Piedmont Realty Trust Inc (PDM) 2023 Q1 法說會逐字稿

Good morning, everybody, and welcome to the Piedmont Office Realty Trust, Inc. First Quarter 2023 Earnings Call. (Operator Instructions) Please note, this conference is being recorded.

I will now turn the conference over to your host, Mr. Eddie Guilbert. Eddie, you may begin.

Thank you, operator, and good morning, everyone. We appreciate you joining us today for Piedmont's First Quarter 2023 Earnings Conference Call. Last night, we filed our Form 10-Q and an 8-K that includes our earnings release and our unaudited supplemental information for the first quarter that's available for your review on our website at piedmontreit.com under the Investor Relations section.

During this call, you'll 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. We encourage everyone to review the more detailed discussion related to risks associated with forward-looking statements in our SEC filings. Examples of forward-looking statements include those related to Piedmont's future revenues and operating income, dividends and financial guidance, future leasing and investment activity, and the impact 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 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 regarding first quarter's operating results. Brent?

Thanks, Eddie, and good morning, everyone. Thank you again for joining us on today's call as we review our first quarter results. In addition to Eddie, on the line with me this morning are other members of the senior management team. Following me, you'll hear from George Wells, our Chief Operating Officer; Chris Kollme, our EVP of Investments; and Bobby Bowers, our Chief Financial Officer.

The first quarter of 2023 demonstrated continued resiliency in leasing, with Piedmont's prospective tenant pipeline holding steady and meaningful tenant lease volumes executed during the first 3 months of the year. In total, we executed almost 550,000 square feet of leasing, with approximately half of that to new tenants, the greatest amount of new tenant leasing on a quarterly basis since 2018. This leasing was comprised of mostly long-term deals, generating an average lease term of 8 years, and delivering attractive cash rental rate roll-ups of almost 6%.

Operational metrics were generally positive. And while Piedmont did generate strong new leasing activity, this success was somewhat mitigated by a roughly 80,000 square foot known tenant moveout in our suburban Boston market. Rollups on cash renewal rental rates were in line with past years, where we have consistently generated positive rollups of 5% to 10%. However, cash same-store NOI was down slightly this quarter due to the timing of lease commitments and expirations.

The market for office tenancy is highly competitive, particularly considering the economic and secular headwinds facing the industry. That said, Piedmont continues to demonstrate that high-quality amenitized work environments operated by well-capitalized service-minded landlords continue to generate demand from small and medium-sized businesses as well as larger non-tech corporate tenants. The flight to quality occurring in the market is playing to Piedmont's strategy, providing premier workspaces at meaningfully lower rental rates versus new construction. In fact, Piedmont has achieved over 200,000 square feet of new tenant leasing 5 out of the last 7 quarters, which is higher than our average pre-pandemic leasing metrics, a testament to the success of our customer strategy.

As in recent quarters, companies requiring a full floor or less continue to drive our leasing demand. And building on this theme, our average lease size in the first quarter was approximately 12,000 square feet. And we're deliberately focused on attracting this key customer segment through our sales approach, property amenities and hospitality minded service model and it's benefiting Piedmont as these small and medium businesses continue to grow and hire new employees, while we see larger corporate tenants generally reducing headcount and office space requirements.

In short, our leasing formula is working and we continue to be optimistic about the value proposition for our customers and the opportunity to continue our leasing success, particularly in today's capital-constrained market. The flight to quality buildings and owner-operators is favoring landlords like Piedmont. And in fact, I'm pleased to share that over 200,000 square feet of leasing has already been executed in the second quarter of 2023, of which over 125,000 square feet is for new tenant space, bringing our total new tenant leasing for the year to almost 400,000 square feet. That's more than half the new tenant leasing we completed during all of 2022 achieved in just the first 4 months of 2023.

Furthermore, our leasing pipeline remains robust, including 350,000 square feet of leases currently in active negotiation and documentation. As Bobby will delve into further in a moment, our balance sheet and liquidity remain strong, a differentiating factor as prospective tenants scrutinize the capital structure of potential future office buildings and landlords. This differentiation amongst office product is driving increased market share for the highest quality, placemaking assets and well-capitalized landlords. And given the disruption in the broader capital markets, transactional activity remains challenging and new construction starts for office development are virtually nonexistent. With limited new development, we do expect that tenant demand will remain focused on the best existing properties within a submarket.

Last, I want to publicly congratulate the Piedmont team for once again being designated as an ENERGY STAR Partner of the Year for the third straight year. It takes a firm-wide effort for the Piedmont portfolio to maintain one of the highest percentages of ENERGY STAR designated properties in the industry, and it's gratifying when our commitment to maintain sustainable wellness-oriented work environments is recognized.

Before turning the call over to George, I want to thank the outstanding employees at Piedmont, who provide excellent service to our customers each and every day. Their dedication, resilience and hard work continue to drive our leasing success.

With that, I hand the call over to George with Chris and Bobby to follow to provide further details on the quarter and our outlook. George?

Thanks, Brent, and good morning, everyone. Flight to quality theme continues as Piedmont posted another quarter of solid operational results. Prospective and existing tenants recognize Piedmont's attractive, commute-worthy workplace proposition, citing ease of accessibility, vast amenity-based unique tenant engagement programming and best-in-class conference facilities in conjunction with a sustainability-minded operator. And now we're beginning to hear more about the financial quality of landlords and their capability of meeting mortgage obligations or funding leasing costs. This will give Piedmont another competitive edge in the leasing arena as we currently have no property level debt except for our fully leased 1180 Peachtree asset in Atlanta. Our competitive advantages reinforce our cautious optimism that leasing production trends will continue for 2023.

This quarter we completed 46 lease transactions for approximately 545,000 square feet of total overall volume. Of this amount, half of these leases totaling approximately 270,000 square feet, were related to new tenant lease activity at levels not seen since 2018 and totaled roughly 12% of our vacant space. As Brent noted, this new deal activity was well over our pre-COVID quarterly average of about 175,000 square feet, and our leasing pipeline activity has remained consistently around 2 million square feet.

Continuing with operational metrics, our lease economics were very favorable with 5.7% and 9.9% roll-up or increase in newly executed rental rates for the quarter on a cash and accrual basis, respectively. And our weighted average lease term achieved on new lease activity for the quarter was approximately 8 years. Our lease percentage at the end of the first quarter was 86.1%, down approximately 0.5% from yearend due to previously disclosed about 2% or so lease expirations during the first quarter and a growing backlog of leases yet to commence.

Quarterly lease expirations drop to approximately 1% over the next few quarters, averaging 150,000 square feet per quarter and leading us to believe we will end the year between 87% and 88% leased based on the current leasing pipeline. Nearly 90% of our new tenant lease activity occurred in our Sunbelt portfolio, which is anticipated given approximately 70% of our available vacancies reside in either Atlanta, Dallas, Orlando, or Northern Virginia.

Looking now at our specific targeted leasing markets, I'd like to highlight for you a few key accomplishments which occurred during this quarter. In Dallas, our second largest market with approximately 20% of ALR, we experienced an extraordinary quarter with nearly 250,000 square feet or 46% of our overall leasing volume including 172,000 square feet of new deals. Most notable was executing 3 new tenant full-floor deals or greater, one being a 70,000 square foot lease to an energy company at our redeveloped Las Colinas Center, a second being a 58,000 square foot headquarters deal at our LEED-gold One Galleria Tower for a global logistics company moving its headquarters from out of state, and the third being a full-floor lease to a local law firm at 6031 Connection Drive.

According to JLL's first quarter report, Dallas continues to post some of the strongest employment growth rates in the country, and our portfolio is well positioned to capture future demand. In Atlanta, our largest market of almost 5 million square feet and generating approximately 27% of our company's ALR, our team had a very active quarter as well, completing almost 175,000 square feet of leasing, of which 37% were new tenant leases. Of note was landing another full-floor headquarters requirement at our most recently completed redevelopment, Atlanta Galleria 600. This lease to a global airline communications company represents another flight to quality example, leaving a nearby Class B building and becoming Galleria's seventh full floor new deal since 2020, 5 of which are headquarter locations. That lease is projected to commence early in the fourth quarter of this year.

Moving on to Boston, our 80 Central Avenue asset made another splash this quarter by landing a sizable new tenant deal again, its third in over the last 4 quarters. Our newest tenant is an internationally acclaimed product development firm which specializes in R&D, industrial design, and engineering. They too are relocating from a Class B building from an adjacent submarket with a modest expansion component. As a result, Central Avenue's lease percentages moved up to 86%, and our overall Boston portfolio where a majority of our tech exposure resides, is well leased with minimal expirations over the next 2 years.

That said, Salesforce and Microsoft, 2 tenants in our Boston portfolio, recently announced workforce reduction. As a result, Salesforce has announced they'll be placing some of its space on the sublease market. However, I would note that these 2 large leases don't expire until 2029 and 2031, respectively.

Coming back to the overall Piedmont portfolio, we remain positive on near-term leasing trends and operational performance. Tenant activity is still good. We have more proposal activity than the previous trailing 12 months, currently totaling around 2.2 million square feet. Our tenant receivables are current, and our overall utilization rate is approximately 60%, although it varies greatly by tenant end markets.

Finally, we're also encouraged that the escalating leasing costs that we've seen throughout the last year have flattened, and actual leasing concessions were down slightly from the fourth quarter of last year.

I'll now turn the call over to Chris Kollme to review investment activity. Chris?

Thank you, George. Given the current constraints in the capital markets, we don't have any significant transactional activity or updates to report today. But we do continue to work a handful of mature and/or noncore assets that we would like to monetize in 2023. Again, this is nothing new for Piedmont. We have received inbound interest in select assets and continue to work creatively and patiently with potential buyers. We remain cautiously optimistic about our ability to dispose of 2 or 3 assets during 2023.

Regarding our 2 assets in Houston, we are under contract and through diligence with one potential buyer. The contract does provide a financing contingency and the buyer is actively pursuing debt. Across all cities and real estate sectors, the dislocation in the debt markets has resulted in seller financing often being a necessary instrument to complete transactions. At this point in time, we do not intend to offer similar financing on assets. However, we will continue to evaluate each potential transaction in light of market conditions. We intend to use any disposition proceeds received to pay down debt.

With that, I'll turn it over to Bobby to walk you through the quarter's financial results and balance sheet highlights. Bobby?

Thanks, Chris. As we indicate every quarter, while we discuss today some of this period's financial highlights, I encourage you to please review the entire earnings release, the 10-Q, and the accompanying supplemental financial information, which were filed last night for more complete details.

Core FFO per diluted share for the first quarter of 2023 was $0.46 versus $0.51 per diluted share for the first quarter of 2022, reflecting the approximately $0.07 per diluted share increase in interest expense on a quarter-over-quarter basis, partially offset by some operational growth resulting from successful leasing efforts, rising rental rates, and asset recycling over the last 12 months. AFFO generated during the first quarter was approximately $37 million. As George noted, rental rate roll-ups on executed leases continued to be strong during the first quarter. Cash basis rents were up almost 6%, and almost 10% on an accrual basis. Property NOI increased slightly on both a cash and accrual basis for the quarter due to the acquisition of 1180 Peachtree during the third quarter of 2023.

Same-store NOI, however, decreased slightly on a cash basis quarter-over-quarter due to a 580,000 square foot increase in total leases yet to commence or in abatement. This total backlog of executed leases is now over 1.3 million square feet as of March 31, 2023. Leases expiring during the first quarter represented approximately 2% of our annualized lease revenue, and they also contributed to the change in our same-store NOI.

The first quarter of 2023 was the largest quarter with scheduled lease expirations that will impact our yearend lease percentage this year. Based upon the current leasing pipeline and outstanding proposals that George mentioned, we continue to anticipate same-store cash NOI will increase approximately 1% to 3% on an annual basis and that our yearend lease percentage will be between 87% and 88%. Termination fees were immaterial during the first quarter and are not expected to be a contributing factor to our 2023 estimates.

Turning to the balance sheet, during the first quarter, we entered into a new $215 million unsecured term loan priced at SOFR plus 105 basis points with a final extended maturity of January 2025. We plan to use a majority of the proceeds from this new facility, along with potential proceeds from select noncore dispositions that Chris alluded to, along with draws on our $600 million line of credit, which is currently fully available to repay our $350 million 10-year bond that matures in June. After the repayment of the bond and receipt of the expected disposition proceeds, we anticipate our debt to gross asset ratio should be between 37% and 38%.

We have no ground-up development projects in 2023, and we have the lowest level of outstanding redevelopment tasks in several years, totaling expected spend of approximately $40 million over the next 2 years. Following this 2023 debt retirement, our next scheduled debt maturity is in March of 2024 for a $400 million 10-year bond. We have already begun addressing this maturity through a number of means. By meeting with our investment bankers to evaluate a wide range of public and private capital markets alternatives. By holding a bondholder informational meeting and credit update scheduled for early next week. By engaging our relationship banks to provide additional term loan lending. And since we have only one existing mortgage for an asset in our entire portfolio, we are also working with brokers regarding secured mortgage financing.

In summary, we are actively pursuing a variety of financing alternatives, including public debt, bank debt and secured debt. Our strong preference continues to be accessing the public and private bond markets for 5 to 10-year bonds for the entire maturity. But with the current debt market dislocation, the likelihood of a combination of the above sources, along with our line of credit availability and potential disposition proceeds will most likely be used to address this 2024 maturity.

At this time, I'd like to reaffirm our 2023 annual core FFO guidance in the range of $1.80 to $1.90 per share. To remind you, in keeping with our typical practice due to certain -- the uncertain nature of estimating the timing of capital markets transactions, our guidance does not include any disposition or acquisition activity, and we'll adjust and update this guidance if and when such transactions occur.

With that, I'll now turn the call back over to Brent for some closing comments.

Thank you, George, Chris and Bobby. Despite the macro challenges that the office sector continues to face, I encourage investors to look through the negative headlines and work from home sentiment and instead focus on those operators and properties which are achieving leasing success like Piedmont. If you follow the leasing, it will identify the top 20% of buildings in a submarket, which on a relative basis are more successful today than they were pre-pandemic. We believe you can see this demonstrated in our 2023 leasing metrics to date.

Throughout the remainder of the year, we anticipate modest space absorption and operational growth. We will continue to be a net seller of assets as we deleverage the balance sheet and enhance our liquidity resources. But as we previously outlined, increased interest expense will weigh on earnings and FFO for the year. I will now ask our conference call operator to provide our listeners with instructions on how they can submit their questions. We will attempt to answer all your questions now or we will make appropriate later public disclosure if necessary. Operator?

(Operator Instructions) Our first question is coming from Michael Lewis of Truist Securities.

It looks like TIs were up a bit in the quarter. And I know one quarter doesn't tell a whole story specific to certain leases, but are you seeing continued pressure on the CapEx? And when do you think net effective rent could ultimately stabilize or grow?

Michael, this is Brent. I think as you did note, TIs were up a little bit this quarter year-over-year, actually down a little bit quarter-over-quarter. I do believe that we are seeing basically a leveling off of hard costs. Sorry, a leveling off and maybe in some instances a little bit of a decline in terms of hard costs around development, redevelopment, sorry, and tenant build-outs.

I'd also note that we did a fair amount of new leasing this quarter as well, which generally tends to be a little bit more elevated than renewal leasing in terms of that TI capital. Overall, I think we are seeing I guess maybe the potential for I guess a leveling off of that CapEx side. In terms of net effectives, I think we continue to try to push rents in the projects where we continue to see meaningful lease momentum. That's generally been in our Sunbelt projects where we have continued to raise rents.

If you look at our past call it 3 years, we've averaged around 7% on a cash rollup basis, so rents have been moving. Now in terms of net effective growth, I think we continue to believe that that may be difficult in this overall environment, particularly this year. I think it's more reasonable to think we'll have a flattening of net effective with maybe a potential for growth into '24/'25 as some of I think the news and headlines and general negative sentiment hopefully around office start to dissipate.

We're writing our earnings note last night, and we're typing in some of these valuation metrics for the stock, which I'm sure you're very familiar with. 3.5x FFO, 5x FAD, 9.5x enterprise value to EBITDA, almost a 12% implied cap rate. And I know, Brent, I've asked you this offline, but this kind of lack of interest from private equity or buyers, I guess it's true in individual assets as well, Piedmont's got a clean balance sheet, no JVs, really just a portfolio there that's traded at this high cap rate. Do you attribute this lack of interest in office and in office stocks to the financing environment? To the fundamentals? It's probably a combination of both. I'm just trying to think, what ultimately stabilizes a stock like Piedmont that trades at this deep, deep discount? I don't know, kind of an open-ended question, but I don't know if you have any thoughts there.

I think it's a very good observation, Michael. And I think Piedmont is not alone in just how heavily the stock itself has been beat up. And I think, really, it is difficult for investors, private equity or otherwise, to really be able to discern in this environment what's successful and what's not. It varies greatly by market, by submarket and by asset.

And even within our own portfolio, that dichotomy shows up. I think we recognize that investors have maybe thrown a very blanket observation across the sector and not delineating between West Coast, East Coast, Gateway, non-Gateway, Sunbelt, etc. We are more Sunbelt focused. We have been successful in leasing and that has continued to be our answer in terms of trying to prove out the success of the portfolio and the strategy that we've been accomplishing. And we continue to reiterate to investors that I think that's the most accurate way of just turning a successful portfolio.

What's been unique to Piedmont is our focus on I'd say small or medium businesses as well as what I call a value A. Not everyone can afford brand-new product, but there's certainly as George noted a flight to quality and now a flight to capital. And we are in that sweet spot. I think that's really generated our leasing success. Now as you know now though, from a pricing standpoint at a 12 cap, there just is a lack of interest overall in the sector and particularly in our name.

And I think that will continue for some time because it is very difficult, again, for people to discern what's a successful portfolio and what's not. We'll continue to focus on the components that we can affect and what we can control and continue to then rely on those metrics and let the market make the decision for themselves. But I think we feel very good on an operational level where the portfolio is headed. But I do think overall fundamentals and the lack of financing in the sector has weighed on our name more so than it should.

Great. And then just lastly for me, I wanted to ask about the dividend. Because some office REITs have cut, some have talked about potentially cutting, some have even raised the specter of a cut just to say that they can if they need access to some extra capital. Your stock had a 13% dividend yield. It looks like good coverage. What's your view of the dividend? Are you kind of committed to continuing to pay that even at a 13% yield?

Yes, Michael, the Board and management, we do review the business plan quarterly and our progress against that and throughout the year and how that relates to the dividend level. We currently pay about $0.84. We do pay $0.84 annually. Taxable income levels will be roughly in that 50% to 60% range. We do pay out about $35 million to $40 million above taxable levels. And no doubt, a 13% dividend yield is unusually elevated. I think though, as you point out, we have about 1.4x AFFO coverage of the dividend from cash flow, so it is well supported.

As long as the business is generating the leasing success that we're seeing, we have no ground-up development, we continue to grow the contractual revenue backlog, and we're keeping the dividend covered, I would anticipate it remaining at these levels. I think we would say though, furthermore, that we would not utilize leverage to pay a dividend long term. And the Board will continue to evaluate the dividend level with a mindset something would need to impact cash flow to warrant a reset.

Whether it be like an interest expense increase that's above what we would anticipate, meaningful dispositions that were significant in nature, and/or diminished cash flow due to expiring leases. But none of that is in the picture right now. I think we feel and the Board feels comfortable where the dividend is today. We do have ample liquidity to fund the business and we continue to monitor it closely. And I want to be clear, Bobby noted I said that taxable levels are $0.50 to $0.60 a share and not percent if that didn't come through clearly.

Your next question is coming from Nick Thillman of Baird.

Maybe starting with Chris, it seems as though activity on some of your noncore assets or strategic sales might have kind of picked up. Just wanted to kind of get an update on what you're seeing, maybe what markets we should think of as noncore. I know we talked about Houston, but is it also New York and Minneapolis? Just your thoughts there.

The comments on Houston, that is I'd say we're cautiously optimistic, as I said in the prepared comments, that we can get a couple of call it 2 to 3 deals done in 2023. As you can imagine, it is a very, very difficult backdrop. We are under contract on Houston. We'll probably have a little bit more clarity over the coming weeks. As I mentioned, there is a financing contingency. The potential buyer is actively pursuing debt. Beyond Houston though, I don't think we really want to get into specifics around markets or particular assets. I will tell you, Nick, if you saw the list that are noncore assets that we might look to dispose, none of them would surprise you. They're nonstrategic assets for one reason or another, whether that's building profile, its location within a submarket, its competitive positioning, or maybe its lower cash flow growth profile. But importantly as I mentioned, recycling assets is not a new initiative for Piedmont. We take great pride in our ability to do that. Whether we are able to do that given the market backdrop in 2023, it's hard to predict, but we're going to certainly try.

Nick, I'd add, this is Brent, in each of these situations, as we've noted in the past, the groups that are looking at assets are generally local operators that know the markets well. Again, we've talked about you've got to discern each submarket and asset or users. And they've mainly been inbound other than the Houston transaction. We're not actively marketing these assets, but we've got groups who recognize the value or want to use it themselves or whatever it may be in that instance. And that's really -- in those instances where it's not core to the portfolio and that may be across a number of markets where those inbounds are coming from, we're evaluating it.

That's helpful. Then maybe turning to George on the leasing, the 350,000 square feet of active negotiations, what percentage of that is new leases versus renewals? And then what's like the average tenant size or profile of that?

I would say that we feel really good about closing out that 350,000 square feet that's in pipeline today. I would say so far I'd say about 1/3 of that is for new activity. I believe that looking at our overall proposal pipeline, which is elevated from where it's been in the past several quarters around 2.2 million square feet, we're hopeful some of those convert. We've got 2 months left in the quarter to make some headway from a new perspective. But if you look at our trend, we're still pretty confident to continue on that what I would call streak.

And I would note too, Nick, as we discussed, we've got about 125,000 square feet of new leasing in already in the second quarter of the 200, so a little bit more in that instance. And it is -- it varies almost greatly by quarter. And some of the larger deals we're chasing that are new in nature, obviously influence that. In terms of the average tenant size of what we're looking at, I think that very much fits what we've been talking about. Maybe one big tenant a quarter, big being 50,000 square feet or more, and lots of kind of full-floors or less where we're seeing the most success. Average tenant size probably still in that 15,000 square foot range is kind of where it works out to you right now.

And then last one for me, Brent, any updates on some of the larger tenants like U.S. Bank or Amazon?

Yes. We continue to be obviously very close with U.S. Bank given their near-term expiration. I would remind everyone that that is a great LEED-gold asset downtown in which they're headquartered, where they occupy about 400,000 square feet. Best amenity package in Minneapolis on the 31st floor with 18-foot windows over the city.

The suburbs, they've got about 350,000 square feet and an asset that has some good walkability to it, but we would look to enhance if they were to renew. We've continued to work through with them. They've got this merger integration with Union Bank of California that's proceeding well. They should, as we've talked about, have clarity early in the summer, but they have kept their cards close to their vest. But we still feel like a renewal of some percentage of space in both locations as we've talked about. I know I've given a wide range of 50% to 100%, but that is our best indication at this point in time.

I think on the positive side, financial services continue to predominantly become office hybrid work strategy, bringing their employees in at least 3 days a week or so, maybe more now as it continues such as JPMorgan, Morgan Stanley, etc. And I think new development for them is not really a risk given the current timeframe in either location. Overall, I think we still feel positive there. Amazon, as you mentioned, they reside now at our LEED-gold Dallas Galleria project that we did have upgraded to LEED-gold status. That project, it continues to I think suit their needs very well.

I think it's more a decision for them about how much to renew in place. The likelihood of them going to new development I think is limited given there is none constructing in the submarket, and it's our understanding they would like to stay there. But overall, it's still very early and too early for us, have not fully engaged on what their expectations are. We're just trying to make observations about how they're utilizing the space. And more importantly, they've required everyone to come back to their space this week, so that is a big change from Amazon's mindset. And I think that will continue to evolve and influence their decisions on that 2025 expiry.

(Operator Instructions) Our next question is coming from Dylan Burzinski of Green Street.

You guys touched on just the overall tough debt financing environment that continues to take hold for the office sector. And I know we hear a lot about the looming debt maturity in the sector over the next few years. Just curious if you guys are expecting to see a large amount of distress in the sector over the next few years and if this may create opportunities for Piedmont. I realize that obviously, near-term capital needs are going towards addressing that 2024 maturity, so just wanted to take this question and how you guys are thinking about that longer term.

Yes, Dylan, this is Brent. Thanks for joining us today. I appreciate the question. Certainly, financing has for office gotten very challenging, particularly for certain assets and certain sponsors. And that has created some dislocation I'd say today in the overall marketplace. I think you have to be mindful though that a lot of what's been truly impacted and is creating distress right now has probably not fit our strategy.

It's generally been in West Coast and probably more CBD Northeast than what we currently operate in that have seen the majority of that impact. I'd say the quality of the assets that we're targeting, that dislocation distress has not been there. There may be dislocation. We continue to talk to those operators that have assets that may have been constructed recently and got not fully leased or continue to have challenges in terms of near-term refinancing that may require not -- they can get a new loan, but they may need to do a paydown or come up with some other slug of mezz or preferred, etc.

We continue to be very engaged on those opportunities with the mindset that it's probably not near term that that is an issue, but more call it 12, 18 months out. We continue to be very patient at this point in time. We'll continue to de-lever and put ourselves in a position that should we find that opportunity with one of these groups that we're building those relationships with, we'd be in a position to move on it. And what that might look like would have to wait for me to give you a better understanding of the market at that time. But we do continue to build those relationships around the assets that we would like to own and acquire someday.

That's helpful. Thanks for the commentary there. I guess just switching gears, we're 3 years post the pandemic I guess. Have you guys noticed a change in how tenants are utilizing and building out their space relative to sort of pre-COVID build-outs?

Yes, Dylan, that's a great question. And I don't think it's lost on a lot of the market that we've leased 5 million square feet since the beginning of the pandemic. That's 30% of our portfolio today at an average cash roll-up to 7%. Now, we've seen a lot of tenant buildout over the last 3 years, you can imagine in 5 million square feet. And I think it's changed. It's been interesting to see that evolution.

But I think where we stand today, we're seeing more space per employee for smaller tenants as they continue to build more I guess community space or teambuilding space or conference space, whatever you want to call it. And it has a different vibe and a different feel depending on the company. And we continue to see buildings that address that small tenant market and medium-sized tenant market be also very successful.

And those tenants generally bid out the same. But if you look at the large corporates that are giving back space, they're shrinking space. And I'd say the average space per employee in that office is more, but they're putting more people through hoteling use potentially and/or just having groups rotate through more efficiently their space. And that's where we have seen maybe the same design as the smaller tenants, but that trend of giving back 30% or so on renewals that has been driven really by utilizing the space differently -- sorry, more efficiently.

Overall space buildout has not I'd say materially changed, although we see about 30% of what used to be individuals' workspace be now utilized within the same space and footprint for community and teambuilding. I think the other thing we would note is there was a big push at the beginning of the pandemic for outdoor space and to have a big focus on each individual tenant, and also maybe some amenities that were very specific on the tenant on their individual floor. I think as time has gone on, we've continued to see modest utilization in that 60% to 70% range.

And we're finding that people want community, and they want teambuilding, and it may not be with their existing company. And those types of spaces are actually more enjoyed and more utilized when everyone in the building has access to them. I think that's a trend that we continue to lean into and design our spaces in our buildings so that there is more community space, and it has more of that hospitality feel. And that has led to that 5 million square feet that we've been able to lease. But overall, how tenants bid out their space, it's really just kind of more community space, 30%, and then what we talked about in terms of the large tenants changing their use of space. Is that helpful?

Yes, that was incredibly helpful. I appreciate that thorough overview.

Thank you very much. We appear to have reached the end of our Q&A session. I will now turn the call back over to Brent for any closing comments.

Thank you, operator. I appreciate everyone joining us today. Again, I want to remind investors to follow the leasing as we say, and continue to focus on those companies that have continued to have leasing success. We would enjoy the opportunity to talk further about this at the New York City June Day REIT conference in about 5 weeks. If you're interested in sitting down with management and talking further, please reach out to Eddie. Again, thank you, everyone, for joining. We'll talk to you next quarter at NAREIT. Thank you.

Thank you, everybody. This does conclude today's conference call. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.