Earnings Call Transcript - PDM Q1 2022

Operator, Operator

Good day, ladies and gentlemen, and welcome to the Piedmont Office Realty Trust, First Quarter 2022, Earnings Call. At this time, all participants have been placed on a listen-only mode. The floor will be opened 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 First 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 First Quarter 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 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 for 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 we filed last night. At this time, our President and Chief Executive Officer, Brent Smith, will provide some opening comments. Brent.

Brent Smith, President and CEO

All right. Good morning, everyone. And thank you again for joining us on today's call as we review our financial and operating results for the first quarter of 2022. In addition to Eddie, on the line with me this morning are George Wells, our Chief Operating Officer, Chris Coleman, our EVP of Investments, and Bobby Bowers, our Chief Financial Officer, as well as other members of the senior management team. We are extremely pleased with the strategic transactions closed during the first quarter and encouraged by the continued momentum we are witnessing across our markets, which led to the strong financial results. While some U.S. companies are taking longer than we anticipated to finalize their return to the workplace strategy, we continue to encourage investors to focus on new tenant leasing as an indicator of the strength in the office sector, as opposed to individual building utilization levels, which can vary greatly by region and tenant size. And on that metric, I would note that Piedmont's new tenant leasing activity this past quarter was the most robust it has been in over three years and marked the third consecutive quarter we've exceeded pre-pandemic levels of new tenant leasing. This leasing volume was achieved irrespective of the fact that the first quarter of the year, historically, tends to have the lowest leasing activity due to winter weather. Furthermore, these leasing transactions continued to demonstrate the positive momentum we're experiencing across our portfolio, particularly in our redeveloped properties. I would reiterate Piedmont's portfolio is long-dated and positioned for growth with the average in-place rent 5% to 10% below market and approximately six years of weighted average lease term remaining. 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, COO

Thanks, Brent. And good morning, everyone. Our operational teams delivered strong first quarter results on many fronts. And the leasing momentum is very encouraging, just as exciting as it is to see our tenants increasingly communicate with their employees to return to the office. Our well-amenitized and wellness-focused portfolio is in an excellent position to support our customers' occupancy goals. In fact, our space utilization rate varies by tenant and property and it is approaching pre-COVID levels at a few locations, while in some markets, utilization is averaging above 50%. Our lowest utilization levels are in Minneapolis and Washington, D.C., which are at approximately the 30% level at the end of the first quarter. I'm very excited about our leasing results this year. We completed approximately 50 individual leases totaling 552,000 square feet, with just under half of that activity related to new tenants’ leases. As Brent noted, these results reflect the third quarter in a row of exceeding pre-COVID new leasing tenant levels, and specific to the first quarter of this year, these results include the largest amount of new tenant leasing that we have experienced in the last 14 quarters. Tenant leasing demand is validating a flight-to-quality bias in the marketplace, and our strategy to aggregate modernized, well-located, classic properties that have on-site and/or walkable amenity bases continues to drive our leasing success. These building factors, combined with a more robust service offering versus our peers for attributes such as tenant engagement, health, wellness, and sustainability, continue to have a meaningful impact on tenant space absorption, driving a 30 basis points increase in our lease percentage this quarter alone. Perhaps the best example of this phenomenon occurred this quarter at our Atlanta Galleria Project. According to the Bureau of Labor Statistics, Atlanta has not only recovered all the jobs lost during the pandemic, but sits at 103% of pre-COVID employment levels. So it should come as no surprise that this market continues to exhibit the strongest fundamentals across our portfolio. As a reminder, we own five office buildings at the Project spanning 2.2 million square feet which is 84% leased, with rental rates in the mid-30s gross, the highest in the submarket, excluding new construction at an all-in basis of $245 per square foot. In the last two years, we redesigned the six-acre park experience, expanded food and beverage options, upgraded the fitness and conference center facilities, integrated new outdoor collaboration space, and improved access to the Atlanta Braves Battery entertainment complex. As a result of these repositioning efforts during the first quarter, we've signed nine new tenants at the Atlanta Galleria, including three corporate headquarter relocations comprising 25,000 to 50,000 square feet each, and we renewed an additional seven tenants. In aggregate, these leases were executed with an average of eight years of term and rental rate roll-ups of approximately 10%. As many of you are aware, this project is situated at the corner of I-75 and I-285 and is connected directly to Atlanta Braves Truist Park, creating a unique office environment with prominent signage. The project exhibits the enhanced workplace strategy that we're employing throughout our portfolio, and as a result of these place-making efforts, leasing has been off the charts. Since January 2021, Piedmont has signed more than 291,000 square feet of new deals, with roughly 300,000 square feet of leasable space remaining at the complex. It's a fantastic organic growth opportunity for the company. Atlanta, along with our other Sunbelt markets, Dallas and Orlando, help drive the first quarter's leasing activity. In fact, Dallas experienced the most leasing during the quarter, led by the renewal of our largest 2022 lease exploration and national pharmaceutical retailer located at 750 West John Carpenter. This approximately 164,000 square foot renewal resulted in a positive cash and accrual rent roll-ups of approximately 10% and 17% respectively. Finally, this transaction highlights the increased focus we see from national corporations towards sustainability-focused landlords and buildings. In this case, the building's LEED Gold status was a differentiator. From a macro perspective, the Dallas economy continues to be a national leader in employment growth. According to the Bureau of Labor Statistics, this metro area has remarkably recovered 106% of jobs lost during COVID. It's not surprising that Dallas is ranked by CBRE in its 2022 Investor Intention Survey as the top office market for capital deployment. It certainly feels like this market is poised to experience positive absorption in the next few quarters. In Orlando, we completed 10 leasing transactions this quarter, including six new tenant leases. Most noteworthy, our local team successfully completed a lease renewal with a top 100 AML law firm with 40,000 square feet under a new 14-year lease and with a high single-digit accrual and cash rent roll-up. This renewal at our 775,000 square-foot South Orange Avenue complex, which is located in the heart of downtown, where we are completing a multi-million-dollar redevelopment project, is gaining a fair amount of market recognition and is attracting a number of new tenant prospects. The redevelopment includes significant lobby modernization, an upgraded two-acre outdoor park with collaborative workspaces, tenant-dedicated balconies, expanded food and beverage options, and a best-in-class conference center. Today, we are pleased to share some exciting news regarding this modernized legal South Orange Avenue project with the announcement of a recently signed approximately 62,000 square foot new lease of one of the nation's premier planning and design consultants, Kimley-Horn and Associates. This marks the second location for this tenant within our portfolio and demonstrates the frequency with which tenants return to Piedmont for their office space needs. With the latest Kimley-Horn lease, new leasing of the South Orange Avenue property now totals approximately 125,000 square feet since January of 2021. Outside of the Sunbelt, new leasing activities are occurring at our Boston assets, albeit these properties were already relatively well-leased. According to Numark Research, a million square feet of office-to-lab conversions were executed during the past five years within the West Route 128 Submarket, which includes our position in Burlington, with another 4 million square feet right behind it in various stages of conversion. That will dramatically reduce the size of that submarket by 19%, allowing us to continue to push rental rates higher. Deal flow is generally slower in our other markets. In Washington, D.C., more return-to-office announcements give us renewed confidence that recovery there will gain momentum. The Biden Administration's recent statement claims that federal agencies will lead by example in returning to the office. Since that news, the Federal News Network has reported that two agencies, the EPA and the Veterans Administration, are returning to the office in the second quarter of the year. Geopolitical uncertainty could also boost office demand in the near term from defense-related industries. This industry generally seeks close proximity to the Pentagon in Northern Virginia, where we own well-amenitized, LEED-designated assets that sit adjacent to metro train stations. We have a very limited amount of lease roll in Washington for the remainder of the year. Our sole asset in New York is approximately 90% leased, with virtually no expirations this year. Deal flow is slow though as the city in general is still in the early stages of recovery. That said, occupancy utilization is over 50% at our 60 Broad asset, and we continue to make modest progress on our lease with New York City. Minneapolis, the city with the largest number of Fortune 500 companies per capita in the U.S., has historically maintained one of the highest stabilized lease percentages in our company and today sits at approximately 90%. Prospect activity is good at our 2021 TOBY Award-winning asset in Norman Point and at our LEED Gold asset at the too, where most of our vacancy resides. In addition, we are in the midst of lease discussions with U.S. Bancorp, our largest tenant, and we hope to report more progress on this active renewal discussion during the next quarter. In summary, economics for future leasing look promising as leases executed during the first quarter were quite favorable, with an approximately 5% and 13% increase in second-generation rents on a cash and accrual basis respectively. The first quarter's executed average lease term was 6.6 years. Our overall portfolio is at 87% leased as of March 31st, 2022, up from 85.5% leased at year-end 2021, with only about 4.6% of our portfolio's annualized lease revenues expiring in the remainder of 2022. Our leasing pipeline has not dissipated. Our record levels of prospective tours and active proposal pipeline represent an additional 1 million square feet of already executed leases that have not commenced or are still in abatement, which represent approximately $33 million of incremental cash ALR due to come to the portfolio over the next 12 to 24 months with very few leases expiring for the remainder of the year. We continue to expect net space absorption during 2022 expansively since roughly 90% of those expirations at 70% of our vacancy reside in the Sunbelt. This bolsters our confidence to reach an anticipated year-end lease percentage of around 88%. Thank you for your time this morning. I am now going to turn the call over to Chris Coleman, who will review with you our property investment transactions completed during the first quarter and our capital deployment strategy.

Chris Coleman, EVP of Investments

Thanks, George. On the investments front, the team has been very busy and we remain highly optimistic about the deal flow we're seeing in our pipeline. Looking back over the past 18 to 24 months, the overwhelming majority of what we've seen marketed through the brokerage channels has been characterized by long, good credit, newly developed, and/or 100% leased assets. They're fully banked with little downside and they've traded at plus or minus 5% cash cap rates, 20% to 35% above replacement costs. As most of you know, this has not been the traditional opportunity set for Piedmont, but if these types of opportunities allow us to continue to elevate the portfolio and further advance our Sunbelt expansion, we will consider these transactions if highly strategic in nature and accretive to earnings. To be clear, we're not abandoning our more traditional investment philosophy of buying well-located real estate in great markets at a basis which supports repositioning, redevelopment, and activation. We firmly believe in the flight-to-quality theme, and we think it's here to stay. But as George outlined at the Atlanta Galleria, 25 Burlington Mall Road in Boston, and through the momentum we're currently seeing in Orlando, following our redevelopment efforts there, quality is not solely defined by age. Well-placed capital can, in fact, reinvent and reinvigorate great real estate. And I will note that while the brokerage community plays an incredibly important role in our acquisition pipeline, we're not dependent on broadly marketed transactions as our only source of investment opportunities. We have made significant progress tightening our footprint and concentrating in particular nodes, which we believe provide outsized growth and opportunity in our portfolio. We know where we want to be. We know the assets we want to own, and our local teams know the owners of those assets. We can't force them to sell, but we can certainly play offense; express our interest and try to engage in discussions, which is precisely how our acquisition of 999 Peachtree in Midtown, Atlanta came about. After just five months of ownership, we have already completed approximately 60,000 square feet of leasing at the asset. So our teams are actively engaged with brokers and directly with owners, principally in Dallas and Atlanta at the moment, and we're optimistic that this heightened focus will continue to generate great results in 2022. The pipeline for acquisitions stands at around $1.5 billion and gives us confidence that we can achieve our goal of having at least 75% of our EOR generated by our Sunbelt markets by the end of 2023. On the disposition side, we've already disclosed two completed transactions in 2022: the sale of our Presidential Way assets in Boston and the sale of Two Pierce Place in Chicago, both of which closed in late January. We also reported that our notes receivable related to the 2020 New Jersey portfolio sale were fully repaid in late March. Completing our exits from Chicago and New Jersey as projected and redeploying those proceeds in Midtown Atlanta through a reverse 1031 at accretive yields. Looking forward, we have engaged a brokerage team to market our two non-core LEED Gold assets in Houston. We're also evaluating market conditions for our two assets in Cambridge, where unprecedented pricing metrics have severely limited our opportunities to grow. So as we've said often, if and when we cannot grow within a submarket and we have fully maximized value on a given asset, we will consider selling. In the case of Cambridge, both variables are certainly true. We believe we can redeploy those proceeds in an accretive manner. We will continue to take a close look at the balance of our portfolio and may likely prune select assets in addition to the activity I just mentioned, with the intention of reinvesting those proceeds in higher growth markets in the Sunbelt. With that, I'll turn the call over to Bobby to walk you through the financial highlights of the quarter and our updated guidance for 2022, Bobby.

Bobby Bowers, CFO

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 that were filed last night for more complete details. Core FFO for the first quarter was $0.51 per diluted share. That's a 6% increase over the first quarter of 2021, and this increase is primarily due to accretive recycling activity since the first quarter of last year and rising rental rates, particularly at our most amenitized locations such as the Galleria and Glenridge Highlands in Atlanta, South Orange Avenue, and CNL Center in Orlando, the Galleria and One Lincoln Park in Dallas, as well as Wayside Road and Burlington Mall Road in Boston. These are projects where we are now achieving net effective rents higher than those pre-pandemic. AFFO generated during the first quarter was approximately $39 million, well above our current $26 million quarterly dividend level. As we mentioned last quarter, our board has indicated that given our cash NOI growth over the last few years, the fact that we're approaching the conclusion of the large construction restacking project for the State of New York at 60 Broad, as well as the time since our last dividend increase, the Board will be reviewing our dividend payout amount during the summer of this year. Also, George has indicated our completed new tenant leasing activity during the first quarter of 2022 was the best in several years. Second-generation rents during the first quarter improved by 5% and 13% for cash and accrual basis rents respectively. On a same-store comparative basis, cash NOI increased a little over 5%, and on an accrual basis, it increased approximately 2.5%. Turning to the balance sheet, our trailing 12-month net debt to core EBITDA ratio, as of the end of the first quarter of 2022, was within our managed range at 5.8 times. As noted on our last earnings call, we anticipated, and during the quarter we did receive approximately $119 million in proceeds from the payoff of two notes receivable that were outstanding as of December 31st, 2021. The proceeds were used to pay down our $500 million line of credit. As of the end of the first quarter, we had approximately $420 million of unused capacity on the revolver, and we had a debt to gross asset ratio of 34.6%. As of now, we have no scheduled debt maturities in 2022 other than a $500 million revolver, which our Treasurer, Eddie Guilbert, and his team are currently in the process of renewing, with the closing targeted for June of this year. Finally, at this time, I'd like to update our annual guidance for 2022, raising the low end of the range and the midpoint of our previous guidance. We currently estimate core FFO per diluted share for 2022 will be in the range of $1.99 to $2.07. This revised estimate incorporates the successful leasing progress year-to-date and an analysis of our existing tour activity and prospective leasing pipeline. It also includes the current backlog of approximately 1 million square feet of leases not yet commenced or in some form of abatement, which will generate new revenues, all offset by reimbursable operating expenses. That guidance also includes an accelerated rise in our projected short-term LIBOR interest rates on our debt, specifically the 30-day LIBOR we expect to increase to over 2% by year-end. We also have several other operational and supply chain considerations that we've included in our new guidance. As a result of this revised guidance, our estimated same-store cash and accrual basis for the year are both expected to be positive in the range of 1% to 4%. I will note the effects of the dispositions that were completed during the first quarter, as well as the payout of the $119 million notes receivable, were already included in our original guidance. However, no acquisition or disposition activity is contemplated in this new revised guidance. At this time, I will turn the discussion back over to Brent Smith.

Brent Smith, President and CEO

Thank you, George, Chris, and Bobby. Repeating the comments I made at the beginning of the call, I'm extremely pleased with the operating results achieved thus far in 2022, and I want to express my sincere appreciation to my colleagues who are working diligently every day at Piedmont. We are excited about our leasing pipeline and the organic cash flow growth that can be generated, and we're very encouraged with the accretive capital recycling opportunities we anticipate this year, both of which can accelerate and improve earnings growth for our portfolio. That said, there will be challenges, particularly in the areas of construction and property management, but our team is closely monitoring supply chain issues to minimize the impact on construction projects and tenant services. Our finance team will be prudently managing our expenses and balance sheet during this inflationary environment. As I talk with other CEOs and business leaders around the country, many are sharing that as much of a struggle it was to lead organizations through the global pandemic, it is just as much of a struggle to lead our organizations out of it, to be more efficient and more productive in this new hybrid environment. Although work styles and schedules will be different than they were before COVID, there seems to be a significant agreement from executives on the long-term value for most organizations to offer their employees a modernized, easily accessible, amenitized office space as part of their hybrid work model. We've been saying that we believe we are positioned to capture a significant amount of that evolving tenant demand in the post-pandemic world, and it is admittedly gratifying to see it coming to fruition. Piedmont's strategy of offering a premier sustainability and wellness-designated amenitized office experience at rental rates well below new construction is resonating across our markets. To that end, I want to reiterate our steadfast commitment to being a leader among the commercial real estate industry for environmental, social, and governance initiatives. Calling your attention to the fact that our entire portfolio was awarded the Well Health and Safety Rating during the first quarter. At Piedmont, we're dedicated to enhancing the safety and well-being of our portfolio as our tenants complete the transition back to the office, and the Well Health Safety Rating reinforces our market-leading policies and procedures for keeping our tenants, employees, and visitors safe, healthy, and productive while bolstering confidence for those utilizing our buildings. We remain fully committed to exceeding the expectations of our customers, staying on the leading edge for space, design, amenity, and service offerings in today's competitive workplace, which will help our tenants attract and retain their employees in a challenging labor market. We're sensibly reinvesting in our portfolio, keeping our assets fresh and modernized, and where we do not see potential to reinvest in an asset, we will take it to premium levels. We will prune from our portfolio. Exceptional quality is crucial, and we do not want our own commodity product. 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 or we'll make appropriate later public disclosure, if necessary.

Operator, Operator

Ladies and gentlemen, the floor is now open for questions. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. Your first question for today is coming from Dave Rodgers.

Unidentified Analyst, Analyst

Baird. Hey, guys. This is Nick, on for Dave. First, I may be wanted to touch on some comments George made, especially on the leasing pipeline. I think last quarter Brent mentioned around 500,000 square feet of active negotiations, and then an additional 1 million square feet up that you're trading LOIs on. Just wanted to get an idea of where that pipeline stands now. Just wanted to see if the strong leasing we saw in the first quarter is going to continue throughout the year, and then maybe break that pipeline down between new and renewal leasing.

George Wells, COO

Sure. Good morning, Nick. This is George. Thank you for the question. I will tell you momentum continues to be quite strong. I mean, just starting out for the things that happen before getting proposals in terms of tour activity, we had a record high number of tours in March that we haven't seen in the past 18 months. So aggregately, we're really happy with where the momentum is from a tour perspective. And diving into proposals, it's been pretty consistent, somewhere around 100 deals per quarter. I'd say $1.5 million to $2 million overall in transactions. And I would say about a little bit more than half of that is for new deal activity.

Unidentified Analyst, Analyst

Great. And then maybe on the renewal side, you guys mentioned U.S. Bank. How soon are you beginning discussions with some of these larger explorations on their spaces?

Brent Smith, President and CEO

Hey, Dave, this is Brent. I'd say we start discussions with the government tenant usually about three years out before expiration. If it's a more traditional corporate tenant, it's usually somewhere around 18 months out. We try to prod them and, depending on the situation these days, usually engage around 12 to 9 months out, just depending on how they’re thinking about their space and how they plan their work-from-home approach. But that’s usually when we start to really heavily engage with bigger tenants. In terms of those bigger tenants right now, we've obviously shared that CVS was the more near-term. We got that one accomplished which was great, significantly reducing the amount of '22 exposure. Everything else would be well into '23, and the most immediate term among those would be Ryan, as we've discussed in the last call. They have not started construction on that potential site they’re considering moving to. We do feel pretty good about our opportunity for at least a short-term renewal but would also remind the market that they have about 80% of their people back in the space, utilizing it, and that would reflect a high teens roll-up on a cash basis. We feel pretty good about the overall positioning of that asset in the market, a very prominent signage but we do think we'll secure something short-term with them.

Eddie Guilbert, President and CEO

In regard to Cargill, that is further out, but we are in discussions with them. They are still working on their work-from-home strategy. I think that's still stands in that situation where I think it could go either way, but I think we're still cautiously optimistic. U.S. Bank, as we've talked about, we're closely engaged with U.S. Bank, which is one of our trusted advisors, particularly on the debt side, and I have a relationship with the management team there. We continue to work with them. And downtown itself continues to recover, and their location out in the suburbs is critical to their operation. So we're engaged, and I'd say we feel pretty good about where things are headed, but it's still pretty early. I think that's really the major ones for '23 as we think about what's on the horizon.

Unidentified Analyst, Analyst

Okay. That's very helpful. And then the last one maybe is on the investment sales side and maybe for Chris. Sounds like the exit from Houston is pretty eminent. I mean, you guys mentioned that before you enter a new market, you would exit one of your current markets. I guess, maybe on the $1.5 billion of pipeline for acquisitions, are there any new Sunbelt markets involved in that or maybe some new submarkets?

Eddie Guilbert, President and CEO

Yes. Yes, it's a fair question, Nick, we have said for some time we've been evaluating new markets. Really in the major markets in the Sunbelt. We have said as you point out that we wouldn’t add a dot without taking a dot off the map. We're certainly trying to further simplify our story, not complicate it. We do intend to be out of Houston sometime this year. It's hard to tell the timing, probably around the third quarter, early fourth quarter. Also, we've been pretty clear on where we are heading in New York. So we think we could be in a position to plant a flag in a new market over the next 18 to 24 months. It's really hard to put a timeline on it. We've been looking at it for two to three years and for the moment, our focus is on Dallas and Atlanta, but we are also making sure we're engaged in some of these potential new markets.

Brent Smith, President and CEO

I think I'd add to that. This is Brent. As we continue to evaluate, I think we really want to go deeper into those submarkets where we already have a presence, particularly those we're seeing strong growth in leasing activity. We will look at a combination of core, core plus, and value-add. What we're looking for are great assets that are at maintenance, may need to be modernized, but once that is complete, can easily and effectively compete against new construction. I think we continue to focus on those opportunities.

Operator, Operator

Your next question for today is coming from Michael Lewis. Michael, please announce your affiliation, then pose your question.

Michael Lewis, Analyst

Thank you. I'm at Truist Securities. I appreciate all the investment update from Chris. I wanted to ask if you could discuss this decision a little bit more. It sounds like you’re interested in some lower cap rate assets, and we estimate the implied cap rate on your shares have an eight handle. So maybe just talk about capital allocation; how you got convinced that this is the best way to allocate capital. You framed it as not really a change in strategy, but it sounds a little bit like it is.

Brent Smith, President and CEO

I wanted maybe feel like that’s putting a little bit of words in our mouth, Michael, to say that we're going after lower cap rate assets. I think we've always said that we are looking for accretive acquisitions, and I think if you look at what we have in the pipeline for dispositions, whether it be Cambridge, long-term lease Houston, potentially monetization in New York, maybe next year. Some of the other non-core but quality assets that we'll continue to prune that are mature, we feel like we can rotate that into accretive acquisitions. I don't think we feel like we're moving down the spectrum, but we're looking for quality in that regard. So I think when it comes to what we think we can buy, we feel there’s still a good opportunity to pick up assets that can compete with new construction. We can find leasing velocity or be able to create value in some manner for shareholders over time. If we look at our own stock, we have bought back our stock in the past, and we still continue to use that same framework that when we trade at significant discounts to NAV, we feel it’s the best use of capital, we will continue to do so. I would note that we don't have any capital coming indoors from a disposition standpoint and would not consider levering up to buy back shares at this point, but we do feel that some of these acquisition opportunities that are in the pipeline that are more value-add and core plus and continue to tighten the footprint and grow cash flow are going to create value for shareholders. Certainly, that’s where we’re going to continue to look.

Michael Lewis, Analyst

Okay. Great. That's helpful. And then, on the leasing side, you have addressed CVS. You talked about Ryan, Cargill, U.S. Bank, so I figured why not even go out further. I wanted to ask about Amazon in Dallas; it's a little less than three years out, but do you have any sense of whether they want new space, or if maybe there's potential for them to stay and expand in place? Any – maybe it’s too early. I don’t know.

Brent Smith, President and CEO

I wouldn't say it's too early. We are engaged in discussions with Amazon and their brokerage representatives. As you pointed out, that lease is still about three years out, so it is a little early. But as we think about our opportunity at Galleria Tower 4, if we were to think about new development, and also our relationship with Amazon, who continues to bring their workforce back to our existing assets, we feel very compelled about our opportunity for them to continue to grow in that location. We'll continue to be engaged, I would say, with them intently on their opportunities at that location, to either stay in the existing buildings or move to a newer asset, if that's what they would prefer. Remember, if you recall, they did sign an expansion shortly after we bought the asset, so we continue to stay very engaged with that team and their space needs.

Michael Lewis, Analyst

And then lastly, for me, one for Bobby. The next maturity of the notes expiring in the summer of 2023, thought I’d ask the question given what’s happened with interest rates lately, how are you kind of thinking about that? I don’t know if you have a sense of what you’d be able to refi that at today if the cost of capital has moved up materially or.

Bobby Bowers, CFO

Well, I'll tell you, you're asking the question that all others are watching as we're looking at interest rates very closely right now. You might have noticed in my comments I indicated we’ve adjusted our interest rates even on our short-term debt, up from a 100 basis point increase this year to a 200 basis points increase taking place, but having an impact on us. But I'll tell you we’re currently running the models. We’re committed to trying to do public debt offerings. You might know in the last two years we’ve done two of them. So we’ll be evaluating that as we get closer and we determine what’s happening with the interest rates.

Operator, Operator

Your next question for today is coming from Q - Anthony Paolone. Anthony, please announce your affiliation and pose your question.

Anthony Paolone, Analyst

Yes. Thank you. JPMorgan. My first question relates to U.S. Bancorp. I know when New York City and state leases were expiring, yes, we're pretty transparent about what mark-to-market and CapEx would look like for those. Can you give us any brackets around what the U.S. Bancorp situation may look like?

Brent Smith, President and CEO

Sure, Tony, this is Brent. For U.S. Bank in Minneapolis, there are two locations coming up for expiration. The first location will see a slight increase in capital. The assets are in decent shape but will require some capital refresh from the tenant side. It's not quite like a new deal, but it will be somewhat more than a standard renewal. We anticipate having a significant amount of term to offset that capital, making it quite favorable on a per square foot per year basis. For the downtown location, it's too early to say since leasing transactions have been limited as the cities recover. However, major firms, including U.S. Bank, are beginning to bring employees back, which should help. If I had to estimate the mark-to-market basis today, I would say it’s roughly flat, maybe slightly up, but I’m being cautious. Regarding capital, it's a great asset. We've invested significantly in the base buildings and created an appealing tenant amenity at the top, which features beautiful 18-foot ceilings. It’s very competitive in terms of amenities, and we don’t anticipate needing to invest much more in the base buildings. The tenant space is also in good condition, similar to the suburban location. It won't require as much capital as a new deal, likely aligning more with a renewal or slightly above it due to the quality of the tenant, which we expect will result in a long-term commitment. So, the per square foot aspect will be very favorable. When I mention long term, I'm typically referring to a commitment of around 10 to 15 years.

Anthony Paolone, Analyst

Okay. Great. That’s really helpful. Thanks for all that color there. My second question is probably for Chris, and going through some of the capital markets discussion. Given the change in rates and spreads moving, have you seen liquidity change, either for better or worse, either geographically or by product type?

Chris Coleman, EVP of Investments

It's a good question. As I mentioned earlier, excluding the core deals, the market has been relatively inactive for the past 18 to 24 months. The new assets with strong credit and long leases, with one or two tenants occupying the entire building until very recently, have traded at high prices, possibly at pre-COVID levels or even higher in some instances. In these cases, buyers aren't concerned with lease negotiations or rollovers; they are primarily focused on the creditworthiness and the income stream's cap rate. There are a few transactions in our market that fit this description, featuring excellent credit and firm leases of 13 to 14 years, which received a great reception until recently. However, due to the ongoing issues in the debt markets, a number of those deals have been put on hold. This situation has caused some buyers to proceed with caution, resulting in some transactions being delayed.

Brent Smith, President and CEO

I would add to that, Tony, this is Brent. If you think about just geographically, I would say certainly dense CBD assets that rely on mass transit as the primary mean to getting to the building may have impaired liquidity. I think we're fortunate in that there's very few of those in our portfolio. And the asset in 60 Broad overcomes that because you just have such great long-term well, with good credit tenancy and that's why we feel pretty good about that. But clearly, there is an increased focus on the Sunbelt and some secondary cities. If you note, AFIRE just announced that Atlanta was its number one city for the year in terms of foreign investment. As noted in our prepared remarks, CBRE noted Dallas was its number one market for investment. I think you're going to continue to see increased liquidity in the Sunbelt, but those more CBD locations and gateway markets, etc., probably have a little bit tougher time.

Chris Coleman, EVP of Investments

And Tony, one thing I’d just add. We do know anecdotally, brokers are extremely busy pitching assignments in our healthier markets and are advising sellers to go sooner rather than later, given the potentially further rising in rates.

Anthony Paolone, Analyst

Okay. Got it. And then, just last question. It’s maybe a little bit for Bobby and everybody. The occupancy or I guess the commenced or used number was 839, I think at the end of the quarter. I’m trying to get a sense as to what you have embedded for that figure come the end of the year and just where you think that could go. Again, just given the leasing traction you’ve had and just the limited expirations this year and even next year if you take U.S. Bancorp out of the mix; it’s also a fairly modest year.

Bobby Bowers, CFO

Tony, this is Bobby. Thanks for the question. I might note that we had probably 750,000 square feet of leases yet to commence or in abatement at the end of the year, and that number's climbed to over a million as we've had more leasing success. Based upon the leasing, which we think looks very good right now, that number could potentially climb, Tony. But remember, that’s good news. Currently, with a million square feet of leases yet to commence renovation, that's about $33 million revenue, probably translates into a 60% margin, which is about right for us, or $20 million of additional NOI. So again, based on current estimates, I think that number will increase, but remember, that's good news in terms of revenues coming down the pipeline.

Brent Smith, President and CEO

I'd say Tony, just from a modeling standpoint, I'd recommend you keep it in walks about for now. If we're projecting somewhere up to 88% leased by year-end, then you can also grow that commenced percent by equal amount. Thank you. I want to appreciate everyone joining today and just remind everyone that we continue to see and be very positive about the momentum on the leasing front. With low expirations, we do feel like we're really positioned for absorption and got a great set of opportunities ahead of us for potential capital recycling. I'd encourage you—those to have a chance to sit down with us at Nareit in June to please reach out to Eddie or Justin to arrange that meeting. We do look forward to sharing more about what differentiates Piedmont, what's driving our strategy, our markets, and our operations that really help us grow FFO 9 out of the last 10 years, and we look to continue that momentum. Thank you for joining us today.

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.