Earnings Call Transcript - PDM Q4 2022

Operator, Operator

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. I will now turn the call over to your host, Eddie Guilbert. You may begin.

Eddie Guilbert, Host

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 Smith, CEO

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, Piedmont 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 the 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. 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 resides and where 60% of the year's expirations are situated. 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 Big Tech 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 are targeting appear to be more resilient to current economic conditions. The Wall Street Journal reported in January that small business 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; 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 do 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. Furthermore, we anticipate 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 decisions. 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 Wells, COO

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 tenant 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 since 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. 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 is 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. 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 redevelopment authority now has plans to expand the Galleria Convention Center, which is adjacent to our five Galleria office buildings and 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 in 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 LEED 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 re-envision 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. 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 ground-up 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 ground-up 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 LEED 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 being 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 café expansion with outdoor workspace, was awarded by BOMA, the Boston Regional Outstanding Building of the Year or TOBY 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 a healthcare and medical enterprise will vacate approximately 77,000 square feet at the end of the first quarter as a 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 LEED 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 experiencing substantial growth and is relocating from 52,000 square feet at nearby 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 LEED Gold project. New York and Downtown Minneapolis continued to improve incrementally, while I would say the toughest market for us remains the District of Columbia, 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 ease of accessibility, vast amenity-based unique tenant engagement programming, best-in-class conference facilities, and a sustainability-minded operator. Building on the color that Brent 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 Cargill, 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 an 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 Kollme, EVP of Investments

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 Peachtree 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 Bowers, CFO

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. 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. 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 returned 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. 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 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.

Brent Smith, CEO

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, Operator

Thank you. We will now begin the question-and-answer session. Please hold on while we collect questions. Our first question is from Anthony Paolone with JPMorgan. Please go ahead.

Anthony Paolone, Analyst

Great. Thanks. Good morning. My first question is about the details you provided on the numbers. You're mentioning that the lease rate in the portfolio this year is expected to increase by about 80 basis points at the midpoint compared to where you ended last year. I'm curious about how the commenced number might be impacted regarding your FFO forecast. You are at 84.6% at the end of the year. Do you think that will increase in line with the 80 basis points in the lease rate, or is there a different dynamic at play?

Brent Smith, CEO

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.

Bobby Bowers, CFO

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

Anthony Paolone, Analyst

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?

Brent Smith, CEO

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, continue to 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 a 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.

Operator, Operator

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

Dave Rodgers, Analyst

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.

George Wells, COO

Sure. Good morning, Dave. Thank you for joining our call this morning. Looking back over the past several quarters, we've averaged around 2 million square feet in overall proposals, indicating the strength of our pipeline. Approximately 40 to 45% of that has been from new activity. The stores have remained consistent. As Brent mentioned, we anticipate more activity in the Sunbelt over the next few quarters, so I'll begin with Atlanta. I want to clarify my earlier comments about Atlanta. I stated that our AR number should exceed 27%, which ties back into our pipeline. Atlanta is showing strong performance, with market depth ranging from 20 to 25 prospects each quarter. In Dallas, as we noted earlier, the activity appears to be lagging significantly, with about 20% of our new activity coming from that submarket. From a small tenant perspective, that segment dominates our marketplace. It's not unusual for us to see two to three tenants each quarter that occupy one to three floors. We've already mentioned one of those in Dallas, and we have a few more in our pipeline.

Brent Smith, CEO

And then, Dave, this is Brent. Regarding your question about US Bank, we have a strong relationship with them, both as a tenant and in our lending and banking advisory roles. Their asset in Minneapolis, especially the headquarters, features excellent amenities, such as the lead gold building on the 31st floor with impressive 18-foot windows overlooking the city. It’s unparalleled in terms of what it offers US Bank, which we believe supports the possibility of a renewal. Although big tech and large corporations have been cautious in their decision-making, financial services firms are actively embracing the office model. US Bank has also brought back over 50% of their employees since the start of the year. When you consider JPMorgan's new headquarters in New York or my previous firm, Morgan Stanley, maintaining their office presence, financial services companies are continuing to utilize office space, especially for customer-facing executive roles, which is relevant for US Bank. The lease is set to expire at the end of May 2024, and we are engaged in discussions, expecting more clarity around early summer. In the suburbs, their location is also seeing increased use, particularly by their IT group, as they continue the integration following their merger with the West Coast bank. This process contributes to the delay until early summer. Overall, we believe the integration and decision-making process is progressing positively. As we guide the market, we anticipate a renewal ranging between 50% to 100% in both locations. I understand that is a broad estimate, but the firm is still determining its hybrid policy. Nonetheless, the signs of bringing employees back are encouraging.

Dave Rodgers, Analyst

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?

Chris Kollme, EVP of Investments

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.

Michael Lewis, Analyst

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?

Brent Smith, CEO

Michael, it's Brent. Thank you for joining us today. We believe we can maintain similar results as this year concerning same-store NOI growth. We're guiding to a range of 1% to 3%, down from our current 2%. This is due to our ability to secure incremental increases in existing leases while still having a fair amount of rent to realize throughout the year. We also anticipate additional leasing activities and some near-term projects in the pipeline that will contribute to this growth. Bobby, do you have anything to add regarding these specific elements?

Bobby Bowers, CFO

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.

George Wells, COO

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.

Michael Lewis, Analyst

Okay. Great. You mentioned this briefly already, and I understand that you have limited tenant exposure in your portfolio. However, are you noticing any effects in your markets due to the recent big tech layoffs? People often think about areas where you lack exposure, like the Bay Area and Seattle, but it’s been noted that job distributions are now more widespread across the country compared to previous cycles. Are you observing any changes or do you anticipate any in Boston, D.C., or any of your other markets?

George Wells, COO

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, it would be in our Burlington portfolio up in Boston. And when you peel back a little further on 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 TOBY 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.

Chris Kollme, EVP of Investments

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.

Michael Lewis, Analyst

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...

Brent Smith, CEO

No, we haven't seen significant sublease space or any other competitive space at this time. I believe Midtown Atlanta remains an appealing market for tech tenants. However, I have heard that some companies have reduced their presence in that area. Nonetheless, our properties there cater more to professional services. Based on the most recent jobs report, we are seeing strong demand from that sector, especially as they transition from Buckhead to Midtown, similar to our recent announcement regarding Cadence Bank this quarter.

Operator, Operator

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

Dylan Burzinski, Analyst

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?

Brent Smith, CEO

Hey, Dylan, it's Brent. Thanks for joining us. That's a great question. I think no office REIT is satisfied with their stock performance right now, and we are reviewing our buyback program. First and foremost, we need proceeds from disposals. We don't want to increase our leverage, especially in the current liquidity-constrained environment. We're also seeing significant underperformance, both absolutely and in comparison to others, although we've been trading in line with the sector. There are very few private transactions happening, and risk has been repriced in the market, affecting stability and cash flow, particularly due to rising rates. This uncertainty in pricing will likely lead to a lack of transactions and doubts about our and our peers' NAV. Therefore, we will remain cautious with our available capital, likely postponing share buybacks in the short term, and will prioritize operating the business and maintaining liquidity. In our view, reducing debt in the near term would be a more effective use of capital.

Dylan Burzinski, Analyst

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?

Brent Smith, CEO

In this environment, conditions vary depending on the market, submarket, and specific building. Taking it market by market, Atlanta is performing well with good absorption and strong activity for our assets, which gives us the opportunity to grow net effective rents there. In Dallas, growth will likely not match Atlanta’s, but it should remain positive. Markets like Orlando, suburban Minneapolis, and suburban Boston are expected to remain stable, showing little to no change. However, we are seeing worsening fundamentals in D.C., especially in the district, where negative net effective rent growth is expected. Our exposure to the leasing market in New York is limited due to long-term leases, but that market could also be flat to slightly down in terms of net effective rents due to existing pressures. I hope this overview provides some clarity on the market situation. Additionally, it's important for investors to note that the general mark-to-market across the entire portfolio is approximately 5% to 10%, which serves as a good indicator for what we anticipate for the 2023 numbers.

Dylan Burzinski, Analyst

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

Brent Smith, CEO

Thank you.

Operator, Operator

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.

Brent Smith, CEO

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 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.

Operator, Operator

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