Piedmont Office Realty Trust, Inc. (PDM) Q2 2026 Earnings Report, Transcript and Summary

Good day, everyone. Welcome to Piedmont Realty Trust Inc. Second Quarter 26 Earnings Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Laura Moon. Please go ahead.

Thank you, operator, and good morning, everyone. We appreciate you joining us today for Piedmont's second quarter 26 earnings conference call. Last night, we filed our 10-Q and an 8-K that includes our earnings release and unaudited supplemental information for the second quarter of 26. Both of these documents are available for your review on our website at piedmontreit.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 2000. 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 supplemental information 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 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. 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 supplemental financial information which was filed last night. At this time, our President and Chief Executive Officer, Brent Smith, will provide some opening comments regarding second quarter 26 operating results. Brent?

Thanks, Laura. Good morning, and thank you for joining us today as we review our second quarter 26 results. In addition to Laura, on the line with me this morning are George Wells and Alex Valente. Our chief operating officers. Christopher A. Kollme, our EVP of Investments and Sherry L. Rexroad, our chief financial We also have the usual full complement of our management team available to answer your questions. Piedmont had a strong quarter. Beating consensus by a penny due to operational outperformance, and raising our 2026 outlook for the second quarter in a row, which Sherry will touch on more in a moment. Our Piedmont PLACEs are generating meaningful earnings and cash flow growth as office-using demand continues to strengthen for high quality, well located, amenitized assets. The US office market is no longer defined by excess space. But rather by increasingly constrained supply at differentiated office buildings, driving higher occupancy, accelerating rent growth, and reducing tenant concessions. Leasing activity has reached post pandemic highs as availability continues to decline across most major markets and is now broadening to more metros and submarkets. While the development pipeline remains at historically low levels, with demand recovering and new supply scarce, our Piedmont PLACEs are benefiting from a more favorable operating environment and meaningful pricing power. As I noted on our last earnings call, Piedmont has materially increased asking rates across a substantial portion of the portfolio, in most cases, >15% over the past 12 to 18 months. Those rate increases implemented across the portfolio in early 26 are now being reflected in our quarterly lease metrics. During the quarter, we signed 460 thousand square feet of leasing with rental rate increases of 14% on a cash basis and over 32% on an accrual basis. And in fact, over the last 4 quarters, the average rental rate increase on a cash basis has been 12%. Which is representative of the rental mark to market and embedded growth in the portfolio. Having renovated 90% of the portfolio since 2020, are amenity rich, hospitality driven Piedmont PLACEs are among the best assets in their respective submarkets and are leasing at record high rental rates. During Q2, we achieved the highest quarterly average net effective rent after capex in the company's history. Now reaching the mid twenties per square foot. Up more than 20% over the prior trailing 12 month average. Even more encouraging is that our rents still remain 35% to 40% below new construction pricing. Providing further runway to increase rental rates. Additionally, Piedmont has leased >80% of the portfolio since the pandemic. Meaning the vast majority of our customers have already right-sized and upgraded their office space for the modern workforce. Our average tenant size across the approximately 16 million-square-foot portfolio is now just 17 thousand square feet. With customer and industry diversification, providing insulation against potential workforce disruption from AI implementation. Piedmont customers with lease expiration several years out are also recognizing that the market for premium office space is tightening. Particularly for tenants that occupy a full floor or greater. As a result, we are seeing customers approach us about renewals of their space well in advance of the expiration. In the coming quarters, we anticipate early renewal discussions with existing tenancy to accelerate, which should bolster client retention ratios above our 60% to 70% historical average, with the ability to reduce free rent and tenant capital concessions. At Piedmont, we recognize the most effective way to reduce capital expenditures on leases is to retain our existing customers. that is why we continue to invest in our team and technology to create the best office experience for our clients. This year, the team's hard work culminated in Piedmont being recognized by Kingsley as a top 5 national office platform. Highest ranking among all public office companies. For those who may not be familiar, Kingsley is a third party research firm that conducts a national survey of office consumers to evaluate their landlord. Most of our public peers participate in the survey, so we could not be more proud to be recognized as a top 5 world-class operator. Additionally, during the second quarter, 9 projects throughout the portfolio won the Building owners and Managers Association or BOMA's outstanding building of the year award in the respective size categories. A tangible testament to the quality of our product and service offering. The strategic repositioning of the Piedmont portfolio along with the substantial leasing we have accomplished over the past 12 months, is translating into improved operating metrics. Including higher economic occupancy now >80% for our in service portfolio, with continued improvement in the coming quarters. Same store cash NOI growth of 10% on a cash basis for the first half of the year, and meaningful earnings growth. $0.02 for the first half of 26 when compared to the first half of 2025. Further, the portfolio is approaching 90% leased, And as of June 30, inclusive of our out of service portfolio, had an executed pipeline of leases that have not commenced equal to approximately $39 million of annualized cash rents. that is the equivalent of 570-basis-point of occupancy that will flow into earnings over the next several quarters. The investment thesis in Piedmont is straightforward. Demand for differentiated office product is increasing, while supply is shrinking. Return to office mandates are becoming more common and more enforceable Companies recognize that the office is critical to the 4 Cs. Building culture, creativity, collaboration, and connectivity. At the same time, new office construction remains near-zero, Older buildings continue to be removed from inventory through conversion or demolition, and many financially constrained owners lack the capital to compete Piedmont is uniquely positioned for success in the marketplace. We are generating the highest earnings and cash flow growth in the office sector, and trade at a very compelling valuation. With net effective rents after capex of $25 per square foot, on a stock price that equates to a gross asset value of approximately $220 per foot. Furthermore, we currently have an outsized earnings backlog, great opportunities for occupancy absorption, 10% to 15% of embedded rental rate growth, and opportunities for accretive debt refinancings, which will all drive core FFO higher in the near term. With that, I will hand it over to George for further details on second quarter operational performance. George?

Thanks, Brent, and good morning, everyone. The operating environment for high quality office remains constructive, and the Piedmont platform continued to perform well during the second quarter. Leasing velocity continued its strong pace with 42 transactions completed for approximately 460 thousand square feet. New business activity was slightly more than half of that volume with a large portion of that expected to translate into 2027 GAAP rent recognition. Average new deal size was approximately 11 thousand square feet, reflecting a good mix of small, medium, and large clients. And the weighted average lease term for new transactions was approximately 11 years, reflecting continued customer commitment to high quality workplace environments. For the ninth consecutive quarter, expansions exceeded contractions in the portfolio. That is an important signal. It shows that our customers are not simply maintaining space, but many are expanding to support growth, return to office requirements, and a renewed focus on collaboration. During the quarter, we completed 9 expansions for 22 thousand square feet with no contractions. Lease economics remain strong. As Brent noted, cash rents of space vacated 1 year or less increased by 14%, while accrual rents increased by 32%. Overall, weighted average starting cash rent of $43.79 per square foot rose 5% from last quarter's $41.59 per square foot. And we anticipate more rental increases in the near term. Leasing capital spend for the quarter was stable at $5.83 per square foot per year and in line with our trailing 12 month average of $5.97 per square foot. Tightening conditions for high quality space are leading to stronger pricing power as net effective rents surged this quarter $25.56 per square foot up over 20% from the prior 12-month average, and we anticipate maintaining any NERs in the mid twenties per square foot or higher supported by persistent demand for high quality space and little to no new development in our submarkets. Equally impressive, the portfolio generated 9% same-store cash NOI growth driven by both burn off of free rent and higher rental rates. We believe these very encouraging second quarter metrics will likely continue into second half of the year. In Northern Virginia, the RBC corridor has been experiencing an uptick in demand over past few months with the defense sector leading the way. Our local team captured the company's largest new deal of the quarter with a defense contractor for 73 thousand square feet at our 4.25 thousand North Fairfax building. This 12-year deal commences as soon as the space can be built and boast a healthy annualized NER $27 per square foot. Our NOVA assets are well located within dense, highly amenitized, walkable environments, and sit adjacent to metro rail stations. The portfolio here is currently 80% leased, and we are projecting strong net positive occupancy and FFO growth over the near term. Atlanta was our most active market with 11 deals for a 130 thousand square feet. A majority of that was new business and landed in each of our 3 vibrant submarkets of Central Perimeter, Cumberland and Midtown. Most noteworthy, we signed a 57 thousand square foot 15-year new lease at 1.16 thousand Perimeter Center West preemptively backfilling a large portion of Broadcom space. We continue to experience strong customer interest in our remaining central perimeter space. Our Dallas team closed 8 deals for a 107 thousand square feet with Epsilon's 11-year extension driving most of that deal flow and yielded a hefty cash roll up of 42%. Our pipeline for backfilling the balance of that space and pushing rate is deep with multiple tenants competing at improving rents. Over in the lower tollway submarket, the Dallas Mavericks announced plans to develop a multibillion dollar arena and entertainment district at the 100-acre Valley View site, which sits a half-mile from our Galleria project. As we have experienced with the Braves Battery development in Atlanta, being adjacent to such a massive entertainment venue will likely see private, public, and reinvestments toward the neighborhood's infrastructure and elevate the desirability of an already healthy office submarket. Today, Galleria Tower's asking net rents of $50 per square foot up 40% from just 2 years ago when we completed the renovation. And we are excited for this 1.4 million-square-foot asset's trajectory and future earnings growth. At 60 Broad, we previously announced that we had agreed to terms with the new administration of the City of New York for substantially all of the space and that a lease of this size will require other internal city reviews and a public hearing process before the transaction can be fully executed. The city is steadily progressing to conclude the lease renewal, However, it is likely the process will not be wrapped up until the fourth quarter. Our redevelopment projects posted another strong quarter of deal flow with over 60 thousand square feet of new transactions signed increasing the out of service lease percentage from 76% to 83%. During the second quarter, we placed 222 Orange Ave back into service and we are confident that the remainder of the out of service portfolio will reach stabilization around the end of 26. Looking ahead, our leasing pipeline remains stout and now has over 700 thousand square feet in a legal stage of the third quarter. Outstanding proposals continue to hold steady at approximately 2 million square feet. Our supplemental report shows 927 thousand square feet or 6% of our operating portfolio expiring in the second half of 26, which is very manageable and even less exposure when you back out the pending New York City extension. Assuming a typical run rate of a 175 thousand square feet, of new transactions in each quarter and concluding known renewals, we are on a path to achieve our previously released guidance with overall lease volume projected to reach the high end of that range or 2 million square feet. We have never been more excited about the outlook for our business. Tenants are choosing Piedmont because our buildings provide the right combination of location, amenities, service, and value that today's dynamic companies require. Our formula is working, and we believe it will continue to drive leasing rent growth, and occupancy gains. I will now turn the call over to Christopher A. Kollme for investment activity. Christopher?

Thank you, George. From an investment perspective, our focus remains on optimizing the portfolio, preserving capital discipline, and positioning Piedmont to benefit from strengthening liquidity in the transaction market. The office investment market is improving driven by the steady increase in leasing demand coupled with a dwindling supply of high quality space. That said, buyers remain cautious, and we see only limited institutional investors in the market. The majority of transactions are being awarded to local operators, family offices, and private capital with a focus on transactions <$80 million. With limited well capitalized operators in the market. Piedmont is well positioned to compete for value add acquisitions. We are focused on opportunities within our existing markets, which are accretive to our earnings and growth trajectory. A quick update on dispositions and process. Specifically the 2 land parcels that we have mentioned previously. Our Royal Lane land parcel in Dallas remains under contract, and we are feeling optimistic that it will close during the third quarter generating approximately $12 million in net sale proceeds. The planned development will provide about 20 thousand square feet of retail directly adjacent to our Connection Drive assets. The other land parcel in Orlando continues to move forward albeit slowly as rezoning takes time. And will likely be a mid 27 closing. Similarly, the land will be redeveloped into a mixed use project containing multifamily, over 40 thousand square feet of retail space, as well as several restaurants. All of which will benefit the environment next door at our town park assets in Lake Mary. Aside from those 2 known sales, we continue to actively weigh the disposition of mature and or non core assets, which lack the growth profile of the balance of our portfolio. In short, Piedmont's opportunity to recycle capital is improving. As liquidity returns to the sector and our capital allocation priorities remain focused on high return leasing capital. Improving balance sheet flexibility and acquisitions which improve our portfolio quality, are accretive and are consistent with our long term growth strategy. With that, I will pass it over to Sherry to cover our financial results.

Thank you, Christopher. While we will be discussing some of this quarter's financial highlights today, please review the earnings release and accompanying supplemental financial information which were filed yesterday for more complete details. Core FFO per diluted share for the second quarter of 26 was $0.38 per diluted share, $0.01 ahead of consensus and $0.02 ahead of the second quarter of 25. Growth was largely driven by higher rental rates and higher economic occupancy, partially offset by the sale of 1 project during the 12 months ended 06/30/2026. AFFO generated during the second quarter of 2026 was approximately $31 million Turning to the balance sheet. I am pleased to report that during the second quarter, we successfully refinanced our term loan that was scheduled to mature in January 2027. We increased the principal from $325 million to $400 million, pushed out the maturity to May 2031, and tightened the spread by 15-basis points. So we are very pleased with this execution. We used the net proceeds from the increase in principal to pay off the balance outstanding under our line of credit. Consequently, we had the full $600 million capacity under the line as well as around $17 million in cash available as of June 30. As we have highlighted previously, we currently have no debt maturities until 2028, and our maturity ladder is now very smooth. At roughly 20% per year from 2028 to 2033. Our overall weighted average cost of debt continues to decrease, and is now at 5.5%. it is important to note that as the impact of the team's leasing over the last 12 months ramps up in the second half of this year. Our net debt to EBITDA ratio will trend below 7x by the end of the year. This trend will continue in 2027 as the balance of the nearly 900 thousand square feet, or $39 million of lease revenue commences. The current 570 basis point spread between leased and commenced occupancy will also compress to approximately 400-basis-point by year end. We continue to think creatively as we evaluate balance sheet management options and look for opportunities to further reduce our interest costs and or extend our maturity ladder. As Brent noted in his remarks, with year to date performance and visibility into second half lease commencements, we are increasing our 2026 annual core FFO guidance to a range of $1.50 to $1.55 per diluted share and increase of $0.025 per share at the midpoint when compared to our original 2026 guidance and equating to an earnings growth rate of >8%. We are also increasing our same store NOI cash and gap, guidance range to 5% to 8%, a 200 basis point increase from original 2026 guidance. Please note that, consistent with our standard practice, this guidance does not include any speculative acquisitions, dispositions, or refinancing activity. We will adjust guidance if and when those types of transactions occur. The most important financial takeaway is that Piedmont's leasing activity is now converting into earnings and cash flow growth. The $39 million of lease revenue still to commence that we discussed earlier will support higher same store NOI, higher core FFO, lower net debt to EBITDA, and continued progress toward a more normalized economic occupancy level. With that, I will turn the call back over to Brent for closing comments.

Thank you, George, Christopher, and Sherry. To summarize, Piedmont is entering the next phase of the office cycle from a position of increasing strength. The portfolio has been repositioned. Leasing demand remains broad and durable. Signed leases are converting into cash flow. Rents are moving higher with more room to run. New supply is limited, and leasing success will start to improve our balance sheet, providing the flexibility to efficiently recycle capital and improving transactions market. We recognize that the office sector continues to face skepticism but the data in our portfolio tells a different story. Companies are returning to the office. They are prioritizing high quality, amenitized environments. And making long term leasing commitments. They are choosing Piedmont because our buildings offer the experience and service they demand at a compelling value relative to new construction. Our focus for the remainder of the year is to grow occupancy increase rents, convert our leasing pipeline into cash flow and continue to optimize the portfolio. If we execute on these priorities, Tiedmont is positioned to generate consistent organic FFO and cash flow growth for the remainder of 2026 and beyond. With that, I will now ask the operator to provide our listeners with instructions on how they can submit their questions. Operator?

Certainly. The floor is now open for questions. If you have any questions or comments, please press 1 on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on a speakerphone to provide optimum sound quality. Please hold for just a few moments while we poll for questions. Your first is coming from Dylan Burzinski with Green Street. Please pose your question. Your line is live.

Hey, guys. Thanks for taking the question. Maybe if you can just sort talk a little bit or expand a little bit on the demand environment. Obviously, things continue to remain strong, evidenced by PT leasing and leasing to date in July. Maybe you can just talk about sort of in your guys' mind, what is sort of causing this to continue to accelerate here? Given the sort of I would say, uncertainty over the macro backdrop?

Good morning, Dylan. This is George. Thank you for joining us. Listen. I think the leasing engine really continues to fire on all cylinders. Right? And employees are looking for space you know, want to move into a more compelling inviting environment where you can see a lot of collaborations space to be made and for employees to reconnect with culture. Perspective. That trend is there. That trend continues. And, you know, when you look at overall demand today, I mentioned earlier that we are on 2 million square feet overall volume. But when you take a look at what is actually new deal activity, that is around 75% of that or 1.5 million square feet. And it is really great to see how that demand permeates over all of our submarkets. And there is an overbalance of activities looking at Portland and Dallas, because that is kind of where most of our exposure is in the near term.

I would layer on to that. We just continue to see a constructive environment for our clients to continue to grow their business Yes, interest rates are elevated, but the investment in what seemed to be productivity gains out of AI are not cannibalizing jobs. And in actuality, we are starting to see it help companies grow in that component. George noted in our prepared remarks, the number of expansions we are seeing versus contractions. I think that is generally fueled by that. But also that our portfolio in particular is geared towards right now, the sweet spot in terms of industry demand in the professional services realm, financial services, insurance. You have talked about in the past. Are designs, floor plates, how we operate the buildings and service them are all geared to provide an elevated experience for those types of users We do not have a lot of tech exposure in the company where you have seen less job growth. So I think all in all, those factors put the desire to be in the most premium product at a very reasonable price fits the Piedmont strategy greatly. There are a lot of you know, great buildings at high price points, but that cannot be afforded by every tenant. But a Piedmont building can, and that is really a unique point of the market or place in the segment that we strive to, and we are seeing increased demand particularly for that segment.

that is that is very helpful. Thanks, guys. Maybe just 1 more if I could. Sherry, you mentioned getting to that sort of sub-7x net debt to EBITDA range. Here shortly. Do you guys sort of have a longer term leverage target goal in mind as you sort of think about 2027, 2028, and beyond?

So the getting below 7 should happen by the end of this year. And then in the intermediate term, we would like to get closer to the 6.5x. Range. And in the longer term, closer to 6x. So somewhere in the 2027 to 2028 time frame, is what I am kind of calling the intermediate term of that 6.5x target.

Right. that is it for me. Thanks so much.

Your next question is coming from Daniela De Armis Rosales with JPMorgan. Live.

it is Daniela here. Thank you for taking my question. On the demand pickup in Northern Virginia, how competitive is it to get deals done there, and do you think the activity there will persist?

This is Brent. Good morning, Daniela. it is Daniela. Thank you joining us. As you point out, Nova has seen an uptick in transaction activity. We did complete a larger, call it about 70 thousand-square-foot lease with a defense contractor tenant. What we continue to see in that market are a couple of factors which give us the belief that we can continue to execute uniquely in the market. That first 1 would be we continue to see less and less blocks of space available as there has been a good bit of absorption, particularly from professional services And then as we noted as well, the components of the increased funding for I guess, defense contractors continues as well as the difficulties in The Middle East, the war in the Middle East, continue to fund growth in those companies that really focus on advanced warfare and this submarket has a large presence of companies that are also in that industry. And so therefore, we continue to see a lot of demand Very few landlords have the capital right now in that market to really create the environment and provide the necessary funds to build out. Unique space and, in some instances, SCIF space, if you are familiar with what that means. They also really see a lot of demand for the young millennial workforce that resides in the RBC corridor in Northern Virginia So there is a couple of factors. We think that demand continues to play out. And bodes well for continuing to drive absorption in our buildings in the RBC corridor overall. So I think you will continue to hear us share positive news in the coming quarters. Thank you. that is really helpful insight. And I guess that is second question from me. On the acquisition side, what opportunities are you guys seeing there, and what do those deals look like? Great question. We continue to canvass the market. For off market transactions. There have been a few assets brought to market as well. And the focus areas that we would like to grow the business, that being primarily, as we have talked about in the past, Dallas, and Northern Virginia, for the reasons we just went through. We do like our other exposure in the Sunbelt, but Atlanta is already our largest market. We see really good opportunities in Dallas. We continue to focus on assets that have great bones, slightly older vintage, but are really well located. We feel like location is the first amenity. But if it has the air and light, the ceiling clearance height, and the right ground plane interaction, we really look for assets that are, call it, 70% to 80% leased They have not been put through our program, so we create value through the lease up. Roll up in rental rates, and putting our Piedmont PLACE expertise to work and drive what would probably going in yield in the call it, 8.5 to 9.5 ish range that we stabilized well north of 10.5% to into the 11% range in terms of yield on cost. We are looking, you know, again, other know, profiles of those buildings would have the existing occupancy would be longer term and durable. And we would consider those assets building up to reposition and bring back to a trophy level quality and demand the highest rents in the submarket. So very much you have seen us accomplish here over the last 5 years in our strategy and portfolio. Alright. Thank you so much. that is it for me.

Your next is coming from Michael Lewis with Truist. Please pose your question. Your line is live.

Yeah. Thank you. So you just answered a question about acquisition pricing for the types of assets you are looking at. I wanted to ask about dispositions, and you know, are the improving fundamentals causing any changes in pricing? I know, you know, the New York asset is relying on a lease but may still have some upside on some upper floors. I saw, you know, the Enclave won a TOBY award. I saw 2 assets in Minnesota did as well. You know, any change there on potential disposition pricing?

Good morning, Michael. Thanks for joining us. This is Brent. Great question. And I think Christopher alluded to in his prepared remarks, we are continuing to see more debt availability in the market as well as good leasing begets better underwriting, better rental rates, absorption, etcetera. So we are seeing the transaction market continue to unthaw, if you will. If you think about our dispositions, and what we think about in a framework around that, as we have always said, we really want to call kind of the most mature, top 10% of our assets as well as what we would consider the bottom 10%. In terms of quality continuing to harvest value. And continuing to grow the overall quality of the portfolio, and earnings stream. So as we think about not only dispositions of the here and now in terms of cap rates, but what is the growth profile of the assets going forward? Our dispositions, you know, because those are 2 different buckets, they will vary, but somewhere between probably the 8 to 10 cap range seems reasonable for most of those assets. The overall desire would be to redeploy those proceeds into the Sunbelt. In terms of pricing we would say it is probably more stabilized pricing and just getting more activity. I do not think we have seen a material movement in overall pricing in the last 6 months? For most of our markets, but Dallas would be 1 that we have seen material move to say otherwise. Everything else has been pretty stable. So we think that still gives an environment where more transactions, we can start to recycle more capital. In the past, pre-pandemic, we historically had $300 million to $400 million of recycling. I do not think that is achievable today, but it is positive to see that is starting to unlock more transactional activity overall.

Okay. Great. And then my second question is capital allocation question. So the last time you paid a quarterly dividend, it was $0.2125 in the first quarter of 25 Your FAD this quarter was $0.24. You have not been below $0.13 of FAD since the fourth quarter of 2020. So even though you suspended that dividend, it is continued to be covered. But the stock has done well since you since you suspended it. So when you think about, you know, that $31 million of FAD you know, after CapEx, in the second quarter. what is the best use of that? Right? You could bring the dividend back. You could-- I know you still have some TIs to pay, but, again, this is extra cash flow. You know, the bond repurchases, those 9.25% bonds now trade at, like, 5.5%. Maybe that is not as attractive anymore. You could repurchase stock. I know you trade well below NAV. So I am listed off options. But what I really wanna hear is what you think the options are.

Very good question. And so if you think about that $30 million after CapEx, a couple of things point out. 1, we are doing a lot of construction this year across the board portfolio. We talked about we are gonna have a lot of commencements really take shape here in the third and fourth quarter. So we are spending capital today in those spaces. That capital will be lumpy through the remainder of the quarters of the year, so we may not achieve that same $30 million level after CapEx quarter. So as we think about those typically this quarter, what would we use that excess cash flow for Plain simple, continuing to focus on paying down debt. Near term, with a high eye towards continuing to drive debt to EBITDA, like Sherry noted, below 7x. By the end of the year. Once we get to those levels, I think we would continue to wanna drive that down further before we were-- and the board would discuss. And, hopefully, there is a determination as to when we would turn back on a dividend. When it comes to debt paydown, I would say bond repurchases of those 9.25% bonds would be the most impactful. So we continue to have a specific eye towards that as our debt paydown instrument. Or near term. The ability to use those excess proceeds to buy back stock is not a priority at the moment. And in fact, we do see, if anything, better opportunities from an acquisition stand standpoint for growth and even for near term accretion over where our potentially investing or buying back stock. And we would not wanna do so as lever up the company buying back stock. So it obviously would have to be paired with disposition proceeds or excess cash flow that we knew we are going to remain. And as I have noted before, this year is still gonna be a little choppy in terms of excess cash flow through the quarter as we finish constructing a lot of space.

Michael, the AFFO number does not deduct all CapEx. And so you know, it is it is not a true measure of cash flow. So some of those TIs that we spend, are in you know, in addition So the actual free cash flow number is lower.

I would think, you know, it is it is a board is going to evaluate it, reestablishing a dividend, that would be in 27 as we talked about at the earliest. And I would take the framework of really, first, you need to have positive net income and showing that there is a need to pay a dividend Do we obviously wanna make sure we have significant cash flow after CapEx that would support turning on that dividend and being able to increase it over time. And we will really, again, start to evaluate in 27.

Okay. Your next question is coming from Nicholas Thillman with Baird. Please proceed your question. Your line is live.

Hey. Good morning, guys. Maybe you wanna just talk a little bit more on the lease pipeline. You guys highlighted the 700 thousand square feet. Assuming that the 300 thousand-square-foot feet included in that is the New York City lease, Maybe give the composition of that remaining, like, 400 thousand square feet that you guys have signed, and then some updates on just New York City broadly. You guys mentioned fourth quarter. I think in the past, you have mentioned you are not you have the they did go into hold over rent this quarter, but you do not expect to be charging holdover rates, in the near term as you work through discussions? So more clarity there and then just mixture on the remaining pipeline of signed to date.

Yeah. Nick, thank you for joining us. This is George here. Listen. We talked about the 700 thousand square feet is either signed or is in the legal stage. And my office is weighted right now, a little heavy towards renewals, right, because of the city. But once you back that out of that particular column, you are kind of looking at pretty much an even balance between new and renewals. I know the previous scores were a little bit more new related, but I still believe we can get to that number that we have seen this historically by hitting about a 175 thousand square feet of new business between this quarter and next quarter. Some other characteristics about that demand, would say we have got a couple of full floors that are in there, which again, is pretty consistent with what we have seen historically. The sectors have been pretty consistent. We, you know, we constantly see legal accounting, financial, banking, insurance prospects, and those continue to look at all of our spaces. I would say know, sales offices is another 1 that is coming up. I would say I know you have heard a lot about our defense sector coming back to life in Northern Virginia. We are also seeing that in some of our other cities that we operate in as well. Brent, would you like to touch on New York City?

Yes. In terms of New York City, it is a lot of transactions, so 1 has to be careful in giving too much detail. But given the delay in execution of the new lease, as you noted, New York City did interrupt the holdover Piedmont retained all the rights for the existing lease which does include some financial penalties aalong with other remedies. But, obviously, we as we noted, continue to be very engaged on a long term renewal with DCAS, the Department of Citywide Administrative Services, Documentation is progressing. We and they have communicated they expected us to be completed in the fourth quarter. Dual terms remain, as we have discussed in the past. So nothing new there. And as you point out, the penalties under the lease are really meant to accelerate its decision by the tenant, as we noted they have made that decision, and they intend to stay at the building. So typically, holdover penalties have a short grace period and or escalate over time. So as we noted, the fact that they are in holdover does not impact the second quarter. And we really do not anticipate holdover is gonna materially influence our 2026 earnings. Hopefully, that gives you a perspective. Again, we do anticipate it will be executed.

No. that is really helpful. And then, Brent, you made some interesting comments on just early renewals and potentially pushing retention above your traditional 60% to 70% on your in-place when you are looking out to 2028 and 2029. I And you have also mentioned the ability to push lease percentage and occupancy into the low to mid-90s. So as we just put those characteristics together, maybe what you think the embedded upside is as you start locking in these renewals for 2028 and 2029. And then also with George's comments of what you need to see from the new leasing for sustainable level or bogey on a quarterly average just to continue to get to those low 90s from an occupancy standpoint?

Great. Thanks. Nick. So really, embedded upside from early renewals, it is kind of an interesting story. We have started to see those 28 and 29 tests come to us early. So there is embedded cash roll ups within that. I think our 12% is a pretty decent guide overall across portfolio. There will be some that are obviously much better in Atlanta and Dallas in terms of cash roll-up. that is a fair average to say in terms of embedded upside. And has strong data behind that. Know, also part of that strategy of having early renewals will be also to leverage the fact that they have already got great space And so with rates really high, we can offer rates that are modestly high and limited capital in that process. So we are going to really think of it as an opportunity to start to reduce the capital spend and the amount of free rent sessions that we provide our tenancy. Still giving them great space because they have already built it out. But leveraging better economics on the renewal in that process. So we still think we can achieve those great cash goals that we have been generating in the 10% to 15% range, and start to reduce capital spend as we get further into 2027 particularly. Now the And then so it is just new leasing. Sorry. Quarterly average I think as George alluded to, that 175 thousand square feet is the kind of sweet spot in terms of continued leasing of new tenancy. And we feel that still see that in the pipeline, and we expect that to continue given the space that we are having come back to us here in 2026 is great. Well located, amenitized, and remodeled. And the ability to, as you point out, drive lease percentage into the 90s-- low 90s, not quite mid nineties, but low nineties here is still on the horizon. So we feel good about the ability to achieve that, getting into the 90% in 2027. As we continue to drive absorption of the portfolio.

No. I really appreciate it. And then maybe just rounding it all out on the 2027 large expiration. Sounds like you had some progress in 1 of the assets in Atlanta, but maybe the coverage on those assets and the remaining larger blocks that you have within the portfolio. It sounded like 100 thousand square feet still in the Midtown asset at 999. Half the Epsilon space, and then those 2 assets in Atlanta. Specifically.

Sure, Nick. I will take that. I mean, I mentioned a minute ago, we had 1.5 million square foot of new leasing activity. And it is across all our markets. So the larger portion of about a third of that really is coming through the Atlanta market which bodes well. Right? Because we already have some exposure right now currently with $9.99. Although we have leased well over 100 thousand square feet there for the past 12 months, and we have good activity there to take away at that 4 block that is remaining. And, again, the hills that we will do there will show something close to a 40% cash roll. So we are we are pretty excited about the opportunity there. The other 1 you alluded to for 2027 is in the central partner market. There are 2 assets, Glenridge, Ireland, and 1.16 thousand. And then we mentioned already that we preemptively chipped away at some of that exposure at 116 thousand. But I think leverage highlands, I think it is it is really important to share with you the competitive features that this asset has. Right? it is gonna be the top part of a very prominent towers well located off of interchange. The vacancy is at the higher end of the marketplace in the high raised bank. It also will have an opportunity on the first Floor to create a beautiful landing visitor space for that large user that could come into the market. We also have top building sites to offer. And why that makes a lot of sense is central perimeter historically been that particular submarket that generates a lot or attracts a lot of corporate relocation just because of centrality of the market to the workers around the city. So we are we are pretty excited about the opportunity there. You also mentioned what else is in 2027. I mean, we talked on Minneapolis last time. That exposure is largely in the suburbs. it is in our 1 asset, Norman Point. That asset, it shows really well. it is already been renovated. it is been stabilized for several years. We are in conversation with that user today to retain it from some. Of that space, and we have other prospects available to us that need some time to get to conclusion. But look, we have we have had we have shown a tremendous amount of success in Minneapolis. Right? We have taken 2 buildings that were totally vacant in Meridian Crossing. And Excelsior leased up to 83% over an 18-month horizon, and we think we can duplicate that. Normandale Point as well.

No. I appreciate all. that is it for me.

Once again, if you do have any questions or comments, please press Your next question is coming from Evercore ISI with Cantor Fitzgerald.

Hello. Thank you for taking my question. I know you guys mentioned that you wanted to reduce debt also. Selling noncore assets to reinvest in the Sunbelt. So I was wondering if you just kind of walk through your thought process there and, like, what you are prioritizing in these new assets.

I am sorry. You faded out there in what we are prioritizing in terms of you are reinvesting in the Sunbelt? Like, what are you prioritizing in these new properties and assets that you are acquiring? All right. What properties? So we I guess, terms of capital allocation, as we have talked about, right now, near term, we have the ability to pay down the 9.25% bonds that, frankly, if we were to refinance today, probably be around a 6% interest rate. So that provides for certain accretion and deleveraging in the process. We are very focused on taking our debt to EBITDA down below 7x. most quickly. And so that will afford the ability to do that We do have some dispositions that are in process. Or in the market, I would say. We hope to consummate them through the year. And that would immediately help to go pay down debt and drive us towards that debt to EBITDA. That said, we also find some pretty interesting opportunities for acquisitions that would be accretive to those dispositions and add also to the EBITDA and earnings stream and also help to reduce debt to EBITDA. So we do not feel like they are necessarily mutually exclusive. There are opportunities on both sides. Of the acquisition and debt pay down drive earnings growth, to improve the balance sheet, and improve the quality of the portfolio. Now then in terms of which assets, as we alluded to, we really like the what we are seeing in terms of demand and our positions in Dallas and Northern Virginia where we have pretty sizable scale in terms of the platform today, but we would like to drive particularly in submarkets where we see pricing power. We get to about 25% of the market share for that. Trophy class a product. Property. And when we have those situations, which is kind of what we are targeting, we really have an opportunity to drive rental rate growth. it is ultimately what we wanna do because that translates into cash flow growth. Do think that we are on a unique position at Piedmont is in terms of our ability to start to aggregate assets in this environment. Some of our peers are much more focused on shiny, brand new glass buildings that are well leased. We feel that the opportunity set in unloved but once really high-quality trophy buildings is 1 that we will continue to lean into buying assets again that are 70% to 80% leased at higher yields, high single digits. And being able to drive that into the low double digits. That strategy also sometimes lends itself to taking on larger campus style, like a Galleria in Atlanta or Galleria in Dallas, And in those projects that are $200 million plus, we are seeing very little competition. And that is really an opportunity set where we can create the environment, the walkability, and the kind of modern workplace that today's companies want We have done it several times, and we continue to believe that will be a unique set for us in the coming years. So hopefully that gives you some idea of our strategy. Okay.

Great. Thank you so much. Thank you.

There are no additional questions in queue at this time. I would now like to turn the floor back over to Brent Smith for any closing remarks.

Thank you, everyone, for joining us here today. We do want to thank particularly the Piedmont team and congratulate them again on achieving a Kingsley top 5 and the numerous BOMA awards. Piedmont continues to execute at a high level. Our premium Piedmont PLACEs are garnering a significant amount of demand and we are excited about what the opportunity holds for Piedmont not only the remainder of this year, but in the several years to come as we continue to execute on our strategy. Thank you, everyone, and have a great day.

Thank you, everyone. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.