Good morning, ladies and gentlemen, and welcome to the Piedmont Office Realty Trust Fourth Quarter 2021 earnings call. At this time, all participants have been placed on a listen-only mode, and we will open up the floor for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Eddie Guilbert. Sir, the floor is yours.
Thank you, operator, and good morning, everyone. We appreciate you joining us today for Piedmont's fourth quarter 2021 earnings conference call. Last night, we filed an 8-K that includes our earnings release and our unaudited supplemental information for the fourth quarter that's available on our website at piedmontreit.com under the Investor Relations section. During this call, you'll hear from senior officers at Piedmont, and they may refer to certain non-GAAP financial measures such as FFO, Core FFO, AFFO, and Same Store NOI. The definitions and reconciliations of these non-GAAP measures are contained in the earnings release and in the supplemental financial information. Also, on today's call, the company's prepared remarks and answers to your questions will contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.
These forward-looking statements address matters which are subject to risks and uncertainties, and therefore, actual results may differ from those we anticipate and discuss today. The risks and uncertainties of these forward-looking statements are discussed in our press release as well as in our SEC filings. We encourage everyone to review the more detailed discussions related to risks associated with forward-looking statements in our SEC filings. Examples of forward-looking statements include those related to Piedmont's future revenues and operating income, dividends and financial guidance, future leasing and investment activity, and the impacts of this activity on the company's financial and operational results. You should not place any undue reliance on any of these forward-looking statements, and these statements speak as of the date they are made.
At this time, our President and Chief Executive Officer, Brent Smith, will provide some opening comments and discuss our fourth quarter and annual results and accomplishments. Brent?
Good morning, everyone, and thank you again for joining us on today's call as we review our financial and operating results for the fourth quarter of 2021 and for the year. On the line with me is Eddie Guilbert, our Executive Vice President of Finance and Treasurer, George Wells, our Chief Operating Officer, and Bobby Bowers, our Chief Financial Officer, as well as other members of the senior management team. Before we begin today's call, I want to take a moment and thank my talented, hardworking team members who deliver first-class service to Piedmont customers 24/7, 365 days a year. Their tireless dedication continues to garner industry honors for operational excellence and sustainability, including our recognition as the 2021 ENERGY STAR Partner of the Year and achieving LEED status now on roughly half the portfolio.
Today, I'm gonna cover Piedmont's operational success and leasing momentum along with an update on capital allocation activities across our markets. Focusing on the fourth quarter of 2021, our FFO per share was $0.51, in line with market consensus. Portfolio operating metrics were solid, with Same Store NOI on a cash basis increasing 5.8%. We leased approximately 400,000 sq ft, generated a 3% increase in second-generation cash rents, and executed an average lease term of 6.5 years, illustrating the longer-term view taken by most of our customers. Most notably, about half of the fourth quarter's leasing was related to new tenants, making this the second consecutive quarter Piedmont has achieved pre-pandemic levels of new leasing. Overall, leasing activity remained robust and well-dispersed across the portfolio, with over 40 leases and amendments executed during the fourth quarter.
While the Omicron variant had a modestly negative impact on building utilization during December and January, the leasing pipeline has not dissipated, and we expect the momentum from the second half of 2021 to continue. Today, our leasing pipeline stands at over 500,000 sq ft in negotiations, and we're trading LOIs on an additional 1,000,000 sq ft, which positions Piedmont for space absorption in 2022, and with only about 1,000,000 sq ft of existing leases expiring, or about 6% of the portfolio. Boston, Dallas, and Atlanta remain our most active leasing markets, albeit for different reasons. The Boston market continues to exhibit strong fundamentals led by business migration to the suburbs and reduced competitive Class A office stock as the insatiable demand from life science users continues to drive office-to-lab conversions.
For example, during the past year in our Burlington sub-market, three competitive Class A buildings comprising over 400,000 sq ft have been repurposed to labs, helping to push net effective rents for office space to pre-pandemic levels. In Dallas and Atlanta, our two largest markets, we continue to see an increasing number of corporate relocations resulting in meaningful job growth. As an example, during the fourth quarter, we signed a 55,000 sq ft lease at our Connection Drive property in Dallas to serve as the new corporate headquarters of an undisclosed Fortune 500 company. In that same market during the second quarter, we signed a 44,000 sq ft lease to serve as the corporate headquarters for a large national beverage distributor. In both these markets, rents at our properties are now above pre-pandemic levels.
However, net effective rents are approximately 2%-5% lower. I would note a customer flight to quality is well underway, which is driving wider rent disparities between placemaking versus commodity office product. For example, JLL Research noted that 84% of Atlanta leasing activity in the fourth quarter was in Class A or trophy product. Orlando also continues to perform well, with leasing and tour activity across all five of our downtown properties at pre-pandemic levels. The downtown sub-market continues to experience population inflows, particularly for the Millennial and Gen Z cohorts, driven by a highly walkable environment with expanding retail, food and beverage options, along with entertainment amenities surrounding the University of Central Florida's Creative Village campus, Amway Center Arena, and Camping World Stadium, along with a uniquely urban Lake Eola.
In Orlando, net effective rents are still trailing pre-pandemic levels by about 5% as a result of increased concessions. Finally, Minneapolis, the District in Washington, D.C., and New York City are all experiencing increasing tour activity. However, leasing velocity and tenant demand still lag our Sunb elt markets. I would add we are fortunate to have limited vacancy and near-term lease expirations at our 60 Broad Street property in Lower Manhattan, and virtually no expirations at our Washington, D.C. properties for more than two years. Leasing across all our core markets contributed to the fourth quarter's totals. Our customer CEO and HR dialogue continues to show our portfolio is positioned to gain market share.
Users of office space are undertaking a flight to quality that focuses on new or newly renovated office buildings with unique environments and a vast set of amenities, owned and operated by responsive, sustainability-minded, service-oriented landlords. Because of these demand drivers, Piedmont's portfolio is well-positioned, supported by a concentration of newly renovated, well-amenitized buildings located near housing communities and highly regarded education systems, with easy accessibility to major highway thoroughfares and airports. Today's tenants are not only focused solely on location and neighboring amenities. The physical attributes of a building have never been more important. The building's indoor air and light, HVAC, fresh air intake, elevator capacity, and outdoor collaboration space are all critical. In addition to high-quality building and a vibrant environment, customers are demanding a higher quality landlord as well.
By that, we mean an attentive operator that focuses on sustainability initiatives and which has the capital base and scale to provide tenant offerings and engagement. Office space is no longer just a real estate product. Taking a look back at the operational highlights for the 2021 fiscal year, Piedmont leased almost 2.3 million sq ft, which was in line with our average pre-COVID annual leasing levels. In addition, the increase in second-generation cash rents was 7.5%, which helped increase same-store cash NOI for the year by almost 7%. Finally, our tenant retention ratio was in line with prior years at approximately 70%. Recovery and leasing activity bolsters our optimism for the rebound of the office sector, and particularly for landlords such as ourselves, who offer high quality, modernized, sustainability-focused, amenity-rich environments.
Looking ahead, approximately 750,000 sq ft of tenant leasing has yet to commence as of this year-end, or is in some form of abatement. This backlog creates organic growth opportunities going into 2022, associated with approximately $26 million in future annualized cash rents. In addition, approximately 60% of the portfolio's vacancy and 85% of 2022's lease expirations reside in our Sunb elt properties, where we are experiencing the greatest level of leasing velocity. A schedule of the larger upcoming lease commencements and abatements is included in our supplemental financial information, which was filed last night. Pivoting now to capital allocation activities. Despite the disruption from the pandemic, and more recently, the Omicron variant, the office investment sales market has continued to unthaw.
We are currently in discussions on a pipeline of over $1 billion of high-quality assets, primarily for properties in our Sun belt markets. Furthermore, we are encouraged to hear of several targeted buildings that will be coming to market in the first half of 2022. Our principal and broker dialogue suggests insurance companies, pension funds, and other private market participants are planning to reduce their office sector exposure in the near term. Currently, well-leased Sun belt office with more than seven years of weighted average lease term is among the most liquid type of property in the asset class. The increase in transactional activity is encouraging, given Piedmont's strategy to recycle capital strategically as an additional driver for our earnings growth.
Finally, I would note that cap rates remain steady for high-quality assets with limited lease rollover, and particularly those that are highly amenitized and that can compete with new construction. While the investment sales market has improved, construction starts have slowed dramatically due to the uncertainty created by the pandemic, a positive for the continued office market recovery. With supply chain constraints, the construction of new product will now take 2.5-3 years to be delivered. In addition, new construction costs have escalated by 15%-20% versus pre-pandemic pricing, driven by an increase in both raw materials and labor. In this capital environment, Piedmont continues to focus on our redevelopment opportunities where costs and timelines can be more easily managed.
In 2021, we completed over $50 million of incremental investment in our properties, upgrading assets to remain best-in-class within their respective submarkets. That said, we continue to have dialogue with a number of clients regarding pre-leasing for ground-up development. Focusing on Piedmont's investment activities, during the quarter, we expanded our Atlanta market footprint with the acquisition of 999 Peachtree Street. Subsequent to quarter end, I'm pleased that we closed on the disposition of a Raytheon asset as well as our accelerated plan to exit from the Chicago market. As you all know, the 999 acquisition marks our entry into midtown Atlanta sub-market. The iconic Class A LEED Platinum 28-story building is 622,000 sq ft with 77% leased at acquisition.
We purchased it for $360/sq ft, which we estimated is over 40% below replacement cost. We're working with Gensler, a tenant at the building, to complete the redesign of 999's arrival experience in public spaces, including a modernized and expanded lobby, energized outdoor space and other enhanced amenities which we'll complete over the next 12-18 months, and will revitalize this asset in a fraction of the time and cost of new construction.
With a 10-foot glass window line across 70% of the facade, this asset will effectively compete against new construction at a fraction of the cost with an expected all-in basis in the low $400 per sq ft versus new product costing in excess of $650 per sq ft, creating substantial pricing leverage for our building when compared to that new development. The $224 million acquisition of 999 is being funded through multiple dispositions. Immediately after quarter end, the disposition of 225 and 235 Presidential Way in Boston closed in a reverse 1031 exchange for $129 million or a mid-5s cap rate.
Also, subsequent to quarter end, we negotiated an agreement to sell and have closed on Two Pierce Place, our last remaining asset in the Chicago area, and we'd anticipate more non-core asset proceeds in the first half of 2022. The acquisition of 999 Peachtree Street during the fourth quarter, as well as the completion of two non-core dispositions just after the quarter end, now makes Atlanta our largest market based on annualized lease revenue. Adjusting our lease percentage for the disposition transactions, our pro forma lease percentage as of December 31st would have been 87%. Additionally, approximately 63% of our Annualized Lease Revenue is now generated from our Sunbelt properties, and our goal is to have 70%-75% of our ALR generated by our Sunbelt markets before the end of 2023.
We believe a goal that's attainable given the investment sales market activity we see today. Finally, I wanna thank those investors who attended the recent property tour in December at our Midtown Atlanta and Galleria properties. Myself and the team were extremely grateful to be able to share some of our most recent redevelopment projects. With that, I'll turn it over to Bobby to walk you through the financial highlights of the quarter and guidance for 2022. Bobby?
Thanks, Brent. While I'll discuss some of our financial highlights for the quarter, I encourage you to please review the entire earnings release and supplemental financial information which were filed last night for more complete details. Looking back on 2021, Core FFO for the year was $1.97 per diluted share, a 4% increase over 2020 and in excess of the upper end of our original guidance range for the year. This growth in Core FFO overcame an approximately 1% reduction in our overall lease percentage on a year-over-year basis.
The decrease in occupancy was driven by several factors, reduced leasing activity during 2020 and the first half of 2021 as a result of the pandemic, a number of sizable lease expirations at recently acquired properties in Atlanta and Dallas that were underwritten as part of their respective acquisitions, and the purchase of the 77% leased 999 Peachtree Street property. After incorporating the just-completed disposition activity in January of 2022, our pro forma lease percentage as of December 31 would have been 87%. We reported $0.51 per diluted share of Core FFO for the quarter. That's an 11% increase over the fourth quarter of 2020. This increase is primarily due to accretive recycling activity and rising rental rates.
Our Core FFO achievement during the fourth quarter also reflects the repurchase of approximately 1 million shares of our common stock at an average price of $17.76 per share during the quarter, leaving approximately $150 million in board-authorized capacity under our share repurchase program. Now, Core FFO, as you know, excludes gains, losses, impairments on real estate, as well as excluding depreciation and amortization. I do wanna discuss this real estate activity during the fourth quarter of 2021. While we had originally intended to lease up Two Pierce Place before disposition, we received an unsolicited offer to purchase the asset during the fourth quarter. Given the fact that we have no other Chicago holdings, we made the decision to accept the offer if the purchase could be negotiated and closed quickly thereafter.
As is often the case, GAAP typically dictates early recognition of potential losses. The decision to shorten the hold period for this asset did result in the recognition of a $41 million impairment charge that is included in our fourth quarter results of operations. Now on the flip side, the sale of 225 , 235 Presidential Way will result in the recognition of an estimated $50 million gain during the first quarter of 2022 when the sale closed. AFFO generated during the fourth quarter was approximately $39 million, which is well above our current $26 million quarterly dividend level.
Our board has indicated that given our cash NOI growth over the last few years, the fact that we're approaching the conclusion of the large construction restacking project for the state of New York at 60 Broad, and the time since our last dividend increase, they will be reviewing our dividend payout amount during 2022. Turning to the balance sheet, I expect more attention will be focused now on corporate financial positions given the rising interest rate environment, including the amount of floating rate debt, upcoming maturities and overall leverage. Our annualized net debt to core EBITDA ratio as of the end of the fourth quarter 2021 was 5.7 x, and we reported $210 million of unused capacity on our line of credit.
Taking into consideration the completed disposition activity occurring right after year-end, with the net sales proceeds received in January, our current available capacity on our $500 million line of credit is approximately $320 million, with an approximate $120 million more expected later this quarter from the payoff of a note receivable. Adjusting for the application of proceeds from the two closed January sales, our pro forma debt to gross asset ratio at year-end would have been approximately 35%. We have no secured debt currently on our books, and we have no scheduled debt maturities in 2022 other than our revolver, which we currently intend to renew long term later this year rather than exercise the line's short-term extension options.
Finally, we're introducing 2022 annual financial guidance for Core FFO in the range of $1.97-$2.07 per diluted share. This guidance assumes a gradual increase in physical utilization of our buildings by our tenants over the course of the year to a level near pre-COVID utilization by the end of the calendar year. It also assumes a neutral amount of asset recycling during the year with about $350 million-$450 million each of acquisitions and additional dispositions. This net neutral activity excludes the recently completed sales of the Presidential Way assets and Two Pierce Place property that were used to fund the 999 Peachtree Street acquisition. We will provide revised guidance as each significant acquisition or disposition is completed this year.
The guidance assumes general and administrative expenses in the range of $29 million-$31 million for the year. Our Same Store cash NOI growth is expected to be flat for the year with a number of abatements occurring during 2022 due to the lease renewals and newly commencing leases, such as a 160,000 sq ft renewal at 1155 Perimeter Center West in Atlanta and a 56,000 sq ft lease at 400 Virginia Avenue in Washington, D.C., as well as downtimes between leases associated with new tenant build outs, such as a 67,000 sq ft lease at 5 & 15 Wayside Road in Boston, and a 44,000 sq ft lease at One Lincoln in Dallas. Accrual-based NOI is expected to grow 1%-3% during the year.
I will remind you that these estimates will ultimately be dependent upon the transactional activity achieved during the year since such properties will be excluded at year-end from the same-store two-year comparisons. Likewise, our lease percentage is expected to grow to approximately 88%. Again, this estimate is subject to the lease percentages of the properties involved with the $350 million-$450 million of potential recycling transactions completed during the year. Our forecast also assumes there will be 3-4 interest rate hikes during 2022 that will impact interest expense negatively versus recent prior years. Finally, we are assuming a dividend adjustment around mid-year, and it is not expected to impact our overall financial results. With that, I'll now ask our conference call operator to provide our listeners with instructions on how they can submit their questions.
We'll attempt to answer all of your questions now, or we will make appropriate later public disclosure if necessary. Operator?
Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star one on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. Your first question for today is coming from Anthony Paolone. Please announce your affiliation, then pose your question.
Thanks, JP Morgan. Bobby, I think I may have just missed this because jotting some things down. The loan investments, did you say those were getting repaid, or what were the details on those?
Hey, Tony. Hope you're doing okay. Yeah, the note receivable, we're expecting to be paid off based on discussions with them. You might remember that originated back last year with the s ale of some properties in New Jersey, but we do expect it to be paid off in the first quarter.
Okay, got it. With regards to the capital recycling this year, you mentioned the neutral acquisitions and dispositions. It sounded like that was from, like, a dollar volume point of view. Can you talk to spreads and what you think happens on that front?
Hi, Tony, it's Brent. Thanks for joining us this morning. In regards to spreads, I think, you know, it obviously depends on the opportunity that we're looking at. While there does seem to be either, you know, some good off-market dialogue that we're currently having, or as I alluded to in my prepared remarks, an opportunity for some brokered assets that we've been looking at for some time in our markets, primarily again, Boston, Atlanta, Orlando and Dallas. We continue to remain, you know, very enthusiastic about continuing to recycle. Historically, as you've mentioned or kind of alluded to, we've been able to do that accretively, probably to the tune of 150 basis points to 200 basis points. Some of it immediate, some of it through value creation over, call it, a few years.
An example of that being 999, where we're gonna do some pretty heavy lifting at the base of the building but drive rents meaningfully. It's tough to give you a specific answer in terms of spreads because we don't know what we'll buy. I can say that what we kind of have in the hopper to sell is either being non-core, some of the more mature assets, and of course, you've heard me allude to Cambridge being a great opportunity or piggy bank. I think we can continue to maintain accretion. To what degree, it's hard to specifically say, but you know, I think that trend is gonna maintain itself given the quality of those assets that we have and/or the long-term lease nature of those assets that I mentioned that are in the disposition hopper.
Okay, got it. You know, you'd mentioned kind of where the sweet spot is in terms of looking for high-quality assets. I think you'd mentioned like seven-year lease term, that sort of thing. Like, how do you think about where your sweet spot is in terms of competing for these assets and just, you know, outcompeting the competition? It seems like everybody's looking for fairly comparable stuff.
You know, I think 999 speaks volumes about kind of the opportunity set. You know, our recent acquisitions, both the Galleria assets, you know, right at the pandemic onset, are good examples of historically what we've been able to find and create value with. You know, great bones, older assets, but they need a little TLC on the front of house, particularly, but the back of house has been well-maintained, so we're not focused too much on mechanicals, et cetera. We're obviously continuing to look for that. We recognize that some of our peers are purchasing, you know, just newly developed assets with long-term leases that is at, frankly, very eye-popping pricing in terms of per pound valuations.
We understand the, I guess, the perspective that those individuals or groups have, but we've utilized our recycling and redevelopment DNA to drive earnings growth more than the risk of ground-up development. That's not to say we wouldn't consider acquiring buildings that are recently ground-up development. Not to say that we wouldn't undertake that to enter into a new market or specifically gain stronghold in a sub-market, but I think we're more leaning towards finding those diamonds in the rough, buying them at call it a 6 cap or 6.5 cap, depending on the hair, and driving them to 7 and 7.5+. I think all of those that I mentioned in the beginning of this answer kind of qualify as that type.
I wanna stress that we're not compromising on quality. When you talk about our sweet spot, there are a lot of companies who are willing to come into a market but can't afford to pay, you know, $45-$50 net rents for new construction. They want an amenitized, high-quality, sustainability-focused landlord, and that's the sweet spot that we provide at a more, I guess, affordable rate for that user group that isn't a tech Big Five, frankly.
Got it. Okay, appreciate all the color. Thank you.
Your next question for today is.
Operator?
Your next question for today is coming from Dave Rodgers. Please announce your affiliation, then pose your question.
Yeah. Good morning, everybody. Dave Rodgers at Baird. I wanted to follow up on the asset sale discussion. Obviously, you don't wanna identify what you're looking at acquiring, but can you talk about what's in the market today? You talked about selling more during the first half of the year, so I presume that there's a number of assets in the market. Can you identify kind of what the targets are when you say non-core? Is that just Houston? Is that where we're going back to D.C.? It sounds like Cambridge is on the chopping block as well. But can you give us more of a sense of what to expect on the sell side?
Sure. I think, you know, Dave, again, thank you for joining today. We look at dispositions, as you know, historically, we've paired our dispositions very well with our acquisitions. I think, you know, 999 is a perfect example. We went under contract actually on the Raytheon asset in the middle of 2021 and, you know, we devised the structure so that we can opportunistically pair that with the buy. I think what's promising in this market is we're seeing more opportunities start to come to fruition. We get a bigger opportunity set that gives us the ability to wait a little bit longer to dispose of the assets.
I don't have anything specifically in the market at the moment that we're looking to dispose of, but we do have dialogue every day with participants who we know we can move quickly and would pay fair value if we needed to. Now in terms of the buys. Well, you wanted to focus on dispositions, so I think I'll leave it at that. I think we have a good opportunity set. Again, that is Houston in that non-core bucket. It includes Cambridge. I use the term chopping block. I don't know if I would phrase it as that, but it is certainly fully matured under our ownership. It's got about a little over 10 years of term remaining with a major tenant there being Harvard in both of those assets.
Frankly, given where pricing is, they call it a 4.5, kind of $1,600 a foot for some assets in that market. We feel like it's a great opportunity to monetize that, and rotate it into something accretively. Hopefully, you know, and looking towards the 2023 event, I would say 60 Broad would be a potential monetization opportunity set there as well.
Maybe one for Bobby, just in terms of the guidance. Since you're not including acquisitions and dispositions in the guidance this year, it's a fairly wide range from an operational perspective. What really kind of pushes you up and down in that range? Do you have any more? It looked like you kind of grabbed another $1 million or so from the GAAP deferrals previously and added that back in the quarter. Do you have more of those that get you to the top end and is the bottom end just kind of move-outs, expirations, terminations? Maybe some guidance on that would be helpful.
Well, obviously, when we release, Dave, our guidance, the midpoint is typically the target we try to focus upon. I think over the last several years, absent of COVID, we've come in a little ahead on those. Hopefully we're conservative with our estimates. But I don't know how to respond to you. There are a number of factors that influence our actual earnings. It depends on our leasing activity that takes place. We try to make good long-term decisions there. It may result in down times, as we try to bring in investment-grade tenants, things like that are not predictable as such. Leasing always is the key driver for us that influences what we achieve in a given year.
I think I would add, Bobby, operationally, you know, we are still in the midst of a pandemic. There are components of parking, you know, in the return to office, variable expenses that create some of that, you know, fluctuation. We've done our best to predict that. Frankly, nobody could have predicted, well, Delta. You know, once you saw Delta, maybe you could have predicted Omicron. I think we're trying to be cognizant that there could be a Zeta or, you know, something else to that effect that could continue to delay. Realistically, we feel like 2022 is moving in the right direction. That's where the midpoint of the range would suggest.
Last one for me, if I could. I guess I wanted to get your thoughts on two things. You've obviously continued to do the stock buyback in the quarter. I think your average buyback price going back to 2011 is above where the stock is today. You talked about increasing the dividend on the call in the middle still of a pandemic. You have an above average financial position relative, meaning more financial leverage than your peers. You have a higher rollover schedule of massive tenants coming due. I guess why the hurry to deploy all this capital, especially after a quarter when concessions on leases were pretty tough and you got a lot coming at you?
Well, there's a lot in there, Dave. I guess first let me take, you know, the quarter. You know, admittedly, the renewals were a little high. Each one of those kind of three deals that we alluded to in our supplemental that were, you know, unusually high. TIs have a reason behind that. You know, not to get into the specifics, but one involved mainly moving around smaller tenants to get a large investment-grade tenant into the space. And so we continue to, you know, do what's right by the real estate. And sometimes that does mean spending a little bit more for a tenant. In that instance, a few of those happened to hit in the same quarter. That's why we always ask that, you know, our investors look at more of a rolling 12 months and look at those trends.
I think you'll find on a rolling twelve months, we still are trending kind of right in line with prior years pre and during COVID. You know, I think on the capital front, we don't feel like there's a wall of capital from our perspective. There's the regular way leasing, and certainly we'll admit that concessions have gone up on the TI side in the pandemic, while free rent has you know dropped more dramatically. We recognize that you know overall, I think our portfolio from a capital standpoint will you know stand against anybody else's, and we don't have an unusual amount of draining needs in that regard.
In terms of our debt profile, you know, we've always stated we operate between 30% and 40%, and call it a sub-6 debt to EBITDA, and I'm very focused on maintaining our credit rating. There is no concern with our rating agencies. We're both stable from both groups, and we feel like the balance sheet is well protected. Our line is currently has some drawn, but Bobby has alluded to, we do anticipate a pay down of the note from our Bridgewater properties. That'll bring our line down into, we call it several tens of millions. We feel like that gives us the capacity to operate the business as we feel is reasonable. Our peers who are lower leveraged are more development-focused and heavy than we are.
If we do get into more of development, we would probably consider taking our leverage down a little bit into probably the low 30s. At the moment, I feel like that's probably still a 2023 event to put a shovel in the ground on our site, even though we are talking to some tenants. Realistically, it's gonna take some time to get that. We view 2022 as a good opportunity to continue to rotate capital. You did note we bought back shares. We never view buying back shares as mutually exclusive from buying or rotating capital into assets. Frankly, we feel like at the time, you know, when we purchased those shares right when Omicron set in, and still believe we're an undervalued company.
I think we trade at the above an 8 cap on a cap rate basis if you use, say, Green Street's estimates of NOI. We feel like we're certainly undervalued in that regard and would buy back shares when it kind of fits the framework. I've said before that framework works generally when we trade at a meaningful discount to NAV, both on a relative and an absolute basis versus our peers and when we're not levering up to do so, and that framework still holds today, and those shares were bought during that framework. Your reference to the buyback since 2011 understandably, I think our average buyback price is really right around where we're trading today and we continue to frankly focus more on assets today than stock.
Well, Brent, thanks for all the color, and I appreciate your indulgence on the time. Thanks.
Yeah. Thank you.
Your next question is coming from Michael Lewis. Please announce your affiliation, then pose your question.
Great. This is Mike Lewis at Truist. You know, this quarter it looked like you had more CapEx classified as incremental as opposed to non-incremental, and therefore not backed out of the AFFO calculation. Maybe that's related to some of the activity you already talked about. Can you just clarify what that $25 million of incremental cost was related to? You know, is there still a lot to spend and allocate to that bucket?
That was primarily related to some base building work at 60 Broad and the redevelopment of that asset for the lower floors. There was a new, quite frankly, HVAC mechanical system and some additional components, as well as just some of the regular way redevelopment of some of our properties. I would not anticipate that would continue. Bobby, maybe.
Yeah, I was just gonna comment. We do track with each of our leases the incremental versus non-incremental, what we're doing at buildings. We have outstanding projects, less than $50 million now on the incremental side. Now, if we go buy something, decide to do a lobby, enhance a building, that will add to that number.
Okay, perfect. Thanks. Just one more from me. I know you get asked frequently about the CVS lease expiring at the end of the year, and then next year, Ryan, Cargill, U.S. Bancorp. I think a previous question kind of alluded to these coming up. I don't know if you know, you talk about it frequently, I think. Is there anything incremental to be aware of, either, you know, changes in how you think about market rates or market rents versus in-place or anything else to report on any of those upcoming expirations?
Hi, Michael, it's Brent. Thanks for joining. You know, we do get asked about those expirations. I think as the prior question alluded to, the number of potential expirations that we have in the next, call it, 24 months and why raise the dividend. I think the reason why we feel like we can raise the dividend is we feel generally pretty good about the leasing market and where that dialogue is with those tenants. So specifically with CVS, as we've noted before, we're well down a path and feel like that it's likely that they'll renew on a majority of the space. It's been noted in the press, Ryan has a site they've considered going and building a building on up in Frisco. Right now, their expiration is slated for the end of next year.
I'm sorry, February of next year. Likely they're gonna have to do at least a short-term renewal, because it's gonna take them probably 2.5-3 years if they could put a shovel in the ground tomorrow, and that is not currently underway. In terms of U.S. Bank and Cargill, both of those are pretty far out, still end of 2023 and 2024. So it's a little early, but I will say we're close with both groups and engaged, and feel pretty comfortable about where that stands. Although, again, it is really early. U.S. Bank is, you know, been headquartered and a stalwart corporation in Minneapolis and intends to continue to be there. And Cargill, again, we feel pretty good about where the early dialogue has been. So that's where it stands at the moment.
Again, I think we feel pretty good about where all the leasing velocity is and our ability to then look forward and say the spread between AFFO and where our current dividend is very meaningful. Call it $1.10-$1.20 in terms of AFFO and a dividend of $0.84. Our ability to raise that 5% or so is really, you know, modest relative to where the cash flow of the operating assets is.
Perfect. Thank you for the update.
Once again, if there are any questions or comments, please press star one on your phone at this time. Your next question is coming from Daniel Ismail. Please announce your affiliation, then pose your question.
Great. Thank you. Daniel Ismail from Green Street. Brent, you touched on this a few times during the call, but you mentioned, you know, the increased focus on amenities and sense of place in the office, as well as increased concessions in some markets and supply chain issues. Is it your sense that normalized CapEx has moved higher for the sector, or is this more of a point-in-time type phenomenon?
Sorry, you trailed off there a little bit at the end. I think you said, do we feel like this environment is a normalized CapEx environment for the sector?
No, I guess, sorry if I trailed off. I was saying, do you think that CapEx for the sector has just structurally moved higher over the last two years as a result of increased focus on amenities and, perhaps a higher concessionary environment, or are you anticipating that to reverse back to pre-COVID levels?
Yeah, I think, Daniel, I definitely would agree with you. Currently, it is definitely elevated. I think it is partly due to, you know, the pandemic and people trying to take advantage of a softening in the marketplace. And frankly we've seen pre-leasing still be very limited, but TI capital kind of rules the day because you have, frankly, it's been a tenant market, and they've continued to not wanna come out of pocket for build-outs. In terms of the opportunity set of the amenities, et cetera, I think, you know, every building has an evolution, and you need to evaluate. When we buy buildings, we do. When that, you know, kind of opportunity needs a refresh and to be able to drive rent and drive velocity.
For a building, it kind of depends on where it is in its life cycle. We see some buildings that, you know, are older in nature but have been well-maintained and amenitized, and they do very well in the marketplace. We wanna recognize that, you know, they're our commodity product that wouldn't make sense to invest in anymore, and probably better in different use. Fortunate that our product isn't of that nature, but I do think you're gonna see just overall in the sector, which already was starting before the pandemic, that commodity obsolescence will continue to take hold, and as I alluded to in my prepared remarks, a disparity between kind of A quality assets and then most everything else, and reinvesting in the As are gonna continue to help drive rent and just continue that disparity between unamenitized, commoditized product.
I think from our strategy, we think that lends itself well. Definitely that flight to quality bodes itself towards our product versus the latter. I do think overall, the sector, that CapEx profile has been elevated up. In terms of being able to claw back from the tenant side, I think you're gonna see likely more a drive in rate than a reduction in that capital. It's still, I think, and most of my peers would probably agree, you're looking at, call it, $6.50-$8 per sq ft per year of term in terms of capital. Depending on the market.
Great. Thank you. That's great, Brent. That's helpful. Thanks. I believe the last time you provided the statistic, your portfolio rents were about 5%-10% below market. Is that still the case?
Yes. That is absolutely the case. I think as we've continued to show, again, on a rolling twelve months, I think, you know, quarter by quarter can be choppy, but on a rolling twelve months, we're right in that sweet spot between 5%-10%, and I think that's very indicative of where the portfolio still stands. We've been pleased that we've held rate on a good bit of the portfolio, although net effectives are down in the single digits. In some of our markets it's flat and others almost down versus pre-pandemic levels.
Great. Thanks, Brent.
There are no more questions in queue. I would now like to turn the floor back over to Brent Smith for any closing comments.
Thank you, everyone, for joining us today. Myself and the team are really excited about 2022 and really continuing the growth and particularly the new leasing at pre-pandemic levels at the end of last year into this year. You know, 6% of our leases expire this year, and with 60% of our vacancy and 85% of our portfolio in the Sun belt, we really are enthused about the ability to continue to drive velocity and occupancy. We feel like we've got the best ESG platform, and paired with our high-quality amenitized assets, we'll continue to drive earnings growth. Thank you, everyone, for joining today. Have a good day.
Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.