Piedmont Office Realty Trust (PDM) Q2 2022 Earnings Call Transcript

Piedmont Office Realty Trust (PDM 4.18%)
Q2 2022 Earnings Call
Jul 28, 2022, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies, and gentlemen. I welcome to the Piedmont Office Realty Trust second quarter 2022 earnings call. At this time, all participants have been placed on a listen-only mode, and we will open up the floor for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Eddie Guilbert.

Sir, the floor is yours.

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

Thank you. On 10-Q and in 8-K, that includes our earnings release and our unaudited supplemental information for the second quarter. That's available for your review on our website at piedmontreit.com under the Investor Relations section. During this call, you hear from senior officers at Piedmont.

Their prepared remarks, followed by answers to your questions, will contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements address matters which are subject to risks and uncertainties, and therefore actual results may differ from those we anticipate and discuss today. The risks and uncertainties of these forward-looking statements are discussed in our press release, as well as our SEC filings. I encourage everyone to review the more detailed discussion related to risks associated with falling these statements in our SEC filings.

Examples of forward-looking statements include those related to Piedmont in 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 only as of the date they're made. Also on today's call, representatives of the company may refer to certain non-GAAP financial measures such as FFO, core FFO, AFFO, and Same Store in line. The definitions and reconciliations of these non-GAAP measures are contained in the earnings release, and in the supplemental financial information which were filed last night.

At this time, our president and chief executive officer, Brent Smith will provide some opening comments. Brent.

Brent Smith -- President and Chief Executive Officer

Good morning, and thank you again for joining us on today's call as we review our financial and operating results for the second quarter of 2022. In addition to Eddie, on the line with me, this morning are George Wells, our chief operating officer; Chris Kollme, our EVP of investments; and Bobby Bowers, our chief medical officer, as well as other members of the senior management team. During the second quarter, we continue to experience the strong leasing momentum that we've witnessed the last several quarters. Marking our fourth quarter in a row of new tenant leasing that is more than 200,000 square feet.

As a reminder, this level of new tenant leasing is above our pre-pandemic levels, and I believe, it validates our strategy over the last few years of investing in premier assets within targeted Sunbelt growth markets. Assets with great amenities in walkable infill environments, and with sustainability, and wellness place top of mind. To that end, during the quarter, we laid the groundwork for our second midtown Atlanta acquisition in less than 12 months. We anticipate closing on 1180 Peachtree Street during the third quarter, which will make Piedmont the largest single owner of midtown office space on this iconic street.

Chris will discuss more about this strategic transaction in a minute. And to round out the quarter, we continue to deliver consistent financial results with core FFO of $0.50 per share. In cash same story and I growth on trend with guidance. At this time, I'm going to turn the call over to George Wells, our COO, to review this quarter's leasing activity with you in greater detail.

George.

George Wells -- Chief Operating Officer

Thanks Brent, and good morning, everyone. Our operational teams delivered strong second quarter results on many fronts, and leasing momentum continues to be very encouraging. Piedmont well-located modernize assets continue to track and resonate with today's discerning office users seeking a highly amenities environment and an owner that embraces wellness and sustainability best practices. This quarter, we completed over 50 lease transactions totaling approximately 724,000 square feet, surpassing last quarter's volume of this amount.

233,000 square feet was related to new leasing activity. Our lease economics for favorable, with approximately 3% and 12% roll-up or increase in second generation rents on a cash and accrual basis, respectfully, with an average lease term of 6.5 years if you exclude one large short-term renewal. Our lease percentage at the end of the second quarter was 87%, up approximately 150 basis points from the end of 2021. While I will note that the majority of our new lease activity continues to emanate from our Sunbelt portfolio where most of our vacancy resides, we are experiencing improved leasing activity in all of our select markets, including our non-sunbelt markets.

If you'll allow me, I'd like to take a few minutes to discuss a few key events that occurred during the second quarter in our operating markets. First, in Orlando, we completed four deals for 71,000 square feet, including the largest new tenant transaction for Piedmont this quarter, which was with Kimley-Horn for 61,000 square feet at our trophy legal South Orange Avenue project. It is worth noting a few things about this lease relocation transaction, that it was a 20,000-square-foot expansion for Kimley-Horn's current location. There are newly spaces on the fifth and sixth floors of our 30-story tower, and at least partially addressed as a substantial portion of a 4-floor contiguous block of vacancy with a 12 and a half year term.

We were told this lease was a flight to quality decision that will enhance Kimley-Horn's recruiting and retention efforts. Also in South Orange, we signed a lease with a new to market West Coast inspired restaurant, expanding further our on site amenity offerings. 200 South Orange is a prime example of our core operating strategy of offering a modern, highly amenities office setting at rental rates well below new construction rates. We acquired Assassin in 2015 for approximately 261 bucks a square foot, when average asking rents were in the mid-twenties.

Although there are still a little bit more work to be done after completing most of the repositioning of this asset for a cost of less than 30 bucks a square foot. We've been able to push asking rental rates to the mid-thirties while improving overall occupancy rates steadily over the last several quarters. Most market participants consider 200 South Orange, the preeminent office complex in downtown Orlando, and is now achieving the highest rents in the marketplace, along with our CNO centers one and two. We are optimistic in our ability to create more organic income from the asset, and from our other downtown Orlando positions for the foreseeable future.

Our Dallas portfolio experienced total leasing production this quarter with a total of 17 deals for a 103,000 square feet. More than half of that was for new lease activity accounting for 9 deals for approximately 76,000 square feet, and majority of that coming from our assets in Las Colinas, Irving. With Las Colinas Irving's office market being known as a prominent home for large corporate hubs and headquarters, Caterpillar's recent announcement to relocate its global headquarters to the submarket from Illinois reinforces that reputation. According to costar Caterpillar, which is ranked 73 on the Fortune 500 list of largest publicly traded U.S.

companies by revenue, expect its employees to transition to Irving over time, though no timeline was mentioned. Las Colinas Irving is now home to 10 Fortune 500 companies, according to the Irving Economic Development Partnership. More growth is projected for this MSA. We are seeing more activity in this market and the Dallas Regional Chamber is currently tracking over 200 corporate relocations, up from 90 in 2020.

As I discuss Dallas, I also want to update you on our largest near-term lease exposure in Dallas, which is with Ryan Tax, who leases and fully occupies nearly 170,000 square feet at three gallery through February of 2023. We are in discussions with Ryan, and we believe we will extend that lease for a substantial portion of that space for up to five years in a market deal and this block would yield a cash for roll-up of approximately 25%. Moving outside the Sunbelt, Minneapolis is beginning to see more deal flow. At our legal Crescent Ridge asset, which last year underwent a lobby renovation and an enhancement of our amenities set, we completed two smaller deals during the quarter, with several other deals there progressing favorably.

Elsewhere in the suburbs, and as part of a longer term lease negotiation, we negotiated a short-term extension with U.S. Bank on its entire 330,000 square feet at Meridian Crossing. While we wish the terminal longer, we remain deeply engaged with the bank on executing a longer term deal both at this location and at our HQ location downtown. We also believe that negotiations will accelerate once eBay completes its merger with Union Bank later this year.

And lastly, we are feeling pretty good about a couple of transactions that we are close to executing and will be executed here in the next couple of days, which would be a great way to start the third quarter in that market. While I've highlighted second quarter leasing results thus far, it's worth looking back over the past 12 months where we've reached pre-COVID new leasing levels and achieved strong and almost 5% cash and 12% accrual rollups. Furthermore, nearly 70% of new deal activity over that time was derived from our recently completed redeveloped assets. Our strategy of concentrating assets and targeting growth submarkets, and then modernizing, and amenitizing in these well-located buildings is resonating with office users leading to our new tenant leasing success.

Looking forward in the near-term, we continue to be optimistic about the performance of our office portfolio, despite what is typically a summer vacation slowdown, our tour activity remains strong and consistent. We have nearly 2 million square feet of outstanding proposals, slightly more than we've had the past two quarters, with about 40% of those proposals were related to new tenant space. With few leases expire for the remainder of 2022, we continue to expect positive space in that space absorption for the year, resulting in an anticipated year-end lease percentage between 87% and 88%. I'll now turn the call over to Chris Kollme to review our second quarter investment activity and our investment strategy going forward.

Chris.

Chris Kollme -- Executive Vice President, Investments

Thank you, George. As disclosed last night in our earnings release, we're extremely excited to have entered a binding contract to purchase 1180 Peachtree Street in the heart of midtown Atlanta. For those of you familiar with Atlanta, this asset needs no introduction. For those less familiar, 1180 is the most iconic differentiated office building in Atlanta, and is certainly among the most recognized properties across the entire Sunbelt.

I'd encourage you to review the acquisition materials, which we posted on our website earlier this morning. For more complete details, including its unique location, amenity, set tenant roster, submarket fundamentals, and our acquisition rationale. But here's a quick snapshot of what we consider to be an exceptionally rare and strategic acquisition opportunity. 1180 Peachtree is an almost 700,000 square foot LEED Platinum, 41 story office tower located at the epicenter of midtown Atlanta on the corner of 14th and Peachtree Streets.

It is 95% leased with a weighted average lease term of over seven years. Its Sterling Tenant roster includes King and Spalding, Work Capital, Bain and Company, and Cushman Wakefield, among others. The global headquarters of King and Spalding, and AM Law Top 25 law firm comprises about 38% of the building and the lease runs through early 2031. We believe in place rents are approximately 20% below current market rents, and this asset certainly goes toe to toe with any new construction due to its unmistakable physical profile, floor to ceiling, full glass facade, rich amenity base, including a 10,000 square foot fitness facility, a 12,000 square foot tenant Sky Park, all at an irreplaceable location.

1180 is located directly across the street from Colony Square, affectionately called Midtown Atlanta's Living Room, offering almost 200,000 square feet of experiential retail, including restaurants, Politan Row, which has been called one of the best food halls in the country, an [inaudible] theater, and significant green space. Importantly, we are acquiring 1180 Peachtree for approximately $675 per square foot, which is modestly below replacement cost. As part of the transaction, we will assume a $197 million secured loan at a 4.1% interest rate, which runs through October of 2028. We project year one accrual yields of approximately 6.3%, with initial cash yields approximately 100 basis points below accrual levels.

This is arguably Atlanta's premier business center, and we will be acquiring this prolific asset without the risk of construction and without the risk of lease up. The acquisition of 1180 is entirely consistent with our stated strategic objectives to accelerate our rotation into the Sunbelt, and thus only in the most dynamic submarkets, and to elevate the overall quality of the portfolio to match the needs of our tenants. Coupled with last year's acquisition of 999 Peachtree, located just four blocks away. Piedmont position in midtown Atlanta grows to over 1.3 million square feet, and Piedmont will become the largest landlord on Peachtree Street in Midtown.

And at a blended acquisition basis of approximately $525 per square foot. We believe we now own the two best existing assets in one of the nation's most vibrant submarkets, and an exceptionally compelling basis. We expect the acquisition of 1180 to be completed by the end of the third quarter. Moving to sources of funding, we have said for 2 to 3 years that we would not sell our two assets in Cambridge until and unless we had identified a truly strategic transformational acquisition as a paired replacement.

1180 certainly fits the bill and accordingly we have already begun the marketing of our two Cambridge assets. We expect the proceeds from the low cap rate Cambridge sales to be accretive, and to cover most of the estimated initial $268 million cash portion of the purchase price in order to return to a relatively leverage neutral position. We anticipate selling another $250 million or more of assets over the next 12 months. Identified disposition assets will likely be non-strategic assets, primarily outside of the Sunbelt.

As for the balance of 2022, given current market conditions and our objective to return to our normalized leverage levels, our capital markets efforts will be extremely focused on disposition activities over the coming months. I would note that we mentioned on last quarter's call that we also considering the disposition of our two asset in Houston. We believe both the current disruption, and the debt markets, and attributes unique to these two assets create a very difficult backdrop for their sale. So while we remain committed to exiting the Houston market, we believe the prudent decision today is to delay these transactions until the capital market environment further stabilizes.

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

Bobby Bowers -- Chief Financial Officer

Thanks, Chris. Well, 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. Core FFO for the second quarter was $0.50 per diluted share.

That's $0.02 or 4% increase over the second quarter of 2021. This increase is primarily due to creative recycling activity since the second quarter of last year, rising rental rates and the continued space absorption throughout the portfolio. AFFO generated during the second quarter was approximately $49 million, well above our current $26 million quarterly dividend level. I do want to point out that we had previously discussed during the last two earnings calls that our board would review our current dividend level this summer.

Given the disruption in the fixed income markets and the potential for near-term recession, the board decided yesterday to maintain our current dividend rate at $0.21 per share per quarter for the time being. I would note that the company still maintains ample AFFO coverage of the dividend, and the board will continue to reevaluate its dividend policy, including the potential for a dividend increase as further economic data becomes available. The quarterly dividend declaration was disclosed in a press release last night. As George alluded to in his comments, with the improved lease economics and rental rate roll-ups of the last few quarters, our quarterly same store cash in July and accrual basis in July for the second quarter of 2022 increased approximately 2% and 3% respectively, compared to the second quarter of 2021.

Now turning to the balance sheet, our annualized quarterly net debt to core EBITDA ratio as of the end of the second quarter of 2022 was at 5.5 times, and our debt to gross assets ratio was 34.6%. These debt metrics obviously will be impacted during the third quarter with the anticipated close of the 1180 Peachtree Street acquisition, and the assumption of the related 4.1% mortgage note temporarily increasing our leverage ratios to the upper end of our targeted debt operating ranges until offsetting dispositions are completed. As typical for us, we will be acquiring the 1180 property in a reverse 1031 exchange and protecting the significant gain of approximately $100 million that we anticipate upon the sale of our two Cambridge assets. Ahead of this acquisition activity during the second quarter, we recast our revolver, increasing the line capacity by $100 million to a total of $600 million and pushing the final maturity out to 2027.

Despite the increased capacity, we do not believe it be prudent to utilize a significant portion of our line capacity to effectuate the 1180 Peachtree Street acquisition. In order to maintain financial flexibility, we disclosed in our filings last night that we entered into an additional $200 million delayed draw bridge loan priced at adjusted terms, SOFR plus 1%, which we anticipate using to fund a majority of the initial cash funding requirements for the 1180 acquisition. We anticipate repaying the bridge loan with proceeds from the property sales that Chris mentioned. We have no other scheduled debt maturities until mid 2023.

Finally, at this time, I'd like to update our annual guidance for 2022. As you've seen with many of our peers, we've been surprised by the rate of inflation hitting 9.2% annually in the U.S. at the end of June. And obviously then the need for the Fed to make significant interest rate increases in an attempt to get inflation under control.

The pace of these rate increases thus far has exceeded anything most of us imagined or budgeted for 2022. Therefore, we're adjusting the midpoint of our previous guidance because of the continued rise and acceleration of short-term LIBOR and sofr rates. And also due to delays in the completion of certain new tenant control space build outs, which consequently delay the start of our GAAP or accrual basis revenue recognition on these related leases. These interest rate increases and delays in revenue recognition offset the expected accretion from the 1180 Peachtree Street acquisition.

We currently estimate core FFO per diluted share for 2022 will be in the range of $1.99 to $2.05. And we are maintaining same store guidance in the 1% to 4% range on both a cash and accrual basis. These revised estimates incorporate the acquisition of 1180 Peachtree by the end of the third quarter of 2022, and the subsequent disposition of non-strategic assets totaling approximately $200 million around the end of the third quarter, and another $200 to $250 million over the next 12 months. The Goddess does not include any additional acquisitions or disposition activity.

As such activity occurs, we will obviously update our guidance. At this time, I'll turn the discussion back over to Brent Smith.

Brent Smith -- President and Chief Executive Officer

Thank you, George, Chris, and Bobby, I appreciate your partnership along with the rest of our Piedmont colleagues as we serve our investors, customers, and other constituents in our communities. As you've heard in the leasing report, I believe we're capturing more than our fair share of new leasing activity. We're aggregating our investments in strong growth markets in some markets, primarily in the Sunbelt, and have chosen high quality assets that contain the necessary amenities that will aid our tenants in attracting and retaining their workforces. Making these capital allocation decisions, we believe, is more effective than ground up development with far less risk, and has allowed us to compete effectively at a reasonable cost basis, while we be able to continue to grow rental rates.

Certainly, we're in a period of headwinds from rising interest rates to slower than expected return to the office, and to inflate inflationary development costs and the potential for an economic recession. However, we remain optimistic about our leasing prospects, our prudent investment strategy and targeted growth markets, and our overall operating performance. We will continue to seek transformative acquisition opportunities to elevate the quality of the portfolio and earnings trajectory of the company, and that's exactly what we accomplished with the acquisition of 1180 Peachtree. A skyline defining project at the most active corner in midtown Atlanta, with an impressive tenant roster comprised of professional services and financial firms with in-place rents 20% below market and limited near-term lease expiration.

The ability to purchase this iconic building and recycle expected 1031 exchange proceeds for our Cambridge properties, along with other non-strategic assets, is an outstanding execution for the Piedmont team. Finally this quarter, we've made continued progress on our ESG initiatives. We're proud to be recognized as a 2022 Energy Star partner of the year, and the only office headquartered in the Southeast to receive such a designation, and our second consecutive year with the honor. In addition, we've been recognized as a 2022 Green Lease Leader, demonstrating our continued commitment to maintaining a sustainable portfolio and to enact new green initiatives.

Finally, we're seeking Grimsby certification across the entire portfolio later this year. And on the social front, we're very much delighted that we now have four students attending either Howard University in Washington, D.C. or Morehouse College in Atlanta that are recipients of our need based Piedmont Scholarship. It's our hope through these scholarships, and related mentoring programs that will bring more diversity into the real estate industry.

And my last comment relates to corporate governance. Our board adopted many years ago a 15 year term limit for our independent directors. Due to this term limitation, Mr. Wes Cantrell wrote off the Pima board in May of this year.

I want to express my sincere gratitude to Mr. Cantrell for his 15 years of service to Piedmont. A great mentor for the board, and for me personally. He will be missed, and his contributions to the management of our firm are greatly appreciated.

And as it relates to the board seat vacated by Mr. Cantrell, I'm pleased to announce that our board voted yesterday to invite Mr. Tesh Durvasula onto our board, is accepted effective August 1st, 2022. Mr.

Durvasula is the former CEO of Cyrus one, and approximately $10 billion data [inaudible] recently acquired by KKR and GIP. In current CEO of Africa data centers, approximately $1.5 billion data center firm focused on Pan Africa digital and solar infrastructure. He brings tremendous experience within our industry and with [inaudible] significant knowledge of publicly entity regulations, and experience working with large scale IT clients, and the investor community. With two more board members approaching term limitations, we anticipate adding another director to our board before the end of the year.

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

Questions & Answers:

Operator

Ladies and gentlemen, the floor is now open for questions. [Operator instruction] Your first question for today is coming from Michael Lewis, please announce your affiliation, then pose your question.

Michael Lewis -- Truist Securities -- Analyst

Thank you. This is Mike Lewis from Truist Securities. My first question about the 1180 acquisition, the 6.3% cap rate actually sounded a little bit high to me, considering the quality of the asset that the mortgage that you're able to assume. Could you maybe just talk a little bit about the bidding process or anything? Any other information related to the pricing of that asset? And maybe if that cap rate, what that implies for other assets in the market.

Brent Smith -- President and Chief Executive Officer

Michael, appreciate you taking the time to join us this morning. And happy, too and excited to talk a lot more about the 1180 transaction. So thank you for the question. In terms of the the 63 accrual cap rate.

I would say that, as we've noted, that asset has roughly 20% below market rents. So a lot of embedded growth, which is great. I would say in-place rents right now are probably in called mid-forties on a gross basis. And so that really has offered us the opportunity to be able to attain that growth and be able to drive it out over the next few years.

It does have a long term weighted average lease, but we do have about college, 75,000 square feet rolling in the next two years, which gives us a little bit of opportunity more near-term, to continue to drive that cash cap rate closer to the accrual cap rate. As you probably know, most of our cash cap rates are generally about 100 basis points behind the accrual. And I think that's fair to say in this instance, it was in that neighborhood and a fair assessment of where cash would be on a cap rate basis. In terms of the bidding process, I think it was a competitive process, certainly has been a choppy capital markets.

But an asset of this quality is we've continued to see in a number of comparable trades since this call in the June timeframe where we started to really see some of this disruption, while competitive, we still felt like we were the kind of optimal group given the quality of the asset, our previous acquisition, call it nine months ago with 999, and being able to really create a beachhead here with 1.3 million square feet. But it would have the usual names you would have expected in terms of other recompetition in those looking for core plus type returns. I think, what probably separated us apart from that is just a continued bird dogging on this asset. That we've continued to search a lot.

As you heard me talk about an off market basis, assets, this was one we were looking at for now, since last year, and continue to to really move ourselves forward in terms of that process, and being able to have diligence completed in a very timely manner, and be able to move quickly and assume the group that could assume that no perceived to be very efficiently in a choppy market. So I think those all kind of led us to get what we thought was very good pricing with embedded upside, low risk, but a little bit of near-term expiries to get some uplift.

Michael Lewis -- Truist Securities -- Analyst

OK. Thanks. And then on the disposition side, Cambridge, we knew was coming when you found an acquisition target. You talked about years in that, kind of pausing on that.

I was wondering if you could give any more detail on what you kind of look to next in that, what's behind Cambridge, which Bobby alluded to. My guess is maybe New York City isn't quite ready yet. You're looking to get a long term lease there. The rest of these markets all look kind of core to me.

There's always a bottom. I always say there's always a bottom, 5% or 10% of the portfolio. But, where do you kind of look for the rest of those disposition proceeds I talked about?

Brent Smith -- President and Chief Executive Officer

Good question too, Mike. On the flip side, in terms of the additional dispositions beyond Cambridge and we continue to see good depth in the market in terms of better pools for high quality, well leased long term assets. And we feel like we've got a bucket of those assets that certainly kind of fit that profile that we could transact on. I would say in the matter of Houston, we felt like we had the pricing.

But obviously, just given the disruption the debt capital markets when that [inaudible] pulls in, we hope to be able to execute on those. But if I would remind you, we probably sold about over $400 million of assets, four out of the last six years, despite COVID and the unusual disruptions that our industry has faced more near-term. So we've been effective in continuing to recycle that capital and feel very confident on both Cambridge and in the additional 250, roughly million behind that and dispose over the next 12 months. But it would have much more of, I would say, a core plus profile, but good tenancy, but long term, not part of our strategic operational plan.

Michael Lewis -- Truist Securities -- Analyst

And then lastly, I'm just wondering, should we think of U.S. Bancorp's short-term renewal. So that scares us or makes us feel good, right. Because, you mentioned going through the merger and it sounds like you're still deep in negotiations for a longer term deal.

And so from that respect, it feels good. From the broader environment, we know about companies that want to do short-term deals because they don't know how much space they ultimately need in this kind of hybrid work world that we're in now. What's kind of the feeling on U.S. Bancorp? Is that short-term deal? Is that is that a good thing? Or is there some hesitancy there? Because maybe they're figuring out how much space they ultimately need.

Brent Smith -- President and Chief Executive Officer

Good question too there, Mike. I would say we have a long history of finding win win situations and solutions with tenants that have difficulties or long processes I point to the New York state, an unusual situation where we did an interim lease or a situation like where we talked about it a project in Boston with Microsoft doing a kind of unusual wrap around lease and letting them get into a campus situation that evolved over time, and continue to kind of come back and forth, or even like at our Galleria project where we've had a number of those situations here in Atlanta. And I would say that generally I would see that as a positive, because you're continuing to find that win win solution with the tenancy. I would note that, as we did in the prepared remarks, the U.S.

bank is in the midst of that merger. But like many financial services firms, they're still trying to figure out with that work from home hybrid strategy ultimately looks like. But we feel very confident that new development is not an option that would be for them in terms of their locations downtown. And I would remind everyone that that asset that they're located in is their headquarters, and on the 31st floor has by far the best amenity set overlooking the city of any office building in that market.

So we feel very good about keeping them for a majority of the space downtown. And then out in the suburbs that is a well located, certainly very accessible right off the highway, great signage IT location. They continued to utilize that space. And the fact that they wanted to extend for 18 months in that location, I think bodes to the desire to do something there longer term.

And again for what we think would be probably the majority of the space out there. But it is going to take some time as they continue to work through those areas. And we started the merger and we continue to work with them, and figuring out their ultimate headcount in Minneapolis in the space plans that best suit that, and how they should design their space. Eddie, correct me to here I just note there was a 16 month extension, not 18 apologies.

Michael Lewis -- Truist Securities -- Analyst

Great. Thank you.

Operator

[Operator instruction] Your next question for today is coming from Ray Zhang. Please announce your affiliation, then pose your question.

Ray Zhang -- J.P. Morgan -- Analyst

Hi. Good morning, everyone. This is Ray Zhang from Tony alone here at J.P morgan. First, congrats on the acquisition, just want to get a little bit of color on it in terms of strategy wise.

I think you guys mentioned previously on a value add acquisition strategy and compared to 1999 PeachStreet is one of the few. Feels like correct me if I'm wrong, is like it's more on the mark-to-market size and 999 Peachtree was more on potential this list of opportunity. Just want to get a sense of is that indicative of the strategy kind of just focus on you know high quality asset, long term lease ,buy with market market opportunity, or you guys are still looking at assets that have these are opportunity as well.

Brent Smith -- President and Chief Executive Officer

Great question. I appreciate you joining us today, Ray. I would say each asset or acquisition is a little bit unique in their own right. And as we mentioned the [inaudible] meetings, were generally kind of 70% core, core plus and 30% value add in terms of that pipeline.

And I think that's fair to say how we think about acquisitions and being mindful of a couple of different components, not all of it, given a balance sheet and being able to make sure you have ample cash flow, we want to increase the dividend as we've talked, about watching the capital markets for that regard. But you can't take on too much value, add too much redevelopment at any one time. And that 999 project is a pretty meaningful in terms of scale, call it about $25 million redevelopment. And then the 1180 profile, though, is very different, much more stable as we think about its 1031 partners, if you will, in Cambridge.

That was a long term leased high credit, and really high quality asset, and we wanted to pair that trade with a similar profile and asset to continue to have that mix within the portfolio. But what's unique about this, I think there are other acquisitions that we've continued to see roll off in our sector for these types of high quality deals. Is that this one will compete with new construction, full glass, window line, beautiful ten foot plus finish ceilings, really unique building and location wise could not be more at the corner of Main and Main in midtown Atlanta. And we got that below.

Replacement cost and the ability to continue to drive rents higher in the building is the way we'll continue to create value. You've probably heard me mention we've got about 75,000 square feet role in the first few years, but a good wallet overall, seven plus years and given a potential for a recessionary environment. We also felt very pleased with pairing this with Cambridge, keeping our occupancy up within the portfolio because those buildings are also well leased, and we're excited overall to continue to grow our presence in Midtown now having 1.3 million square feet and it's a great combination with our 999 asset. Once we stabilize both buildings, we feel like we'll still be around $550 a foot on a basis versus construction costs.

Now for replacement would be $700 plus. So that's a little bit around the strategy. I could talk more for hours on midtown itself and the benefits there, but we'll kind of pause and hand it back to you. I think last point, though, on the strategic side is the fact that this will continue to move our percentage in the Sunbelt to 67%, and we continue to stay to target a goal of getting to 75% by the end of next year.

Ray Zhang -- J.P. Morgan -- Analyst

Thank you for the color. And you guys mentioned if I got the number correctly, 2 million square footage in the pipeline that they hired in previous quarters. Any chance we can have a little bit color on the pipeline on Atlanta,[inaudible]I was trying to look at night and night peachtree from quarter to quarter, just trying to see if the lease rate has gone up or anything. Just any color on the leasing pipeline there will be great in that market.

Brent Smith -- President and Chief Executive Officer

I'll handle that, and hand it over to George, Rae. In terms of 999, I think we've been very pleased, the receptivity in the marketplace. We've been working on our repositioning. We've completed plans for that and been sharing that with the market.

I think near-term we're going to have some success to share, both on the leasing side and the office tower, but also on the retail side, as well as the base of the building continuing to create that environment. And I think the the exciting thing there will be, we continue to see real range yield that are above our initial underwriting. All that George talked a little bit about more around that and maybe some of the pipeline as well and what we're competing against. George.

George Wells -- Chief Operating Officer

Thank you, Brent. Good morning, Ray. We did talk a lot about Atlanta in the script, but I will tell you that there has been a fair amount of activity, dominant play over the past couple of quarters. The news was all about 1180 this time around.

But look, we're still enthusiastic about what's happening in Atlanta and the overall. We've got about 25 deals in the pipeline today for over 350,000 square feet. So that really, really brings a lot of optimism about what we're doing in Midtown at at 999 itself. We've got over 40,000 square feet in the pipeline there, too.

So with all the relocations that are happening in migration of new companies coming into Atlanta, that would really makes us excited about what's happening there.

Brent Smith -- President and Chief Executive Officer

I would add to to get more specific, I think what's unique about Atlanta overall versus, say, a Charlotte or a Dallas is that we don't have a competitive city in the sense of Raleigh and Austin that are taking the technology firms. So what we're seeing in Midtown is, as we talked about, is not only the technology companies that are coming into the market for the high quality software, and hardware engineers, and the diverse talent, but also the companies that we continue to see from a professional services standpoint move from Buckhead into the midtown market, particularly on the legal side and some of these other firms. So we continue to see absorption in Midtown, pulling from other submarkets as well as that out of market corporate and tech company. I think what continues to really separate Midtown from the rest of Atlanta is that just a mixed use environment.

And what we've continued to see successful leasing wise, are those projects that are very accessible by transportation and very walkable to amenities, restaurants, retail, etc. And certainly that midtown market is probably bar none. And I think in our presentation it's the second most dense city in the southeast or sorry, area of the city in the southeast. 

Ray Zhang -- J.P. Morgan -- Analyst

Got it. Thank you. That's all right. Thank you.

Operator

There are no further questions in queue. I will now like to turn the call over to Brent Smith for any closing remarks.

Brent Smith -- President and Chief Executive Officer

Thank you. I will just remind everyone who joined us on the call today, if you haven't had a chance to look at the presentation materials on our website around 1180 acquisition, please do so. You'll find additional detail and pictures, etc. about the asset.

But I would just reiterate that while we still remain optimistic about our performance for the rest of the year, we are cautiously continuing to watch for uncertainty given the uncertain economic environment. But I think overall very pleased with [inaudible] execution in the second quarter, and look forward to talking again in October. Thank you, everyone. And as we get closer to October, reminder to reach out to Eddie or Bobby to get on the [inaudible] calendar for November's meeting.

Thank you.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

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

Brent Smith -- President and Chief Executive Officer

George Wells -- Chief Operating Officer

Chris Kollme -- Executive Vice President, Investments

Bobby Bowers -- Chief Financial Officer

Michael Lewis -- Truist Securities -- Analyst

Ray Zhang -- J.P. Morgan -- Analyst

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