across your geographical footprint?

In this environment, it's different by market and it's always different by submarket and building. So I think we're going to continue to see -- I can take it market-by-market but Atlanta, yes, the market where we continue to see good absorption and great activity where we have assets. I think you have the ability to grow net effective rents in that market. In Dallas, I think it will not have nearly the amount of growth in Atlanta, but probably the on the positive side. I think Orlando, suburban Minneapolis, suburban Boston, probably just hold water if you will kind of flat. I do think we continue to see deteriorating fundamentals in DC, particularly in the district, that's where you're probably likely to see negative net effective rent growth. And then, we don't have much exposure in terms of the leasing market in New York given those long-term leases but that might be another market that I would say would be flat to slightly down from a net effective rent, just given some of the weight there. Hopefully, that covers the market and give you a little bit of color. I would remind you investors as well the general mark-to-market and the whole portfolio is roughly 5% to 10%. And I think that's a good indication of what we would expect in terms of the 2023 numbers as well.

Awesome. That’s extremely helpful. Thanks for the time today, guys.

Thank you.

Thank you. As there appear to be no further questions in queue at this time, I will hand it back to Mr. Brent Smith for closing comments.

First, I wanted to take the opportunity to acknowledge the incredible effort that the Piedmont team has put forth in 2022. I'm really fortunate to work alongside some very highly knowledgeable and high-caliber individuals who are experts in their field. I want to say thank you. I also want to remind investors that we're going to be attending the Wells Fargo conference in about two weeks and the Citigroup conference in early March. If you're interested in sitting down with management, please reach out to Eddie. And again, thank you everyone for joining. We appreciate the time. Look forward to talking further on our next quarter earnings call in early May, late April. Thank you.

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