Piedmont Realty Trust, Inc. Q3 FY2022 Earnings Call

Good day ladies and gentlemen, and welcome to the Piedmont Office Realty Trust Third Quarter 2022 Earnings Conference Call. At this time all participants have been placed on a listen-only mode then we will open up the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Eddie Guilbert. Sir, the floor is yours.

Thank you, operator and good morning everyone. We appreciate you joining us today for Piedmont's third quarter 2022 earnings conference call. Last night we filed our 10-Q and an 8-K that includes our earnings release and our unaudited supplemental information for the third quarter that's available for your 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 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 speak as of the date they 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.

Good morning. And thank you again for joining us on today's call as we review our financial and operating results for the third quarter of 2022. 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. During the third quarter Piedmont executed over 440,000 square feet of leasing at meaningfully higher rental rates with almost a third related to new tenant leasing. In addition, the company delivered solid financial results in line with the quarter's consensus estimates. Also, we completed a very strategic acquisition and laid the groundwork for two important dispositions. Notwithstanding these accomplishments, the broader economic environment continues to pose numerous challenges to the commercial real estate sector. This results from a number of factors including the impact of remote work, rapidly rising interest rates and inflation, as well as concerns regarding a recession. Despite these headwinds, we remain optimistic and realistic about our leasing prospects. Our prudent investment strategy in targeted growth markets and our overall operating performance. Our current leasing pipeline remains stable with over 300,000 square feet currently in documentation and over 150,000 square feet of leasing already executed in the fourth quarter, positioning us to close 2022 with over 2 million square feet of complete leasing, and the portfolio approximately 87% leased. In short, we believe Piedmont's focus on high quality assets in amenity-rich working environments will allow us to continue to attract and retain tenants. And our well capitalized balance sheet provides us with an operating flexibility to successfully navigate these challenging times. With that, I'll turn it over to George, Chris, and Bobby to provide further details on the quarter.

Thanks, Brent, and good morning everyone. Despite the usual summer travel impact along with the growing macro-economic uncertainty that Brent alluded to. Our operational teams delivered solid third quarter results on many fronts and leasing momentum remained solid. We're still seeing demand from a broad range of industries, particularly the financial, legal, healthcare and business services sectors. Workspace utilization and our portfolio continues to increase incrementally and it's up to 50% in September, and nationally there is a growing chorus of companies setting the stage for greater in office participation by removing vaccine mandates. Increasing the number of required in-person days, or enhancing the office experience with additional incentives or amenities. We believe our operating strategy of providing a highly amenitized modern working environment is a critical component in meeting today's corporate flight to quality objectives, which is not only appealing to leasing prospects with new space needs, but also to attracting and retaining employees for existing tenants and for drawing employees back into the office. And we believe the merits of this strategy is showing up in our leasing results. Workforce priorities have shifted post-COVID. There's a much higher concern for quality of life, homeownership, work-life balance and shorter commute times. Our premier assets complement these needs and are located in growth areas, most of which are easily accessible suburban, and infield submarkets. This quarter, we completed over 50 transactions for approximately 444,000 square feet of total overall volume. Of this exactly half or 25 of these leases totaling 124,000 square feet were related to new tenant lease activity and expansion. While the volume of new deal activity was good, the total square foot lease did not reach the level on the past few quarters. We largely attributed this to the first part of the summer when historically we have seen some slowdown in general business activity due to vacation and travel season, and that smaller businesses continue to make corporate decisions quicker than larger corporations. As Brent already noted, our pipeline activity is strong, and we anticipate that new leasing in the fourth quarter will be back at pre-pandemic levels. I will note our leasing economics were very favorable with approximately 33% and 38% roll-up or increase in rents for the quarter on a cash and accrual basis respectively. Our weighted average lease term at the end of the third quarter is approximately six years. Our lease percentage at the end of the third quarter was approximately 87%, up 150 basis points from year end and largely unchanged from the close of the previous quarter. While the majority of new lease activity continues to emanate from our Sunbelt portfolio where over 70% of our vacancies reside. We are experiencing good leasing activity in all of our spiked markets. Now I'd like to highlight a few key accomplishments that have occurred in some of our operating markets this quarter. Beginning with Atlanta, our portfolio experienced the most form of new activity with 10 deals for nearly 35,000 square feet. Atlanta has been Piedmont's most consistent performer for the past four quarters, capturing 43% of all new tenant transactions, and the pipeline continues to be quite robust. In fact, we've already signed six more new deals in October for another 57,000 square feet, including a well-known Atlanta Financial Services firm, which is relocating their regional headquarters into our LEED Gold 999 Peachtree property from the Buckhead submarket. I would add that our building was selected by that tenant over a newly completed development in the midtown submarket, likely because of its superior location and sustainability designation. Adding to Atlanta's notable reputation was Money magazine's recent ranking of Best Places to Live in the United States with Atlanta taking the top spot. We are excited to be growing here with the recent acquisition of our LEED Platinum 1180 Peachtree AA Trophy Tower, which Chris Kollme will touch on in just a moment. Atlanta is our largest market accounting for 26% of our ALR at the end of September. And the flight to quality is very evident here. We anticipate continued leasing production in the quarters ahead. Coming to Dallas, we're happy to announce the extension to the entire Ryan lease at our LEED certified Three Galleria office tower. The economics of this 178,000 square foot deal were strong with significant rental rate roll-ups on both a cash and accrual basis, no pre-rent and no tenant improvement allowances. That extension will expire in phases over the next two to five years. Also noteworthy is the completion of nine new lease deals totaling 32,000 square feet spread amongst the remainder of our Dallas assets. One of those deals was an approximate 9,000 square foot expansion of an existing tenant. Evidence that businesses in this dynamic market are continuing to grow despite the cloudy economic environment. Our Minneapolis holdings were quite active this quarter with three new tenant transactions for 50,000 square feet, including our largest new tenant lease and deal for this quarter, and a headquarters relocation into our LEED Gold asset for 35,000 square feet. That new user, a financial services firm, will double in size from its existing location. Interestingly, they will have all staff working in-person 100% of the time. Our modernization efforts at Crescent Ridge are paying off, having completed four new lease transactions in the past few quarters and a robust pipeline that should stabilize occupancy there. Moving Downtown to our LEED Gold trophy tower, US Bancorp Center, our team there signed a new lease to a white tablecloth seafood restaurant for a 10-year term, adding to our already robust set of onsite amenities. Lease extension conversations are ongoing with our anchor tenant at US Bank, and we believe negotiations with the bank at this Downtown asset and at Meridian Crossings in the suburbs will accelerate once the bank completes its merger with Union Bank, anticipated at year-end. The Piedmont formula continues to demonstrate leasing success, particularly with smaller tenants, the most active customer segment across all of our markets. These tenants are driven to our office project citing their ease of accessibility, vast amenity base, unique tenant engagement programming, best-in-class conference facilities, along with a sustainability-minded operator. As noted in a recent CBRE report, owners are witnessing increased demand for LEED designated assets, which are also generating a meaningful rental premium on average of 4%, with the difference even more substantial in suburban markets. Looking ahead to the remainder of 2022 and into 2023, we remain optimistic about the leasing performance of our portfolio. Tour activity continues to be strong and consistent. We have approximately two million square feet of outstanding proposals, which is in line with the past four quarters. With only a few leases expiring for the remainder of the year, we expect positive net space absorption in the fourth quarter, resulting in an anticipated year-end lease percentage around 87%. Additionally, expirations are low next year, with only one lease larger than 100,000 square feet that will not expire until December of 2023. In conclusion, I do want to mention that Piedmont has invested in a number of our assets over the last few years improving amenity offerings, and modernizing lobbies and elevators and the like to compete on an attractive basis with any new build. A large portion of this redevelopment has now been completed, and we have no exposure to inflation associated with grounds of development. We will focus on redevelopment, which we believe is a better risk-adjusted return.

Thank you, George. As we disclosed on last quarter's call, we entered into a binding contract to purchase 1180 Peachtree Street in the heart of Midtown Atlanta, for a purchase price of approximately $465 million, including the assumption of an approximately $200 million, 4.1% Fixed Rate secured mortgage, which matures in 2028. I'm pleased to report that we have closed on the acquisition of what we believe is the highest quality, most differentiated office setting in Atlanta. At almost 700,000 square feet, 1180 Peachtree is a LEED Platinum, skyline-defining asset with a weighted average lease term of over seven years and in-place rents at approximately 20% below market rates. The initial accrual basis yield for the transaction is 6.3%. Piedmont is now one of the largest owners in Midtown, accumulating a position of over 1.3 million square feet within just the last 12 months. If you haven't already done so, I'd encourage you to review the materials on our website, which offer more complete details about this acquisition. We anticipate ultimately funding the 1180 acquisition using sale proceeds generated from non-core asset dispositions. After quarter-end, we have agreed to terms for the disposition of our two assets in Cambridge, Massachusetts to two separate buyers. Both groups are nearing completion of their diligence periods. These transactions are on an all-cash basis with no financing contingencies. We anticipate recognizing an approximate nine-digit gain on a consolidated basis. As for the balance of 2022, given current market conditions and our temporary leverage levels, our capital markets initiatives will be principally concentrated on evaluating additional dispositions of non-core assets. That said, we will be patient and we will be disciplined as today's market environment is certainly challenging for both buyers and sellers.

Thank you, Chris. I'll discuss some of our financial highlights for the quarter. But I encourage you to please review the entire earnings release and supplemental financial information which were filed last night. More complete details, including additional interest expense incurred during the current quarter driven by rising interest rates, as well as interest expense from additional debt associated with the 1180 Peachtree acquisition, Piedmont still achieved operational and financial goals for the quarter. With successful leasing year-to-date, rising rental rates and asset recycling, the company was able to maintain core FFO of $0.50 per diluted share, consistent with the third quarter of 2021. FFO generated during the third quarter was approximately $43 million, which is well above our current $26 million orderly dividend level. We continue to experience improving lease economics and rental rate roll-ups during the quarter. Similar to the last several quarters, our same-store cash NOI, however, decreased marginally as expected during the third quarter due to successful prior leasing activity and the commencement of these leases, resulting in a 60% increase in lease square footage under abatement as of September 30, 2022 compared to September 30, 2021. Our guidance for same-store NOI on a cash accrual basis remains the same for the year and is still anticipated to increase approximately 2% to 3% as several abatements burn off during the fourth quarter. Turning to the balance sheet, our debt-to-gross asset ratio was 39.8%. This temporarily elevated ratio is due to the debt related to the acquisition of 1180 Peachtree that Chris mentioned. I say temporarily elevated because as with all of our acquisitions, we intend the recycling of assets to be leveraged neutral. We anticipate reducing our current floating debt outstanding with the proceeds from property sales over the next few quarters, including our two Cambridge assets, which are currently expected to close around the end of the year. We also anticipate selling other non-core and non-strategic properties during 2023, which will ultimately allow us to return to a more normalized leverage level, the mid-30% range with no development projects outstanding. As is often the case, we acquired the 1180 Peachtree property in a reverse 1031 exchange. In order to protect the significant tax gain we anticipate recognizing in conjunction with the sale of our two Cambridge assets. During the third quarter, our average net debt-to-core EBITDA ratio was 5.9x on a trailing 12-month basis. In addition to assuming the $197 million mortgage in conjunction with the 1180 Peachtree acquisition, during the third quarter, we also entered into a $200 million bridge loan priced at SOFR plus 1%, which covered the majority of the initial cash funding requirements for the 1180 Peachtree acquisition. Additionally, I would note that Eddie and his financial planning team continually run capital financing models. In that regard, debt maturing through the end of next year includes a $350 million bond maturity in June of 2023 and a $200 million term loan maturing during the third quarter. The majority of the term loan will be paid down with disposition proceeds that we have previously discussed. The $350 million bond will be paid off with either a five- to ten-year new bond issuance or more likely with a bank term loan, which we've already begun having discussions about with our lenders. I will note that Piedmont has only one mortgage outstanding. Therefore, the option of an additional mortgage debt is also available to us. Finally, after considering year-to-date results, and our updated 2022 annual leasing forecasts, including higher interest expense resulting from the rising interest rates, we are narrowing our 2022 annual core FFO guidance per share to between $1.99 and $2.01 per diluted share. This revised guidance is almost exclusively attributable to increased interest expense. This concludes my prepared comments. So I'll turn it back over to Brent at this time.

Thank you George, Chris, and Bobby. As George mentioned, Piedmont operates a portfolio of Class A assets predominantly in the Sunbelt, where continued population migration and job formation trends provide a mitigate to the remote work headwinds the office sector faces. We have refined our portfolio over the last several years to create differentiated buildings that offer premier amenities and hospitality-driven collaboration spaces in conjunction with local food and beverage operators. At Piedmont, we go beyond the building to provide unique services and offerings, including our tenant engagement platform, published sustainability initiatives, and concierge experiences. It's a dynamic workplace environment that our competitors and frankly, the employees can't easily replicate. The flight to quality is helping our customers to attract, retain, and increase their employees' overall productivity. In fact, over the last two years, 70% of our executed leases have taken place at properties that we have redeveloped within the last five years. These asset-level investments are what's garnering more than our fair share of leasing activity. Our balance sheet is slightly elevated in terms of leverage due to a key strategic acquisition, but we will address a majority of the floating rate debt related to this acquisition with our anticipated Cambridge dispositions. We will focus on a few other dispositions into 2023. Patiently managing our balance sheet, but committed to reduce our leverage ratio by a few percent. Finally, I would note that we recently published our annual ESG report, and it is available on our website. I would encourage you to please take a look when you have a moment as there is a lot of good information. We're proud of the work we're doing in these areas, reducing GHG emissions, energy and water consumption, and curtailing waste production. We have been designated as an Energy Star Partner of the Year, 2022 Greenleaf leader with 50% of the portfolio now LEED certified, 100% of our portfolio well health rated, and 88% BOMA certified. At Piedmont, I'm fortunate to work alongside colleagues who are good caretakers of the planet and good citizens within our communities. Along those lines as I conclude, I want to thank each of my Piedmont colleagues with whom I've had the privilege to work alongside each day for their impeccable work ethic, creative tenant offerings, and the drive to provide best-in-class service to our customers. With that, I will 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 of your questions now. We will make appropriate later public disclosure if necessary.

Ladies and gentlemen, the floor is now open for questions. Your first question for today is coming from Dave Rogers. Please announce your affiliation and then pose your question.

Baird. Hey guys, this is Nick on for Dave. I just wanted to touch on the leasing pipeline. I think George went over in great detail kind of some of the key factors we're looking at. But as we're looking at the 150,000 square feet signed in the fourth quarter and the 300,000 square feet in documentation. I guess I want a little more color on what's that new versus renewal. And then what's like the average deal size you're seeing?

Sure, Nick. Good morning. Great question. I'm delighted to talk about our pipelines, which continues to be pretty robust. I would say that in terms of how much we have in the new activity bucket, about a third of that that's already been signed is new. Looking forward to what's in the documentation stage, it's about a third or so that's in the new bucket list. I think we have a couple of other transactions that we're chasing that we hope to convert into the legal stage pretty soon as well. In terms of average size, it's been a small kind of market for the most part. Last quarter, I think 24 of our 25 deals were under 10,000 square feet. Looking at what we're doing so far for November and October, we have a couple of full floor transactions that were completed, which is pretty typical for us. I think we see one to three deals that are about a full floor or larger. But after that, I'd say the average ranges a little under 12,000 square feet across the board.

I'd add there to George, and this is Brent. Nick, thanks for joining this morning. As we’ve kind of, as George alluded to, we really have seen that smaller tenant call, and half of floor 12,000 to 15,000 square feet or less has really been the strongest part of the market. Frankly, we're probably in terms of the number of deals and volume for that segment, above where we were pre-pandemic. I think that's what gives us some positive vibes regarding the expiration for the remainder of this year and into next year, given that we have the Cargill expiration. The average tenant size that will be expiring is about 8,000 square feet. Most of that, about 60-65%, is in the Sunbelt markets. We really feel like the portfolio is positioned to continue to get good leasing traction and good pipeline volume.

Yes, that was very helpful. Regarding your resolution, for the intermediate term, what are the chances we might see similar activity from larger tenants like Amazon at Galleria Towers? Are there any potential holdovers, or have you started discussions for something as distant as 2024?

I think this is Brent again. We were really pleased to renew Ryan. We noted about kind of a phased period over time with a weighted average term of a little bit about 3.5 years now. Really, I think an example of the success we've had at that LEED-certified building. As we look to Amazon, I think it's pretty early given their 2025 expiration. I will say that they are active in the space, along with our other Dallas tenants. At this point, I think it's a little early to ascertain their longer-term plans. We do have Cargill towards the end of '23, as I've noted on the last earnings call, we continue to be engaged with them. That LEED Gold building is a phenomenal asset. It's a 2010 vintage, and if you'll recall, we bought it for about $185 a foot at a 10 cap. What's really interesting there is, and it continues to attract Cargill and other tenants looking at the building. We have a 300-seat auditorium, a 13,000 square foot fitness center with lockers, cafes, and coffee shops. It has everything we think about in terms of amenities in a complex. Green parking ratio 5 per 1,000 and it is right down the street from the new light rail stop being built as we speak, operational sometime in 2024, according to the city. It's a great positioned asset. We're hopeful they will stay, but again, we are marking that space. We will provide continued updates on Cargill as it gets closer to their expiration, which again is at the end of '23. I would also mention that U.S. Bank continues to engage with us both on the banking side and as a customer relationship with tenants.

Thanks Brent. Very helpful. Maybe last one for me. Maybe for Chris kind of touching on the asset sales. Sounds like the Cambridge assets that are going to trade relatively soon. Just kind of wondering on pricing, how it's changed relative to your underwriting when you were looking at selling those assets, and then maybe touch on the bigger pool out there. It sounds like all cash deals. Maybe debt financing is a little tough out there. So how does that bode for like other assets you have in the market right now?

Yes, good morning, Nick. Good question. Sorry again for the technological challenges. Got to be a little guarded with our commentary on Cambridge. We like where we sit, but in this market, we're not done until the wire hits. We did run a fully marketed process, and demand there was frankly very robust. These are generational assets. We had over 80 confidentiality agreements signed in the first couple of weeks. We launched it back in July, shortly after we went non-fundable on 1180. We threw a wide net, wanting as many eyeballs as possible on these two assets. Approached domestic investors, international investors, as well as a couple dozen ultra-high-net-worth individuals with ties to Harvard or who have invested in Cambridge for years. The debt markets, as you mentioned, and economic uncertainties did impact some potential buyers. However, the uniqueness of Harvard Square and Cambridge, along with the long-term leased assets to Harvard and Bank of America, generated ample demand. We have two highly qualified all-cash buyers, and I expect to close later in the quarter. We feel good about where we stand on Cambridge. Regarding Houston, we mentioned earlier that we've talked to some potential buyers for those two assets. We'd like to remind everyone that it's only two assets, totaling 600,000 square feet. Those conversations are ongoing. However, it's quite challenging to predict when or if those assets will trade. We will keep you informed as we make progress there.

Yes, I would add that overall, clearly the market is repricing risks. The lower the risk, the less the price impact; our Cambridge assets are generational. We've been fortunate to probably see less of an impact there. Regarding Houston, as you noted in your question, I think that's accurate. Great assets, and as we discuss with potential buyers, valuations have seemed reasonable. Still, the financing markets have not been accessible, which has been a significant barrier in these discussions. We are hopeful the market will open back up, and we are also thinking creatively about ways to monetize and exit Houston in the long run.

Great, with Green Street, just curious on conversations with tenants renewing their space? Has there been any conversations around changing lease terms on a renewal or new lease with respect to early termination rights? Have you seen tenants taking less space when they renew or taking up more space? I'm just curious if you'd speak to any of those trends.

Thank you, Dan. This is George Wells here. We've taken a look back at renewal and retention rates that we've had over the past couple of years. They've held pretty steady, I would say in that 70% plus range. We also dug further into how many of those were looking for contractions versus expansions. We were pleasantly surprised to note that 40 of our deals had some expansion element to them versus 27 of those deals had contractions, and that's still what we're seeing today in terms of where the dynamics of our tenants are going. Some want more space, and some want less. In the past quarter, we had six expansions versus three contractions for a net positive of 15,000 square feet. Yes, it still seems to be evolving. I don't think that all the macro noises you're hearing is fully being reflected in our pipeline. We don't want to be naive to think that it won't, but at this point, our properties continue to resonate with demand in the marketplace. I will say that flexibility is always critical for tenants looking at entering any building today. The biggest ask in that realm is basically termination rights, somewhere in the realm of two-thirds of the way into a lease term. But that's not universal. I think it’s something that’s asked for quite often, although we’re not seeing a lot of contraction options or contractions in our existing pipeline today. I'd say well, usually those termination rights come with penalties. That's a positive overall. We continue to see the small tenant market, which I've mentioned before, having significant depth to be the portion of the market where they're not giving back space. Larger corporate situations have been the ones down-sizing. We've seen some organizations downsizing from large spaces to new suburban offices, too.

Great, appreciate the color there. And then last one for me. Can you give us an update on the current market regarding the portfolio, just in-place rents versus market rents?

Absolutely, Danny. I think we've continued to reiterate over the past few quarters that we're generally in the neighborhood of 5% to 10%. We had a stellar quarter this year with a significant roll-up in several tenants. Even if you remove the largest tenant with a massive roll-up, we were still above that range of 5% to 10%. I think as we also look forward to the roll, that's representative of kind of the more near-term roll that we have in the portfolio as well. So I think that's still a fair barometer.

Thanks, JPMorgan. Just first question is regarding asset sales and thinking about earnings over the next year or so. I think historically, you've tried to pair dispositions with acquisitions. You've tried to match those in a way where it's actually been accretive, but in your commentary, it seemed like the focus has shifted a bit more towards the balance sheet and maybe reducing debt. So should we think about, maybe dispositions next year, do you think that will be dilutive? Or do you still intend to match that up and mitigate the earnings impact?

Yes, I appreciate you joining us this morning, Tony. This is Brent. As we continue with our operating business model, we remain big recyclers of capital. We've sold about $400 million in four of the last six years, and despite COVID, we've managed to continue our asset recycling operations. The anticipated Cambridge disposal should achieve about $300 million this year. We feel like the asset sales market will give us the opportunity to sell Cambridge, which should be accretive relative to 1180, and then have additional dispositions come in. So net-net, when we sell everything, we will return to leverage neutral and approximately earnings neutral on 1180. Again, that was a trophy-quality asset we’re trading against a trophy-quality asset in Cambridge. Overall, we feel positively about the ultimate end game and maintaining earnings levels without diluting them. We'll continue our recycling strategy, always aiming for improvements in portfolio quality and ensuring acquisitions are accretive to earnings. I wouldn’t say anything has changed in that regard, but we will keep this focus in 2023.

Okay, got it. And then just one other item, just thinking about the inflationary environment. If the portfolio stays in this mid-80% occupied level, does inflation on the cost structure for the other 15% that you're not getting reimbursed on? Is that something we should consider as potentially notable as we head to next year? Or can you control that?

The majority of our leases do have clauses that insulate us from immediate price increases. As you pointed out, the portfolio is a little under-leased. We accepted some vacancy knowingly at the early end of 2019 when we acquired a number of assets. I feel like we’re at the trough related to the vacancy in those acquisitions, and we have made great traction at those assets. So I think we can maintain the occupancy level that we have in the portfolio, which is a little under-leased, but overall, I don’t feel the inflationary pressures will materially impact our bottom line as landlords. We are above the occupancy level where most costs are passed through to tenants, and I don't see that as a significant exposure that shareholders should focus on.

There are no further questions in queue. I would like to turn the floor back over to Brent Smith for any closing comments.

Thank you. And again, I want to thank everyone for joining the management team this morning. As a reminder, we will be at the NAREIT Conference in San Francisco in two weeks. So reach out to Justin or Eddie if you'd like to sit down with management. We certainly welcome the opportunity to tell our story and share what we think is a very exciting transition that Piedmont is going through with strong leasing activity and recycling transactions. Again, I hope everyone has a wonderful holiday season, and we look forward to continuing the dialogue on the fourth quarter call in January. Thank you.

Thank you, ladies and gentlemen. 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.