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Date
Tuesday, July 29, 2025 at 1:00 p.m. ET
Call participants
President and Chief Executive Officer — Brent Smith
Chief Financial Officer — Sherry Rexroad
Chief Operating Officer — George Wells
EVP of Investments — Chris Kollme
SVP, Investor Relations — Laura Moon
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Takeaways
Leasing activity: 712,000 square feet of leases signed in fiscal Q2 2025 (period ended June 30, 2025), bringing the year-to-date total to over 1,000,000 square feet, with approximately 66% of activity in fiscal Q2 2025 from new tenant leases.
In-service lease percentage: Increased 140 basis points year-over-year to 88.7% at the end of fiscal Q2 2025, with management targeting 89%-90% leased by year-end.
Out-of-service portfolio: Lease percentage surpassed 30% at the end of fiscal Q2 2025 and is approaching 60% leased for the out-of-service portfolio based on July activity following fiscal Q2 2025, with stabilization expected by year-end.
Rental rate roll-ups: Space vacant less than one year achieved roll-ups of 7.3% on a cash basis in fiscal Q2 2025 and almost 14% on an accrual basis.
Trailing twelve-month retention rate: 78%, with expansions cumulatively exceeding contractions over the past four quarters.
Core FFO per diluted share: $0.36 core FFO per diluted share in 2025, down $0.01 year-over-year compared to 2024 due to higher net interest expense from refinancing, offset by higher economic occupancy and rental growth during 2025, but negatively impacted by asset sales and downtime from lease expirations over the past twelve months.
AFFO for the period: AFFO (non-GAAP) generated in 2025 was $16 million.
Bond repurchases: $68 million of 9.25% bonds were repurchased in fiscal Q2 2025, resulting in a $7.5 million loss on extinguishment included in the fiscal Q2 2025 results, and expected to generate $2.5 million in annual interest savings over the next three years.
Debt maturity schedule: No final debt maturities until 2028, with $450 million available on the revolving credit line at the end of fiscal Q2 2025.
Future lease revenue backlog: $71 million in annual cash rent yet to commence or under abatement as of June 30, 2025, composed of $28.6 million of leases yet to commence as of June 30, 2025, and $41.9 million in abatement at the end of fiscal Q2 2025.
Leasing guidance: Annual executed leasing guidance raised to 2.2 million to 2.4 million square feet in 2025, an increase of more than 800,000 square feet from the original 2025 annual leasing guidance; majority of earnings impact anticipated in 2026 and beyond.
Share price and implied yield: The current share price implies a $200 per square foot portfolio valuation, as stated on the fiscal Q2 2025 earnings call, and a yield on cost after CapEx of more than 10%.
Disposition activity: One non-core suburban Boston asset was sold in fiscal Q2 2025 for gross proceeds of $30 million, with additional small asset sales possible but not yet at a stage to disclose specifics.
Market performance drivers: Management cited increased demand from larger tenants, low new office construction, and higher construction costs providing rental growth opportunity.
Portfolio capital spend: Leasing capital spend was $6.73 per square foot per year in fiscal Q2 2025, reflecting higher new leasing volume.
Summary
Piedmont Office Realty Trust(PDM 4.10%) reported significant new leasing momentum in both its in-service and out-of-service portfolios during fiscal Q2 2025 (period ended June 30, 2025), driving higher occupancy and future revenue growth visibility. Rental rate roll-ups realized on recent leases underscore pricing power for quality space, while record-setting deal volume with large tenants highlights market bifurcation. The company maintained its core FFO guidance for 2025 and executed a targeted debt repurchase for near-term interest expense savings, while emphasizing that most incremental leasing will augment earnings in 2026 and beyond.
Management affirmed a targeted focus on growing Sunbelt market exposure, which was approximately 70% as of the fiscal Q2 2025 earnings call, with intentions to prudently rotate out of select northern assets to reach an 80% Sunbelt allocation over time, as discussed on the fiscal Q2 2025 earnings call.
CEO Smith said, "doesn't come back on until 2027," clarifying the payout timeline and capital priorities in light of ongoing leasing recoveries.
The weighted average lease term for new deals remained strong at ten years in fiscal Q2 2025, providing revenue stability across future periods.
Repurchased bonds, combined with the absence of near-term debt maturities and anticipated refinancing at lower rates, are expected to be a tailwind for FFO per share growth.
Out-of-service assets, including those in Minneapolis and Orlando, are pacing toward stabilization, with July 2025 activity sharply increasing lease-up beyond fiscal Q2 2025 quarter-end levels.
Industry glossary
Core FFO: A non-GAAP measure reflecting net income adjusted for items such as gains or losses on property sales, impairment charges, and nonrecurring items, used to evaluate REIT cash-generation performance.
AFFO (Adjusted Funds from Operations): A non-GAAP metric adjusting FFO to account for recurring capital expenditures and straight-line rent adjustments, providing a proxy for REIT cash available for distribution.
Roll-ups: The percentage increase in rent achieved upon lease renewal or re-leasing activity compared to prior leases in the same space.
Abatement: A lease term providing rent relief, often a rent-free period at lease commencement, before actual rent payments begin.
Full Conference Call Transcript
Laura Moon: Thank you, Operator, and good morning, everyone. We appreciate you joining us today for Piedmont's second quarter 2025 earnings conference call. Last night, we filed our 10-Q and an 8-K that includes our earnings release and unaudited supplemental information for 2025, which is available for your review on our website at piedmontreit.com under the Investor Relations section. During this call, you will 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 supplemental information as well as our SEC filings. We encourage everyone to review the more detailed discussion related to risks associated with forward-looking statements in our SEC filings. Examples of forward-looking statements include those related to Piedmont's future revenues and operating income, dividends and financial guidance, future financing, 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 are based upon the information and estimates we have reviewed as of the date the statements are 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 NOI. The definitions and reconciliations of these non-GAAP measures are contained in the earnings release and supplemental financial information which were filed last night. At this time, our President and Chief Executive Officer, Brent Smith, will provide some opening comments regarding second quarter 2025 operating results. Brent?
Brent Smith: Thanks, Laura. Good morning and thank you for joining us today as we review our second quarter 2025 results. In addition to Laura, on the line with me this morning are George Wells, our Chief Operating Officer, Chris Kollme, our EVP of Investments, and Sherry Rexroad, our Chief Financial Officer. We also have the usual full complement of our management team available to answer your questions. Before I delve into the quarter, I want to highlight three macro trends that bolster growth for Piedmont in the near term. One, the flight to quality means that demand for the best office buildings is accelerating, and Piedmont is well-positioned having invested to create a modern work environment at every asset.
Two, large tenants are making more leasing commitments, driving meaningful absorption at the top end of the market. Three, given the lack of new office construction for the foreseeable future, today's differentiated buildings have a long runway for meaningful rental rate growth. Now getting back to the quarter, we were very pleased with our leasing success, totaling 712,000 square feet and bringing total year-to-date leasing to over 1,000,000 square feet. Importantly, approximately two-thirds of our Q2 activity related to new tenant leases, marking the most new tenant leasing we've executed in a single quarter since 2018.
Further, the new activity included numerous full-floor or greater leases which will meaningfully backfill several blocks of space in the portfolio, including a three Galleria Tower in Dallas, and our currently out-of-service Minneapolis portfolio as George will talk about more in a moment. Our leasing success during the second quarter pushed our in-service lease percentage as of the end of the quarter up 140 basis points year-over-year to 88.7%, tracking well to our year-end goal of 89 to 90% leased. While not reflected in our lease percentage, our out-of-service portfolio comprised of two projects in Minneapolis and one in Orlando, is also performing extremely well as differentiated amenitized workplaces continue to garner the majority of leasing in the market.
At the end of the second quarter, the out-of-service portfolio stood at over 30% leased but is approaching 60% leased based on the activity in July. We anticipate these assets will reach stabilization by the end of next year. In addition to the overall volume, second quarter leasing also resulted in favorable economics, with rental rates for space vacant less than a year reflecting just over 7% and almost 14% roll-ups on a cash and accrual basis respectively. As JLL Research noted this quarter, rents for trophy offices and new construction are reaching new highs. Asking rents for developments have grown by 27% year-over-year and stand at $92 a square foot, the highest on record by a substantial margin.
We believe the underlying effects of high interest rates, cumulative inflation on labor and materials, and potential tariff impacts will continue to diminish new office supply and push construction costs higher and by extension, the required rents for new buildings, providing Piedmont with more runway to materially increase our rental rates across the portfolio. Leasing momentum remains strong, including over 300,000 square feet of leases signed during July, and the pipeline remains robust with another approximately 300,000 square feet currently in late-stage documentation.
Demand for our buildings, from full-floor and larger tenants, is particularly evident in Minneapolis and our Sunbelt markets, with 10 transactions for a full-floor grader increasing our backlog of annual revenue from leases yet to commence or in their free rent period to $71,000,000. With the gap between lease percentage and economic lease percentage or cash-paying tenants remaining at a historically wide 10%, we anticipate roughly 80 to 90% of this revenue to commence by 2026.
From a macro level, JLL Research reports that although overall volume for the second quarter was essentially flat as compared to the first, active space requirements grew 5.8% reflecting the highest level of demand since 2021, and national occupancy held relatively firm during the second quarter as a modest amount of negative absorption was recorded. However, in contrast, Piedmont observed positive absorption in four of our operating markets. To my point earlier on construction costs, overall inventory remained flat in the second quarter, with only 1,000,000 square feet of new projects breaking ground across the country and projected conversions and demolitions expected to exceed new deliveries this year.
Given all of this activity, we are bullish about our leasing prospects and as I noted before, are increasing our annual leasing guidance for the second time this year to a range of 2.2 to 2.4 million square feet, which reflects an increase of more than 800,000 square feet compared to our original 2025 guidance that was established at the beginning of the year. It is important to note, however, that the majority of this new leasing is expected to benefit earnings in 2026 and beyond.
Sherry will touch on our bond repurchases that occurred during the quarter in her prepared remarks, but before I hand over the call to George, I want to quickly call your attention to our recent rebranding, including a new website. There are a lot of exciting things happening at Piedmont, and I hope you take a moment to examine for yourself the unique placemaking environments we've cultivated at each of our assets. With that, I now hand the call over to George who will go into more details on the leasing pipeline and second quarter operational results.
George Wells: Thanks, Brent. Our local operational teams were exceptionally productive this summer, capitalizing on elevated demand for Piedmont's well-located hospitality-inspired workplace environments. During the second quarter, we completed 57 lease transactions for 700,000 square feet, well above our historical average. New deal activity accounted for the bulk of that volume, reaching 470,000 square feet, a record amount not seen since 2018. As recently highlighted, we've seen a spike in large users with seven full-floor or larger new deals executed this quarter compared to one or two per quarter historically. A third of those new leases signed will generate GAAP revenue in 2025 with the remaining two-thirds positively impacting the first half of 2026.
Our weighted average lease term for new deal activity stays consistent at ten years. Expansions exceeded contractions cumulatively over the past four quarters. Our trailing twelve-month retention rate came in at 78%. As Brent mentioned, lease economics were solid with a 7.3% to 13.6% roll-up or increase in rents for the quarter on a cash and accrual basis, respectively. Atlanta, Dallas, and Minneapolis each contributed meaningfully towards the positive roll-up numbers with an overall weighted average starting cash rent of $43 per square foot. We anticipate further rental rate growth as our portfolio approaches stabilization or crosses into the low nineties. But also from a confluence of two market factors.
Vacancy at the top end of the market is quite low, and rates are justified in new construction or reaching new records. Leasing capital spend was slightly up at $6.73 per square foot per year this quarter when compared to our trailing twelve months, reflecting the fact that our quarterly volume was more heavily weighted towards new leasing this quarter. Net effective rents came in at approximately $20.78 per square foot. And sublet availability continues to hover around 5% with no near-term expirations of those spaces over the next four quarters.
Dallas was our most productive market during the quarter, closing on 15 deals for over 200,000 square feet or a third of the company's overall volume with new transactions accounting for 90% of that volume. Most notable was landing two large global companies for a combined 130,000 square feet at three Galleria Tower which now stands at 94% leased and is asking $55 per square foot, the highest rents in its submarket. Minneapolis was a remarkably close second, capturing nine deals for 190,000 square feet. In addition to our previously disclosed 84,000 square foot new deal at 9320 Excelsior, our team completed two new full or larger headquarter transactions at Meridian.
The Piedmont redevelopment strategy underway at Meridian and Excelsior is generating immense interest with another 180,000 square feet executed in July or in a legal stage. Asking rates are now approaching $40 per square foot, up 10% from the pre-redevelopment phase from just a couple of months ago and the highest within its submarkets. Orlando was quite active as well with eight deals for 175,000 square feet. The key story here was retaining 125,000 square feet at 2026 expiration and achieving record high rental rates for both our downtown and suburban assets. I would like to thank our Orlando team for winning BOMA's renovated Tobey Award at the international level, quite a Herculean feat.
Another international BOMA award in the 250,000 to 500,000 square foot category was awarded to our 25 Mall Road asset in Boston. Congratulations to both of our teams. Atlanta racked up 19 deals for 110,000 square feet, including new activity in all three of our operating submarkets. Central perimeter fundamentals where our Glenridge Highlands and 1155 assets are improving as several obsolete office buildings have been demolished, sublet availability has declined, and recent out-of-state corporate relocations like Mercedes, submarket in the city. And to reiterate what Brent said, we are bullish about our near-term leasing prospects. Our leasing pipeline is strong with over 300,000 square feet in 2.2 million square feet for both our operating and out-of-service portfolios.
Our out-of-service portfolio, which is projected to meaningfully contribute towards 2026 FFO growth, saw its lease percentage spike 220 basis points in the second quarter, and based on what we're seeing in the early and late-stage activity, we project the portfolio to reach 80% by year-end. I'll now turn the call over to Chris Kollme for any comments on investment activity.
Chris Kollme: Thanks, George. I'll just provide a brief update. The transactions market continues to be challenging amid ongoing economic uncertainty. Despite the difficult backdrop, we remain in dialogue with potential buyers of select non-core assets and continue to see a modest increase in groups evaluating the office for investment. As we alluded to on last quarter's call, we did dispose of one small non-core project up in Suburban Boston during the second quarter, which resulted in gross proceeds of approximately $30 million. This asset located in Boxborough has been on our disposition list for some time, and the decision to sell it is entirely consistent with the portfolio pruning we have completed over the past couple of years.
We will continue to do so, and we do have a few other small assets in the market. But it is too early to comment on specifics or speculate on timing. On the acquisitions front, we remain highly engaged in each of our key markets and continue to think creatively about ways to leverage our operating platform while conserving our capital resources. With that, I'll pass it over to Sherry to cover our financial results.
Sherry Rexroad: Thank you, Chris. While we will be discussing some of this quarter's financial highlights today, please review the earnings release and accompanying supplemental financial information which were filed yesterday for more complete details. Core FFO per diluted share for 2025 was $0.36 versus $0.37 per diluted share in 2024 with the $0.01 decrease attributable to higher net interest expense as a result of refinancing activity completed over the past twelve months. Growth in operations due to higher economic occupancy and rental rate growth was offset by the sale of three nonstrategic projects and downtime associated with the expiration of certain leases over the last twelve months.
I would reiterate that we anticipate the lease with Travel and Leisure in Orlando will commence in the fourth quarter of this year and provide approximately $5.7 million of additional annualized rent. AFFO generated during 2025 was $16 million. Turning to the balance sheet, during the second quarter, we utilized the proceeds from the small disposition that Chris mentioned, as well as our line of credit to repurchase $68 million of our nine and a quarter bonds. As a result of these repurchases, we recognized a $7.5 million loss on early extinguishment of debt which is included in our second quarter results.
However, the repurchase is expected to result in total interest savings of $7.5 million or $2.5 million on an annual basis over the next three years. While this is certainly an opportunistic strategy, and highly dependent on market conditions, we will continue to think creatively about ways to refinance these higher interest rate bonds that are currently scheduled to mature in 2028. As we've highlighted before, we currently have no final debt maturities until 2028 and approximately $450 million of availability under our revolving line of credit.
Based on the current forward yield curve, we expect all of our unsecured debt maturing for the remainder of this decade will be refinanced at lower interest rates and thus be a tailwind to our FFO per share growth. At this time, I'd like to affirm our 2025 annual core FFO guidance in the range of $1.38 to $1.44 per diluted share with no material changes to our previously published assumptions, other than the increase to our anticipated annual executed leasing goal to 2.2 million to 2.4 million that Brent mentioned. Please refer to page 26 of the supplemental information filed last night for the details of major leases that have not yet commenced or are currently in abatement.
As of June 30, 2025, the company had approximately 2 million feet of executed leases yet to commence or under abatement, representing approximately $71 million of future additional annual cash rent which consists of $28.6 million of leases yet to commence, and $41.9 million of leases in abatement. This future cash flow is evidence of the leasing success of the team and will fuel future earnings growth although it does demand additional capital spend in the short term. Finally, I'd like to draw your attention to page 25 of the supplemental which includes new disclosure for the calculation of the portfolio's net effective rents for the previous five quarters.
I'd highlight that Piedmont's five-quarter average is a gross rental rate of more than $46 per square foot with a net effective rent after CapEx of $21.83. We believe the current share price presents a compelling entry point for investors with Piedmont's portfolio trading at roughly a $200 per square foot valuation, while generating an implied yield on cost after CapEx of more than 10%. With that, I will turn the call over to Brent for closing comments.
Brent Smith: Thank you, George, Chris, and Sherry. We continue to focus on designing, leasing, and managing best-in-class work environments and believe that our recent leasing success is a testament to our strategy. The recent investments that we've made in our portfolio combined with our customer-centric placemaking mindset continue to set us apart from the office sector. We will continue to be selective with capital deployment, concentrating our resources on driving lease percentage, increasing rental rates we believe will result in FFO and cash flow growth. I will now ask the operator to provide our listeners with instructions on how they can submit their questions. Operator?
Operator: Thank you. Ladies and gentlemen, at this time, we will be conducting our question and answer session. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. It may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for questions. Thank you. Our first question is coming from Nick Thillman with Baird. Your line is live.
Nick Thillman: Hey. Good morning, everyone. Maybe, Brent, just high level. Obviously, good success from a leasing standpoint and just sounds as though the portfolio is gonna start to stabilize here in 2026. Then I think you've outlined the plans to kind of resume a dividend in 2027. But taking a step back, if you look at the portfolio and just kind of how you're positioned in your markets, now there's a big push to get 60% of the Sun Belt. Like, I guess, what are the longer-term goals for exposures within markets? And kinda how do you think this kinda plays out over the next two to three years?
Brent Smith: Thanks. Appreciate it, Nick. Sorry. Just taking notes as you put the question out there. And then thank you for joining us this morning. In terms of, you know, yeah, we have had an immense amount of leasing success and both in our in-service and out-of-service portfolios, and we anticipate both of those being, you know, approaching 90% leased here at the end of the year for the in-service, and right behind is the out-of-service probably somewhere around maybe 80% or so. So that success has really been driven by the effort the team's put forth in terms of creating the right environment, investing in the assets, elevating our service.
And that has been also aided by the fact that large tenants are back in the market. As we think about stabilization, I think we would agree with you that '26 is a period in which we really will be turning our attention to growth. And looking to continue to drive occupancy above 90% at that point. The dividend, as we've talked about, likely doesn't come back on until 2027. But in the meantime, we'll continue to fund very accretive leasing capital, which is generating returns of over 25%. And we're seeing growth in all of our markets, actually. In terms of leasing velocity and absorption.
Sunbelt, obviously, performing extremely strong, but still seeing really good velocity and rental rate growth in Minneapolis. In Northern Virginia now. New York has continued to perform strong. I'd say, really, the district Boston are the only two markets that continue to flag what is a very strong portfolio overall. And we will continue to reposition and prune the portfolio with non-core assets and land sales more near term. And really try to continue to drive our exposure to the Sun Belt, which stands at about 70% today. Upwards of 80%. Obviously, there's a couple of transactions in the North that we've talked about. That would help aid that. Minneapolis is a market we've looked at.
Boston, and then we may continue to evaluate monetizing our New York asset. But overall, you will continue to see us focus on the Sunbelt market and likely to prune modestly near term. And continue to rotate to the Sunbelt. No. That's very helpful. And then maybe, George, just wanted to touch on some of the larger pending vacancies and kind of the activity you're seeing. And then also the progress on the New York City lease. As well. So maybe you have the Piper space in the US Building, in Minneapolis, the city of New York, and then also maybe talk about the Epsilon Building in Dallas and kinda activity there.
I guess we could make the last one too as well on, 999 Peachtree space as well. But those four spaces in particular. Thank you. Certainly. Good morning, Nick. I would say that when you look at our overall pipeline and where that where that activity is coming from, that's why we feel pretty confident about backfilling some of those large box space. I mean, overall, right now, we've got about in the early stage, we've got about 2.2 million square feet of outstanding proposals. 65% is for new activity. And when you look at that activity, 55% of that for new space is actually going into Atlanta.
And that's that kinda addresses one of the large expirations that we have in early 2026, which is Eversheds. So we've got about nine deals today for that particular project, which the back of all of that. We're not suggesting that everyone in the deals we're chasing will back over right away, but the fact of the matter is we're getting a lot of good deal a lot of deal flows to that particular project. And the nice part about it is that the roll-up is gonna be pretty strong once we have a chance to ink those transactions that we're chasing. Heading to Dallas, and I mentioned Evershed, expiring again in 2026.
That's gaining about 20% of our overall new deal activity there, so it's quite active. We've got about two, three deals for about 50 to 75,000 square feet. And, again, once we execute on those transactions, we'll see some roll-ups there in that particular project for about 15%. Starting to rub there, George. George meant to take Epsilon, not Evershed and related. Dallas. Oh, excuse me. Thank you. Go ahead. Both in 2026. Coming closer to Piper, we you know, Minneapolis, we're getting about 10% of our roll-up new activity into Minneapolis. There's a lot of excitement up there with all the things we're doing. With our renovations.
So Piper does have about 120,000 square feet expiring at the end of the fourth quarter. At our downtown asset, but we've got some good news. We hope we can announce here next few weeks to backfill about 30% of that. We have other deal activity there as well, so we're pretty pleased with that. But, you know, kind of kind of pulling back a little bit, one of the other factors I wanna mention is that the size of transactions that we're seeing continue to be a many full floor of larger deals. In fact, we've got about 15 of those proposals outstanding for about 25,000 square feet or more, which aggregates about 800,000 square feet.
So it's just that kind of activity that gives us the confidence see the momentum go beyond the third the second and third quarter of this year. And I would add to that too in terms of the five space. That building is coming the renovation is completing this month. Which is really exciting. Already the best asset in terms of amenities in Downtown Minneapolis. And only getting better. And then to pick up where George left off in New York City, we are expecting and wrapping up at least towards the end of the year as we continue to share and would expect that again to be a renewal for substantially all the space long term in nature.
So we'll provide more details as that likely gets closer to execution again. Potentially around the time of the first quarter's earnings call, but more likely towards the end of the year. From a timing perspective. Very comprehensive and very helpful. Thank you all. Appreciate it, Nick.
Operator: Thank you. Our next question is coming from Ray Zhang with JPMorgan. Your line is live.
Ray Zhang: Good morning, everyone. I have two questions. First one on the guidance. You guys bought back some debt. And it seems like the core is running stronger than expected with revised up on the leasing side. Just curious you know, what were there any offsets that we should be thinking about in terms of the guidance? Like, because at bottom line, it was not revised up. So, any thoughts there would be helpful, or maybe you just come conservative.
Sherry Rexroad: Sure, Ray. Hey. And thanks for being on the call. I appreciate your questions. On the debt buyback, as we noted in the press release, it about $0.02 per year on an annualized basis. Accretiveness. That is offset primarily by the asset sale. Which is about 2¢ as well. In regards to the leasing, strength, you know, most of that will translate into growth in 2026 and beyond. You know, any leases that we signed today aren't really going to, you know, hit our income statement until 2026. And I would just add to that too. We actually as noted, you know, continue to increase our guidance for leased percentage of 800,000 square feet for the year.
And that has been driven a lot by large tenant activity in our out-of-service portfolio as well. So that is something to note. You know, it doesn't get captured immediately in the guidance per se, but setting up again for additional growth in '26. That's very helpful. Thank you so much.
Ray Zhang: And my second question is then on capital allocation. You guys mentioned as you soon to wrap up the New York City lease, that's on the deck to be, you know, another one to tap in terms of source of funding. Maybe first, can you give us some insights on how you think about the buyer group and potential outcomes dependent on that in terms of pricing, And then on the redeployment side, how should we think about it? Core value add or I don't know. Will you consider that? Any color on those? And maybe, you know, targeted cap rates or IRRs? Any color on that side will be helpful as well. So yeah. Yeah, Ray.
Know, as we continue to execute leasing across the portfolio and really see activity come back into all our markets, it is starting to improve the overall sales and transactions market. Just stay. Giving investors the mindset to not assume that vacant space will remain vacant forever. And so we're starting to see solidification. That's word for pricing, in the market, particularly for more core quality assets. We're not seeing that kind of uplift, if you will, in other parts of value add and opportunistic spectrum. Certainly capital has started to come back in the markets like New York, We're seeing it in Dallas. And continue to kind of solidify of high quality asset valuation.
And I think that also then gives us some expectation that if we continue to be patient, the overall sales market will continue to strengthen. In our favor. As we think about near-term dispositions, that's really focused on some select non-core assets and land, looking to dispose of that operators of other uses, primarily retail and resi to augment our existing office that's adjacent to our land. So we almost feel it like we're getting paid to amenitize. That'll be expected dispositions. Maybe one of those parcels this year another larger parcel next year. And as we think about continuing to rotate capital, we will be focused on just dispositions in our northern markets, into the Sunbelt markets.
That can span a wide range of cap rates, You know, our Boston asset, which we just disposed of within a low double digits cap rate, But I would anticipate most of everything else in the portfolio given that was our lowest quality asset, would price well tied to that. And frankly, most of our assets should probably price somewhere towards an eight cap or better. So I think that would give some indication as to what the average cap rate in the portfolio might be. And we have, you know, some buildings in the North that we've talked about, disposing of or monetizing. And potentially looking at cashing in, if you will, a stake in the asset.
Probably pricing would be in that eight to nine cap ZIP code. Core assets. We're starting to see some foreign buyers come back into the market. Certainly, high net worth family offices have been in the market for some time. And we are seeing a little bit of institutional capital, particularly in, again, stronger markets like New York that have come back and continue to give us the belief that both financial buyers and real estate-minded buyers would be interested in that market. At the right time when we look to monetize that asset.
So, hopefully, that gives you some sense of the dispositions terms of redeployment of that capital, right now, we continue to look at primarily what I would consider core plus less value add if it were to go on the balance sheet. Fortunately, today, we don't have a cost capital that really affords us to execute on that right now. But we do also continue to look at more distressed opportunistic deals through a JV partnership structure which would take advantage of that distress and be, frankly, something that we wouldn't want to put on the balance sheet day one. Given it's likely to have a lot of capital needs and or vacant as well.
But it would be something that we'd eventually wanna bring into the portfolio. That would generate returns, you know, call it 18% IRRs levered or greater, And in terms of what we were looking at on balance sheet, we don't have a cost of capital to go after that. But probably something that would look like going in cap rates in the eight to nine ZIP code on a cash basis, better on a GAAP basis. A modest role profile, but an opportunity for us to do what we do best, which high quality older vintage assets into modern, high performing office.
Operator: Thank you. Our next question is coming from Dylan Brzezinski with Green Street. Your line is live.
Dylan Brzezinski: Howdy, guys. Thanks for taking the question. Brent, I think you mentioned in your prepared remarks that 80% to 90% of the lease percentage gap should commence by year-end '26. Are you able to share sort of what that looks like on a weighted average basis? Is most of that likely to commence in the first half of the year? Or is this all sort of back end weighted?
Brent Smith: Hey, Dylan. Thanks for joining the call today. In terms of your question, exactly as we've described, we'll have at least 80%, 90% of that embedded $71 million commencing by the end of next year. There is a good chunk that's gonna start in the first quarter, actually, or call it a little bit in the fourth quarter a good chunk in the fourth quarter of next year. Call it maybe between the fourth quarter this year, the end of the fourth quarter, really, and then the first quarter next year. As well.
So it's almost like a I don't know, like a smile, if you will, where it's a little bit more front end and back end weighted with a little bit of a lull in the middle. Great. That's helpful color.
Dylan Brzezinski: And then maybe if you can just provide details on what you think is sort of driving this, this reinvigoration of leasing activity, particularly amongst some of the larger tenants that you mentioned in your markets? And then I guess is this sort of net new demand within those markets? Or is this sort of musical chairs where the tenant's moving out of an older or looking to move out an older building and upgrade their physical space with, you know, a property that Piedmont owns?
George Wells: Good morning, Dylan. This is George. You know, it's when we look at the demand characteristics, we see that coming from six seven different areas. I mean, first of all, one of the largest users that we were able to sign this quarter who had actually billing signage and had the billing slightly refreshed, decided to move to upgrade the overall office experience because the renovation that we were pursuing in Minneapolis is bringing a broader range of amenities and nicer finishes bring in more of a hospitality feel. So upgrading the office experience is the first one. We're seeing a lot of continued RTO mandates being reinforced and being expanded.
As I mentioned in my prerecorded remarks, we had net 26 expansions for 80,000 square feet. But let me let me blow that up a bit more. It was actually 39 expansions versus 13 contractions. So that's been really helpful. Larger users, are gaining greater conviction in terms of the workplace strategy. I think a lot of that probably has a lot to do with we've experimented with this hybrid environment for a long time, and I think there's been more bias to come back to the office. And I also think the balance between employers and employees is beginning to tip back into the favor of the employer.
I would say office conversions and demolitions you know, those are certainly heating up and speeding up, and that's allowing us take a look at those users that have to be kicked out of those particular projects. We've seen that in Atlanta as well as New York, and we're starting to see that in Nova as well. And then it transitions to special servicer. Right? We had we had a large user that we sent these again in Minneapolis who was in a park very nice park with a lot of amenities, but the capital structure was pretty broken. And they didn't wanna live through that transition to a special servicer.
So when you put all that together, that's what's allowing us to continue to see the momentum, and we continue to be open-minded in terms of, you know, landing large deals for longer-term leases. I'd also I mean, continue to see you know, really, small tenants have continually been in the market, but large tenants, they put that space fee on pause. Really trying to figure out the environment. And now as we seen them come back into the market, it has created a little bit of an pickup of demand because those best buildings we've talked about that's five or 10 assets, There's not a lot of large blocks that are 50,000 square feet or greater in those buildings.
And so I think user groups, particularly large users that have an ending expirations, know they need to gotta make a decision. And if they want quality space sooner rather than later, to the decision making for large users. I would continue to say that overall, the portfolio we did 700,000 square feet of leasing this quarter. Roughly 470,000 of that was new. And what was interesting about that is predominant new but a lot of that was for, let me call it, for unoccupied space. 25% was actually for occupied, but the remaining of that $470,000,000 was split between the out-of-service portfolio and the operational portfolio.
So we continue to see a lot of leasing in all of our areas of the business not all of it shows up in the same reporting mechanism. But I think that just overlays the reason why we haven't changed our lead percentage guidance for 2025. Despite all this leasing. Because it is going into some buckets that are not necessarily captured in that in-service stuff.
Dylan Brzezinski: Thanks, guys. That was extremely helpful. Really appreciate it.
Brent Smith: In terms of the final point on is this debt new demand? I would say, overall, it's mostly in market. Dallas is the one market where we continue to see we've talked about it on our prior earnings call, Atlanta has still some. But Dallas continues the momentum really over the last three years in terms of inbound migration. Companies. And we've been the beneficiaries of that. Otherwise, this is us just continuing to capture more than our fair share of the overall market. Because of the quality of our assets, the service and the environment we're creating.
Operator: Thank you. Ladies and gentlemen, as we have reached the end of our question and answer session, I would like to turn the call back over to Mr. Smith for any closing remarks.
Brent Smith: I want to thank everyone for joining us today. Hopefully, it's come through that we are extremely positive and excited about our track record of leasing and operational growth. More recently, but really consistently post the pandemic. I think it's really starting to show through in terms of the quality assets, and the positioning of our platform for future growth. I'd encourage investors, if you're still trying to understand the Piedmont story and our success, and what makes up our secret sauce. Come to Atlanta. Spend some time with management. We can show you a billion 4 of assets in about two hours.
And if you've got other time, we'd love to host you in Dallas or Minneapolis or any market that you happen to be traveling to. December. I know that's a ways out. I'd also encourage investors will be at NAREIT in Dallas in But we will be having a tour of our Galleria Dallas asset on that event. If you're interested in joining, please let Sherry or Jennifer know. Again, thanks, everyone, for joining. Have a good week.
Operator: Thank you, ladies and gentlemen. This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.