Piedmont Office Realty Trust, Inc.PDMNYSE
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Laura Moon: Thank you, operator, and good morning, everyone. We appreciate you joining us today for Piedmont's third 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 the third quarter of 2025 that 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 revenue 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 third quarter 2025 operating results. Brent?
Christopher Smith: Thanks, Laura. Good morning, and thank you for joining us today as we review our third 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. After nearly 4 years of steady losses, U.S. office demand turned around in the third quarter. According to CoStar's data, about 12 million more square feet of office space was occupied than returned to landlords in the third quarter, the first positive figure since late 2021. More impressive was that it was also the largest total since the second quarter of 2019. The broader leasing data continues to validate what Piedmont has been experiencing on the ground. Pent-up demand is resulting in record levels of leasing across the Piedmont portfolio. In fact, 5 of our operating markets experienced positive absorption with Washington, D.C. and Boston being the exceptions. In addition, new tenant leasing velocity has materially strengthened in 2025. The third quarter's total square footage leased on new agreements in the United States, excluding renewals, is estimated to have reached about 105 million square feet and is now within 10% of the 2015 to 2019 national quarterly average of about 115 million square feet. No doubt, after a challenging 4 years, the office sector is turning the corner. One explanation for this sector shift is a surge in large tenant leasing. The limited availability of large blocks of premium space typically sought by major occupiers and corporate tenants is accelerating the decision-making process. Despite generally slow hiring and an uncertain economic outlook, the upward trend in leasing volume signals that tenants still have a strong appetite for office space. With the supply pipeline contracting and prime availability is becoming scarce, more demand continues to chase a rapidly reducing supply landscape. According to JLL, the cycle of footprint reductions is tapering off as today's users of over 25,000 square feet are cutting just 2.2% of their footprint at renewal. Inventory for high-quality space, either new or renovated is increasingly scarce and office construction has been reduced by an additional 20% from the second quarter with new supply not a factor in most of our markets. These market dynamics have limited high-quality supply and growing demand are allowing Piedmont to materially increase rental rates across its portfolio. And with asking rents still ranging from 25% to 40% below the rates required for new construction, we believe existing high-quality office has a long, long runway for rental rate growth. Within the Piedmont portfolio, which comprises newly renovated, highly amenitized buildings paired with our hospitality-driven service model, we are experiencing multiple tenants competing for full floor spaces, providing the backdrop for Piedmont to increase rental rates at our projects by as much as 20% during the year. By way of example, at our Galleria on the Park project in Atlanta, we executed our first $40 per square foot gross rental rate at the end of 2024. In this quarter, we completed numerous transactions in the mid-40s and have increased rents now to $48 per square foot. Across our portfolio, our hospitality-driven environments have allowed us to increase rental rates to such an extent that we now estimate that more than half the portfolio's in-place rents are at least 20% below market. Our strategy to strengthen the Piedmont brand within the tenant community as the landlord of choice is driving more than our fair share of leasing demand, and it's been reflected in our transaction volumes. Having now leased over 10% of the portfolio over the last 2 quarters, more than 1/3 of the portfolio in the last 2 years and an astounding 80% of the portfolio since the beginning of 2020, equating to almost 12 million square feet since the pandemic. Delving into the numbers, we are thrilled with our third quarter results, exceeding consensus FFO by 3% and achieving record levels of leasing. Most exciting is that all the leasing the team has accomplished this year is positioning Piedmont for sustainable earnings growth. Our backlog of uncommenced leases have reached almost $40 million on an annualized basis and substantially all of those leases will commence by the end of 2026. Piedmont executed approximately 724,000 square feet of total leasing during the quarter, including over 0.5 million square feet of new tenant leases. This new tenant leasing represents the largest amount of new tenant leasing we've completed in a single quarter in over a decade and brings our total year-to-date leasing to approximately 1.8 million square feet. Importantly, over 900,000 square feet of our 2025 new leasing relates to currently vacant space, and it's likely this number will reach over 1 million square feet by the end of the year. That level of absorption equates to $0.10 to $0.15 per share of incremental annualized earnings, an indication of the growth we believe our portfolio is poised to experience. Of note, the 3 largest leases completed during the third quarter related to our out-of-service Minneapolis portfolio, where we're experiencing incredible demand, as George will talk more about in a moment. Our leasing success during the third quarter pushed our in-service lease percentage up another 50 basis points quarter-over-quarter now to 89.2%, bolstering our confidence in achieving our year-end goal of 89% to 90% leased. While not reflected in our lease percentage, our out-of-service portfolio, again, comprised of 2 projects in Minneapolis and 1 in Orlando has experienced astounding market receptivity as differentiated amenitized workplaces continue to garner the majority of leasing in the market. At the end of third quarter, Piedmont's out-of-service portfolio stood at over 50% leased and is approaching 70% leased, including those that are in legal stage today. We couldn't be more excited that the leasing pipeline and continued tenant demand for our buildings positions both the in-service and out-of-service portfolios to achieve 90% leased next year. Furthermore, we anticipate the out-of-service assets will reach stabilization by the end of 2026. In addition to the overall volume, third quarter leasing, as expected, resulted in favorable economics with rental rates for space vacant less than a year, reflecting almost 9% and just over 20% roll-ups on a cash and accrual basis, respectively. In fact, as a result of the repositioning of the portfolio, in the past 2 years, Piedmont leased over 5 million square feet with rental rate roll-ups of approximately 9% and 17% on a cash and accrual basis, respectively. Finally, cash basis same-store NOI also turned positive this quarter as some previously executed leases began to reach the end of their abatement period. With over $35 million of annualized revenue currently in abatement and due to start paying cash in 2026, we expect same-store cash metrics to continue to improve. As George will touch on, leasing momentum remains strong, including over 150,000 square feet of leases signed during the month of October and a robust pipeline with approximately 400,000 square feet currently in the legal stage. I cannot emphasize enough that the broader macro factors, along with our successful portfolio repositioning and elevated service model has and should continue to drive Piedmont's ability to grow FFO organically. We're still on track to meet or exceed our 2025 financial and operational goals with confidence in our ability to deliver mid-single-digit FFO growth or better in 2026 and 2027. Before I hand the call over to George, I want to mention that we have once again achieved a 5-star rating and Green Star recognition from GRESB, placing us in the top decile of all participating listed U.S. companies for this prestigious recognition. I hope that you'll take a moment to review our recently published corporate responsibility report, highlighting the team's hard work and many accomplishments that went to achieving this record. The report is available on our website under the Corporate Responsibility section. With that, I will now hand the call over to George, who will go into more details on the leasing pipeline and third quarter operational results.
George Wells: Thanks, Brent. Strong demand for Piedmont's well-located hospitality-inspired workplace environments generated exceptional operating results for the third quarter. A record 75 transactions were completed for over 700,000 square feet, well above our historical average for the second quarter in a row. New deal activity surged, accounting for 75% of total volume and topping last quarter's record amount. Like last quarter, large users are driving new deal activity to record-breaking levels with 9 full floor or larger leases executed this quarter with another 6 large deals in late stage. Around 15% of new leases signed this quarter will begin recognizing GAAP revenue this year with the remaining 85% throughout 2026. Our weighted average lease term for new deal activity stayed consistent at approximately 10 years. As we've experienced now for 5 straight quarters, expansions exceeded contractions largely to accommodate customers' organic growth. Atlanta and Dallas were the driving forces behind strong economics. As Brent mentioned, we posted a 9% and 20% roll-up for the quarter on a cash and accrual basis, respectively. Our overall weighted average starting cash rent of nearly $42 per square foot was essentially unchanged from the previous quarter, though we do anticipate more rental growth as our portfolio crosses into the low 90s lease percentage. Leasing capital spend was $6.76 per square foot, up slightly when compared to our trailing 12 months as this quarter's leasing volume was dominated by new tenant activity where leasing concessions are generally higher than renewals. Net effective rents came in at $21.26 per square foot, reflecting a 2.5% increase from the previous quarter. Sublease availability held steady at 5% with a modest amount expiring over the next 4 quarters. Atlanta was our most productive market during the third quarter, closing on 27 deals for 250,000 square feet or 1/3 of the company's overall volume with new lease transactions accounting for 75% of that amount. Most notable, our local team mitigated a large fourth quarter 2025 expiration at Medici with a 35,000 square foot headquarter requirement and achieved the highest cash roll-up for the quarter at 30%. Medici is uniquely located within a luxury mixed-use development catering to wealth managers and ultra-high net worth family offices. We anticipate additional cash roll-ups there, 20% or more as another 40,000 square feet is expiring soon, and our pipeline remains strong. At 999 Peachtree in Midtown, we continue to experience encouraging activity to backfill Eversheds's remaining 150,000 square foot expiration in May of 2026. We currently have 4 proposals outstanding, which total 125,000 square feet at significantly higher rental rates. 999 Peachtree has set a new standard for repositioning assets in Midtown Atlanta, and we remain confident in our ability to backfill this known vacancy at very favorable economic terms. Minneapolis once again was our second most active market, capturing 8 deals totaling almost 200,000 square feet, the vast majority of which was new deal flow into our redevelopment portfolio. The Piedmont redevelopment strategy underway at Meridian and Excelsior is generating tremendous interest with another 125,000 square feet in the proposal stage. Our team has moved asking rental rates up another 5% from last quarter with rates now in the low 40s up 15% from pre-redevelopment phase at the beginning of the year and the highest within its submarkets. We continue to be the clear landlord of choice in the Minneapolis suburbs as many once competitors surrounding projects are now either dated, uninspiring or financially impaired. Meanwhile, downtown is experiencing noticeably more foot traffic as 2 of Minneapolis' top 10 employers, Target and RBC Wealth Management recently increased their mandates to 4 days a week. Deal flow at our U.S. Bancorp is growing, and we're close to signing a new deal that would backfill 1 of the 3 floors being vacated next quarter. Dallas is quite active for us as well with 16 transactions for 156,000 square feet. Most notable was a 56,000 square foot deal with a global data center service provider in one of our 1.5 million square feet Las Colinas portfolio, which has experienced a surge of leasing activity for the year, moving up from 82% at the beginning of the year to 91% at the end of the third quarter with another 35,000 square feet of deals close to being signed. Additionally, we're exchanging proposals to renew Epsilon and the subtenants for roughly 50% of its footprint. Our local team has pushed asking rates there up 15% to 20% over the last 6 months. Overall market conditions in Las Colinas are improving rapidly and led all Dallas submarkets in net absorption for the quarter and year-to-date. With Wells Fargo's 850,000 square foot new campus in Las Colinas being delivered this quarter and no other development underway, Piedmont is poised to see additional rental growth here over the next several quarters. At 60 Broad, we continue to work with the Department of Citywide Administrative Services regarding New York City's long-term extension for substantially all of its space. Unfortunately, additional delays during the planning process will result in the execution of a potential lease to spill over into early 2026. Coming back to the overall portfolio, we remain bullish about our near-term leasing prospects. Our leasing pipeline remains robust even after 2 straight quarters of record new leasing activity. And as Brett mentioned earlier, now has over 400,000 square feet in the late-stage phase with insurance, legal, accounting and financial services driving demand for new deals. Outstanding proposals remain steady as well, sitting at 2.4 million square feet for both our operating and out-of-service portfolios and comparable to last quarter's volume. As I noted on our last call, we have seen a large uptick in full floor users ranging from 25,000 to 50,000 square feet across a wide range of industries and throughout most of our markets. Considering our leasing momentum and a modest number of expirations in the fourth quarter, we remain comfortable in achieving our lease percentage guidance of 89% to 90% for our operating portfolio. Our redevelopment portfolio, which is on track to meaningfully contribute towards 2026 and 2027 FFO growth, saw its lease percentage spike for the second quarter in a row from 31% to 54%. Based on early and late-stage activity, we project this portfolio to reach 60% to 70% by year-end. I'll now turn the call over to Chris Kollme for his comments on investment activity. Chris?
Christopher Kollme: Thanks, George. As we have said for several quarters, we remain focused on pruning certain noncore assets throughout our portfolio. We are under contract on 2 of our land parcels. Both are contingent on time-consuming rezonings. So if these are approved, neither will close in 2025. We are actively marketing another small noncore asset that could potentially close around the end of the year. The rationale for this disposition is entirely consistent with recent sales. There are no assurances that any of these will close, and as is our custom, acquisitions and dispositions are not included in any of our projections. On the acquisitions front, we are certainly seeing elevated interest in the sector among more traditional institutional investors. The debt markets continue to improve and differentiated office environments have proven their resilience and durability over the past few years. High-quality office is no longer redlined, and liquidity is growing in the sector. Dallas, in particular, has seen a handful of sizable fully priced transactions over the past 6 months. We remain active in reviewing opportunities in Dallas and elsewhere. We will be disciplined and patient. Rest assured, our team is thinking creatively around compelling opportunities, including evaluating potential transactions alongside institutional capital partners. We do intend to put ourselves in a position to be more active on the transaction front in 2026. 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 the third quarter of 2025 was $0.35 versus $0.36 per diluted share for the third quarter of 2024, with a $0.01 decrease attributable to the sale of 3 projects during the 12 months ended September 30, 2025, and higher net interest expense as a result of refinancing activity completed over the past 12 months. This was offset by growth in operations due to higher economic occupancy and rental rate growth. As I have mentioned on the last several calls, our lease with Travel and Leisure in Orlando commenced in September and will contribute meaningfully to our fourth quarter results. AFFO generated during the third quarter of 2025 was approximately $26.5 million. It was a relatively quiet quarter from a financing perspective. However, as previously announced, we did amend our revolving credit facility and term loan during the quarter to remove the credit spread adjustment from the SOFR-based interest rates applicable to those 2 facilities, thereby lowering the all-in rate on each facility by 10 basis points. As we've highlighted before, we currently have no final debt maturities until 2028 and approximately $435 million of availability under our revolving line of credit. We continue to evaluate balance sheet management options, including traditional bonds and hybrid instruments to smooth our maturity ladder and reduce our interest costs. Based on the current forward yield curve, we expect all of our unsecured debt maturing for the remainder of this decade could be refinanced at lower interest rates and thus be a tailwind to FFO per share growth. To illustrate how powerful this tailwind could be, I'll use the example, if we were to refinance the remaining $532 million of our outstanding 9.25% bonds at current rates, we would generate approximately $21 million of interest savings and be $0.17 accretive to FFO per share. At this time, I'd like to narrow our 2025 annual core FFO guidance from a range of $1.38 to $1.44 to $1.40 to $1.42 per diluted share with no material changes to our previously published assumptions. Please refer to Page 26 of the supplemental information filed last night for details of major leases that have not yet commenced or currently in abatement. As of September 30, 2025, the company had just under 1 million square feet of executed leases yet to commence and an additional 1.1 million square feet of leases under abatement that combined represent approximately $75 million of future additional annual cash rent, which will fuel the mid-single-digit future earnings growth that Brent mentioned earlier, although it does demand additional capital spend in the short term. With that, I will turn the call over to Brent for closing comments.
Christopher Smith: Thank you, George, Chris and Sherry. Our portfolio of recently renovated, well-located hospitality-inspired Piedmont places continue to set the standard for the office market, helping us to drive leasing volumes to all-time highs. On that point, you may recall that we started 2025 with an operational goal to lease a total of 1.4 million to 1.6 million square feet, which was inclusive of approximately 300,000 square foot renewal by the New York City agencies. Today, we reiterated our revised guidance of 2.2 million to 2.4 million square feet, but note that, that does not anticipate the completion of the New York City lease this year. In effect, we're on pace to lease 1 million more square feet than we anticipated at the start of the year, and much of that leasing was for currently vacant space, an astounding accomplishment I want to commend the Piedmont team for. With office vacancy declining for the first time in years, quality space is becoming harder to find and new developments are becoming more expensive for occupiers. We believe that the recent investments that we've made in our portfolio, combined with our customer-centric place-making mindset will continue to set us apart in the office sector, enabling us to push rents to all-time highs across the portfolio and generate consistent earnings growth. We will continue to concentrate our resources on driving lease percentage above 90% and increasing rental rates while opportunistically refinancing above-market rate debt to further drive FFO and cash flow growth. With that, I will now ask the operator to provide our listeners the instructions on how they can submit their questions. Operator?[ id="-1" name="Operator" /> [Operator Instructions] Our first question is coming from Nick Thillman with Baird.
Nicholas Thillman: Maybe for Brent or George, you commented a little bit on just expansion versus contraction. So I just wanted to clarify, is that within the Piedmont portfolio when you're quoting those numbers? And then as you look at the new leasing and the strength there, has that been more new-to-market requirements? Or has that been market share gains in flight to the Piedmont portfolio? Just a little bit of color there would be helpful.
Christopher Smith: In my prepared remarks, Nick, I was referring that 2.2% with the JLL report noting that large users, 25,000 square feet or greater on the U.S. data set was reducing footprint substantially less. So that's that comment, not specific to our portfolio. But George can talk a little bit more to that. We are seeing more expansions than contractions for sure.
George Wells: Thank you. It's amazing. It's been 5 quarters in a row we've had expansions. I mean this past quarter, we had 16 expansions versus 2 contractions for a net positive 40,000 square feet. But if you look at the totality for the past 5 quarters, looking at 55 expansions versus 15 for a net of about 120,000, 130,000 square feet. So the dynamics in our portfolio have been quite positive. And in terms of where new leasing activity is coming from, the second part of your question, Nick, I would say that it's mostly intra-market moves in terms of those users wanting to upgrade to higher quality space.
Christopher Smith: I think the exception to that might be Dallas, where we continue to see a robust inbound activity. Atlanta, a little less so, still up from where we were pre-pandemic, but Texas does seem to have a little bit more inbound and particularly Dallas.
Nicholas Thillman: And those larger requirements, the 25,000 to 50,000 square feet, are those -- if you look at what they're currently in place, what's the size change there? Is that a downsize? Or is it keeping the same sort of footprint? Just trying to get a better understanding of kind of larger tenant behavior. We're hearing about slowing hiring. Just -- I guess, how far are we along in the rationalization of just office utilization as you kind of look within the markets for larger usage.
George Wells: This is George, again. Absolutely. Well, let me first hit this. We had -- last quarter, we had 15 deals that were 25,000 square feet or larger for aggregately about 800,000 square feet. And this quarter, we have in terms of proposals outstanding 18 that are fit that size. So it continues to grow within our overall portfolio. I would say it's mixed. I mean in a couple of instances, we're hearing about some consolidations. In other words, companies wanting to create a cost to bring their employees back together for increased collaboration. In some other cases, it might be a small deduct, which is they used to justify moving to a higher quality space and paying higher rents.
Christopher Smith: I think that's one thing we continue to see within the marketplace is the desire to upgrade the quality of your space to bring your people back. And that means having an environment and an offering that is compelling. And that's where our renovations and what we've implemented across the portfolio in terms of our service model, while we're garnering our more than fair share of that leasing.
Nicholas Thillman: That's helpful. And Brent, you alluded to this runway you have for occupancy growth and mid-single-digit FFO growth at a steady state over the next 2 years. You guys touched a little bit on some of the larger expirations of the portfolio and the coverage you have there. But maybe anything over 100,000 square feet, you guys touched on the Piper, you touched on the Epsilon, you touched on 999. Anything else that we should be looking at as we kind of look at roll over the next 2 years?
Christopher Smith: I think from our perspective, the chunky ones, if you will, in 2026 are well known, which does give us the confidence to be able to look into '26, given the prior leasing success, even with those known move-outs to feel confident that there's going to be earnings growth next year. Unfortunately, office REITs were a battleship. It takes a lot to move. But when you do start going, the momentum can carry. As we look ahead into '27, there are a couple of larger expiries. It's a little early to tell overall. They're in Atlanta, which is also our headquarters location and where we have the most depth in the market. So I feel very good about where we're positioned with those, but it's still 20, 24 months out for those. And so it's going to still take a little bit of time to get clarity, but we think we are well positioned for renewal. [ id="-1" name="Operator" /> Our next question is coming from Anthony Paolone with JPMorgan.
Anthony Paolone: Brent, just following up on just the conviction level that earnings will grow next year. I know you'll give more specifics when you actually provide guidance. But just wondering, do you think that comes by way of some of the debt refinancing that Sherry talked about potentially existing? Or do you think the core in and of itself can move higher?
Christopher Smith: Great question, Tony. And I want to clarify that is organic growth only within a static portfolio. It assumes no acquisitions, dispositions or refinancings. As you know, we don't have any debt maturities really for several years until 2028. But as Sherry noted on the call, we do have a pretty large embedded mark-to-market benefit if we were to refinance those bonds, which she outlined in her prepared remarks. And we will capture that at some point between now and when those mature in '28. But rest assured, from a risk management perspective, the team is very focused on optimizing that transition from high-cost debt to lower cost debt. And what we've laid out in terms of FFO growth, again, is just from organic lease only. The comments that Sheri made is upside on top of what I described as operating growth.
Anthony Paolone: Got it. And then maybe, Sherry, on the debt refinancing, what -- I guess, what are the gating factors to doing something there? Because, I mean, you kind of laid out the spread is pretty clear. Just what would it take to kind of go do something there?
Sherry Rexroad: Well, as we've discussed before, there are a variety of ways in which you can refinance the 9.25% bonds that are outstanding. You can do a purchase them in the market, you can do a tender or you can do a make-whole. There's no gating factors related to that, but there are processes in place and there are periods of time where you can or cannot be in the market. And so that's really kind of the variables that we'll be considering as we go forward. The spread right now between the 9.25% and where we would refinance if we did alongside is about 400 basis points. And that's what's behind the math whenever we said, if you hypothetically could buy back all of them, that you would achieve an interest savings of about $21 million or $0.17 a share.
Anthony Paolone: Got it. Okay. And then just last one, if I could. You kind of talked about being out in the market looking at potential deals out there and the liquidity coming back to office and so forth. I mean what does a typical acquisition that Piedmont might be looking at, at this point look like in terms of cash on cash, type of assets, going in occupancy versus maybe the opportunity? Just kind of what is the type of stuff you're looking at right now?
Christopher Smith: Great question, Tony. As we continue to canvass the market, not only the existing markets we're in, but as we've talked about in the past, select other Sunbelt markets where we would consider growing if we took a dot off the map elsewhere. We really see 2 buckets of opportunities within those markets. The first would be, I would call, an opportunistic set. That's the situation where we've talked about in the past of looking for a partner, which we have identified several partners who would be looking for more like 20% IRRs or greater and really probably going in with a lower yield, higher vacancies and a significant amount of capital that needs to go into those. And so that's why we continue to think about a partner in that situation because it would be an earnings drag and an FFO drag and an occupancy drag to bring it in-house initially. But we always have a mindset if we're going to put any capital to work and our time and effort, it would be something we'd want to bring into the REIT over time. And so those situations, we have looked at a few to swung at buying some debt on some situations didn't work out in that scenario. But we continue to work with those partners. I'd say that bucket right now, kind of comes and goes or off-market deals. But right now, I'd say it's in the $500 million range in terms of opportunity set that we're looking in that bucket. And then the other category would be more on balance sheet, what I would consider more value-add in nature, very similar to what we've done in our Galleria project in Atlanta or 999 in that it's going to be on balance sheet. It's going to be a little bit lower IRR, probably call it mid-teens. You'd have an opportunity to go in that would probably be really close to where we trade, maybe a little bit below or a little bit above, but with more importantly, the opportunity to grow that yield by, call it, 300 basis points over a couple of years. again, through our leasing model, our service model and leveraging the platform to drive that value. So they may start with GAAP yields in the 8.5% to 10% range and drive from there and cash might be, let's say, 50 basis points less. But those assets are going to be probably 70-ish percent leased, like I said, and give us a good opportunity to lease up. One thing that we do think is unique about the Piedmont story is while other groups may be chasing particularly private capital, long-term wall, brand-new assets, we do feel like there is a dearth of capital chasing well-located, good bones, but older vintage assets like a Galleria here in Atlanta, where we've had admit success or a 999. And so those campus, large kind of unique ability to create your own environment interest us and then highly accessible, walkable mixed-use environments also interest us. And there are very good opportunities set around that bucket. I'd say right now, we're looking at roughly $800 million or so that I would characterize as that value-add on balance sheet component. And unfortunately, right now, given our cost of capital, we're not able to move on those immediately, but we continue to keep them warm and continue to have dialogue so that when we do feel like we have a green light from the market to grow externally, we're prepared to do so in pretty short order. [ id="-1" name="Operator" /> Our next question is coming from Dylan Burzinski with Green Street.
Dylan Burzinski: Most of my initial questions have been asked, but I guess just one quick one. In the past, you guys have sort of talked about taking some noncore assets to market. Just sort of curious where you guys are at in that process and if you're starting to sort of see capital market side of things clear up a little bit as the recovery story in terms of the fundamentals start to pick up here.
Christopher Smith: Dylan, thanks for joining us today. And in regards to dispositions, it's kind of -- it's tough. It's still challenging, honestly, given the mindset in the office sector that everybody deserves a deal. And if it's not 10 years of WALT and just built the last 4 years, I would say it doesn't price efficiently, which is great if you're buying assets, not optimal if we're trying to sell. But we continue to be focused on pruning, as you noted, the noncore assets that can sell into this market and/or just we don't have conviction that we'll have and be able to drive long-term value. So we do have an asset in the district that we're in the market with. I would say we continue to feel like the district remains a challenging market that will not likely turn around in D.C. And so we will hopefully execute on that asset and continue to pair back our exposure in the district itself, still very much have conviction in Northern Virginia, and we're seeing good leasing velocity there and uptick in our assets in terms of absorption. But the other markets that we would consider noncore are those where we have very few assets and we can't seem to grow and/or want to grow. And of course, that would be Houston, which has long-term WALT on one of the assets and then Schlumberger great credit in another. We're going to continue to look to dispose those in '26 as well. They've been in the market, and we'll reintroduce them again, hopefully in a more constructive environment. But on that environment, it takes leasing really to give investors the conviction to underwrite an asset, vacant space roll in a constructive manner. And so what does give us positive, if you will, hope that we'll be able to execute on some of this in '26 is that we are seeing more leasing in our markets, and that should give a better underwriting conviction in terms of rates and absorption and not just underwriting vacant space stays there forever. And then finally, we do have our asset in New York City, as we've noted, and that will likely be something we would look to monetize upon a long-term lease at that asset. The overall environment as well as improving, particularly for that asset in the debt capital markets. It would be a chunkier disposition. And so having the ability and you're seeing the strength right now in the secured debt markets will also improve execution, particularly on that New York City asset and when we monetize it. [ id="-1" name="Operator" /> [Operator Instructions] Our next question is coming from Michael Lewis with Truist Securities.
Michael Lewis: I'm sorry if I missed this, but did you say why New York City was pushed back again? And with that lease expiration now kind of almost right on top of us, is there any reason for concern there that they might do something surprising, give back space or anything else?
Christopher Smith: Michael, it's Brent. Thanks for joining us today. Great question. We hadn't touched on it in specifics. And given it's a live transaction, I don't like to get into a lot of detail. But as we've noted on prior calls, and we are still very highly engaged with both DCAS, the Department of Citywide Administrative Services who runs the leasing process for the city. They're working with OMB. And of course, there's also 3 different agencies within that block. So there are a lot of moving pieces and groups that need to weigh in. As we've noted on prior calls, though, it is a unique envelope that is their own entrance, their own elevator bank, a building within a building, if you would add, you would say. And so the other note would be downtown in Manhattan, there are very now a few large blocks, competitive buildings that we would historically have been competing with. Some of them have been converted to residential as well. And so we feel like it's, I guess, not as much a concern as they would go elsewhere in lower Manhattan. And then the fact that there's an $8 million holdover penalty on top of their current rental rate that's on an annual basis. But if they do trip over into holdover, we reiterated to them as a public company, we will be upholding that in the pandemic, we were a little bit more immediate on that. Of course, if they renew, we're not going to enforce that. But it is a pretty heavy stick that also goes with the care of a building that really suits the agencies well. We do recognize there is a new administration coming in. However, given the Department of Homeless and the other agencies there seem to be more geared towards helping the community, we think there is a strong likelihood that they will continue to stay engaged in this location. But at that point, that's all I can share, and we still remain very positive on a renewal sometime in the early part of '26.
Michael Lewis: No, that's helpful. And as far as the $75 million of cash rent that's kind of pending signed but not paying yet. You give a lot of great detail in the supplemental package, but there's a lot of detail. Could you -- at a high level, how should we think about that $75 million coming online, for example, what percentage of that might be might be paying by the end of the first half of '26 versus the back half? And can you just kind of, at a high level, kind of frame how that will flow through?
Sherry Rexroad: So Michael, thanks for your question. And the -- most of it is going to hit in the middle of the year. I recommend about 70% within 2026. And note that those numbers are annualized numbers. So I'm trying to see what other clarity I can give you. Does that help?
Michael Lewis: Yes. No, yes, that's helpful. And then just my last question.
Christopher Smith: I might add real quick -- sorry, Michael, I might add, you think about that $75 million, it's really split into 2 buckets, right? There's $40 million of yet to commence. And that's a pretty wide margin historically that we would say that would be 3% of the portfolio. It's now approaching, I think, almost 5% of the portfolio. And so we're expecting a lot of that, if you will, the $40 million commit next year more towards the middle of the year to the end. So we might realize roughly about $26 million of that $40 million within 2026 itself. On the cash component, which is about $35 million, that's going to lead in on a similar pace as well. So again, $35 million is your annualized number, not all that's going to start paying cash next year. But on that same kind of ratio of about 60% of it, a little bit higher than that, say maybe 70% of it will be realized next year.
Michael Lewis: Got it. And then lastly for me, this might be beating a dead horse. You talked about all the office leasing demand. Given the jobs numbers, I guess, back when we used to get jobs numbers, but what we know about jobs numbers and then AI, there was a headline recently layoffs now at Amazon. I saw an article that said more layoff announcements this year in any year since 2000. Is some of the leasing velocity, is it just that REITs like yourself, you had more space to fill, and so that helps explain why there's more new leasing volume? Or it sounds from your comments like it's really a stronger demand, just more space out there looking for a home. Any way to kind of reconcile those 2 things I just said, the jobs and the layoffs and everything that's happening in the broader economy with this -- what feels like a surge in office demand?
George Wells: Well I'll start with that. Michael, this is George. It's interesting. We keep seeing announcements with layoffs. But as I kind of reconcile that to what we're seeing in our portfolio, we just -- I'm not seeing that affect us yet. And I get back to the comment that I made earlier, people are still looking to upgrade their space because collaboration and innovation just happens a lot quicker when you were working together. So just to give you some statistics that supports that theme in terms of why we don't see a letdown at all in overall leasing. We talked about overall proposals earlier at 2.4 million square feet overall. That's quite comparable to what we've seen for the past several quarters. But most notable is 2/3 of that is for new space, right? And so that is amazing considering how much new leasing activity we've done for the past 2 quarters that we continue to backfill that pipeline. And then looking even further out, the tour activity is an interesting early indicator of what's happening for demand in our portfolio. We did hit a low point in July for 34 tours, but that's kind of more seasonal than anything else. It recovered in August to 45 tours. September, 41 tours. And here we are sitting 27 days in October at 43 tours with 4 more days to go. So we're just not seeing it right now. Getting to your point about Amazon, it is interesting. It's new information we'd like to absorb. But although we have a large hub in Dallas, for them. They lease a tremendous amount of space through WeWork in other submarkets, which are more on the short-term situation. So if I were to guess, I suspect that those short-term contracts in these co-working operations would probably be first to go.
Christopher Smith: And I'd add on that, Michael, really taken a step back, 2 things I think about our portfolio have linked to our success, and they're not just because we had more space available. The first is we don't lean in or have floor plate and buildings designed heavily for just tech use. It is much more of a professional services, fire, conducive amenity set, finish level, floor plate size, et cetera. And so as tech has pulled back from the -- being kind of the incremental lessor in a lot of markets, our assets have continued to perform because we were never beholden specifically to that group. As George noted, we do have tech in our portfolio, particularly in Dallas and Boston, but it's buildings that fit well for a law firm as well. And so that would be one factor. I think the other one is if you look at our portfolio and our strategy of having great assets, amenitized location, but we don't cost as much as new construction. So if you're a firm, a national firm or a local kind of regional firm, if you want to create a presence, regional headquarters, et cetera, and you want it to be fabulous space to bring your people back, but you don't want to pay $65 to $80 gross, you come to a Piedmont building. And so we are much more appealing to a larger segment of the market, in my opinion, and I think the data set shows that. And that's why we also have had so much uptick into our assets. And then you layer on the fact that a lot of landlords are kind of stuck in the capital structure that doesn't allow them to think creatively work with the clients and create the environment in the common areas that are necessary to lease space. So trophy is full and our set of assets are very compelling. I'll give you one last anecdote. We are working our buildings in Minneapolis at Meridian and having great receptivity in the marketplace. A tenant toured that building before the renovations were completed about 4 months ago. end up going to new construction and entering a lease on that new construction, they did come back to us. We don't have that deal, but they are very compelled now to see the completed product and the fact that, that's a 30%, 40% discount to new construction rents that they are about to enter a lease into. And we'll see if we'll get that 60,000 square foot user. But I think there's an opportunity to stag that because our environments are so compelling, we can compete with new construction, and we don't have to charge as much. And again, that goes to my point on our ability to push rate across a lot of the portfolio given we've done this investment, and we've got a service level that is truly differentiated, and it's not just that we have more available space.
Michael Lewis: I can't argue with those leasing results. [ id="-1" name="Operator" /> As we have no further questions on the lines at this time, I would like to turn the call back over to Mr. Brent Smith for any closing remarks.
Christopher Smith: Thank you. I appreciate everyone joining us this morning. I do want to remind you of 2 important dates. First, this Friday, Happy Halloween to all those. And then the second is in December, we are going to be at the NAREIT event in Dallas on the 8th. We're going to hold an office tour where we'll be sharing and showing off all the success we've had in our Dallas Galleria project. We'll also have additional brokers and others from the investment community, giving their thoughts and insights on the office sector. So please join us, reach out to either Sherry or Jennifer if you're interested in joining that tour and discussion and dinner. Hope everyone has a great week. Again, thank you again. [ id="-1" name="Operator" /> Thank you. Ladies and gentlemen, this does conclude today's call. You may disconnect your lines at this time, and have a wonderful day, and we thank you for your participation.