Piedmont Office Realty Trust (PDM) Q2 2021 Earnings Call Transcript

Piedmont Office Realty Trust (PDM 1.64%)
Q2 2021 Earnings Call
Jul 29, 2021, 11:00 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. second-quarter 2021 earnings call. [Operator instructions] At this time, it's my pleasure to turn the floor over to Mr. Eddie Guilbert.

Please go ahead, sir.

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 second-quarter 2021 earnings conference call. Last night, we filed our Form 10 Q and a Form 8-K that includes our earnings release and our unaudited supplemental information for the quarter ending June 30, 2021, which is available on our website at piedmontreit.com under the investor relations section. During today's call, you'll hear from senior executives at Piedmont, 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 in the supplemental financial information. Also during the 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 in 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 second-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 second-quarter financial and operating results. On the call with me this morning are George Wells, our Chief Operating Officer; Eddie Guilbert, our executive vice president of finance and treasurer; and Bobby Bowers, our chief financial officer; as well as other members of the senior management team. I would like to begin today by expressing our hopes that all of you and your families are well. The second quarter really marked the country's reemergence from the economic shadow that COVID cast over us all for a year, along with the related concerns around the long-term outlook for the office industry.

Office utilization by tenants has improved across the portfolio, and fears of a continued large amount of space being pushed out for sub-lease have subsided. While still nowhere near pre-COVID levels, tenant utilization of space seems to be improving roughly 5% a month across the portfolio, and this trend is expected to continue into the fall, with several tenant return-to-office announcements coinciding with the beginning of the new school year. That said, our building utilization varies by tenant and by market, with the Sun Belt markets leading the way, with several locations having over 50% utilization. The lowest utilization rates in our portfolio are generally in our few northern markets and perhaps best described as being a couple of months behind the Sun Belt markets in recovery.

As I focus upon the second quarter of 2021, we are very pleased with this quarter's achievements from many perspectives. Financial results were solid, with core FFO of $0.48 per diluted share, along with almost a 5% increase in both cash and accrual same-store NOI. We were particularly encouraged by our leasing accomplishments, with 664,000 square feet of completed leasing coming from across our entire portfolio. Approximately 1/4 of that total leasing was executed with new tenants.

And notably, we achieved significant double-digit roll-ups in both cash and accrual rents on the leases signed during the quarter. The weighted average lease term for activity was about six years, reflecting long-term commitments from our tenants and not just short-term solutions; in our opinion, another indication of the health of our completed leasing activity. As we mentioned on the first-quarter's earnings call, we were very close to completing a five-year extension with the City of New York for their entire 313,000 square feet at 60 Broad Street. The public hearing and formal documentation processes were officially completed during the second quarter, and a new lease with the city has been executed and commenced in June.

The rental rates during the term are in the mid- to high-$40 per square foot, and there is very limited capital associated with this lease. Clearly, this large renewal had a favorable impact for the second quarter's lease roll-up metrics that I just highlighted. While we are pleased to have the extension in place, we are continuing to work with the city on a much longer-term renewal, which would include a significant capital outlay to rebuild their space. As you've seen with both the city's five-year extension, as well as the process for the State of New York's 20-year renewal completed last year, negotiations with larger government entities are complex, involving multiple agencies, the Department of City Administrative Services and with numerous departmental approvals and detailed build-out plans.

Therefore, well-intended negotiation schedules have a tendency to become protracted, primarily to accommodate the internal processes and timelines of these multiple constituents. We will work to complete the longer-term renewal as expeditiously as possible, and we will continue to keep you updated as we pass significant milestones in the process. Once completed, the long-term lease should result in a significant straight-line FFO roll-up. Looking at our overall leasing activity, I would note the number of leasing prospects and volume of our property tours has improved steadily throughout the year, particularly in our Sun Belt markets, which continue to lead the U.S.

recovery. A detail of significant leases executed during the quarter is included in both our earnings release and the quarterly supplemental information for your reference. I would characterize the majority of our prospects as having per-employee space needs similar to pre-pandemic levels but with more focus on collaboration space and the availability of employee amenities necessary for our customers to attract and retain their workforces in today's very competitive labor market. With the majority of the millennial cohort now in the family formation stage, and with that significant portion of today's workforce migrating to suburban areas for affordable housing, ample space and strong school systems, we believe we are well-positioned owning nodes of well-amenitized, high-quality office buildings in mixed-use environments located in walkable urban infill areas or along a city's primary ring road.

These types of properties have been in high demand, and we believe they will continue to benefit from the population migration trends taking the United States. Looking forward, based on our current prospect pipeline and our tour activity, we anticipate the current leasing momentum to continue into the fall. Importantly, for Piedmont and others in the office sector, the improving leasing volumes have stymied the decline in occupancy resulting from the pandemic, which brought most new office leasing activity to a virtual halt during 2020. Our lease percentage was essentially flat, changing 0.01% during the just-completed quarter.

For PMA, with low expirations for the next 24 months, we expect our leasing percentages to improve by the end of the year and to reach approximately 87%. I will note that, since we tend to sell our 100% leased properties and to acquire properties with some earnings growth and lease-up potential, our occupancy baseline changes constantly due to these capital transactions. Regardless of that changing baseline, we are working aggressively to grow our occupancy. Moving to capital transactions activity.

As I mentioned in last quarter's call, with the completion of Raytheon's long-term 440,000 square-foot renewal at our 225 and 235 Presidential Way buildings in Boston, and with 10 years of lease term remaining with a creditworthy tenant, we believe the value potential for the assets has been maximized under our ownership; and we, therefore, began marketing the buildings for sale. I'm pleased to report that during the second quarter, we entered into a binding contract to sell these 100%-leased assets for $129 million, or approximately $293 per square foot, to an investment-grade buyer. A sizable gain is anticipated, and we currently expect the transaction to close around the end of this year. As we've been doing over the last several years, we will continue to focus our portfolio expansion in Sun Belt markets.

To that end, we're looking to recycle the Presidential Way proceeds into a strategic Sun Belt acquisition where we have nothing to announce at this time. Finally, I want to mention that our annual ESG report is now available on our website. This year's report has a broader scope, including all sustainability accounting standards, board metrics, and information which aligns to the recommendations of the Task Force on Climate-Related Financial disclosure. In addition to these environmental issues, the report covers our various diversity initiatives, including our financial scholarship program for need-based students and employee training programs, along with details on our first green bond issuance and corporate governance policies.

We are extremely proud of the progress that we continue to make on the environmental, social and governance areas of the company, and I hope you will take time to review this important report, which covers matters that should concern us all as we strive to make our communities and the planet better places to live and work. With that, I'll turn it over to Bobby to walk you through the financial highlights of the quarter and updated guidance for 2021. Bobby?

Bobby Bowers -- Chief Financial Officer

Thanks, Brent. I'll 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. As Brent mentioned, for the second quarter of 2021, we reported $0.48 per diluted share of core FFO, and our AFFO was approximately $42 million for the second quarter and $80 million year-to-date, which is well in excess of our current dividend level.

Same-store NOI increased 4.8% and 4.7% on a cash and accrual basis, respectively, for the second quarter compared to the same quarter a year ago, primarily reflecting the burn-off of abatements at certain properties and the commencement of new leases with improved economics. We've previously provided same-store guidance for the year in the range of 3 to 5% for both the cash and accrual basis. However, based upon completed leasing and financial operating results to date, we're increasing the same-store cash guidance for the current year to 5 to 7%. Leases executed during the second quarter of 2021 for recently occupied space reflected an 18.2% and 27.4% roll-up in cash and accrual rents, respectively.

And as Brent also mentioned, both metrics were influenced by the City of New York renewal. But both of those metrics would have been strong even when excluding that sizable renewal at a 4.5% cash roll-up and a 15.2% accrual roll-up. Turning to the balance sheet, with collections having returned to normal pre-COVID levels, our balance sheet looks very good. You will note that we reclassed our 2 Presidential Way assets to held-for-sale once the purchase and sell agreement became binding and the earnest money was no longer refundable.

Also, all of our debt is now unsecured as we paid off our only remaining secured debt during the second quarter, which was a small mortgage previously secured by our 5 Wall Street building in Boston. Our average net debt to core EBITDA ratio as of the end of the second quarter of 2021 was 5.7 times, and our debt to gross asset ratio was approximately 34.6%. We currently have approximately 425 million of availability on our line of credit for strategic purposes should we complete an acquisition prior to the closing of the sale around year-end of the Presidential Way properties. Looking at our debt maturity schedule, we do plan to refinance later this year our maturing $300 million term loan with long-term unsecured debt that will both extend the maturity schedule and ladder out our maturities, with a continued interest in replacing maturing debt with a public bond issuance.

At this time, I'd like to review our previously provided 2021 guidance for core FFO per diluted share, which was originally $1.86 to $1.96 per share. This guidance did not include any acquisition or disposition activity and contained many uncertainties related to the economic recovery post-COVID. Even though the sale of the Presidential Way properties is pending, since this transaction is set to close around year-end, it does not necessitate a change in our guidance. However, with the leasing completed year-to-date and the limited amount of competitive sub-lease space in most of our concentrated submarkets, along with property level operating costs being lower than we originally budgeted due to the gradual return-to-office utilization by our tenants, we are revising our previous guidance to the upper end of our range, between $1.90 to $1.96 per diluted share for core FFO.

We remain optimistic about our investment strategy, which is consistent with office trends that we believe our target tenants desire, and we're optimistic about Piedmont's longer-term outlook, as well. We believe that, together, our communities and tenants have weathered the pandemic and are returning to a more normalized operation, encouraged by this but still remain vigilant, and we encourage everyone to get vaccinated. With that, I now ask our operator to provide our listeners with instructions on how they can submit their questions. We'll attempt to answer all of your questions now or will make appropriate later public disclosure if necessary.

Operator?

Questions & Answers:

Operator

[Operator instructions] And we'll take our first question from Anthony Paolone with J. P. Morgan.

Anthony Paolone -- JPMorgan Chase & Co. -- Analyst

Yeah, hi thanks. My first question is just maybe, Brent, if you could walk through your portfolio pretty broadly in terms of where you're seeing the strongest rebound in activity versus which parts of the portfolio might be lagging in terms of your margins?

Brent Smith -- President and Chief Executive Officer

I'll tick through each of the markets, but just in general, I would say Boston continues to be very strong and active, continued lab space, taking out competitive product, and just it's a market that's difficult to build in, so there's not a lot of construction. And we see a good roadway there for continued absorption from our portfolio, at least. I'd say, moving down to New York, obviously a very challenged market. It continues to open up, and we've seen utilization at our building go over 30, now almost 40%.

We do have some leasing activity for smaller-sized users. If you recall, our 60 Broad asset, which is our only asset in New York, has a small floor plate at the top, bigger floor plates at the bottom where we've done the state, and we just renewed the city. So we can accommodate those smaller users, and we've seen them come back in the market. So I think that's a positive and bodes well for New York.

Again, we're thankful we have very limited exposure there, though. In D.C., Northern Virginia continues to, I'd say, be behind Boston and the Sun Belt. It's still pretty active and strong. We continue to see smaller tech tenants active in that market, needing anywhere from, call it, 5,000 to 15,000 square feet.

And in the District, though, I will say it continues to be challenged, although we've seen a recent uptick in tour activity, but nothing imminent. I'd say the District itself is our most challenged market from a fundamentals and operations standpoint from leasing. Moving down into the Sun Belt in Atlanta, we continue to see robust activity across the market, but particularly with what we own around that first ring road, well amenitized product and easily accessible off the highways, and we continue to have good activity in those markets, in that submarket. In Orlando, we've seen a pickup in activity downtown, which I think it bodes well.

In Lake Mary, we're well-leased at the moment; but again, those are both well-amenitized nodes and easy, accessible off the highway. And so we're looking to hopefully announce some absorption in Orlando in the future here a couple of quarters. In Dallas, it's one of our strongest markets as well, in line with Atlanta and Orlando, and maybe not more so because of the amount of corporate relocations coming into that market. I'd say it's most active on that front.

Although those users are being pragmatic in their approach, it's entering a new market, taking their time, and looking at options, etc. But we still see good activity in our portfolio there from those and signed a large user this quarter in that market, as well as in Orlando, for more than 40,000 square feet. And then, Minneapolis, I would say the suburbs have picked up in activity. We have a number of tours and ongoing proposals for that part of the portfolio.

We're well leased in CBD. We're thankful for that. And so it's good, because that area of the market has been more challenged than the suburbs, frankly. But overall, I'd say we've definitely continued to see activity pick up.

We've got 75 proposals outstanding. And we've, frankly, been averaging about 20 deals a quarter during the pandemic, and we did 44 in the second quarter. So I think we continue to see good leasing velocity as we head into the fall. And of course, schools are going to be starting back here in the Sun Belt this month and in the North in September, and we think that continues to bode well for continued utilization, and hopefully, that translates into tenants making decisions, as well.

But we've been very proud of the 1.3 million square feet almost that we've done year-to-date on the leasing front, and we continue to push forward and have really low expirations for the remainder of the year to take advantage of that.

Anthony Paolone -- JPMorgan Chase & Co. -- Analyst

And then, I just have two others. One is CVS being one of just the only large expirations you have for a while here late next year, what's the mark-to-market on that like?

Brent Smith -- President and Chief Executive Officer

Well, Tony, they do occupy our 750 West John Carpenter Freeway asset in Las Colinas. It's a great building, about 0.5 mile from the Music Factory, a great amenitized area there. It's a little early in the process, but we have had dialogue with them as they continue to figure out their space needs. But I think we continue to feel very positive about where that's headed.

As you point out, we have very little expiring. They're our only tenant that is greater than 1% of AOR that expires between now and the end of '22. So I think we feel like that should pan out well. The team's here giving me the exact mark-to-market, but I'd say it's roughly in line with our portfolio, which is about 5 to 10% below.

So we'll have a nice roll-up, assuming they renew.

Anthony Paolone -- JPMorgan Chase & Co. -- Analyst

And then last question. Just you have a few parcels of land. And I'm just curious, with some of the corporate relocation activity that you talked about and new entrants in some of these markets, any shot of any of that getting activated any time soon, maybe just seem like the parcel adjacent to Medici, stuff like that?

Brent Smith -- President and Chief Executive Officer

We have had some dialogue with a number of larger user groups that would kick off a development in both Atlanta and Orlando. And so I think we continue to be optimistic on that front, but there is nothing imminent, I would say, in that regard. We continue to lean in right now on redevelopment, got a number of interesting projects, and feel like that's a great way to continue to have covered cash flow and enhance our assets, whether it be 25 Mall Road up in Boston or our campus in downtown Orlando; and, of course, the gallery in Atlanta. But we have a number of sites that will, on the development front, keep active on, and maybe in '22 have some positive things to share on that front.

Anthony Paolone -- JPMorgan Chase & Co. -- Analyst

Great. Thank you.

Brent Smith -- President and Chief Executive Officer

You said there's two more. Sorry, Tony. I thought you said there are two more questions.

Operator

Mr. Paolone if you do have another question you can go ahead and queue back up I will get you back into the queue. We'll go next to Dave Rodgers with Baird.

Dave Rodgers -- Baird -- Analyst

Yeah. Good morning everybody. Brent, maybe start with you, and we'll kind of work our way around. But from an economic perspective, it seems like you're pretty bullish that rents really haven't moved much, net effective rents, since the pandemic, or even through the pandemic.

And your numbers showed that a little this quarter. I guess what's your view on net effective rents and the impact on economics that COVID's had and sublease space has had? Do you have a view for the portfolio overall?

Brent Smith -- President and Chief Executive Officer

I think you've got to take it really market-by-market, almost submarket-by-submarket, when it comes to competitive sublease space. I think in regards to sublease overall, we found that it's kind of going the other direction. Companies are taking it off the market and/or it's been leased. So we're not competing heavily against that, but maybe in one or maybe two locations.

And we've continued to beat them out when we have had competitive deals and kept those tenants. And so, overall, I don't really see sublease space being too competitive. When it comes to the NER, as you referenced, I think we would characterize it's really face rates have held up very well, but that NERs have eroded depending on the market in the Sun Belt and, say Boston. I'd say it's pretty limited, but it's there, 0 to 5%.

In our other markets, though, I think it's probably closer to 5 to 10%, and maybe DC and New York and downtown Minneapolis, but the suburbs, many have continued to hold well. And that's really been because of additional TI, right, and just people feeling they need a COVID discount. And with the increase in commodity pricing for construction of space, that's where they're looking to take the bite out of the landlord's hide, if you will. So we have seen a little bit of erosion in NERs.

The good news is where our vacancy stands today, whether it's in Dallas, Atlanta or Orlando, those are the markets where we've seen the least amount of erosion. And we've been able to continue to manage that in the portfolio. You'll see this quarter, we add about $5 per square foot per year on the capital side, which is kind of in line with the trend we've had pre-pandemic, almost. So we feel pretty good about our ability to continue to hold NERs.

Dave Rodgers -- Baird -- Analyst

Maybe one for Bobby. Just can you talk about kind of where deferrals are today, how much you've collected, what the plan is there? And then, also, I was looking for a trend in your parking and ancillary income from a dollar basis perspective and kind of how that's contributing in the first half, second quarter, and the expectation and guidance.

Bobby Bowers -- Chief Financial Officer

On your deferrals, you might remember, we had a limited number of deferrals that we gave, and they were primarily to our retail customers who were a total of about 70 agreements that we entered into, and we had about $6 million of deferrals, with over a third of that collective last year and the remaining portion to be paid this year. Our cash same-store NOI numbers included in our original forecast, remember, it was 3 to 5%, was about 1% related to those workouts. We've collected most of that. We still have some that's outstanding.

And to be honest, I've got reserves against all the remaining balances that are there, so right around $1 million.

Dave Rodgers -- Baird -- Analyst

And then maybe on parking and ancillary income, what are you seeing in terms of the improvement sequentially from the first quarter? And is that helping out the guidance for the second half of the year, as well?

Bobby Bowers -- Chief Financial Officer

Yes. It is tied closely to our utilization. When we originally budgeted this year, we took a fairly conservative view on that. But Eddie, if you want to comment specifically on how much was parking?

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

We basically sort of troughed out at the ending part of 2020. We've started to increase here in '21. Of our parking income, which is a little bit more than 1% of our annual revenue, about 70% of that is contractual, meaning it's embedded in leases, and then 30% of that historically had been transient parking. And obviously, it was really the transient parking in the got hit.

We did see an increase over the first two quarters of, let's just call it, about $200,000 increase. And we would expect to come back to -- at least currently our thought is that, by the beginning of 2022, that we'll be back to more normalized level. So we would expect to see an increase in Q3 and in Q4.

Bobby Bowers -- Chief Financial Officer

But parking really is a relatively small number of our revenue state.

Dave Rodgers -- Baird -- Analyst

It's just a good indicator of people getting back to work. And then last, maybe, I don't know if Brent or Chris, whoever wants to take this one. Just on the acquisitions, you talked about trying to find a strategic Sun Belt acquisition. It sounds like you're looking at something specifically.

I guess can you talk about the acquisition market broadly? Are you finding discounts and opportunities out there? Or have interest rates, cap rates really stabilized and not really providing maybe substantial discounted opportunities?

Brent Smith -- President and Chief Executive Officer

This is Brent again. We're looking to [Inaudible] cycle. Obviously, we have the Raytheon proceeds coming toward the end of the year, but likely 200 to 400 million in the next 12 months or so. And we continue to focus on those markets where we do see the most leasing velocity, and that being the Sun Belt and Boston.

And we're always having off-market discussions. There's nothing imminent, but we do feel like something might come to fruition, and that would be a good opportunity to recycle into. The deals we're looking at, too, again, would be existing market, potentially a new submarket, but would follow our strategy of well-located, amenitized assets that are slightly older vintage, but have great bones and a means by which we can enhance value. So I think we'll continue to keep the market abreast of that, but nothing imminent at this point I could point to and say we're going to get that one in the door.

But from a pricing perspective, I think you're going to see in the strong markets where you're still having activity and growth, pricing is down modestly, 0, 5%. I think what we see as a benefit right now is there's just limited competition and maybe more is coming, and now might be the time to strike. And in northern markets, we're not really heavily looking at. I'd say, values have been impaired maybe a little bit more.

But to your point, interest rates have held. And frankly, Walt has held really well as our Raytheon disposition exemplifies, having 10 years of term on that deal. And others that we see in the market of similar profile have continued to price, frankly, almost through COVID levels. But I'd say Sun Belt down 0 to 5%, and some of these other markets, New York, Minneapolis, maybe 5 to 15%-plus if you go to the West Coast and San Francisco, etc.

But obviously, we don't operate there. Is that helpful?

Dave Rodgers -- Baird -- Analyst

Very helpful. Thanks everyone.

Brent Smith -- President and Chief Executive Officer

Yeah.

Operator

We'll take our next question from Joab Dempsey with Truist.

Joab Dempsey -- Truist Securities -- Analyst

Hi, good morning everyone and thanks for taking the questions. First of all, are you able to disclose the cap rate to the recently announced Woburn transaction?

Brent Smith -- President and Chief Executive Officer

We don't give specific cap rates. I can give you a range, and so we would say that's in the mid- to high five cap rate. OK.

Joab Dempsey -- Truist Securities -- Analyst

And then just secondly, to sort of piggyback on the earlier expiration question. As it relates to CVS, U.S. Bank, REI and Cargill, do you have an early sense of whether those tenants will stay? And with that 5 to 10% mark-to-market you mentioned earlier, Brent, would that apply to all four of the properties?

Brent Smith -- President and Chief Executive Officer

Well, the 5 to 10% we referenced is really the portfolio as a whole. In terms of our mark-to-market, there was a specific question around the CVS lease, which I said also kind of fell within that range and parameter. But we don't usually provide mark-to-markets for specific assets or tenants generally, but that's kind of the range for CVS. As we think about the overall other tenancy that you mentioned, it's a little early to say, to engage on some of those, given they're beyond '22.

And so we'll continue to, as we always do, have regular dialogue with our tenancy, helping them to meet their needs, whatever it may be as they return to work, if they're a larger corporation and haven't already. But at this point, it's a little early to speculate, but we still always feel good about kind of our relationship with those firms, and they're using their space, and I wouldn't see any reason to be concerned at this point. And we'll keep you apprised as we continue to have more dialogue with those that are further out, again, beyond '22.

Joab Dempsey -- Truist Securities -- Analyst

And then lastly, have you seen any changes in how tenants want to utilize their space? Have you seen much in the way of space reconfiguration requests coming in?

Brent Smith -- President and Chief Executive Officer

I'd say, in general, there's been a modest de-densification, and obviously a much greater focus on, I'd say, two factors. One is collaboration space and a more hospitality feel to the office environment, as well as outdoor space being very important to tenants that we have coming -- new tenants coming into the building. So I'd say that's been the focal point to date. Really, though, overall, I would not say I've seen a trend.

And really, the existing tenancy, some of our larger tenants are spending their own capital to, quote, "change" or "de-densify" their own space, create a little bit more collaboration space, etc. And that's an interesting phenomenon. But I don't think it's overall dramatically changing the environment in which they already exist. And again, that was on their own time.

And I think as I mentioned on our last call, a tenant described that effort as making their space more like a WeWork, which was an interesting comment to say, that they're creating a little bit more of, again, that hospitality feel and making it a place to be a culture kind of building environment. And I think all the more important to create those different activities at an office building that can help companies attract and retain that talent, have amenities around them, walkable, etc.

Joab Dempsey -- Truist Securities -- Analyst

Great. Thanks so much Brent. That's all I had. Thank you.

Operator

[Operator instructions] We'll go next to Daniel Ismail with Green Street.

Daniel Ismail -- Green Street Advisors -- Analyst

Great, thank you. Regarding utilization and the return to office, any trends in terms of the return to office by the size of tenants or the industry, those [Inaudible]?

Brent Smith -- President and Chief Executive Officer

I think I wouldn't say by industry, but certainly by size, Danny. I would say the small tenancy, they were back, frankly, the end of last year because of, I think, a lower concern for potential lawsuit from employees concerned for their health, but also the ability to space out more within their own environment. Smaller users under 5,000 square feet typically know each other well, and they were more comfortable coming back. We saw the medium-sized tenancy also return and also, call it, middle of this year really starting to picking up in June, as we've talked about.

And for the most part, I think we've seen a few larger tenants, but they have continued to be out of the office overall. And I'd characterize them as being kind of a 25,000 square feet, maybe 50,000 square feet or greater. And it also depends on just if they're a national firm or a smaller local firm because we have several local firms even within this building who take up 50,000 square feet and have a lot of their employees back. The Gallery is also a good example, where we have some buildings that are approaching over 75% utilization.

And of course, we always have those mission-critical facilities, no matter where they are, that have always been active during the pandemic. But I think, hopefully, that gives you a little bit of color. I think Labor Day will be a leg up. We are watching the Delta variant very closely.

But we have not -- at least the tenants were engaged in their return to the workplace have not backed off that September number, although there are a number of headlines. I think both of us have, and you've probably seen that some of the technology companies have been a little bit more shy of returning to the office, large technology companies.

Daniel Ismail -- Green Street Advisors -- Analyst

Great. That's helpful. And then, Brent, you mentioned a few times the growing demand in Sun Belt markets, and in the past have mentioned the need to have significant pre-leasing to start a development. I'm just curious if there's any change to that thinking, or perhaps a bit more willing to take a bit more risk, given the strong demand backdrop in the Sun Belt.

Brent Smith -- President and Chief Executive Officer

That's a good question, Danny, and I think our peers, or the developers that we talk to, are getting more bullish on the market. However, I think we're a little bit more cautiously optimistic, if you will. So we're looking for something that pre-leasing is 50% or so, maybe it's come down a little bit, just given the volume that we're seeing start to kick tires in these markets, but we're still going to have it be meaningfully pre-leased in that regard and would not put a shovel in the ground to accomplish that. So we'll keep an eye on other developers who seem to be implying they may go.

I think one has announced here in Atlanta, and maybe others in some of the Sun Belt markets, but we're going to be a little bit more pragmatic.

Daniel Ismail -- Green Street Advisors -- Analyst

And then last one for me. Regarding the potential acquisitions, as well as future dispositions, are portfolio deals on either side of the coin being considered? Or should we continue to look for Piedmont to sell assets as they get stabilized and look to deploy into another single asset-type deal?

Brent Smith -- President and Chief Executive Officer

I think it's a great question, Danny. I think we're always going to be engaged in the regular blocking and tackling, harvest value as we create it with well-leased assets and by opportunities to create value for our shareholders and utilize the platform to do so. So I think we're going to continue to look for everything that's out there. Whether it's a portfolio or a single asset, we're looking in those markets.

I think we described Boston and the Sun Belt as being most active right now. So don't ever count out a portfolio opportunity, and we continue to look at them as they arise. So I'd say everything is on the table at this point.

Daniel Ismail -- Green Street Advisors -- Analyst

Great. Thanks Brent.

Operator

And ladies and gentlemen, that does conclude the Q&A session for today. At this time, I'd like to turn the conference back over to Mr. Brent Smith for closing remarks.

Brent Smith -- President and Chief Executive Officer

Well, I appreciate everyone joining us today. It's been productive, and I appreciate we've got really what we think has been a great start to 2021. We think that's going to carry into the later half of this year with very little expirations, again, 3% of the ALR, and very manageable debt maturities. And the portfolio vacancy, as I said, sits in those more active markets of Atlanta, Dallas, Orlando and Boston.

And we haven't touched on it today, but really proud of our best-in-class ESG platform, and we've really paired that with some high-quality amenitized environments that I think positions us well for our chance to get some larger corporate users. But I encourage the investors to check out on our website that latest ESG report that's been posted, as well. Again, thank you, everyone, for your time, and we'll reconvene in October. Thank you.

Operator

[Operator signoff]

Duration: 43 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

Anthony Paolone -- JPMorgan Chase & Co. -- Analyst

Dave Rodgers -- Baird -- Analyst

Joab Dempsey -- Truist Securities -- Analyst

Daniel Ismail -- Green Street Advisors -- Analyst

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