Piedmont Office Realty Trust (PDM) Q4 2021 Earnings Call Transcript

Piedmont Office Realty Trust (PDM 2.20%)
Q4 2021 Earnings Call
Feb 08, 2022, 10:00 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 fourth 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. We appreciate you joining us today for Piedmont's fourth quarter 2021 earnings conference call. Last night, we filed an 8-K that includes our earnings release and our unaudited supplemental information for the fourth quarter that's available on our website at piedmontreit.com under the investor relations section.

During this call, you'll hear from senior officers 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, 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 our press release as well as in our SEC filings. We encourage everyone to review the more detailed discussions related to risks associated with forward-looking statements in our SEC filings. Examples of forward-looking statements include those related to Piedmont's future revenues and operating income, dividends and financial guidance, future leasing and investment activity and the impacts of this activity on the company's financial and operational results. You should not place any undue reliance on any of these forward-looking statements and these statements speak as of the date they are made.

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

Brent Smith -- President and Chief Executive Officer

Good morning, everyone, and thank you again for joining us on today's call as we review our financial and operating results for the fourth quarter of 2021 and for the year. On the line with me is Eddie Guilbert, our executive vice president of finance and treasurer; George Wells, our chief operating officer; and Bobby Bowers, our chief financial officer; as well as other members of the senior management team. Before we begin today's call, I want to take a moment and thank my talented, hard-working team members who deliver first-class service to Piedmont's customers 24/7, 365 days a year. Their tireless dedication continues to garner industry honors for operational excellence and sustainability, including our recognition as the 2021 ENERGY STAR partner of the year and achieving LEED status now on roughly half of the portfolio.

Today, I'm going to cover Piedmont's operational success and leasing momentum along with an update on capital allocation activities across our markets. Focusing on the fourth quarter of 2021, our FFO per share was $0.51, in line with market consensus. Portfolio operating metrics were solid with same-store NOI on a cash basis increasing 5.8%. We leased approximately 400,000 square feet, generated a 3% increase in second-generation cash rents and executed an average lease term of six and a half years, illustrating the longer-term view taken by most of our customers.

Most notably, about half of the fourth quarter's leasing was related to new tenants, making this the second consecutive quarter Piedmont has achieved pre-pandemic levels of new leasing. Overall, leasing activity remained robust and well dispersed across the portfolio with over 40 leases and amendments executed during the fourth quarter. And while the omicron variant had a modestly negative impact on building utilization during December and January, the leasing pipeline has not dissipated and we expect the momentum from the second half of 2021 to continue. Today, our leasing pipeline stands at over 500,000 square feet of negotiations.

And we're trading LOIs on an additional 1 million square feet, which positions Piedmont for space absorption in 2022 and with only about 1 million square feet of existing leases expiring or about 6% of the portfolio. Boston, Dallas and Atlanta remain our most active leasing markets, albeit for different reasons. The Boston market continues to exhibit strong fundamentals led by business migration to the suburbs and reduced competitive Class A office stock as the insatiable demand from life science users continues to drive office to lab conversions. For example, during the past year in our Burlington submarket, three competitive Class A buildings comprising over 400,000 square feet have been repurposed to labs, helping to push net effective rents for office space to pre-pandemic levels.

And in Dallas and Atlanta, our two largest markets, we continue to see an increasing number of corporate relocations, resulting in meaningful job growth. As an example, during the fourth quarter, we signed a 55,000 square foot lease at our Connection Drive property in Dallas to serve as the new corporate headquarters of an undisclosed Fortune 500 company. And in that same market during the second quarter, we signed a 44,000 square foot lease to serve as the corporate headquarters for a large national beverage distributor. In both these markets, rents at our properties are now above pre-pandemic levels.

However, net effective rents are approximately 2% to 5% lower. I would note a customer flight to quality is well underway, which is driving wider rent disparities between place-making versus commodity office product. For example, JLL Research noted that 84% of Atlanta leasing activity in the fourth quarter was in Class A or trophy product. Orlando also continues to perform well with leasing and tour activity across all five of our downtown properties at pre-pandemic levels.

The downtown submarket continues to experience population inflows particularly for the millennial and Gen Z cohorts driven by a highly walkable environment with expanding retail, food and beverage options, along with entertainment amenities surrounding the University of Central Florida's Creative Village campus, Amway Center Arena and Camping World Stadium, along with a uniquely urban Lake Eola. In Orlando, net effective rents are still trailing pre-pandemic levels by about 5% as a result of increased concessions. Finally, Minneapolis, the districts in Washington, D.C. and New York City, all experiencing increasing tour activity.

However, leasing velocity and tenant demand still lag our Sunbelt markets. I would add, we are fortunate to have limited vacancy and near-term lease expirations at our 60 Broad Street property in Lower Manhattan and virtually no expirations at our Washington, D.C. properties for more than two years. Leasing across all our core markets contributed to the fourth quarter's totals.

And our customer CEO and HR dialogue continues to show our portfolio is positioned to gain market share. Users of office space are undertaking a flight to quality that focuses on new or newly renovated office buildings with unique environments and a vast set of amenities, owned and operated by responsive, sustainability-minded service-oriented landlords. And because of these demand drivers, Piedmont's portfolio is well positioned, supported by a concentration of newly renovated, well amenitized buildings located near housing communities and highly regarded education systems with easy accessibility to major highway thoroughfares and airports. 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 building's indoor air and light, HVAC, fresh air intake, elevator capacity and outdoor collaboration space are all critical. In addition to high-quality building in a vibrant environment, customers are demanding a higher-quality landlord as well. And by that, we mean an attentive operator that focuses on sustainability 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. Taking a look back at the operational highlights for the 2021 fiscal year. Piedmont leased almost 2.3 million square feet, which was in line with our average pre-COVID annual leasing levels. In addition, the increase in second-generation cash rents was seven and a half percent, which helped increase same-store cash NOI for the year by almost 7%.

And finally, our tenant retention ratio was in line with prior years at approximately 70%. Recovery in leasing activity bolsters our optimism for the rebound of the office sector, and particularly for landlords such as ourselves who offer high-quality, modernized sustainability-focused amenity-rich environments. Looking ahead, approximately 750,000 square feet of tenant leasing has yet to commence as of this year-end or is in some form of abatement. This backlog creates organic growth opportunities going into 2022 associated with approximately $26 million in future annualized cash rents.

In addition, approximately 60% of the portfolio's vacancy and 85% of 2022's lease expirations resided in our Sunbelt properties, where we are experiencing the greatest level of leasing velocity. A schedule of the larger upcoming lease commencements and abatements is included in our supplemental financial information, which was filed last night. Pivoting now to capital allocation activities. Despite the disruption from the pandemic and more recently, the omicron variant, the office investment sales market has continued to unthaw.

We are currently in discussions on a pipeline of over $1 billion of high-quality assets primarily for properties in our Sunbelt markets. Furthermore, we are encouraged to hear of several targeted buildings that will be coming to market in the first half of 2022. Our principal and broker dialogue suggests insurance companies, pension funds and other private market participants are planning to reduce their office sector exposure in the near term in currently well-leased Sunbelt office with more than seven years of weighted average lease term is among the most liquid type of property in the asset class. The increase in transactional activity is encouraging, given Piedmont's strategy to recycle capital strategically as an additional driver for our earnings growth.

And finally, I would note that cap rates remain steady for high-quality assets with limited lease rollover and particularly those that are highly amenitized and that can compete with new construction. While the investment sales market has improved, construction starts have slowed dramatically due to the uncertainty created by the pandemic, a positive for the continued office market recovery. With supply chain constraints, the construction of new product will now take two and a half to three years to be delivered. In addition, new construction costs have escalated by 15% to 20% versus pre-pandemic pricing driven by an increase in both raw materials and labor.

In this capital environment, Piedmont continues to focus on our redevelopment opportunities where costs and time lines can be more easily managed. In 2021, we completed over $50 million of incremental investment in our properties, upgrading assets to remain best-in-class within their respective submarkets. That said, we continue to have dialogue with a number of clients regarding pre-leasing for ground-up development. Focusing on Piedmont's investment activities.

During the quarter, we expanded our Atlanta market footprint with the acquisition of 999 Peachtree Street. And subsequent to quarter end, I'm pleased that we closed on the disposition of a Raytheon asset as well as accelerated our plan to exit from the Chicago market. As you all know, the 999 acquisition marks our entry into Midtown Atlanta submarket. The iconic Class A LEED-Platinum 28-story building, a 622,000 square feet with 77% leased at acquisition.

We purchased it for $360 a square foot, which we estimate is over 40% below replacement cost. We're working with Gensler, a tenant at the building to complete the redesign of 999s arrival experience in public spaces, including a modernized and expanded lobby, energized outdoor space and other enhanced amenities, which will complete over the next 12 to 18 months, and we'll revitalize this asset in a fraction of the time and cost of new construction. With a 10-foot glass window line across 70% of the facade this asset will effectively compete against new construction at a fraction of the cost with an expected all-in basis in the low $400 per square foot versus new product costing in excess of $650 per square foot, creating substantial pricing leverage for our building when compared to that new development. The $224 million acquisition of 999 is being funded through multiple dispositions.

Immediately after quarter end, the disposition of 225 and 235 presidential Way in Boston closed in a reverse 1031 exchange for $129 million or a mid-5s cap rate. Also subsequent to quarter end, we negotiated an agreement to sell and have closed on Two Pierce Place, our last remaining asset in the Chicago area, and we'd anticipate more non-core asset proceeds in the first half of 2022. The acquisition of 999 Peachtree Street during the fourth quarter as well as the completion of two non-core dispositions just after the quarter end, now makes Atlanta our largest market based on annualized lease revenue. Adjusting our lease percentage for the disposition transactions our pro forma lease percentage as of December 31 would have been 87%.

Additionally, approximately 63% of our annualized lease revenue is now generated from our Sunbelt properties and our goal is to have 70% to 75% of our ARR generated by our Sunbelt markets before the end of 2023. We believe a goal that's attainable given the investment in sales market activity we see today. Finally, I want to thank those investors who attended the recent property tour in December at our Midtown Atlanta and Galleria properties. Myself and the team were extremely grateful to be able to share some of our most recent redevelopment projects.

With that, I'll turn it over to Bobby to walk you through the financial highlights of the quarter and guidance for 2022. Bobby?

Bobby Bowers -- Chief Financial Officer

Thanks, Brent. While I'll discuss some of our financial highlights for the quarter, I encourage you to please review the entire earnings release and supplemental financial information, which were filed last night for more complete details. Looking back on 2021, core FFO for the year was $1.97 per diluted share, a 4% increase over 2020 and in excess of the upper end of our original guidance range for the year. This growth in core FFO overcame an approximately 1% reduction in our overall lease percentage on a year-over-year basis.

The decrease in occupancy was driven by several factors: Reduced leasing activity during 2020 in the first half of 2021 as a result of the pandemic, a number of sizable lease expirations at recently acquired properties in Atlanta and Dallas that were underwritten as part of their respective acquisitions and the purchase of the 77% leased 999 Peachtree Street property. After incorporating the just completed disposition activity in January of 2022, our pro forma lease percentage as of December 31 would have been 87%. We reported $0.51 per diluted share of core FFO for the quarter. That's an 11% increase over the fourth quarter of 2020.

This increase is primarily due to accretive recycling activity and rising rental rates. Our core FFO achievement during the fourth quarter also reflects the repurchase of approximately 1 million shares of our common stock at an average price of $17.76 per share during the quarter, leaving approximately $150 million in board authorized capacity under our share repurchase program. Now, core FFO, as you know, excludes gains, losses, impairments on real estate as well as excluding depreciation and amortization. And I do want to discuss this real estate activity during the fourth quarter of 2021.

While we had originally intended to lease up Two Pierce Place before disposition, we received an unsolicited offer to purchase the asset during the fourth quarter. Given the fact that we have no other Chicago holdings, we made the decision to accept the offer if the purchase could be negotiated and closed quickly thereafter. As is often the case, gap typically just dictates early recognition of potential losses and the decision to shorten the hold period for this asset did result in the recognition of a $41 million impairment charge that is included in our fourth quarter results of operations. On the flip side, the sale of 225, 235 presidential Way will result in the recognition of an estimated $50 million gain during the first quarter of 2022 when the sell closed.

AFFO generated during the fourth quarter was approximately $39 million, which is well above our current $26 million quarterly dividend level. Our board has indicated that given our cash NOI growth over the last few years, the fact that we're approaching the conclusion of the large construction restacking project for the State of New York at 60 Broad, and the time since our last dividend increase, they will be reviewing our dividend payout amount during 2022. Turning to the balance sheet. I expect more attention will be focused now on corporate financial positions given the rising interest rate environment, including the amount of floating rate debt, upcoming maturities and overall leverage.

Our annual debt -- net debt to core EBITDA ratio as of the end of the fourth quarter of 2021 was 5.7 times and we reported $210 million of unused capacity on our line of credit. Taking into consideration the completed disposition activity occurring right after year-end, with the net sales proceeds received in January, our current available capacity on our $500 million line of credit is approximately $320 million, with an approximate $120 million more expected later this quarter from the payoff of a note receivable. Adjusting for the application of proceeds from the two closed January sales, our pro forma debt to gross asset ratio at year-end would have been approximately 35%. We have no secured debt currently on our books and we have no scheduled debt maturities in 2022 other than our revolver, which we currently intend to renew long term later this year rather than exercise the line's short-term extension options.

Finally, we're introducing 2022 annual financial guidance for core FFO in the range of $1.97 to $2.07 per diluted share. This guidance assumes a gradual increase in physical utilization of our buildings by our tenants over the course of the year, to a level near pre-COVID utilization by the end of the calendar year. It also assumes a neutral amount of asset recycling during the year with about $350 million to $450 million each of acquisitions and additional dispositions. This net neutral activity excludes the recently completed sales of the presidential Way assets and Two Pierce Place property that were used to fund the 999 Peachtree Street acquisition.

We will provide revised guidance as each significant acquisition or disposition is completed this year. The guidance assumes general and administrative expenses in the range of $29 million to $31 million for the year. Our same-store cash NOI growth is expected to be flat for the year with a number of abatements occurring during 2022 due to the lease renewals and newly commencing leases such as 160,000 square foot renewal at 1155 Perimeter Center West in Atlanta, and a 56,000 square foot lease at 400 Virginia in Washington, D.C. As well as downtimes between leases associated with new tenant build-outs, such as a 67,000 square-foot lease at 5 and 15 Wayside in Boston and a 44,000 square foot lease at One Lincoln in Dallas.

Accrual-based store NOI is expected to grow from 1% to 3% during the year. I will remind you that these estimates will ultimately be dependent upon the transactional activity achieved during the year since such properties will be excluded at year-end, from the same-store two-year comparisons. Likewise, our lease percentage is expected to grow to approximately 88%. But again, this estimate is subject to the lease percentages of the properties involved was $350 million to $450 million of potential recycling transactions completed during the year.

Our forecast also assumes there will be three to four interest rate hikes during 2022 that will impact interest expense negatively versus recent prior years. And finally, we are assuming a dividend adjustment around midyear, and it is not expected to impact our overall financial results. With that, I'll now ask our conference call 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] Your first question for today is coming from Anthony Paolone. Please announce your affiliation, then pose your question.

Anthony Paolone -- J.P. Morgan -- Analyst

Thanks. J.P. Morgan. Bobby, I think I may have just missed this because jotting some things down.

The loan investments, did you say those were getting repaid or what were the details on those?

Bobby Bowers -- Chief Financial Officer

Hey, Tony. I hope you're doing OK. Yeah, the note receivable, we're expecting to be paid off based on discussions with them. You might remember that originated back last year with the sale of some properties in New Jersey, but we do expect it to be paid off in the first quarter.

Anthony Paolone -- J.P. Morgan -- Analyst

OK. Got it. And then with regards to the capital recycling this year, you mentioned the neutral acquisitions and dispositions. It sounded like that was from like a dollar-volume point of view.

Can you talk to spreads and what you think happens on that front?

Brent Smith -- President and Chief Executive Officer

Hi, Tony. It's Brent. Thanks for joining us this morning. In regards to spreads, I think it obviously depends on the opportunity that we're looking at.

And while there does seem to be either some good off-market dialogues that we're currently having or as I alluded to in my prepared remarks, an opportunity for some brokered assets that we've been looking at for some time in our markets primarily again Boston, Atlanta, Orlando and Dallas. And so we continue to remain very enthusiastic about continuing to recycle. Historically, as you've mentioned or kind of alluded to, we've been able to do that accretively probably to the tune of 150 basis points to 200 basis points some of it immediate, some of it through value creation over, call it, a few years. An example of that being 999, where we're going to do some pretty heavy lifting at the base of the building but drivers meaningfully.

So it's tough to give you a specific answer in terms of spreads because we don't know what we'll buy. But I can say that what we kind of have in the hopper to sell is either being noncore, some of the more mature assets. And of course, you've heard me allude to Cambridge being a great opportunity or a piggy bank. I think we can continue to maintain accretion to what degree it's hard to specifically say, but I think that trend is going to maintain itself given the quality of those assets that we have and/or the long-term leased nature of those assets that I mentioned that are in the disposition hopper.

Anthony Paolone -- J.P. Morgan -- Analyst

OK. Got it. And then you had mentioned kind of where the sweet spot is in terms of looking for high-quality assets. I think you mentioned like a seven-year lease term, that sort of thing.

Like how do you think about where your sweet spot is in terms of competing for these assets and just outcompeting the competition. It seems like everybody is looking for fairly comparable stuff.

Brent Smith -- President and Chief Executive Officer

I think 999 speaks to volumes of kind of the opportunity set. Our recent acquisitions, both the Galleria assets, right at the pandemic onset are good examples of historically what we've been able to find and create value with great bones, older assets, but a need a little TLC on the front house, particularly, with the back of house has been well maintained, so we're not focused too much on mechanicals, etc. So we're obviously continuing to look for that. We recognize that some of our peers are purchasing just newly developed assets with long-term vault that is a, frankly, very eye-popping pricing in terms of per pound valuation.

We understand the, I guess, the perspective that those individuals or groups have, but we've utilized our recycling and redevelopment DNA to drive earnings growth more than the risk of ground-up development. That's not to say we wouldn't consider -- sorry, acquiring buildings that are recently ground up development. Not to say that we wouldn't undertake that to enter into a new market or specifically gain stronghold in a submarket, but I think we're more leaning toward finding those diamonds in the rough, buying them and call it, a six cap or six and a half cap depending on the hair and driving them to seven and a half plus. And I think all of those that I mentioned in the beginning of this answer, kind of qualify as that type.

But we're not -- I want to stress that we're not compromising on quality. When you talk about our sweet spot, there are a lot of companies who are willing to come into a market but can't afford to pay $45, $50 net rents for new construction, but they want an amenitized high-quality, sustainability-focused landlord and that's the sweet spot that we provide at a more, I guess, affordable rate for that user group that isn't a tech big five frankly. 

Anthony Paolone -- J.P. Morgan -- Analyst

Got it. OK, appreciate all the color. Thank you.

Brent Smith -- President and Chief Executive Officer

Operator?

Operator

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

Dave Rodgers -- Baird -- Analyst

Hey. Good morning, everybody. Dave Rodgers at Baird. I wanted to follow up on the asset sale discussion.

Obviously, you don't want to identify what you're looking at acquiring. But can you talk about what's in the market today? You talked about selling more during the first half of the year. So I presume that there's a number of assets in the market. Can you identify kind of what the targets are when you say noncore, is that just Houston? Is that -- we're going back to D.C.

It sounds like Cambridge is on the chopping block as well. But can you give us more of a sense of what to expect on the sell side?

Brent Smith -- President and Chief Executive Officer

Sure. I think Dave, again, thank you for joining today. We look at dispositions, as you know, historically, we've paired our dispositions very well with our acquisitions. I think 999 is a perfect example.

We went under contract actually on the Raytheon asset in the middle of '21 and devise the structure so that we can opportunistically pair that with the buy. I think what's promising in this market is we're seeing more opportunities start to come to fruition. And so we get more -- a bigger opportunity set gives us the ability to wait a little bit longer to dispose of the assets. So I don't have anything specifically in the market at the moment that we're looking to dispose of.

But we do have dialogue every day with participants who we know we can move quickly, and we pay fair value if we needed to. Now in terms of the buys, I think we're looking at -- well, you wanted to focus on dispositions. So I think I'll leave it at that. So I think we have a good opportunity set.

Again, that is Houston in that non-core bucket. It includes Cambridge, you used the term chopping block, I don't know if I would phrase it as that, but it is certainly fully matured under our ownership. It's got about a little over 10 years of term remaining with a major tenant there being harbored in both of those assets. And frankly, given where pricing is at, call it, a four and a half kind of $1,600 a foot for some assets in that market.

We feel like it's a great opportunity to monetize that and rotate into something accretively. Hopefully and looking toward the '23 event, I would say, 60 Broad would be a potential monetization opportunity set there as well.

Dave Rodgers -- Baird -- Analyst

Maybe one for Bobby. Just in terms of the guidance, since you're not including acquisitions and dispositions in the guidance this year, it's a fairly wide range from an operational perspective. What really kind of pushes you up and down in that range? Do you have any more -- it looked like you kind of grabbed another $1 million or so from the GAAP deferrals previously and added that back in the quarter. you have more of those that gets you to the top end and as the bottom end just kind of move outs, expirations, terminations? Maybe some guidance on that would be helpful.

Bobby Bowers -- Chief Financial Officer

Well, obviously, when we release, Dave, our guidance, the midpoint is typically the target we try to focus upon. I think over the last several years, absent of COVID, we've come in a little ahead on those. So hopefully, we're conservative with our estimates. But I don't know how to respond to you, there are a number of factors that influence our actual earnings.

It depends on our leasing activity that takes place, we try to make good long-term decisions there. It may result in downtimes as we try to bring in investment-grade tenants, things like that that are not predictable as such. So leasing always is the key driver for us that influences what we achieve in a given year.

Brent Smith -- President and Chief Executive Officer

And I would add, Bobby, operationally, we are still in the midst of a pandemic. There are components of parking and the return to office variable expenses that create some of that fluctuation, and we've done our best to predict that. But frankly, nobody could have predicted, well, Delta, once you saw Delta, maybe you could have predicted omicron. But I think we're trying to be cognizant that there could be a Beta or something else to that effect, that could continue to delay.

But realistically, we feel like '22 is moving in the right direction and that's where the midpoint of the range would suggest.

Dave Rodgers -- Baird -- Analyst

Last one for me, if I could. I guess I wanted to get your thoughts on two things. You obviously continued to do the stock buyback in the quarter. I think your average buyback price going back to 2011 is above where the stock is today.

You talked about increasing the dividend on the call in the middle still of a pandemic you have an above-average financial position relative, meaning more financial leverage than your peers, higher rollover schedule of massive tenants coming due. So I guess why the hurry to deploy all this capital, especially after a quarter when concessions on leases were pretty tough and you got a lot coming at you.

Brent Smith -- President and Chief Executive Officer

There's a lot in there, Dave. I guess, first, let me take the quarter. Admittedly, the renewals were a little high. Each one of those kind of three deals that we alluded to in our supplement that were unusually high TIs have a reason behind that.

Not to give in the specifics, but when involved mainly moving around smaller tenants to get a large investment-grade tenant into the space. And so we continue to do what's right by the real estate and sometimes that does mean spending a little bit more for a tenant. And in that instance, a few of those happen hit in the same quarter. That's why we always ask that our investors look at more of a rolling 12 months and look at those trends.

And I think you'll find on a rolling 12 months, we still are trending in kind of right in line with prior years and during COVID. So I think on the capital front, we don't feel like there's a wall of capital from our perspective, there's the regular way leasing and certainly, we'll admit that concessions have gone up on the TI side in the pandemic while free rent has dropped more dramatically, but we recognize that overall, I think our portfolio from a capital standpoint will stand against anybody else's and we don't have an unusual amount of draining needs in that regard. In terms of our debt profile, we've always stated we operate between 30% and 40% and call it a sub-6% debt to EBITDA, and I'm very focused on maintaining our credit rating. And there is no concern with our rating agencies.

We're both stable from both groups. And we feel like the balance sheet is well protected. Our line is currently -- has some drawn, but as Bobby has alluded to, we do anticipate a pay down of the note from our Bridgewater properties. So that will bring our line down into, call it, several tens of millions.

And we feel like that gives us the capacity to operate the business as we feel is reasonable. Our peers who are lower leveraged are more development-focused and heavy than we are. If we do get into the more of development we would probably consider taking our leverage down a little bit into probably the low 30s. But at the moment, I feel like that's probably still a '23 event to put a shovel on the ground on our site, even though we are talking to some tenants realistically, it's going to take some time to get that.

So we view 2022 as a good opportunity to continue to rotate capital. You did note we bought back shares, we never view buying back shares is mutually exclusive from buying a rotating asset -- capital into assets. And frankly, we feel like at the time when we purchased those shares right when omicron set in and still believe we're an undervalued company. I think we trade at above an eight cap on a cap rate basis if you use, say, Green Street's estimates of NOI, and we feel like we're certainly undervalued in that regard and would buy back shares when we kind of fit the framework.

And I've said before that framework works, is generally when we trade at a meaningful discount to NAV, both on a relative and an absolute basis versus our peers. And when we're not levering up to do so and that framework still holds today and those shares were bought during that framework. And your reference to the buyback since 2011, understandably, I think our average buyback price is readily right around where we're trading today and we continue to, frankly, focus more on assets today than stock.

Dave Rodgers -- Baird -- Analyst

Well, Brent, thanks for all the color and I appreciate your indulgence on the time. Thanks.

Brent Smith -- President and Chief Executive Officer

Yeah. Thank you.

Operator

Your next question is coming from Michael Lewis. Please announce your affiliation, then pose your question.

Michael Lewis -- Truist Securities -- Analyst

Great. This is Mike Lewis at Truist. This quarter, it looked like you had more capex classified as incremental as opposed to nonincremental and therefore, not back out of the AFFO calculation. Maybe that's related to some of the activity you already talked about.

Can you just clarify what that $25 million of incremental cost was related to? And is there still a lot to spend and allocate to that bucket?

Brent Smith -- President and Chief Executive Officer

That was primarily related to some base building work at 60 Broad and the redevelopment of that asset for the lower floors. There is a new RHP HVAC mechanical system and some additional components as well as just some of the regular way redevelopment of some of our properties. I would not anticipate that that would continue. Bobby, maybe?

Bobby Bowers -- Chief Financial Officer

Yeah. I was just going to comment. We do track with each of our leases, the incremental versus nonincremental, what we're doing at buildings. We have outstanding projects less than $15 million now on the incremental side.

Now, if we do buy something, decide to do a lobby, enhance the building that will add to that number.

Michael Lewis -- Truist Securities -- Analyst

OK. Perfect. Thanks. And then just one more from me.

I know you get asked frequently about the CVS lease expiring at the end of the year and the next year, Ryan, Cargill, U.S. Bancorp, I think a previous question kind of alluded to these coming up. I don't know if -- you talk about it frequently, I think, is there anything incremental to be aware of, either changes in how you think about market rates -- or market rents versus in-place or anything else to report on any of those upcoming expirations?

Brent Smith -- President and Chief Executive Officer

Hi, Michael. It's Brent. Thanks for joining. We do get asked about those expirations.

I think as the prior question alluded to, the number of potential expirations that we have in the next, call it, 24 months and why raise the dividend. I think the reason why we feel like we can raise the dividend is we feel generally pretty good about the leasing market and where that dialogue is with those tenants. So specifically with CVS, as we've noted before, we're well down a path and we feel like that it's likely that they'll renew on a majority of the space. As been noted in the press, Ryan has a site they've considered going and building a building on up in Frisco.

Right now, their expiration is slated for the end of next year -- sorry, February of next year. And likely, they're going to have to do at least a short-term renewal because it's going to take them probably two and a half, three years if they could put a shovel in the ground tomorrow and that is not currently underway. In terms of U.S. Bank and Cargill both of those are pretty far out still into '23 and '24.

So it's a little early, but I will say we're close with both groups and engaged, I feel pretty comfortable about where that stands, although again, it is really early. But U.S. Bank has been headquartered in Stalwart, corporation in Minneapolis and intends to continue to be there. And Cargill, again, we feel pretty good about where the early dialogue has been.

So that's where it stands at the moment. But again, I think we feel pretty good about where all the leasing velocity is and our ability to then look forward and say the spread between AFFO and our current dividend. And dividend is very meaningful, call it, $1.10 to $1.20 in terms of AFFO and a dividend of $0.84. So our ability to raise that 5% or so is really modest relative to where the cash flow of the operating assets is.

Michael Lewis -- Truist Securities -- Analyst

Perfect. Thank you for the update.

Operator

[Operator instructions] Your next question is coming from Daniel Ismail. Please announce your affiliation, then pose your question.

Daniel Ismail -- Green Street Advisors -- Analyst

Great. Thank you. Dan Ismail from Green Street. Brent, you touched on this a few times during the call, but you mentioned the increased focus on amenities and kinds of place in the office as well as increased concessions in some markets and supply chain issues.

Is it your sense that normalized capex has moved higher for the sector or is this more of a point in time type phenomenon.

Brent Smith -- President and Chief Executive Officer

You're -- sorry, you kind of -- you've trailed off there a little bit at the end. I think you said, do you -- do we feel like we're -- in this environment is a normalized capex environment for the sector?

Daniel Ismail -- Green Street Advisors -- Analyst

No. I guess, sorry if I trailed off. I was saying do you think that capex for the sector has just structurally moved higher over the last two years as a result of increased focus on amenities and perhaps a higher concessionary environment? Or are you anticipating that to reverse back to pre-COVID levels?

Brent Smith -- President and Chief Executive Officer

Yeah. I think, Danny, I guess definitely would agree with you. Currently, it is definitely elevated. I think it is partly due to the pandemic and people trying to take advantage of a softening in the marketplace.

And frankly, we've seen free rents still be very limited, but TI capital kind of rule the day because you have frankly, it's been a tenant's market, and they've continued to not want to come out of pocket for build-outs. In terms of the opportunity set of the amenities, etc., I think every building has an evolution and you need to evaluate when we buy buildings, we do. When that kind of opportunity is to -- needs a refresh and then be able to drive rents and drive velocity. So for a building, it's kind of depends on where it is in its life cycle.

We see some buildings that are older in nature, but have been well maintained and amenitized and they do very well in the marketplace. But we want to recognize that there are commodity products that we wouldn't make sense to invest in anymore and probably better in different use. Fortunately, our product isn't of that nature. But I do think you're going to see just overall in this sector, which already was starting before the pandemic, that commodity obsolescence will continue to take hold.

And as I alluded to in my prepared remarks, a disparity between kind of A quality assets and then most everything else and reinvesting in the As are going to continue to help drive rent and just continue that disparity between unamenitized, commoditized product. And so I think from our strategy, we think that lends itself well. It -- definitely, that flight to quality bodes itself toward our product versus the latter. But I do think, overall, the sector, that capex profile has been elevated up.

And in terms of being able to claw back from the tenant side, I think you're going to see likely more a drive in rate than a reduction in that capital. It's still, I think most of my peers would probably agree, you're looking at, call it, $6.50 to $8 per square foot per year of term in terms of capital depending on the market.

Daniel Ismail -- Green Street Advisors -- Analyst

Great. Brent, that's helpful. And I believe the last time you provided the statistic, your portfolio rents were about 5% to 10% below market. Is that still the case?

Brent Smith -- President and Chief Executive Officer

Yes, that is absolutely the case. I think as we've continued to show, again, on a rolling 12 months, I think quarter by quarter can be choppy, but on a rolling 12 months, we're right in that sweet spot between the five and 10, and I think that's very indicative of where the portfolio still stands. We've been pleased that we've held rates on a good bit of the portfolio, although net effectives are down in the single digits. And some of our markets been flat and others are almost now on a versus pre-pandemic levels.

Daniel Ismail -- Green Street Advisors -- Analyst

Great. Thanks, Brent.

Operator

There are no more questions in queue. I would now like to turn the floor back over to Brent Smith for any closing comments.

Brent Smith -- President and Chief Executive Officer

Thank you, everyone, for joining us today. Myself and the team are really excited about 2022 and really continuing the growth and particularly the new leasing that pre-pandemic levels at the end of last year into this year, 6% of our leases expire this year. And with 60% of our vacancy and 85% of our role in the Sunbelt, we really are enthused about the ability to continue to drive velocity and occupancy. We feel like we've got a best ESG platform and paired with our high-quality amenitized assets, we'll continue to drive earnings growth.

Thank you, everyone for joining today. Have a good day.

Operator

[Operator signoff]

Duration: 48 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 -- J.P. Morgan -- Analyst

Dave Rodgers -- Baird -- Analyst

Michael Lewis -- Truist Securities -- Analyst

Daniel Ismail -- Green Street Advisors -- Analyst

More PDM analysis

All earnings call transcripts