Earnings Call Transcript - PDM Q2 2022

Operator, Operator

Good day ladies and gentlemen and welcome to the Piedmont Office Realty Trust Second Quarter 2022 Earnings Call. At this time, all participants have been placed on a listen-only mode. And we will open up the floor for 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.

Eddie Guilbert, President and CEO

Thank you, operator, and good morning, everyone. We appreciate you joining us today for Piedmont's second quarter 2022 earnings conference call. Last night we filed our Form 10-Q and an 8-K that includes our earnings release and our unaudited supplemental information for the second quarter, which is 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. This will contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements address matters that 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. I 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 as 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. Brent?

Brent Smith, President and Chief Executive Officer

Good morning and thank you again for joining us on today's call, as we review our financial and operating results for the second 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 second quarter we continued to experience the strong leasing momentum that we've witnessed over the last several quarters, marking our fourth quarter in a row of new tenant leasing that is more than 200,000 square feet. As a reminder, this level of new tenant leasing is above our pre-pandemic levels and I believe it validates our strategy over the last few years of investing in premier assets within targeted Sunbelt growth markets. Assets with great amenities and walkable infill environments and with sustainability and wellness placed top of mind. To that end, during the quarter, we laid the groundwork for our second Midtown Atlanta acquisition in less than 12 months. We anticipate closing on 1180 Peachtree Street during the third quarter, which will make Piedmont the largest single owner of Midtown office space on this iconic street. Chris will discuss more about this strategic transaction in a minute. To round out the quarter, we continued to deliver consistent financial results, with core FFO of $0.50 per share and cash same-store NOI growth on trend with guidance. At this time, I'm going to turn the call over to George Wells, our COO, to review this quarter's leasing activity with you in greater detail. George?

George Wells, Chief Operating Officer

Thanks, Brent, and good morning, everyone. Our operational teams delivered strong second quarter results on many fronts and leasing momentum continues to be very encouraging. Piedmont's well-located modernized assets continue to track and resonate with today's discerning office users seeking a highly amenitized environment and an owner that embraces wellness and sustainability best practices. This quarter, we completed over 50 lease transactions totaling approximately 724,000 square feet, surpassing last quarter's volume. Of this amount 233,000 square feet was related to new leasing activity. Our lease economics were favorable, with approximately 3% and 12% roll-up or increase in second-generation rents on a cash and accrual basis respectively, with an average lease term of 6.5 years if you exclude one large short-term renewal. Our lease percentage at the end of the second quarter was 87%, up approximately 150 basis points from the end of 2021. While I will note that the majority of our new lease activity continues to arise from our Sunbelt portfolio where most of our vacancies reside, we are experiencing improved leasing activity in all of our select markets including our non-Sunbelt markets. Let me take a few minutes to discuss some key events that occurred during the second quarter in our operating markets. First in Orlando, we completed four deals for 71,000 square feet, including the largest new tenant transaction for Piedmont this quarter, which was with Kimley-Horn for 61,000 square feet at our Trophy LEED Gold South Orange Avenue project. It is worth noting a few things about this lease relocation transaction; it was a 20,000 square foot expansion from Kimley-Horn's current location. Their new lease space is on the fifth and sixth floors of our 30-story tower and the lease partially addresses a substantial portion of a four-floor contiguous block of vacancy with a 12.5-year term. We were informed this lease was a flight to quality decision that will enhance Kimley-Horn's recruiting and retention efforts. Also at South Orange, we signed a lease with a new-to-market West Coast-inspired restaurant, further expanding our onsite amenity offerings. 200 South Orange is a prime example of our core operating strategy, of offering a modern, highly amenitized office setting at rental rates well below new construction rates. We acquired this asset in 2015 for approximately $261 a square foot, when average asking rents were in the mid-20s. Although there is still a little bit more work to be done, after completing most of the repositioning of this asset for a cost of less than $30 a square foot, we've been able to push asking rental rates to the mid-30s while improving overall occupancy rates steadily over the last several quarters. Most market participants consider 200 South Orange to be the preeminent office complex in downtown Orlando and it is now achieving the highest rents in the marketplace along with our CNL Centers I and II. We are optimistic in our ability to create more organic income from this asset and from our other downtown Orlando positions for the foreseeable future. Our Dallas portfolio experienced total leasing production this quarter with a total of 17 deals for 103,000 square feet, with more than half of that for new lease activity accounting for nine deals for approximately 76,000 square feet, the majority coming from our assets in Las Colinas Irving. With Las Colinas Irving being known as a prominent home for large corporate hubs and headquarters, Caterpillar's recent announcement to relocate its global headquarters to this submarket from Illinois reinforces that reputation. According to CoStar, Caterpillar, ranked 73 on the Fortune 500 list of largest publicly traded U.S. companies by revenue, expects its employees to transition to Irving over time, though no timeline was mentioned. Las Colinas Irving is now home to 10 Fortune 500 companies, according to the Irving Economic Development Partnership. More growth is projected for this MSA. We are seeing more tour activity in this market and the Dallas Regional Chamber is currently tracking over 200 corporate relocations, up from 90 in 2020. As I discussed Dallas, I also want to update you on our largest near-term lease exposure in Dallas, which is with Ryan Tax, who leases and fully occupies nearly 170,000 square feet at Three Galleria through February of 2023. We are in discussions with Ryan and we believe we will extend at least for a substantial portion of that space for up to five years, and a market deal on this block would yield a cash roll-up of approximately 25%. Moving outside the Sunbelt, Minneapolis is beginning to see more deal flow. At our LEED Gold Crescent Ridge asset, which last year underwent a lobby renovation and an enhancement of our amenity set, we completed two small new deals during the quarter, with several other deals progressing favorably. Elsewhere in the suburbs and as part of a longer-term lease negotiation, we negotiated a short-term extension with U.S. Bank on its entire 330,000 square feet at Meridian Crossing. While we wish the term were longer, we remain deeply engaged with the bank on executing a longer-term deal at this location and at their HQ location downtown. We also believe the negotiations will accelerate once the bank completes its merger with Union Bank later this year. Lastly, we are excited about a couple of transactions that we are close to executing or will be executing here in the next couple of days, which will be a great way to start the third quarter in that market. While I've highlighted second quarter leasing results thus far, it's worth looking back over the past 12 months where we've reached pre-COVID new leasing levels and achieved strong and almost 5% cash and 12% accrual roll-ups. Furthermore, nearly 70% of the new deal activity over that time was derived from our recently completed redeveloped assets. Our strategy of concentrating assets in targeted growth submarkets and then modernizing and amenitizing these well-located buildings is resonating with office users, leading to our new tenant leasing success. Looking forward in the near term, we continue to be optimistic about the performance of our office portfolio, despite what is typically a summer vacation slowdown, our tour activity remains strong and consistent. We have nearly 2 million square feet of outstanding proposals, slightly more than we've had in the past two quarters, with about 40% of those proposals related to new tenant space. With few leases expiring for the remainder of 2022, we continue to expect positive net space absorption for the year, resulting in an anticipated year-end lease percentage between 87% and 88%. I'll now turn the call over to Chris Kollme to review our second quarter investment activity and our investment strategy going forward. Chris?

Chris Kollme, EVP of Investments

Thank you, George. As disclosed last night in our earnings release, we are extremely excited to have entered a binding contract to purchase 1180 Peachtree Street in the heart of Midtown Atlanta. For those of you familiar with Atlanta, this asset needs no introduction. For those less familiar, 1180 is the most iconic differentiated office building in Atlanta and is certainly among the most recognized properties across the entire Sunbelt. I'd encourage you to review the acquisition materials which we posted on our website earlier this morning for more complete details, including its unique location, amenity set, tenant roster, submarket fundamentals, and our acquisition rationale. But here's a quick snapshot of what we consider to be an exceptionally rare and strategic acquisition opportunity. 1180 Peachtree is an almost 700,000 square foot LEED Platinum 41-story office tower located at the epicenter of Midtown, Atlanta, at the corner of 14th and Peachtree Streets. It is 95% leased with a weighted average lease term of over seven years. Its sterling tenant roster includes King & Spalding, Roark Capital, Bain & Company, and Cushman & Wakefield among others. The global headquarters of King & Spalding, an Am Law top 25 law firm, comprises about 38% of the building and the lease runs through early 2031. We believe in-place rents are approximately 20% below current market rents and this asset certainly competes with any new construction due to its unmistakable physical profile, floor-to-ceiling full glass façade, rich amenity base including a 10,000 square foot fitness facility, a 12,000 square foot tenant SkyPark, all at an irreplaceable location. 1180 is located directly across the street from Colony Square, affectionately called Midtown Atlanta's Living Room, offering almost 200,000 square feet of experiential retail including restaurants, Polson Road, which has been called one of the best food holes in the country, an IPIC Theater, and significant green space. Importantly, we are acquiring 1180 Peachtree for approximately $675 per square foot, which is modestly below replacement cost. As part of the transaction, we will assume a $197 million secured loan at a 4.1% interest rate, which runs through October of 2028. We project year one accrual yields of approximately 6.3% with initial cash yields approximately 100 basis points below accrual levels. This is arguably Atlanta's premier business center and we will be acquiring this prolific asset without the risk of construction and without the risk of lease-up. The acquisition of 1180 is entirely consistent with our stated strategic objectives to accelerate our rotation into the Sunbelt, invest only in the most dynamic submarkets, and to elevate the overall quality of the portfolio to match the needs of our tenants. Coupled with last year's acquisition of 999 Peachtree, located just four blocks away, Piedmont's position in Midtown Atlanta grows to over 1.3 million square feet and Piedmont will become the largest landlord on Peachtree Street in Midtown at a blended acquisition basis of approximately $525 per square foot. We believe we now own the two best existing assets in one of the nation's most vibrant submarkets at an exceptionally compelling basis. We expect the acquisition of 1180 to be completed by the end of the third quarter. Moving to sources of funding, we have said for two to three years that we would not sell our two assets in Cambridge until and unless we had identified a truly strategic, transformational acquisition as a paired replacement. 1180 certainly fits the bill. Accordingly, we have already begun marketing our two Cambridge assets. We expect the proceeds from the low cap rate Cambridge sales to be accretive and to cover most of the estimated initial $268 million cash portion of the purchase price. In order to return to a relatively leverage neutral position, we anticipate selling another $250 million or more of assets over the next 12 months. Identified disposition assets will likely be non-strategic assets, primarily outside of the Sunbelt. As for the balance of 2022, given current market conditions and our objective to return to our normalized leverage levels, our capital markets efforts will be extremely focused on disposition activities over the coming months. I would note that we mentioned on last quarter's call that we were also considering the disposition of our two assets in Houston. We believe both the current disruption in the debt markets and attributes unique to these two assets create a very difficult backdrop for their sale. While we remain committed to exiting the Houston market, we believe the prudent decision today is to delay these transactions until the capital market environment further stabilizes. With that, I'll turn it over to Bobby, to walk you through the financial highlights of the quarter and our updated guidance for 2022. Bobby?

Bobby Bowers, Chief Financial Officer

Thanks, Chris. While I'll discuss some of our financial highlights 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. Core FFO for the second quarter was $0.50 per diluted share. That's $0.02 or a 4% increase over the second quarter of 2021. This increase is primarily due to accretive recycling activity since the second quarter of last year, rising rental rates, and the continued space absorption throughout the portfolio. AFFO generated during the second quarter was approximately $49 million, well above our current $26 million quarterly dividend level. I do want to point out that we have previously discussed during the last two earnings calls that our Board would review our current dividend level this summer. Given the disruption in the fixed income markets and the potential for near-term recession, the Board decided yesterday to maintain our current dividend rate at $0.21 per share per quarter for the time being. I would note that the company still maintains ample AFFO coverage of the dividend and the Board will continue to reevaluate its dividend policy including the potential for a dividend increase as further economic data becomes available. The quarterly dividend declaration was disclosed in our press release last night. As George alluded to in his comments, with the improved lease economics and rental rate roll-ups over the last few quarters, our quarterly same-store cash NOI and accrual basis NOI for the second quarter of 2022 increased approximately 2% and 3% respectively compared to the second quarter of 2021. Now turning to the balance sheet. Our annualized quarterly net debt to core EBITDA ratio as of the end of the second quarter of 2022 was at 5.5 times and our debt to gross assets ratio was 34.6%. These debt metrics will be impacted during the third quarter with the anticipated close of the 1180 Peachtree Street acquisition and the assumption of the related 4.1% mortgage note, temporarily increasing our leverage ratios to the upper end of our targeted debt operating ranges until offsetting dispositions are completed. As typical for us, we will be acquiring the 1180 property in a reverse 1031 exchange and protecting the significant gain of approximately $100 million that we anticipate to fund the sale of our two Cambridge assets. Ahead of this acquisition activity, during the second quarter we recast our revolver, increasing the line capacity by $100 million to a total of $600 million and pushing the final maturity out to 2027. Despite the increased capacity, we do not believe it would be prudent to utilize a significant portion of our line capacity to effectuate the 1180 Peachtree Street acquisition. In order to maintain financial flexibility, we disclosed in our filings last night that we entered into an additional $200 million delayed draw bridge loan priced at adjusted term SOFR plus 1%, which we anticipate using to fund the majority of the initial cash funding requirements for the 1180 acquisition. We anticipate repaying the bridge loan with proceeds from the property sales that Chris mentioned. We have no other scheduled debt maturities until mid-2023. Finally, at this time, I'd like to update our annual guidance for 2022. As you've seen with many of our peers, we've been surprised by the rate of inflation hitting 9.2% annually in the US at the end of June and the need for the Fed to make significant interest rate increases in an attempt to get inflation under control. The pace of these rate increases thus far has exceeded anything most of us imagined or budgeted for 2022. Therefore, we're adjusting the midpoint of our previous guidance because of the continued rise in the acceleration of short-term LIBOR and SOFR rates and also due to delays in the completion of certain new tenant control space build-outs which consequently delay the start of our GAAP or accrual basis revenue recognition on these related leases. These interest rate increases and delays in revenue recognition offset the expected accretion from the 1180 Peachtree Street acquisition. We currently estimate core FFO per diluted share for 2022 will be in the range of $1.99 to $2.05, and we are maintaining same-store guidance in the 1% to 4% range on both a cash and accrual basis. These revised estimates incorporate the acquisition of 1180 Peachtree by the end of the third quarter of 2022 and the subsequent disposition of non-strategic assets totaling approximately $200 million around the end of the third quarter and another $200 million to $250 million over the next 12 months. The guidance does not include any additional acquisitions or disposition activity. As such activity occurs, we will obviously update our guidance. At this time, I'll turn the discussion back over to Brent Smith.

Brent Smith, President and Chief Executive Officer

Thank you, George, Chris, and Bobby. I appreciate your partnership along with the rest of our Piedmont colleagues as we serve our investors, customers, and other constituents in our communities. As you've heard in the leasing report, I believe we're capturing more than our fair share of new leasing activity. We're aggregating our investments in strong growth markets primarily in the Sunbelt and have chosen high-quality assets to contain the necessary amenities that will aid our tenants in attracting or retaining their workforces. Making these capital allocation decisions we believe is more effective than ground-up development with far less risk, and has allowed us to compete effectively at a reasonable cost basis while being able to continue to grow rental rates. Certainly, we are in a period of headwinds from rising interest rates to a slower-than-expected return to the office to inflationary development costs and the potential for an economic recession. However, we remain optimistic about our leasing prospects, our prudent investment strategy, our targeted growth markets, and our overall operating performance. We will continue to seek transformative acquisition opportunities to elevate the quality of the portfolio and earnings trajectory of the company and that's exactly what we accomplished with the acquisition of 1180 Peachtree, a skyline-defining project at the most active corner in Midtown Atlanta with an impressive tenant roster comprised of professional services and financial firms with in-place rents 20% below market and limited near-term lease expirations. The ability to purchase this iconic building and recycle expected 1031 exchange proceeds from our Cambridge properties along with other non-strategic assets is an outstanding execution for the Piedmont team. Finally, this quarter, we've made continued progress on our ESG initiatives. We're proud to be recognized as a 2022 ENERGY STAR Partner of the Year and the only office REIT headquartered in the Southeast to receive such a designation for our second consecutive year. In addition, we've been recognized as a 2022 Green Lease Leader, demonstrating our continued commitment to maintaining a sustainable portfolio and enacting new green initiatives. Finally, we're seeking GRESB certification across the entire portfolio later this year. On the social front, we're very pleased that we now have four students attending either Howard University in Washington D.C. or Morehouse College in Atlanta that are recipients of our need-based Piedmont scholarship. It's our hope through these scholarships and related mentoring programs that will bring more diversity into the real estate industry. My last comment relates to corporate governance. Our Board adopted many years ago a 15-year term limit for our independent directors. Due to this term limitation, Mr. Wes Cantrell left the Piedmont Board in May of this year. I want to express my sincere gratitude to Mr. Cantrell for his 15 years of service to Piedmont. He was a great mentor for the Board and for me personally. He will be greatly missed and his contributions to the management of our firm are greatly appreciated. Regarding the Board seat vacated by Mr. Cantrell, I'm pleased to announce that our Board voted yesterday to invite Mr. Tesh Durvasula onto our Board, effective August 1, 2022. Mr. Durvasula is the former CEO of CyrusOne, an approximately $10 billion data center REIT, recently acquired by KKR and GIP, and is the current CEO of Africa Data Centres, an approximately $1.5 billion data center firm focused on Pan-Africa digital and solar infrastructure. He brings tremendous experience within our industry and with running a REIT, significant knowledge of public entity regulations and experience working with large-scale IT clients and the investor community. With two more board members approaching term limitations, we anticipate adding another director to our Board before the end of the year. With that, I 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 or make appropriate later public disclosure if necessary. Operator?

Operator, Operator

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

Michael Lewis, Analyst

Yes, thank you. This is Mike Lewis from Truist Securities. My first question about the 1180 acquisition. The 6.3% cap rate actually sounded a little bit high to me considering the quality of the assets and the mortgage that you're able to assume. Could you maybe just talk a little bit about the bidding process or any other information related to the pricing of that asset and maybe if that cap rate implies anything for other assets in the market?

Brent Smith, President and Chief Executive Officer

Good morning, Michael. I appreciate you taking the time to join us this morning, and I'm excited to talk a lot more about the 1180 transaction. Thank you for the question. In terms of the 6.3% accrual cap rate, I would say that, as we've noted, that asset has roughly 20% below market rent, so a lot of embedded growth which is great. I would say in-place rents right now are probably in the mid-40s on a gross basis. That really has afforded us the opportunity to be able to obtain that growth and drive it out over the next few years. It does have a long-term weighted average lease, but we do have approximately 75,000 square feet rolling in the next two years, which gives us a little bit of near-term opportunity to continue to drive that cash cap rate closer to the accrual cap rate. As you probably know, most of our cash cap rates are generally about 100 basis points behind the accrual. I think that's fair in this instance as well. Regarding the bidding process, it was competitive. Certainly, the capital markets have been choppy but for an asset of this quality, we felt like we were the optimal group given the quality of the asset, especially our previous acquisition of 999 about nine months ago, allowing us to establish a presence with 1.3 million square feet. We encountered the typical names you would expect in terms of other REIT competition and those looking for core plus type returns. What likely set us apart is our continued diligence on this asset, as we have been searching for similar off-market acquisitions since last year, and we were able to complete the necessary due diligence in a timely manner, which allowed us to move quickly in a choppy market. All these factors led us to get what we thought was very good pricing with embedded upside and low risk, along with some near-term expirations to drive additional uplifts.

Michael Lewis, Analyst

Okay, thanks. And then on the disposition side, Cambridge was anticipated when you found an acquisition target. You talked about Houston that you've kind of paused on. I was wondering if you could give any more detail on what you look to next in that regard. What's behind Cambridge, which Bobby alluded to? My guess is maybe New York City isn't quite ready? You're looking to get a long-term lease there. The rest of these markets all look core to me. There's always a bottom; I always say there's always a bottom 5% or 10% of the portfolio. But where do you look for the rest of those disposition proceeds that you talked about?

Brent Smith, President and Chief Executive Officer

Good question, Mike. Regarding additional dispositions beyond Cambridge, we continue to see good depth in the market with better pools for high-quality, well-leased, long-term assets. We feel we have a bucket of those assets that certainly fit that profile. On Houston, we believe we had the pricing right, but given the disruption in the debt capital markets that volatility has made executing those transactions challenging. We have successfully sold over $400 million of assets four out of the last six years despite COVID and unusual disruptions faced by our industry. We're confident about Cambridge and the additional $250 million we're looking to dispose of over the next 12 months. These will lean towards a core plus profile with good tenancy but will not be part of our strategic operational plan.

Michael Lewis, Analyst

Okay. And lastly for me, should we think of US Bancorp's short-term renewal as a positive or a negative? Because you mentioned they are going through a merger and it sounds like you are still deep in negotiations for a longer-term deal. From that perspective, it feels good. However, in the broader environment, we are aware of companies that want to do short-term deals because they are uncertain about how much space they ultimately need in this hybrid work world. What’s the sentiment on US Bancorp? Is that short-term deal a good thing, or is there some hesitancy because they are figuring out how much space they ultimately need?

Brent Smith, President and Chief Executive Officer

Good question, Mike. I would say we have a long history of finding win-win situations with tenants facing challenges or elongated processes. I'd point to New York State as an unusual situation where we did an interim lease, or the project in Boston with Microsoft, which has allowed for flexibility as they transitioned. Generally, I see this as a positive, as we're working to find a solution with the tenancy. I would note that US Bank is in the midst of their merger. Like many financial services firms, they are still figuring out their work-from-home hybrid strategy. But we feel confident that new development is not an option for them considering their downtown locations. I want to remind everyone that the asset they are situated in is their headquarters, with the best amenity set in the market. We feel strongly about retaining them for the majority of the space downtown, as well as their well-located suburban asset. The fact they extended for 16 months speaks to their desire to solidify a longer-term deal. Again, I want to clarify that was a 16-month extension, not 18.

Operator, Operator

Your next question for today is coming from Ray Zhong. Please announce your affiliation, then pose your question.

Ray Zhong, Analyst

Hi. Good morning, everyone. This is Ray Zhong on for Tony Paolone here at JPMorgan. First, congrats on the acquisition. Just wanted to get a little bit of color on it in terms of strategy-wise. I think you guys mentioned previously on the value-add acquisition strategy compared to 999 Peachtree Street. This one feels like, correct me if I'm wrong, it's likely more on the mark-to-market side, while 999 Peachtree was more on potential lease-up opportunity. Just wanted to get a sense of whether that is indicative of your strategy to focus on high-quality assets with long-term leases but also with mark-to-market opportunity or if you are still looking at assets with lease opportunities as well.

Brent Smith, President and Chief Executive Officer

Great question and I appreciate you joining today, Ray. I would say each asset or acquisition is a little bit unique. As we mentioned, our general strategy is about 70% core, core plus and 30% value-add in terms of our pipeline, and I think that’s a fair assessment. We are mindful of several components regarding our balance sheet and ensuring we have ample cash flow to grow our dividend. However, we can't take on too much value-add or redevelopment at one time. The 999 project is a significant $25 million redevelopment project. The 1180 profile is quite different and much more stable. Our goal is to ensure that whatever we pair with Cambridge—characterized by a long-term lease and high credit—is aligned with a similarly high-quality asset. What’s unique here is that this transaction allows us to acquire a property that competes favorably with new construction, which are generally more costly to build. The ability to continue to drive higher rents while maintaining a high-quality tenant base is what we aim for during acquisitions. You probably heard me mention we have about 75,000 square feet rolling in the first few years, but overall a good wall at seven-plus years. With the potential for a recessionary environment, this acquisition places us in a beneficial yield-generating position.

Ray Zhong, Analyst

Got you. Thank you for the color. You mentioned 2 million square feet in the pipeline, slightly more than previous quarters. Do you have any updates on the leasing pipeline in Atlanta or Midtown Atlanta? I was attempting to track 999 Peachtree from quarter to quarter to see if the lease rate has changed. Any color on the leasing pipeline in those markets would be great?

Brent Smith, President and Chief Executive Officer

I'll handle that and then hand it over to George. In terms of 999, we've been pleased with market receptivity. We have made strides with repositioning and have plans that we’re sharing with the market. We expect to have success both on leasing and retail fronts within the base of the building. The exciting takeaway is that rental rates have exceeded our initial underwriting. I'll let George provide some additional context on the pipeline and competition.

George Wells, Chief Operating Officer

Thank you, Brent. Good morning, Ray. We discussed a lot of Atlanta in the script, but I can confidently say that there has been substantial activity from dominant players in the market over the last couple of quarters. While the focus has shifted to 1180, we remain very optimistic about the Atlanta market. Overall, we have about 25 deals in the pipeline today for over 350,000 square feet, which reinforces our excitement about what's happening in Midtown. At 999 itself, we have over 40,000 square feet in the pipeline as well. With the relocations that are transpiring in Atlanta and new businesses establishing a presence here, we are very encouraged.

Brent Smith, President and Chief Executive Officer

I would add that Atlanta is unique compared to cities like Charlotte or Dallas, as it doesn’t have competitive cities such as Raleigh or Austin drawing technology firms away. What we see in Midtown is not just the technology companies moving here but also professional service firms relocating from Buckhead, particularly in the legal sector. We have continued to welcome absorption in Midtown from other submarkets and out-of-market technology companies as well. Midtown’s mixed-use environment significantly enhances its appeal, especially for projects that provide easy access to transportation and walking distances to amenities like restaurants and retail.

Ray Zhong, Analyst

Got you. Thank you. That's all I have.

Operator, Operator

There are no further questions in queue. I would now like to turn the call over to Brent Smith for any closing remarks.

Brent Smith, President and Chief Executive Officer

Thank you. I would just remind everyone joining us on the call today that if you haven't had a chance to look at the presentation materials on our website around the 1180 acquisition, please do so. You'll find additional details and pictures about the asset. I would just reiterate that while we still remain optimistic about our performance for the rest of the year, we are cautiously watching the uncertain economic environment. Overall, we are very pleased with Piedmont's execution in the second quarter, and I look forward to talking again in October. Thank you, everyone, and as we get closer to October, a reminder to reach out to Eddie or Bobby to get on the NAREIT calendar for November's meeting. Thank you.

Operator, Operator

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.