Piedmont Office Realty Trust (PDM) Q3 2021 Earnings Call Transcript

Piedmont Office Realty Trust (PDM -1.15%)
Q3 2021 Earnings Call
Oct 28, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Piedmont Office Realty Trust third-quarter 2021 earnings call. [Operator instructions] It is now 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 third-quarter 2021 earnings conference call. Last night, we filed our 10-Q and an 8-K that includes our earnings release and our unaudited supplemental information for the third quarter that's available on our website at piedmontreit dot com, under the investor relations section. During this call, you'll hear from senior offices 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, in 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 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 on the company's financial and operational results. You should not place any undue reliance on any of these forward-looking statements as these statements speak as of the date they are made. At this time, our president and chief executive officer, Brent Smith, will provide some opening comments and discuss our third-quarter results and accomplishments.

Brent?

Brent Smith -- President, Chief Executive Officer, and Chief Investment Officer

Good morning, everyone, and thank you for joining us on today's call as we review our third-quarter financial and operating results. On the call with me this morning, along with Eddie Guilbert, our executive vice president, finance, and treasurer, are George Wells, our chief operating officer, and Bobby Bowers, our chief financial officer, as well as other members of the senior management team. Reflecting upon the third-quarter results, this was an outstanding quarter in which we made meaningful progress against several strategic objectives. Financial metrics were strong with our highest reported quarterly FFO per share since our IPO, as well as a double-digit increase in cash-basis same-store NOI, along with a sizable double-digit rent roll-up on both accrual and in cash basis.

Additionally, we were able to complete another significant debt refinancing at extremely attractive spreads. Bobby will touch more on that accomplishment during his comments. Perhaps, the accomplishment that we're most pleased with is the return of new tenant leasing activity to pre-pandemic levels. And importantly, our pipeline for the remainder of the year remained strong, giving us confidence that we'll meet most of our targeted annual leasing goals across our seven markets.

Equally significant was a sizable strategic acquisition that was completed subsequent to quarter-end, along with several meaningful ESG milestones that were achieved. I'll go into more detail on each of these topics today. But first, let me start by providing additional color on our third-quarter leasing activity. Leasing activity for the third quarter totaled 509,000 square feet, bringing total year-to-date leasing to just under 1.8 million square feet, significantly exceeding in three quarters what we realized for the whole year in 2020.

We project that our 2021 leasing will, in fact, exceed our average annual results for the four years prior to the COVID pandemic. More importantly, however, is that approximately 43% of our third-quarter leasing, or 221,000 square feet, was executed for new tenant leases, marking a return to pre-pandemic new leasing levels. This quarter's leasing activity was representative of the mark-to-market opportunity across our portfolio as well, generating rent roll-ups of 10.5% on a cash basis and 16.1% on an accrual basis, along with a weighted average lease term of 6.4 years and with limited levels of committed capital of approximately $5 per square foot per year of term. Leasing volume was robust and well-distributed across all our markets, with almost 50 leases executed during the quarter and only one lease accounting for more than 25,000 square feet.

The largest lease completed during the third quarter was an exciting and complex transaction with Microsoft at our 5 and 15 Wayside property in the Boston suburb of Burlington. At the surface, it's a 10-year renewal and expansion, totaling approximately 155,000 square feet. However, in conjunction with its pending acquisition of Nuance Communications, a tenant at our adjacent 1 Wayside property, Microsoft will soon lease 356,000 square feet at the Wayside campus, with the anticipation of leasing the remaining approximately 120,000 square feet over time, making this a major single-tenant campus for the company in the Boston market. Looking forward, I'm encouraged by the continuing momentum in all our prospective tenant pipeline, particularly in our Sunbelt markets of Atlanta, Dallas, and Orlando, where we are witnessing rental rate growth, increased leasing velocity, and confirmation of the population migration trends and major corporate relocations into these areas.

Moving to capital markets, as many of you are aware, a purchase and sale agreement was executed a few weeks ago for 999 Peachtree Street in Atlanta. We completed our due diligence for the purchase of this iconic, Class A, LEED-Platinum, 28-story, 77%-leased building located at the corner of Peachtree and 10th Streets in the heart of midtown Atlanta. I'm pleased to announce that we closed on this asset purchase this past Friday. The property offers spectacular views of the midtown skyline and nearby Piedmont Park, has superior accessibility to the interstate and the city's rail system, MARTA, along with a unique outdoor amenity set.

With close proximity to Georgia Tech and a large technology-skilled millennial workforce with more than 30,000 residents within a one-mile radius and significantly more walkable multi-family housing under construction nearby, this unmatched pin corner asset with structured parking and a great window line is an ideal strategic acquisition for Piedmont, as we establish a material foothold and expand into this high-growth Atlanta submarket. The acquisition of the 622,000-square-feet 999 Peachtree Street property at $360 per square foot allows Piedmont to enter this submarket at a basis of approximately 40% below replacement cost and achieve immediate scale. We plan to revitalize this asset, modernizing the lobby, energizing the outdoor space, creating tenant balcony options, and enhancing existing fitness and conference amenities. We will deliver a differentiated product which provides a premier tenant experience at 999 that we believe will attract both local and relocating tenants to the market.

The acquisition will be primarily funded by the 1031 proceeds from the previously announced sale of our 225 and 235 Presidential Way assets in Boston that are scheduled to close early in the first quarter of 2022, along with other anticipated non core asset sales. Inclusive of our redevelopment efforts, which will be started immediately, our all-in basis will be in a low $400 per square foot and will compete favorably against new products costing $650 per square foot or more, with gross rental rates asking over $60 per square foot for that new product. With the completion of the 999 acquisition and Presidential Way dispositions, our three Sunbelt markets of Atlanta, Dallas, and Orlando are anticipated to provide approximately 55% of our annualized lease revenues. Our goal over the next two to three years is to continue to drive that regional percentage to over 70% of ALR.

Finally, touching on ESG and property operations, in addition to Piedmont being one of only 69 corporations receiving the ENERGY STAR Partner of the Year Award in 2021, we are pleased to announce that our entire 17 million-square-foot portfolio had submitted for the WELL Health-Safety Rating from the International WELL Building Institute. The WELL Health-Safety Rating is a relatively new evidence-based third-party verified rating for all new and existing building facility types that focused on operational policies, maintenance protocols, tenant engagement, and emergency plans to prioritize the health and safety of all occupants, including staff, visitors, and stakeholders during the COVID-19 crisis and for longer-term health and safety concerns. Additionally, we continue to be a leader in our industry in BOMA 360 designations, with approximately 90% of our portfolio now achieving this recognition of excellence in buildings, operations, and management. We prioritize our building operational efficiencies.

And during the most recent third quarter, our three LEED-certified Dallas Galleria Office Towers that we acquired just last year were awarded the BOMA 360 designation along with three other buildings, 5 Wall Street in Boston, and Norman Pointe I and U.S. Bancorp Center, both in Minneapolis. And all three of these buildings were recognized with awards for being the outstanding building of the year, TOBY, award recipient in their respective competitive classes, continuing to demonstrate the quality of the Piedmont portfolio. Lastly, I'm extremely pleased to report that Piedmont has awarded scholarships to two minority students, one at Howard University in Washington D.C., and the other at Morehouse College in Atlanta, Georgia.

The scholarships were awarded pursuant to Piedmont's scholarship program, whereby Piedmont has partnered with these two historically Black colleges and universities to provide need-based, scholastic support to selected rising sophomores interested in pursuing a career in the field related to the real estate industry, which we hope will draw a much-needed diversity into our industry. The scholarship program also includes opportunities to join Piedmont in summer internship positions and mentoring opportunities. Initiatives like this, as well as other social programs, such as feeding the homeless, and sponsoring education and health programs for families and homeless children, are means to which Piedmont looks to give back to the communities in which we operate. These are more important corporate responsibilities to which our industry needs to be more proactively involved, and we will continue to pursue.

With that, I will turn you over to Bobby to walk you through the financial highlights of the quarter and guidance for the remainder of 2021. Bobby?

Bobby Bowers -- Chief Financial Officer

Thanks, Brent. While I 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 touched on, for the third quarter of 2021, we reported $0.50 per diluted share of core FFO, a $0.02 increase as compared to the third quarter of 2020. This increase is primarily due to rising rental rates, coupled with decreased operating expenses, particularly expenses related to lower-than-budgeted real estate taxes, as well as the expiration of operating expense abatements on certain leases.

These revenue improvements, however, were partially offset by year-to-date 0.9% reduction in overall lease percentage resulting from the industrywide reduced leasing activity brought on by the COVID pandemic. The good news regarding our lease percentage is that lease expirations for the next 12 months remain relatively low. That is particularly true with minimal expirations in two markets that have been slower to recover. That is the District of Washington D.C.

and in New York City. The improvement in new tenant leasing that Brent mentioned is encouraging to us all and leads us to be optimistic about growing our overall lease percentage over the next few years. This statistic, however, is complicated by our strategy of selling fully leased assets that have reached their full value potential during our ownership and then recycling the proceeds into lower-leased assets that provide us with more organic growth opportunities. We will update you on our guidance on occupancy as transactions are closed.

AFFO generated during the third quarter of this year was approximately $41 million, which is well above our current $26 million quarterly dividend level. Same-store NOI increased 11.6% and 5% on a cash and accrual basis, respectively, with the increase in both metrics primarily attributable to improved rental rates and decreased operating expenses noted previously. Turning to the balance sheet, we issued during the third quarter a long 10-year bond totaling $300 million in aggregate principal amount at 2.75%. The senior notes are due in 2032, and we use the proceeds from the bond to repay without penalty a $300 million bank term loan that was scheduled to mature next month.

Our average net debt to core EBITDA ratio as of the end of the third quarter of 2021 was 5.5 times. And our debt to gross asset ratio was approximately 34.4% after the acquisition of 999 in Peachtree. We currently have approximately $202 million of availability on our line of credit. As Brent mentioned, we plan to utilize the proceeds from the sale of our two Presidential Way assets in Boston that are expected to close in January to pay down the line once the reversed 1031 exchange proceeds are received.

With no other scheduled debt maturities for a couple of years, we currently plan to renew our $500 million revolver during 2022. Finally, I'd like to update you on our guidance for the rest of the year. Based on our better-than-expected year-to-date operating results in strong leasing activity, as well as the 999 Peachtree acquisition, along with almost 800,000 square feet of leases and abatement are yet to commence for vacant space, we've raised our 2021 financial guidance to a range of $1.95 to $1.98 per diluted share of core FFO. This guidance compares to our guidance last quarter that had been raised to a range of $1.90 to $1.96.

This latest 2021 guidance now includes approximately $1.07 contribution from the just-completed acquisition of 999 Peachtree Street, but no other acquisition or disposition activity before the end of the year is contemplated. With the addition of the 77%-leased 999 Peachtree building, we also estimate our overall occupancy will be around 86% at yearend. And we also believe same-store cash NOI will end the year 2021 in the upper end of our previously provided 5% to 7% guidance range. With that, I'll now ask our conference call operator to provide us with instructions of how you, as our listeners, can submit your questions.

We'll attempt to answer all of your questions now or make appropriate later public disclosure, if necessary. Operator?

Questions & Answers:

Operator

[Operator instructions] Your first question is coming from Anthony Paolone. Your line is live.

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

Thanks. Good morning. My first question is on 999 Peachtree. Brent, I think, you gave some brackets, and I think I caught that you said about $400 a foot is where you think you'll end up in your base.

So I guess that means an extra $25 million in spending. And so, I'm just wondering if you can kind of go further and give us a little bit more of a sense as to where you think the yield is going to land, and you know, timing to lease up.

Brent Smith -- President, Chief Executive Officer, and Chief Investment Officer

Got it. Good morning, Tony. I appreciate you taking the time with us today. Indeed, we are very excited about the 999 strategic transaction.

It's a great iconic midtown asset. We've known it well. In fact, I live about seven blocks from the building and really have been looking for a way into that submarket for some time now. And it's a unique opportunity to get the scale quickly and certainly a foothold, and we'll continue to expand.

As you know, you know, it's got everything we want to buy, accessibility, prominence, great bones, big window line, and the ability to -- for us to add value through a repositioning and lease-up. And so, as you noted, we're going in about $360 a foot. We'll land somewhere around that $400 a foot, call it $25 million of investment. And that's really to transform the asset.

It's got great mechanical systems. But admittedly, it needs to be modernized for today's workforce, and you kind of take it into the next -- and update it for the next generation of workforce. And so that's really where a lot of that capital is going to be going toward. We do have some what we think is near-term lease-up opportunity for some great, already built out space that we think can drive occupancy up into the mid-80s here more near term.

And then longer term, we do think as the building stabilizes, somewhere in the low-90s with additional lease-up and opportunity set. It's great, and the building's already -- existing rents are about 20% below market, so there's a great mark-to-market there. And as we've noted, we're going into the GAAP, call it six and a half. I think with that near-term lease-up, it gets quickly to a -- nearer to a seven.

And then, as we have noted in the materials on the website, which I encourage everyone to take a look at -- you know, also, you'll see in the back of the presentation renderings of what we intend to do. We've been working with Gensler now for about two months on that. They are a tenant in the building as well. So really excited to kind of bring this asset back to the prominence that it's well-known for in the market here in Atlanta.

So hopefully, that gives you some sense. But probably, that stabilization will curve a little bit further out. So again, let's call it maybe two years to kind of get to that seven and a half.

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

OK. That seven and a half though is, I'm sorry, GAAP or cash?

Brent Smith -- President, Chief Executive Officer, and Chief Investment Officer

That's all in GAAP. We typically provide again cap -- GAAP. But as you know, probably our cash number is historically have been about 100 to 150 basis points inside of that, near term due to the fact that the rents are so far below market. But you know, we anticipate that as those leases roll, and it is a more near-term roll within that building.

We'll be able to quickly drive the cash numbers closer to those GAAP numbers I gave you over that kind of that two-year horizon. Makes sense?

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

OK. Got it. Thank you.

Brent Smith -- President, Chief Executive Officer, and Chief Investment Officer

Yup.

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

Yup. And then, second question relates to non core asset sales. Sounds like beyond Boston, you still have some other things teed up. Can you give us some sense of order of magnitude there, and also, if we should expect acquisitions to kind of get paired with that as well?

Brent Smith -- President, Chief Executive Officer, and Chief Investment Officer

As you have known, we do, I think, a great job of pairing buys and sells. It's a unique differentiator, we think, to our business model, and we continue to successfully drive earnings growth in that manner. It's selling well-leased, long-term, stabilized assets for great pricing and buying other assets at higher cap rates, low per square foot, renovating and leasing them up, and driving value creation in that manner. So we do feel like we've got a great pipeline of potential acquisitions, but more importantly, as you know, on the DISCO side, we do have non core assets that we've labelled that I've talked about selling in the next six to 12 months.

And we're in active dialogue around that "non core portfolio" that we label in the supplemental, as well as just mature assets that we'll also be disposing of regular way like we've always done. We've got an exciting pipeline like I said, the pair with those dispositions. And we still believe we're able to kind of accretively recycle. I think that 999 acquisition is a perfect example of that, pairing it with the Boston disposition.

You know, we're going in day one on an accretive basis on GAAP earnings, and then we're able to drive that even meaningfully higher. And I think what you see us continue to do is to leverage that non core portfolio along with Boston, Cambridge, particularly, you've heard me talk about. The lease to Harvard is an opportunity to monetize a low cap rate asset and redeploy into the Sunbelt. And that's probably our next big rotation asset as long as the regular way in non core we've talked about.

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

OK. So, we'll look out for Cambridge. It seems like that's the one that's on deck here. And then, last question, can you just give us some updated thoughts on a couple of the larger spaces that come up in the next couple of years, like CVS and Ryan, and just anything you're doing there proactively or updated thoughts on what happens to that space?

Brent Smith -- President, Chief Executive Officer, and Chief Investment Officer

Absolutely. So I think as most people have known, we've been in dialogue with CVS now for some time. I think that continues to trend well. There will be a modest downsize but not material.

And overall, I feel very good about where that transaction's headed. Other ones that are in the pipe but much further out. You know, that's really the most near term within twelve months. But as you mentioned, we do have some in latter parts and middle parts of '23.

As we've noted, Ryan has been in the press about a potential development. However, I think it's going to be -- and as we've discussed with them, very very difficult for them to be able to complete that development anywhere near where their lease rolls. And so we'll anticipate having some pretty substantial dialogue with them on opportunities to keep them at the building at least longer term -- near term, and maybe longer term as they continue to evaluate that opportunity in Plano. When it comes to Cargill, which is really even further out than that, '24.

I'd say it's early, but indications from them are still very positive that this is their overflow and release valve for their headquarters location. And they continue to actively use the building despite being one of the lower-utilized markets. We still see a lot of card swipes into the building, and I'm a very active user of it. And they're very fond of the campus away from their existing campus.

Excelsior Crossings really provide the unmatched amenity set in the suburban market, with a 10,000-square-foot fitness center at the complex, huge, you know, multi-food-type cafe, and a 3,000-square-foot -- sorry, 3,000-person auditorium, so it's a -- sorry, 300-person auditorium. So it's a large, great amenity set. It's that building with light rail coming to it in about two to three years. So we feel -- still feel very good about Cargill's intent at that building.

And then, as you probably know, U.S. Bank is one of our largest tenants. They have a suburban location that will expire in '23. And we feel very good again about our long-term relationship with U.S.

Bank, both at that location, and then in 2024, their downtown location. Their headquarters building, which we own, will also come up for lease. I'd say we're being very proactive in those dialogues, and so we feel very good about, again, that long-term opportunity to keep them and there -- those assets.

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

Great. Thanks. Thanks for all that color.

Brent Smith -- President, Chief Executive Officer, and Chief Investment Officer

Yup.

Operator

Your next question is coming from David Rodgers. Your line is live.

David Rodgers -- Robert W. Baird -- Analyst

Yeah. Good morning, everybody. I wanted to talk about the lease pipeline into the fourth quarter. Brent, you mentioned that the activity was staying strong.

Can you provide additional color on that with regard to kind of small versus larger tenants, some of more of the urban versus suburban activity? I would be interested in any thoughts you have there.

Brent Smith -- President, Chief Executive Officer, and Chief Investment Officer

So I think it's really been consistent with what we've heard and kind of shared rather over prior quarters, which is large tenants continue to be active in the market, those being greater than 50,000 square feet. We're seeing them to make a little bit more decisions along that process. And that's really, you know, in our Sunbelt markets. We're seeing in Boston, like we do with Microsoft, a lot of that larger-tenant activity.

We're seeing -- what's good news is again, we've talked about the small tenants, 10,000 square feet and less. I'd say they're back to pre-pandemic levels now in most of our markets. And so what we've continued to talk about is being more robust, and then, I think the third quarter and going into the fourth quarter is indicative of that. It's that 25,000 -- call it 15,000 to 25,000-square-foot, single-floor user, middle market-type firm, and we continue to see that be more robust in the Sunbelt.

And what's more positive is now we've seen it start to pick up in suburban Minneapolis. But we do, and admittedly I think a lot of our peers, still have a little bit of lower utilization in our CBD assets, and then, also, I think, as a result, a little bit lower lease velocity. So we're fortunate to have a lot of roll in the other -- D.C. proper, downtown New York, and downtown Minneapolis, but I would say those are still the markets that are slowest to come back from that perspective.

I'm going to hand it over to George Wells here, who also can give you just a little bit of detail around some of the pipeline that we've seen grow over here in the last year and what's ahead of us. George?

George Wells -- Executive Vice President and Chief Operating Officer

Thank you. Thank you. I'll tell you. We're really optimistic about what we're seeing for the fourth quarter.

Here we are, 28 days into October. And as -- we're looking at transactions that we've already agreed to on the legal stage. So that's what gives us the comfort, the optimism that you've seen from us for the activities, you've seen from us in the second and third quarter continuing into the fourth. I think, also, behind that, when you look at the kind of proposals that we're seeing, it has been rising rapidly over the past couple of quarters.

And we started in the first quarter with around 60 proposals for just around 900,000 square feet, popped up in the second quarter with 75 transactions for 1.1 million square feet. And then, this past quarter, we're at 87 at 1.5 million square feet. And then, if you take a step back and look behind that in terms of what our tours -- what do they look like across our markets? I'll tell you what, it's been also increasing from 90s, I would say, in the first quarter to mid-90s in the second quarter. And they jumped up about 25% in the third quarter for 116 tours.

So we feel good. We feel that our portfolio certainly resonates with the market demand that's out this way, and we feel pretty confident about continuing to chip away at our vacancy.

David Rodgers -- Robert W. Baird -- Analyst

That's great detail, guys. I really appreciate it. I want to go back to -- I think it was one of Tony's questions about the asset sales. You said 70% of ALR from the Sunbelt.

And I don't know that you gave a specific time frame, but you know, New York, Chicago, and the Presidential Way buildings would get you there. So I guess I wanted to think about what that timing looks like. Did you include New York in that number? Is that yet another kind of 9%, 10% that we can expect beyond, you know, this initial wave that you're doing in the next year or so?

Brent Smith -- President, Chief Executive Officer, and Chief Investment Officer

Dave, you know, it's very astute of you. That is exactly part of that component. As we've talked about, you know, New York City continues to progress. We are still very much engaged in the 20-year renewal.

We did a great five-year renewal with no capital last quarter. And yeah, market continues to improve really day by day. We're excited that the entire New York City is back in their space, and utilization rates are up. And I'm starting to feel like New York is coming on par with some of our Sunbelt markets, as well as Boston in terms of just economic activity broadly.

So I think we're very encouraged by that. And as part of that overall rotation in potential into the Sunbelt, that doesn't include Cambridge, as well as potentially monetizing New York at the right time. If you think about what we've said, that's probably a potential monetization event in mid to latter part of '23. So I think we see the potential for that billion-dollar rotation over the next two to three years.

David Rodgers -- Robert W. Baird -- Analyst

Very helpful. And then, maybe specifically, I think you've talked about very much nearer term on assets like Houston and Chicago. Do you have any specific progress to report?

Brent Smith -- President, Chief Executive Officer, and Chief Investment Officer

No, not specific. You know, we will share at the right time. But I think the good news is we continue to get leasing made at both of those kind of non core assets. We still have some availability.

And we've got great term in single-credit users in Houston, which also positions them well. And frankly, with oil over $85 a barrel -- or around $85 a barrel, we feel pretty good about being able to dispose those Houston assets in this environment. Schlumberger and Transocean both continuing to have improving operations.

David Rodgers -- Robert W. Baird -- Analyst

All right. Thanks, Brent.

Brent Smith -- President, Chief Executive Officer, and Chief Investment Officer

And I still think that's six to 12, in that timeframe.

David Rodgers -- Robert W. Baird -- Analyst

That's helpful. Thank you.

Operator

Your next question is coming from Daniel Ismail. Your line is live.

Daniel Ismail -- Green Street Advisors -- Analyst

Great. Thank you. Brent, circling back to the 70% goal of Sunbelt exposure, you mentioned, you know, potential aggregates of concurrent markets. I'm curious if that goal includes the entrance to any new Sunbelt markets.

You know, the Peachtree acquisition, saw you guys enter a new submarket. So I'm just curious if there any new markets that's in the Sunbelt that you guys are currently considering.

Brent Smith -- President, Chief Executive Officer, and Chief Investment Officer

Morning, Danny. Appreciate you joining the call. The point as you make, yeah, we continue to really evaluate. At this point, more new submarkets like the 999 acquisition.

And now we have a strong midtown [ph], and we do continue to look for opportunities and have others that we think we could score to continue to gain scale in that submarket. And we see there's a good opportunity given its high growth. We still feel like right now, though, between Atlanta, Dallas, and some of these other existing markets, we've got plenty of product that fits the Piedmont style of having a good bones. You've heard me use that phrase, with great window lines, good ceiling heights, but needs some TLC, great accessibility, walkability.

And really, what we've continued to find as we talk to tenants is they don't care how old the building is, right? They care about, "Well, my employees love coming to work here." And so, we will continue to focus right now on those markets we were in, potential new submarkets. That's not to say, though -- we don't follow a number of other MSAs that we think are competitive to the -- some of what we are looking at today in terms of population, and migration, and corporate relocation. So we very much are keeping our pulses on, say, Charlotte, Nashville, Tampa. Certainly, potentially, even Denver and Austin are competitors to some of our other markets.

So not to [ph] say that we would go into any of those specifically, but also just to say that we continue to get educated on them from a number of different perspectives and angle.

Daniel Ismail -- Green Street Advisors -- Analyst

Great. And then, a question for Bobby. I noticed -- it looks like disclosure changed a bit with respect to the increased physical utilization of the buildings and perhaps some savings in operating expenses. I'm just curious, is that no longer the case of, you know -- physical utilization of your office building just picked up, so that -- there's no longer just kind of key operating expense savings that you saw earlier in the pandemic?

Bobby Bowers -- Chief Financial Officer

Daniel, I may ask you a question to clarify this, but you're talking about our disclosure though [ph] that changed.

Daniel Ismail -- Green Street Advisors -- Analyst

Correct, specifically on the same-store net operating income page in the supplemental. It just looked like a footnote that was removed discussing the benefit of lower operating expenses as a result of lower utilization. So I'm just curious if that is no longer the case going forward?

Bobby Bowers -- Chief Financial Officer

Well, no, we're still experiencing that. We did make some changes in our disclosures this past quarter. You might have noticed that we've incorporated the press release into the supplement. As over the last year or two, the disclosures almost began matching the press release.

So we just went ahead and pulled some of that information out. We also decreased some of the disclosure when we had so many very large leases and stuff like that, but Brent's already covered the leases that have come up. But I can't think of anything that would cause us -- right now, our operating expenses are a little bit lower as a result of the utilization. That primarily is reflected in our janitorial costs and is reflected to some extent in the real estate tax area.

Daniel Ismail -- Green Street Advisors -- Analyst

Got it. And then, maybe a bigger picture question for Brent. So you know, we've mentioned ESG on this call and in prior calls. I'm curious how that has now, you know, played into your underwriting on acquisitions.

Is -- are environmental factors, you know, carbon emissions or energy utilization, now explicitly factored into your underwriting when looking at new properties or new submarkets you enter into?

Brent Smith -- President, Chief Executive Officer, and Chief Investment Officer

I would say absolutely. It's tough to say it's quantifiable. But obviously, we try to identify if there are energy-efficient savings that we can implement where there's a reasonable payback period going into an acquisition. We -- obviously, though, I think what we see it right now driving, you know, from an underwriting perspective, making sure you have the capital to create the right environment for tenants.

And ESG is part of that right environment. I think, you know, Microsoft is a perfect example. We were in discussions with two other tenants from the space that they took in Boston. And we went to them when the Nuance transaction got announced.

We knew that they were in the marketplace and we recorded them, if you will. And what was a key differentiator was our director of sustainability and the team that we can provide to help them think about their space and improving the quality of just their own individual space, even above and beyond the actual building. And in terms of if we look at new assets, we are still trying to focus on those that are more of, I'd say, a more modern generation, double window pane, so we're not having to do major facade components to it. And also, to really think about outdoor space and what you can create.

We continue to hear more and more tenants that desire that collaboration space to also include components outside of the building. So it's almost as important today how your lobby and your first floor interacts as much as the area around the base of your building as well. In terms of -- you know, we've set corporate goals of 20% reduction in both water and energy consumption by '26 and '28, respectively. And we also take that into consideration as, OK, can this building help us get to those levels of achievement.

We're very pleased to have about 40% of our portfolio LEED certified, excited that 999 is Platinum LEED certified. And so, we continue to lean into that recognition as well. It does still have kind of impact with tenants who are looking for a more energy-focused and environmentally friendly operator. So I think that's a long-winded way of saying we take it into account.

Each building is different. We try to look at for vintages that we're able to -- that one day, you know, we know -- we're just throwing around this concept of net zero. I think it's a little early from our perspective, but we are very mindful of the energy and the potential expense that might come from making sure we have a top of -- a best-in-class, energy-efficient building. I would also encourage you, for those that are more interested in ESG, we do have a specific ESG report on our website.

The annual report, most recent, was put out in October earlier this month. And so I think I encourage those who want to learn more about our programs on all three of those front to visit our website, under the investor relations section or the sustainability section.

Daniel Ismail -- Green Street Advisors -- Analyst

Got it. Thanks, everyone.

Operator

[Operator instructions] Your next question is coming from Michael Lewis. Your line is live.

Michael Lewis -- Truist Securities -- Analyst

Thank you. My question is kind of along the lines of rebuilding occupancy. And you gave some good color on the leasing pipeline. Bobby talked about, you know, selling high-occupancy buildings and buying lower ones with some lease-up opportunity, and that will move the numbers around.

But I kind of, you know, grasped on to the 770,000 square feet that's signed, but not yet in occupancy or paying cash rent yet. You know, you compare that to 250,000 square feet expiring in 4Q, about a million square feet next year. You know, assuming, of course, you know, those expirations will renew, you'll be doing some leasing. You know, maybe talk about what you think the opportunity is to, you know, grow occupancy and cash flow over the next year in this environment where, you know, the investors are, you know, worried about office occupancy.

You know, do you have an opportunity here you think that kind of significantly grow from here?

Brent Smith -- President, Chief Executive Officer, and Chief Investment Officer

I appreciate the question, Michael, and thank you again for joining. I think we view the -- you know, our strategy of buying, you know, vacancy more near term has been, you know, positioning the company to capture a lot of the movement into the Sunbelt, as we've talked about. Most of our vacancy and roll is in, really, Dallas, Atlanta, and Orlando. And that is what continues to give us very good optimism about the projections and the opportunity for lease-up across portfolio and, as you point out, really, absorption.

So we do have, you know, limited amount of roll this year. And then next year, you know, pretty modest amount. And the fact that we've continued to be able to, even during the pandemic, track to about a 70% retention rate also gives us some pretty good comfort on our ability to not have too much walk out the door. And so, given that kind of backdrop, I think that's what really drives the occupancy growth.

If you want a specific timing, it's -- I'd have to say let's freeze the portfolio and say it's static today because you just never know what comes in or out. But we already know Boston is technically the mover [ph] assets are going out. And so, we stand at roughly, call it 86. I think there is an opportunity to drive that, call it 100 to 200 basis points by the end of next year.

But I think there is also material upside potential to that, given what we see from some potential big tenant leasing activity in both Dallas and Atlanta. I would also point out that, you know, our redevelopment is more short term in nature than a more development-focused model. So we do have some occupancy on the books, if you will, and the portfolio, where some of our peers who are doing development don't show that vacant development space yet technically in their numbers. But overall, I think with construction costs increasing and the potential for pushing out construction time periods, given supply chain issues, material availability, etc., that's why we still feel very excited about the redevelopment opportunity because it's shorter time frame.

If there are cost overruns, it's going to be a lot less impactful on your pro forma. And frankly, we're going to be able to get tenants in the space sooner. And what we're finding is, as we continue to talk to companies looking into midtown Atlanta, as we've already taken over the asset and had that dialogue, is a lot of these relo's are looking immediacy. They want to be in this space very near term.

And the reality is, there's not actually that much space of, you know, either completed or soon to be completed in midtown. And given the deal flow that's overall in the market, we feel very excited about to drive occupancy, specifically at that asset. In Galleria Atlanta, I'd say as well. We're seeing a meaningful uptick in the activity.

Go Braves in the World Series, I would add. But I think it's really that dynamic battery environment, and being adjacent to it, and continuing to create that mixed-use component at the Galleria has also given us a great comfort around some absorption. And then finally, I'd have to mention our downtown Orlando asset. We continue to get great momentum.

The Orlando Economic Development Corporation, which is in charge of bringing new corporations into the market, signed a lease at our building and will soon take occupancy. And it will bring just about every company looking at that market into our building, and we're wrapping up a very transformative redevelopment there. It was about, call it 200,000 square feet between that and our 222 building to gain occupancy. So between all those and the leasing velocity you heard George discuss, we are very optimistic about that time frame and those levels to achieve occupancy growth.

Michael Lewis -- Truist Securities -- Analyst

That sounds good. Just one more for me. You could correct me if I'm wrong, but it looks to me like Piedmont hasn't grown its dividends since 2014. But you know, today, in the coverage, looks like you're positioned now to potentially grow the dividend if you chose.

And you know, where -- I realize, you know, these are sensitive conversations, these are board decisions, about setting the dividend, but maybe from a strategy perspective, where does growing the dividend sit as a goal or a priority, or signaling that Piedmont is a different company than it once was? Or do you have a strategy of, you know, you'd rather keep the capital and pay the minimum? I don't know when that would, you know, trigger necessary increases. But any comments you could give kind of around that?

Brent Smith -- President, Chief Executive Officer, and Chief Investment Officer

I think your spot on, Michael, and that, you know, we've been -- recognized it. The last time we raised the dividend was in 2014. We've got, you know, ample AFFO these days in $1.10 to $1.20 range. So we've got plenty of room to meaningfully move the dividend, I would say.

I think we've been conservative in that regard on two points. And we've continued to tell The Street that we were going to evaluate in '22. But with the significant redevelopment, particularly at 60 Broad with the New York state and a significant capital outlay there, as well as in the onset of the pandemic, we felt that it was prudent to reevaluate, as I mentioned, in '22. So I would expect the company to have a more -- a specific comment toward the middle of the year, But certainly, we recognize there's an opportunity to meaningfully grow the dividend, and from a philosophical question, the company has no issue, nor the board in that regard.

I think we've just been trying to conserve cash and make sure we feel comfortable with where the market stabilized post-COVID, and we're starting to feel that clarity come into the picture. We're wrapping up the New York state work as we -- next year as well, probably around that middle-of-the-year timeframe. So the good news is that project is under-budget. Thankfully, we ordered a lot of that material before -- at the early onset of the pandemic before the cost overruns, and supply chain issues have come into effect.

So we feel fortunate in that regard, and we'll reevaluate it the middle next year.

Michael Lewis -- Truist Securities -- Analyst

Makes sense. Thank you.

Operator

There are no further questions from the line at this time. I would now like to turn the floor back to Brent Smith for closing remarks.

Brent Smith -- President, Chief Executive Officer, and Chief Investment Officer

Thank you. I hope we've conveyed today that, you know, we feel like that the opportunity set before Piedmont is really unique. We've got a differentiated opportunity and strategy, and we're extremely excited about our progress on a number of fronts. I would encourage everyone, if they want to hear more or learn more about some of the things we've touched on today, to visit our website under the investor relations section.

Pull down our 999 acquisition piece. We also have renderings of the new space that we've discussed around the outside of the building and what we're doing to really differentiate that product. And I'd also encourage those who are interested in ESG to visit that specific report on our website as well. Again, I thank everyone for joining us today.

We look forward to continuing the discussion at NAREIT in a few weeks. That will be virtual, but we look forward. If you've got an interest in meeting with management, please reach out to Eddie or Justin, and we'll happy to get you on the calendar while we're at that virtual conference. And with that, let me say, go Braves, and look forward to further dialogue.

Thank you.

Operator

[Operator signoff]

Duration: 48 minutes

Call participants:

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

Brent Smith -- President, Chief Executive Officer, and Chief Investment Officer

Bobby Bowers -- Chief Financial Officer

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

David Rodgers -- Robert W. Baird -- Analyst

George Wells -- Executive Vice President and Chief Operating Officer

Daniel Ismail -- Green Street Advisors -- Analyst

Michael Lewis -- Truist Securities -- Analyst

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