Piedmont Office Realty Trust (PDM) Q1 2021 Earnings Call Transcript

Piedmont Office Realty Trust (PDM 1.74%)
Q1 2021 Earnings Call
Apr 29, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Piedmont Office Realty Trust, Inc. first-quarter 2021 earnings call. [Operator instructions] At this time, it is my pleasure to turn the floor over to your host, Eddie Guilbert. Sir, the floor is yours.

Eddie Guilbert -- Executive Vice President, Finance, Treasurer, and Assistant Secretary

Thank you, operator, and good morning, everyone. Thank you for joining us today for Piedmont's first-quarter 2021 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 of 2021. This information is available on our website at piedmontreit.com under the Investor Relations section.

During this call, you'll hear from senior executives of Piedmont, and they may make and they 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 the supplemental financial information. Also on today's call, the company's prepared remarks and 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 detail 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 the COVID-19 pandemic 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 only as of the date they are made.

At this time, our president and chief executive officer, Brent Smith will provide some opening comments and discuss our first-quarter results and accomplishments. Brent?

Brent Smith -- President and Chief Executive Officer

Good morning, everyone, and thank you for joining us on today's call as we review our first-quarter financial and operating results. On the call with me this morning are George Wells, our executive vice president of operations; Eddie Guilbert, our executive vice president of finance and treasurer; and Bobby Bowers, our chief financial officer; as well as other members of our senior management team. First and foremost, I hope that everyone is and continues to be healthy and safe. This quarter, we reached a dubious milestone having been in the midst of the pandemic for over year now.

While it has been highly disruptive to the office sector in general and Piedmont's leasing pipeline specifically, we are fortunate that the vast majority of our customers are current on rent and building utilization continues to improve, now approaching an average of 25% across the entire portfolio, primarily led by a return to the workplace by our small to medium size tenants. While overall daily utilization for the portfolio remains far below pre-COVID-19 levels, that percentage is improving and is expected to continue to ramp up in the second half of the year. But I will note the daily utilization still varies greatly based on tenant characteristics and geography. With vaccines becoming widely available for all, we continue to see incremental gains in local economic activity week by week, particularly in our Sunbelt markets as I noted on our last earnings call.

However, this quarter, we track an increase in activity for our Northern markets as well, first since the pandemic began. In addition, we are beginning to see medium-size space request in the 15,000 to 25,000 square foot range and starting to conduct tours with these tenants. We're encouraged that our leasing pipeline has strengthened and we feel positive about our ability to generate some leasing momentum headed into the rest of the year. While we saw consistent upticks in tour activity across the portfolio as the first quarter progressed, a 30% increase actually from January to March, we still anticipate it will take two to three more quarters for Piedmont leasing volumes to approach pre-pandemic levels.

With the USD GDP expected to grow 6.2% in 2021, per Bloomberg's April economist survey, U.S. feels like it's getting back to a new normal. And with this backdrop, we are encouraged for our tenants, our employees and our stockholders as corporations and large businesses begin to plan their return to the office with most targeting the early fall for the workforce to reenter in mass. Even more tangible evidence of this improving outlook is the fact that we experienced a sizable uptick in the number of executed leases for the first quarter of 2021.

The company completed approximately 678,000 square feet of leasing, with new tenant leasing accounting for approximately one-quarter of that activity. Had it not been for one large tenant, new leasing would have actually outpaced renewals. I would also note that the weighted average term of leases introduce during the quarter was approximately seven years. Comparing the first quarter of this year to the first quarter of last year, both the number of leases and the overall square footage related to new tenants exceeded the first quarter of 2020s pre-pandemic levels.

Through this leasing activity and customer dialogue, we continue to better understand tenant space needs and design requirements. I would characterize the majority of new leases is having a space plan matching pre-pandemic levels of square feet per employee, but with a greater focus on creating collaboration space and integration of technology to facilitate work from home and in-office employee communication. That said, we believe a vast number of firms are still trying to understand what work from home truly means for the organization. We are finding that medium-size enterprises are having the greatest difficulty in reaching a conclusion and as such, these customers typically requiring 15,000 to 25,000 square feet are those most often requesting shorter-term renewals of two to three years.

One positive note is that these customers are requiring very little tenant incentive or capital to transact on these shorter renewals. As I noted in our last call, we continue to see the smaller user market, defined as those being less than 10,000 square feet remain rather resilient, almost approaching pre-pandemic levels of activity. And in a large user segment, to find as those needing more than 50,000 square feet, we continue to see the companies who know their business well, use this market disruption as an opportunity to negotiate more favorable terms from their landlords. While the large user segment has not recovered to the extent of small users, we are still experiencing elevated levels of activity from large tenants in Dallas, Atlanta, Orlando and Boston.

I am pleased to share that one example of this phenomenon has resulted in an early seven-year renewal of Raytheon's approximately 440,000 square foot lease, comprising the entirety of our 225 and 235 Presidential Way assets in Boston. The lease acquired only a modest level of tenant sales and leasing commissions equating to approximately $2.60 per square foot per year of term, with a modest adjustment to the current rental rate which we noted in our earnings release had a disproportion effect on our lease mark-to-market for the quarter. A more complete lifting of the larger leases executed during the first quarter of 2021 is included in the supplemental information that we published last night and is available on our website. Looking ahead, our only expiration of any significance over the next 18 months is the City of New York lease of approximately 313,000 square feet, that remains in holdover at 60 Broad Street.

We are pleased to welcome approximately 20% of the various agencies workers back to the building next week. I am also excited to share that Piedmont has executed a five-year interim lease extension and the Department of Citywide Administrative Services has informed us that the public hearing and final approvals are in process. As a reminder, all government tenant transactions, the landlord's required to execute documentation prior to the tenant. Assuming things move forward as anticipated, we expect a conclusion to this interim renewal around the end of the quarter, very much in line with the economics in terms we've shared in the past.

Finally, following our playbook, on the State of New York's lease in 2019, we continue to work with DCAS on a potential 20 year extension at the building beyond this extension. Taking a step back, I would like to share three trends which are benefiting almost all our operating markets. First, an accelerating population migration to the Sunbelt, along with other secondary cities which offer businesses and employees a lower cost, higher quality experience. We believe this great affordability migration will constitute a decade-long trend that, in conjunction with the second trend, which is millennial family formation and a movement to the suburbs, will play well amenitized offices in mixed use environments located along a cities primary Ring Road and higher demand.

And finally, as we have dialogue with our tenants and track leasing activity, we're witnessing a third trend, a flight to quality with a focus on amenitize buildings with unique environments, owned and operated by responsive service oriented landlords. Piedmont's portfolio is well-positioned to be the beneficiary of all three of these themes, a concentration of well amenitized buildings located near strong housing communities and highly regarded education systems, with easy accessibility to major highway thoroughfares and airports and with more than half of our portfolio in the Sunbelt where population growth is expected to surpass national averages. But today's tenants are not only focused solely on location and neighboring amenities, the physical attributes of a building have never been more important. The buildings indoor air and light, HVAC, fresher intake, elevator capacity and outdoor collaboration space are all critical.

In addition to a high quality building and a vibrant environment, customers are demanding a higher quality landlord as well and by that we mean a attentive operator, that focuses on ESG initiatives and which has the capital base and scale to provide tenant offerings and engagement. Office space is no longer just a real estate product. Our customers view our offering as a service, which excites us and gives us the opportunity to provide a differentiated product, when that we believe will allow us to achieve greater occupancy and real rates in the prevailing submarket. Touching briefly on transactional activity.

Although we did not complete a capital transaction during the first quarter,, the Raytheon lease extension will likely provide a catalyst. This is the first time that that tenant has executed renewal that provides a total of 10 years of remaining lease term at the buildings. As the two assets represented by this renewal are now 100% leased to a single credit-worthy tenant with significant term, we believe that value has been maximizing the properties and we have a unique opportunity to realize that value which has been created. Therefore, we began marketing our 225 and 235 Presidential Way properties for sale late in the first quarter and we received a good deal of interest.

We are therefore anticipate recycling the proceeds from the sale into high quality amenitized assets would fit strategically into one of our core markets. Finally, I want to highlight the recent progress that we made on several key ESG initiatives. ESG have gain more widespread investor and tenant attention here in the U.S. over the past few years and Piedmont's management team has made it a priority to establish a best-in-class ESG platform, getting involved to help to make our communities and planet a better place to live while ensuring our employees, tenants and vendors are treated with respect and given equal opportunities.

I would like to take a moment and point out a few recent achievements. On the sustainability front, out of 1,000 of participants in the U.S. ENERGY STAR program, Piedmont was recently named one of 70 company's designated the 2021 ENERGY STAR Partner of the Year and Piedmont is the only office REIT headquartered in the Southeast U.S. to receive this designation.

I'm also very pleased with ENERGY STAR's recognition of our ongoing commitment to reducing our portfolio's carbon footprint, including lower energy consumption, in addition to water conservation efforts and reduced landfill waste from our buildings. Approximately three-quarters of our portfolio is currently ENERGY STAR certified and we continue to make significant progress toward our goal of reducing the overall energy consumption by 20% at our properties over a 10-year period ending in 2026. Additionally, during the first quarter, our five Atlanta Galleria properties were awarded the WELL Health-Safety Rating by the International WELL Building Institute. The WELL Health Safety Rating is a new evidence based third-party verified rating for all new and existing buildings.

It focuses on operational policies, maintenance protocols, stakeholder engagement and emergency plans to address the post COVID-19 environment now and into the future. Our Atlanta Galleria properties representing over 2.1 million square feet of rentable space, were the first properties in our portfolio, as well as the first for all office post the Atlanta to receive this new rating and we're actively working to expand this program across our portfolio. Additionally, Piedmont recently partnered with Morehouse College, Division of Business and Economics in Atlanta and with Harvard University School of Business in Washington D.C. to introduce the Piedmont Office Realty Trust Scholarship Program.

The program provides scholastic support to rising sophomore students, taking degrees in economics, finance, accounting, engineering or real estate with a renewable scholarship for the Piedmont scholars sophomore, junior and senior years. Along with access to an executive shadowing program, the scholarship offers each recipient the opportunity to intern with Piedmont and acquire a first-hand experience in commercial real estate and participate in a board-level mentoring program. It is our hope that this program will provide need based aid to ambitious students and expose the more diverse African pool to a career in the commercial real estate industry. Our ESG efforts are overseen by our board-level ESG Committee which is chaired by Barbara Lang, the former president of Washington D.C.'s Chamber of Commerce.

Ms. Lang joined our board six years ago and immediately began making a positive impact, helping to lead the company's environmental objectives and social involvement in our communities. For additional information on our overall ESG program, I encourage you to review our annual ESG report that's available on our website. With that, I turn it over to Bobby, to walk you through the financial highlight of the quarter and guidance for 2021.

Bobby?

Bobby Bowers -- Chief Financial Officer

Thanks, Brent. While I'll briefly discuss some of our financial highlights for the quarter, I encourage you to please review the earnings release and supplemental financial information which were filed last night for more complete details. For the first-quarter 2021, our reported net income increased to $9.3 million, up 7.3% from the same period a year ago. We also reported $0.48 per diluted share of core FFO up $0.01 over the first-quarter 2020.

AFFO was almost $39 million for the first quarter, well in excess of our current quarterly dividend level. Rent roll ups, roll downs on executed leases during the first-quarter 2021 were largely influenced by the significant renewal with Raytheon, that Brent mentioned earlier. Accrual based rents increased on average approximately 7% while cash rents decreased approximately 2.8%. However, excluding the strategic Raytheon renewal, cash and accrual rents for the remainder of the leasing activity rolled up 8% and 10.1% respectively.

Same-store net operating income increased almost 4% on a cash basis and was down slightly on an accrual basis. The increase in cash basis, same-store NOI was primarily attributable to the burn off of significant abatements at 11.55 Perimeter Center West in Atlanta and Arlington Gateway in Washington D.C., along with income associated with WeWork's termination in Orlando. These increases were partially offset by reductions and transient parking and retail revenues as a result of the lingering effects of the pandemic, and by 0.8% decrease in portfolio occupancy during the first quarter of this year. We continue to believe that same-store NOI on both the cash and accrual basis will end the year positively between 3% and 5% and economic occupancy is also expected to improve with the burn off of over 400,000 square feet of abatement during the second quarter.

Our overall lease percentage is estimated to end the year around 87% to 88%, but this estimate is before any capital transactions. Turning to the balance sheet, our average net debt to core EBITDA ratio improved during the first quarter of 2021 to 5.6 times. And our debt to gross asset ratio at the end of the first quarter remained relatively flat, compared to 2020's year-end at approximately 34.9%. Our tenant rent collections have returned to near pre-COVID levels at over 99% collections and we now only have approximately $3 million of previously deferred 2020 rents remaining to be paid during 2021.

We currently have approximately 90% of our $500 million line of credit available for strategic capital transactions, along with proceeds expected later this year from the sale of the two Presidential Way assets in Boston. We plan to repay the only secured debt remaining on our balance sheet, a small $27 million mortgage, once the loan allows for prepayment without yield maintenance later this quarter. We also plan to go to the public debt markets later this year to refinance a $300 million term loan that matures at the end of November. At this time, I'd like to reaffirm our 2021 guidance in the range of $1.86 to $1.96 per diluted share for core FFO for the year.

Also as a reminder, this is annual guidance and results vary by a penny or two by quarter due to lease commencements and expirations as a result of seasonal expenses and other such items. Further, this guidance is before any significant capital transactions. We'll adjust our guidance range when such transactions occur. As Brent mentioned earlier, we are cautiously optimistic regarding our leasing pipeline, but please be reminded there is typically a six- to 12-month lag between the time a new tenant lease is executed and when occupancy physically occurs.

With that, I'll now ask our operator provide our listeners with instructions on how they can submit their questions. We will attempt to answer all of your questions now or we will make appropriate later public disclosure, if necessary. Operator?

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question comes from Anthony Paolone. Please state your question.

Tony Paolone -- J.P. Morgan -- Analyst

Thanks. Good morning. So my first question is with regards to the leasing pipeline, I think last quarter you provided a number that was real strong and obviously included Raytheon in it now. But just curious how that looks now to give us some color as to what you're seeing there?

Brent Smith -- President and Chief Executive Officer

Good morning, Tony. Thank you for joining. Happy to provide a little more color around the pipeline. I'd say, as we've tried to characterize coming through the pandemic, we were obviously pre-pandemic doing about 200,000 square feet of new leasing a quarter, roughly that went to near zero, as did most companies leasing pipelines during the pandemic in the early days.

As we continue to get into the third and fourth quarter, we've seen that trajectory go higher, we were doing call it in the high double-digits in terms of 1,000s and then up to around 100,000 in the most recent quarter and is now continuing that trajectory even greater in this quarter. And we continue to see the pipeline build more so quarter over quarter. So I'd say that trajectory continues to be very positive. And as I noted in my prepared remarks, seeing the northern markets actually start to have tour activity in person, is a very positive sign and actually getting request for proposals.

Our prior leasing with almost predominantly in the Sunbelt with a little bit sprinkled throughout the other Northern markets, mostly on renewals and a few new deals, but we're seeing that creep up. As well as, as I noted in my prepared remarks, that medium-sized enterprise, it takes 15,000 to 25,000 square feet, at least submit RFPs and we're scheduling tours. So I think incrementally, it's nice to see those two user segments come in further into the market, but still clearly we're not going to get back to those pre-pandemic pipeline levels in terms of new leasing activity, I think until third, fourth quarter of the year, it's really going to take a little bit more positive momentum behind the vaccine and people getting a little bit more comfortable in returning to workplace which we are seeing. I think to really see full activity get back to where it was.

If we want to go think about market-by-market though, we still see good activity in all our Sunbelt markets, Boston to a lesser extent Northern Virginia and Minneapolis, but New York's still trailed overall in terms of that new leasing pipeline activity. I'd say it's -- that's how I'd characterize it. Anything else, more specific?

Tony Paolone -- J.P. Morgan -- Analyst

No, that's helpful. The 86% lease that you had at the end of the first quarter, and Bobby, you had mentioned 87% to 88% for year-end, any big puts or takes in either direction to watch out for by market or buildings?

Brent Smith -- President and Chief Executive Officer

I think they've been mostly put or well known to the market. WeWork is the one that will be coming out that so size in Orlando and other than that, no, I don't think there is anything dramatic and nothing of size for quite some time. If you look at our large tenant list, really the next larger tenant is not until the end of 2022. So we feel pretty good about having low expirations, limited kind of big hits and the opportunity to capture what we think is going to be continuing to focus on landlords that prior provide a high quality product and a service with a focus on initiatives that are important to both corporations and their workers, as well as I noted in my remarks.

So all things that we see with only 4.7% of our own ALR rolling in the rest of '21 and once we conclude the New York City lease '22 also gets a lot shorter. We feel very good about our runway to achieve those occupancy levels by the end of the year.

Tony Paolone -- J.P. Morgan -- Analyst

OK. So WeWork being the more notable drag, but then the positives to get to the 87%, 88% just being a little more spread out, is that fair characterization?

Brent Smith -- President and Chief Executive Officer

Absolutely.

Tony Paolone -- J.P. Morgan -- Analyst

OK. And then on Boston from a capital markets point of view, now that you're putting Raytheon on pursuing, I think last quarter you talked about Cambridge being a potential sale candidate quite. What are the prospects or thoughts around just your exposure to Boston at this point?

Brent Smith -- President and Chief Executive Officer

Maybe I'll take an opportunity here Tony and take a step back and explain a lot of how we thought about our really entrants into that area in that market 10 years ago, and is a good maybe allusion to what we might do if we were to enter a market elsewhere, even a market and that was to say we like the dynamics in Burlington. Woburn was an adjacent market and we were building a platform in Burlington but saw an opportunity to get an asset that was frankly we thought a good way to create value, use our market knowledge, use that platform, but knowing all along we were going to build our core base around Burlington. And so we were able to get Raytheon to extend to a level where we are able now to push them into the market, we think, create a lot of value on the cap rate in that process, probably to the tune of, maybe 125 to a 150 basis points, we'll see. And so, we were then able to kind of think about our opportunities to recycle that.

Now in Cambridge, we've also got great assets and we've continued to have a great relationship with Harvard. We don't feel a rush to sell those necessarily. I think that market is quite strong. That tenant is well known that at the right time we'll -- as I have coin that, use those as our piggy bank.

But we're still very committed to the Boston market. We think there's a lot of great opportunity to continue to provide good office space, particularly as competitive office space is continue to use for -- pulled into other uses and really creating need for tenants that are more than the urban core looking for, as we've talked about in other calls, a more reasonable rate and more space for their employees. So we continue to see very positive things in that market. I would also note maybe a credit upgrade from our Nuance tenant in that market, which is potentially being acquired by Microsoft in a full building user there, but that's a core holding again in our Burlington market.

I would anticipate disposing of that one. But with Raytheon, we saw a chance to really harvest the value created and we lunged at it.

Tony Paolone -- J.P. Morgan -- Analyst

Got it. That's helpful. And then just last question. The Industrious lease, is that a straight lease that you saw in there? Or is that like a revenue sharing operating type deal?

Brent Smith -- President and Chief Executive Officer

Yeah, I'll take a step back and that just to be clear, is really a replacement of an existing co-working operator. As we've talked about on prior calls, we've taken our operating risk, our counterparty risk, if you will, and spread a note across a number of operators, we were being one, but also some local operators. However, the disruption in that sector has been meaningful and as time has gone on, the quality operators we think being primarily Industrious and WeWork are -- we think it's going to drive incremental tenancy. Again, it's not an additional exposure to co-working and so, co-working still comprises only 2% of our ALR.

We replaced a company called MakeOffices with Industrious, it is a lease with a revenue sharing component, but it is a lease.

Tony Paolone -- J.P. Morgan -- Analyst

OK. Great. Thank you.

Operator

Our next question comes from Dave Rodgers with Baird. Please state your question.

Dave Rodgers -- Baird -- Analyst

Yeah. Good morning, everybody. Wanted to touch on the Raytheon sales, it sounds like those have been in the market, maybe 30 to 45 days. Brent, can you give us some color on kind of the appetite, and maybe the timing of closing something? And then the flip side of that question is, you obviously want to reinvest and you mentioned that in your comment.

Can you talk about what the reinvestment pipeline looks like today and is there sufficient opportunity in your mind to then bring more assets to market this year to pursue that pipeline of activity?

Brent Smith -- President and Chief Executive Officer

Good morning, Dave. Yeah. So yeah, again, touching on Raytheon, we will -- kind of had a unique situation where we were able to extend that tenant and get that 10 years of term, which as I noted before we felt really created a lot of value. On top of that, it was a low capital deal, so we are able to keep a lot of that down in our metrics for the quarter.

But I would note, it was a slight roll back on the rate, a modest mid-single-digits. We felt like that was more than made up for what the cap rate might achieve in the market. As you know, we've been in the market now, not even 30 days really, it takes a little bit time to get people under CAAs etc. So at this point it'd be a little bit early overall to comment, but I would say as you can imagine, Boston is a very hot market, it's got a credit-worthy tenant with long-term lease, it should do very well we think, but I think it'd be too early to tell.

In terms of the timing, that's also a little bit tough to pinpoint and the reason being is, this is a very strategic asset for the user, and as I would anticipate this may require some government approvals and to dictate exactly how long that might take, depends on the ultimate buyer and ultimately, we'll be able to shed a little bit more light on toward that on the next call. But in-terms of then redeploying that capital and how we think about things, we're looking at several acquisitions, both off-market and then few on-market, most off market, but they're all strategic opportunities in our core markets and sub-markets. And as we've thought about in the past same today, we think of initial yields in the 6% to 7% range, where we can create value. We feel like we're in a good position to pursue acquisitions and that we've got a pipeline for potential deals and we think that's growing.

I would say at this point in time, as we think about capital allocation, probably developments further down the list, we feel pretty good about where the stock trades today and see some opportunities that are better in assets for growth,. And then of course we always had the alternative to pay down debt if we needed to with a little bit on the line currently, but I think you'll find us be able to marry that disposition well as we have done in the past with an acquisition. There is a modest gain there, we think that would be a taxable gain that we can handle appropriately, but ideally, yes, you'd like the 1031 if possible. Is that helpful?

Dave Rodgers -- Baird -- Analyst

I want to appreciate that color, Brent. I guess I wanted to ask on the -- like an asset like Enclave where maybe the credit isn't as good, is that something that you could foresee bringing to the market and redeploying as well or is the market not strong enough for that type of tenancy just yet?

Brent Smith -- President and Chief Executive Officer

Yeah. I think, Dave, as we think about the non-core portfolio, we've got realistically a little bit of maybe a few months on two peers place in terms of trying to get a tenant that's in TO, we're not if we'll land that but in any case, that's the non-core asset I think that I would like to definitely get out the door this year. As I think about the two Houston assets given the credit in Schlumberger, maybe that one's a little bit more primed. But as we continue to see oil recover and Transocean is paying rent now, cash rent, it is an opportunity to potentially monetize that asset.

But I think it's more likely to be a next year event than a this year event as we think about that specific one with TO.

Dave Rodgers -- Baird -- Analyst

Very helpful. And then last for me on the New York City renewal, sounds like that it would be mid-year. And you did make the comment that it would be consistent with terms in the past. I guess I just wanted to go back and reconcile are we talking about kind of terms, this would look like a long-term deal just in a shorter form until you're done or would this look like the holdover rent? So I guess I just wanted a comparison between kind of holdover and kind of where we go there, the impact of this year's financials?

Brent Smith -- President and Chief Executive Officer

Yup. And maybe I'd say take a step back and let's talk about the New York City process and leased in whole. I'd say overall, all the incremental progress we're seeing in New York City opening up is a great thing for it. The State of New York in the country frankly and 60 Broad, there in New York City employees themselves are actually returning next week, and I saw this morning to De Blasio opened up the city 100% starting July 1, so all very positive things.

But unfortunately as we've taken through this process, it's certainly been more protracted than we anticipated, but rightfully so, given what that region is dealt with and had to contend with the pandemic. So, as I noted in my prepared remarks, all government leases require -- we signed first, which we've done so and then followed through with the various agencies that occupies. The next step will be a citywide hearing and that will be put on the calendar, the mayor offices still have to improve so there is a few more steps, but we still think that gets executed sometime around the end of June, that interim lease. And so that initial lease was really designed to provide the time required to complete their swing space, design plans and covered what would be a construction period.

So once that construction is complete that longer-term 20-year lease that we're still negotiating would commence, and both Piedmont and city are engaged on that longer-term lease. So that's how we kind of think about that overall process. Now getting to your initial question which is, what's that mean from an economic standpoint, you're exactly right, we've thought about the current rate that they pay today and holdover is being what I've called market for unimproved space. And so, roughly what they're signing that interim lease is, that market rate with a modest annual affiliation as anticipated.

So there is very little capital associated with the lease. All that kind of significant build-out would be triggered once that 20-year lease is executed and again we're working on that, but we obviously needed some time and neither group wanted to have this continue to be in a holdover status.

Dave Rodgers -- Baird -- Analyst

Appreciate all this color. Thanks, Brent.

Brent Smith -- President and Chief Executive Officer

I would note that the term of five years is from the date of execution by all parties.

Dave Rodgers -- Baird -- Analyst

Gotcha. Thank you.

Operator

Our next question comes from Michael Lewis with Truist Securities. Please state your question.

Michael Lewis -- Truist Securities -- Analyst

Thank you. When I think of work from home threat, I don't really think of City of New York or Raytheon. But Raytheon has been a company that has talked publicly about reducing square footage, maybe in their case because they're reducing headcount in certain areas. But is there any change in either of those renewals in the way that the company is intend to utilize the space or their philosophy on hybrid work or anything else like that or have you seen anything else tangible anywhere else in your portfolio yet?

Brent Smith -- President and Chief Executive Officer

It's -- good morning. And I appreciate the time today, Michael. It's surprising and we're still learning more day by day. As you talk to more and more tenants more and more architects and more and more CEOs thinking about their business longer-term.

It's surprising that I think people are coming back to a very similar design space that existed in many offices not everyone, but bench style seeding is definitely fallen by the wayside, more perimeter offices, open areas but exorbing the life from the window line, which is why the window lines is imported into the center portion of the core of the building. But overall, space planning and space need has not materially changed for those two tenants, specifically, Raytheon will continue to operate in very much the same footprint and the New York City is going to need a refresh given its 20-year-old, now 22-year-old space. But it's very much in the same vein as to what it was designed to be beforehand. So, similar with the New York City though pre-pandemic.

They went to a design that was utilizing a little bit more average space that they had before per employee, utilizing team building space and conference room space more efficiently, we created their own little WeWork area on about 20,000 square foot floor print on one of the floors, that was shared conference just for the various agencies. So they're getting creative in their own way. I think you're just going to continue to see that in the design process and focus on collaboration space, but we're not seeing at this point. I can point to them, I could point to Lux here in Atlanta, which is a sub-tenant but redoing 170,000 square feet, no material change right now, which is a little surprising in our minds.

But as I talked about on the call, a much greater focus on the service and the physical characteristics of the building and the quality of the landlord more than ever before.

Michael Lewis -- Truist Securities -- Analyst

Thanks. But that's interesting to -- on a -- we finally have a 10-year renewal to look at and it sounds like not a lot of changes at least for them. My second question is kind of a two-parter that kind of shares a theme though. You talked about the expectations for selling the Raytheon asset.

Did Raytheon know you might market that property for sale, and does that impact the lease negotiation at all? And I mentioned there is a second part, the second part would be does the City of New York care or does it enter into the talks at all whether you may not be the long-term landlord for them at that property if you decided to sell that after a long-term lease was signed?

Brent Smith -- President and Chief Executive Officer

Good question. I will take them in -- each in separate part. I think in the instance with Raytheon given it's a sole tenant in the building and as we've had a deep relationship with that from -- at that location for 10 years now, I personally negotiated the last renewal prior to this. So new, the Raytheon team and their representative is very well.

I know they're very astute. I think it would be naive to think that they didn't understand that there was that potential and that we were -- had always asked to do more than a five-year renewal and they always had robust. But in this instance, we saw an opportunity, I think they did too and that's the only reason why there was a modest roll back in the rate because there is very little capital and we felt like we were creating a lot of value and obviously they probably want to distract a little bit of that value as well, but again that was not really a significant part of the negotiation, but it obviously had to play into their minds I would think. But that's speculation and I do not know.

Michael Lewis -- Truist Securities -- Analyst

OK. And then does the City of New York care at all what you do with the building? I guess I could even ask the same question about two peers given what you just said, right? Does that complicate leasing that asset up?

Brent Smith -- President and Chief Executive Officer

I would say no, and that has not proved to be a point in the current interim lease that we just executed but also -- that's also not a single-tenant building and is also provides the city with a various, as I've talked about on prior calls, it's very unique building. Within a building their own elevator bank, it fits their use is very well particularly at that value price point. So I don't think in that regard it's going to be a lever around their mind at all versus with Raytheon I would suspect they were aware.

Michael Lewis -- Truist Securities -- Analyst

OK. All right. Thanks.

Operator

[Operator instructions] Our next question comes from Daniel Ismail with Green Street. Please state your question.

Danny Ismail -- Green Street Advisors -- Analyst

Great. Thank you. Pretty similar to the question asked about work from home previously. I'm curious how you're thinking about Minneapolis as a market long-term.

I know the exposure to the city is limited, but with the target sublease news recently, I'm curious how you'd rank our markets relative to your other core markets.

Brent Smith -- President and Chief Executive Officer

Good morning, Danny. Appreciate you joining. In regards to Minneapolis specifically, I think we've been a long-term operator in that market and we enjoy being one of the 800-pound gorillas in terms of being a major player and deep relationships with a lot of corporations that operate within that market. So we still view our platform and capability there as being -- one that gives us an advantage and we're still committed to the city.

As we continue to talk very closely with the tenants that we have both Downtown in the suburbs, I would say there is obviously more disruption Downtown given what's been going on with the pandemic and also with the social unrest. The good news is to some degree the city is moving forward and it continue -- things continue to open up from the pandemic and things continue to move forward from the social reform aspect within the city. So businesses are getting more constructive and returning back to the workplace which is a positive. We're starting to see some of that tour activity pick up, particularly in the suburbs, I think it's still to come in Downtown, but overall we're still very optimistic about the city.

It provides a great work-life balance that we've talked about, the ability to track large corporations, great airport, good education systems and neighboring markets that feed into it. Our location advantage for our asset Downtown right next to Target Headquarters and very little competitive sublease space that what I would can -- see deem superior to ours in the Downtown market. And as I note, the suburban market continues to kind of perform as I would have expected any of our other Northern markets at this point. I would note that we do as low expiries in that market for the next two years.

Sorry.

Danny Ismail -- Green Street Advisors -- Analyst

No, that's helpful. Appreciate it, Brent. I'm not sure it's on your land bank. And with the rising construction costs, I'm curious how you perceive that's impacting the choppiness of development these days.

Brent Smith -- President and Chief Executive Officer

I'm sorry. What was your last point, the choppiness of the what?

Danny Ismail -- Green Street Advisors -- Analyst

The attractiveness of development these days.

Brent Smith -- President and Chief Executive Officer

Oh, attractive. Yes, it's interesting. We've been watching commodity prices continue to accelerate and certainly right now, there is I think a supply chain constraints, it's going to continue to keep those materials for construction elevated for probably at least the next 12 maybe 24 months. So as you think about impact on your ability to start a construction project, it's got a obviously impact, it's going to be very difficult to get GMP pricing.

But most leases with prospective tenants typically have some sort of flex component to it related to the cost. So you're able to some degree cushion against that if you were to find the right opportunity, but at this point in time, I think we're going to be continuing to focus on redevelopment, that's what we feel is a great better risk adjusted return with the right bones and what we're accomplishing in some of our larger scale projects, I think that's a better use of capital than ground-up development. But that said, we have seen more inbound inquiries on the opportunities we have potentially in Atlanta and Orlando, but it all is centered around that, creating that right compelling environment, and right now, I think that's probably going to be better done through redevelopment than ground up.

Danny Ismail -- Green Street Advisors -- Analyst

And just last one for me. How are you viewing the mark-to-market opportunity across the portfolio? I know that's a hard question to answer, were depending on certain markets, but I'm just curious how far above or below you think the portfolio is portfolio rents are these days relative to market.

Brent Smith -- President and Chief Executive Officer

Yeah, Danny, that's a question we get regularly and I'd say the one thing through this disruption has been a positive is the resiliency in face rates. Now don't get me wrong, we've felt the pain particularly on the capital end, is where most of the tenancy is trying to beat up their landlords with their scale and credit and not on rate. And so that's been a positive. So rate is held for most part through our portfolio.

Prior to the pandemic, we were saying, we are 5% to 10% mark-to-market, I'd say that's still the range that we gave and 0.2% is specifically even this quarter, ex-Raytheon which we've explained, not a lot of capital and so there was another lever there on rate. But elsewhere if you exclude that, we were at 8% roll up and I think that's very indicative of where we stand today in the portfolio and will continue for the near term.

Danny Ismail -- Green Street Advisors -- Analyst

Great. Thanks, everyone.

Operator

Our next question comes from Dave Rodgers with Bayer. Please state your question.

Dave Rodgers -- Baird -- Analyst

Yeah, just a couple of follow-ups maybe for Eddie and Bobby. Three questions specifically. One, any changes in the general reserve this quarter? Two, can you give us a little more detail maybe on the sequential change in parking revenue in that component? And then lastly, the $3 million that you have left to collect from last year's deferrals, what's the timing on that?

Bobby Bowers -- Chief Financial Officer

Hey, Dave, this is Bobby. I'll try to take the first and the last one, while Eddie gives some of the information. You asked about the bad debt reserve. You might remember that we recorded a $5 million bad debt general reserve last year at the onset of the pandemic.

That $5 million came from basically seeing a reduction in collections. So we just had 1% of our annual revenues, so $500 million, 1% $0.5 million. The balance is still right at $5 million for tenant receivables and related assets and just think of that including straight-line rents things like that. We still have tenants primarily retail customers that are on our watch list, that we're still trying to track and we still have that reserve is, I'm going to try to bring in near deferral answer.

Outstanding of about little over $3 million related to the workout agreements that we entered. Did about 70 of them, $6 million in total and deferrals, collected about half of it, but our reserve is set as protection against that. So that's the status. Imagine I think you asked me a couple of quarters ago when we established this, Dave, could some of that come back to you? Yeah, it could.

But I believe that would take place over several quarters and that pace and amount certainly indeterminable at this point. That answered two of the questions. And I forgot the third one, Ed.

Eddie Guilbert -- Executive Vice President, Finance, Treasurer, and Assistant Secretary

David, as far as the market goes, it's basically Q1 was in line with Q4 sort of continuing the trend that we are seeing in Q4. And so, hopefully that answers that question. I think we would expect, as we see more people return to the office that in the latter half of the year, we're going to see an increase there.

Bobby Bowers -- Chief Financial Officer

Parking though Dave, remember, it is only a small percentage of our revenues, I think 1%.

Dave Rodgers -- Baird -- Analyst

Gotcha. Yeah. Thank you.

Operator

I would like to turn it back over to Mr. Smith for closing remarks.

Brent Smith -- President and Chief Executive Officer

Well, I appreciate everyone joining us today. It was a positive first quarter for Piedmont. We look forward to continuing the dialogue next quarter, is hopefully continue to build -- see the pipeline build and build on the momentum that we've garnered so far this year. We still remain optimistic on overall how the year will pan out and perform and we're excited to talk to you.

I would say if you have an interest in meeting with the company during NAREIT in June, please reach out to Eddie or Justin Caudill, information is in the supplemental. Thank you, everyone.

Operator

[Operator signoff]

Duration: 52 minutes

Call participants:

Eddie Guilbert -- Executive Vice President, Finance, Treasurer, and Assistant Secretary

Brent Smith -- President and Chief Executive Officer

Bobby Bowers -- Chief Financial Officer

Tony Paolone -- J.P. Morgan -- Analyst

Dave Rodgers -- Baird -- Analyst

Michael Lewis -- Truist Securities -- Analyst

Danny Ismail -- Green Street Advisors -- Analyst

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