The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and notes thereto ofPiedmont Office Realty Trust, Inc. ("Piedmont," "we," "our," or "us"). See also "Cautionary Note Regarding Forward-Looking Statements" preceding Part I, as well as the consolidated financial statements and accompanying notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . Given our low-leverage operating model of long-term leases targeted toward creditworthy tenants, the ongoing COVID-19 pandemic has not materially impacted our financial condition, overall liquidity position and outlook, or caused material impairments in our portfolio of operating properties; however, the pandemic-related slowdown of leasing activity, particularly leasing of vacant space to new tenants, during 2020 and the first half of 2021 has moderated earnings growth and negatively impacted our occupancy levels and rental rate growth. The pandemic has had an ongoing impact on a few of our small, primarily retail, tenants. The long-term repercussions on our tenant's operations, future leasing decisions, and the global economy remains unclear.
Cash and capital resources
We intend to use cash on hand, cash flows generated from the operation of our properties, net proceeds from the disposition of select properties, and borrowings under our$500 Million Unsecured 2018 Line of Credit as our primary sources of immediate liquidity. We have$416 million of capacity on our$500 million line of credit available as of the date of this filing. When necessary, we may seek other new secured or unsecured borrowings from third party lenders or issue securities as additional sources of capital. The nature and timing of these additional sources of capital will be highly dependent on market conditions. Our most consistent use of capital has historically been, and we believe will continue to be, to fund capital expenditures for our existing portfolio of properties. During the three months endedMarch 31, 2022 and 2021 we incurred the following types of capital expenditures (in thousands):
Three months completed
March 31, 2022 March 31, 2021
Capital expenditures for redevelopment/renovations $
13,144
Other capital expenditures, including improvements to buildings and tenants
19,421 13,994 Total capital expenditures (1) $
32,565
(1) Of the total sums paid, approximately
relates to indirect costs such as capitalized interest, payroll and other costs of operating the property for the three months ended
"Capital expenditures for redevelopment/renovations" during both the three months endedMarch 31, 2022 and 2021 related to building upgrades, primarily to the lobbies and the addition of tenant amenities at our60 Broad Street building inNew York City ; our200 South Orange Avenue building inOrlando, Florida ; our Galleria buildings inAtlanta, Georgia ; as well as ourDallas Galleria Office Towers inDallas, Texas .
“Other capital expenditures, including building and tenant improvements” includes all other capital expenditures during the period and generally includes tenant and building improvements required to lease, maintain or make improvements to our existing portfolio of office properties.
Given that our operating model sometimes results in leases for large blocks of space to credit-worthy tenants, our leasing success can result in capital outlays that vary significantly from one reporting period to another depending upon the specific leases executed. For leases executed during the three months endedMarch 31, 2022 , we committed to spend approximately$5.59 per square foot per year of lease term for tenant improvement allowances and lease commissions (net of expired lease commitments) as compared to$3.40 (net of expired lease commitments) for the three months endedMarch 31, 2021 . Commitments per square foot per year of lease term for tenant improvement allowances and lease commissions (net of expired lease commitments) for the three months endedMarch 31, 2021 were unusually low as they reflected the 330,000 square foot, five-year extension of theNew York City lease at our 1.0 million square foot asset,60 Broad Street , which did not include a tenant improvement allowance. As ofMarch 31, 2022 , we had one individually significant unrecorded tenant allowance commitment outstanding of approximately$15.1 million related to theState of New York's lease, also at our60 Broad Street building. 22
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In addition to the amounts that we have already committed to as a part of executed leases, we also anticipate continuing to incur similar market-based tenant improvement allowances and leasing commissions in conjunction with procuring future leases for our existing portfolio of properties. Both the timing and magnitude of expenditures related to future leasing activity can vary due to a number of factors and are highly dependent on the size of the leased square footage and the competitive market conditions of the particular office market at the time a lease is being negotiated. There are other uses of capital that may arise as part of our typical operations. Subject to the identification and availability of attractive investment opportunities and our ability to consummate such acquisitions on satisfactory terms, acquiring new assets consistent with our investment strategy could also be a significant use of capital. We may also use capital resources to repurchase additional shares of our common stock under our stock repurchase program when we believe the stock is trading disparately from our peers and at a significant discount to net asset value. As ofMarch 31, 2022 , we had approximately$150.5 million of remaining capacity under the program which may be used for share repurchases throughFebruary 2024 . Finally, other than our$500 Million Unsecured 2018 Line of Credit, which has a maturity date ofSeptember 2022 but can be extended for up to one additional year, we have no scheduled debt maturities until the second quarter of 2023. We may use capital to repay debt obligations when we deem it prudent to refinance various obligations. The amount and form of payment (cash or stock issuance) of future dividends to be paid to our stockholders will continue to be largely dependent upon (i) the amount of cash generated from our operating activities; (ii) our expectations of future cash flows; (iii) our determination of near-term cash needs for debt repayments, development projects, and selective acquisitions of new properties; (iv) the timing of significant expenditures for tenant improvements, leasing commissions, building redevelopment projects, and general property capital improvements; (v) long-term dividend payout ratios for comparable companies; (vi) our ability to continue to access additional sources of capital, including potential sales of our properties; and (vii) the amount required to be distributed to maintain our status as a REIT. With the fluctuating nature of cash flows and expenditures, we may periodically borrow funds on a short-term basis to cover timing differences in cash receipts and cash disbursements. 23 --------------------------------------------------------------------------------
Table of Contents Results of Operations Overview Net income applicable to common stockholders for the three months endedMarch 31, 2022 was$60.0 million , or$0.49 per diluted share, as compared to$9.3 million , or$0.08 per diluted share, for the three months endedMarch 31, 2021 . The quarter endedMarch 31, 2022 included a$50.7 million , or$0.41 per diluted share, gain on sale of real estate assets almost entirely associated with the sale of 225/235 Presidential Way (see N ote 7 to the accompanying consolidated financial statements).
Comparison of the three months ended
The following table sets forth selected data from our consolidated statements of income for the three months endedMarch 31, 2022 and 2021, respectively, as well as each balance as a percentage of total revenues for the same period presented (dollars in millions): March 31, March 31, 2022 % of Revenues 2021 % of Revenues Variance Revenue: Rental and tenant reimbursement revenue$ 131.9 $ 125.9 $ 6.0 Property management fee revenue 0.7 0.8 (0.1) Other property related income 3.6 2.6 1.0 Total revenues 136.2 100 % 129.3 100 % 6.9 Expense: Property operating costs 53.6 39 % 51.4 40 % 2.2 Depreciation 31.5 23 % 28.1 22 % 3.4 Amortization 22.3 16 % 22.9 17 % (0.6) General and administrative 7.6 6 % 7.3 6 % 0.3 115.0 109.7 5.3 Other income (expense): Interest expense (13.9) 10 % (12.6) 10 % (1.3) Other income 2.0 1 % 2.3 2 % (0.3) Gain on sale of real estate assets 50.7 37 % - - % 50.7 Net income$ 60.0 44 %$ 9.3 7 %$ 50.7 Revenue Rental and tenant reimbursement revenue increased approximately$6.0 million for the three months endedMarch 31, 2022 as compared to the same period in the prior year. The increase was primarily due to accretive capital recycling activity, rental rate increases associated with recent leasing activity across the portfolio, and higher tenant reimbursements as a result of higher recoverable operating expenses as compared to the prior period. Other property related income increased approximately$1.0 million for the three months endedMarch 31, 2022 as compared to the same period in the prior year primarily due to higher transient parking utilization at our buildings during the current period, as compared to the prior period, which reflects the negative impact of the COVID-19 pandemic on parking revenue during early 2021. Parking revenue associated with the acquisition of the999 Peachtree Street building inAtlanta, Georgia during the current period also contributed to the increase.
Costs
Property operating costs increased approximately$2.2 million for the three months endedMarch 31, 2022 as compared to the same period in the prior year. The variance was primarily due to higher recoverable operating expenses such as janitorial and utilities resulting from higher tenant utilization during the current period, as compared to the prior period, which reflects the impact of the COVID-19 pandemic during the first quarter of 2021.
Depreciation expense increased by approximately
24 -------------------------------------------------------------------------------- Table of Contents period in the prior year. The increase was primarily due to additional building and tenant improvements placed in service subsequent toJanuary 1, 2021 . Amortization expense decreased approximately$0.6 million for the three months endedMarch 31, 2022 as compared to the same period in the prior year primarily due to certain lease intangible assets at our existing properties becoming fully amortized subsequent toJanuary 1, 2021 , partially offset by additional amortization resulting from the acquisition of the999 Peachtree Street asset inOctober 2021 . General and administrative expenses increased approximately$0.3 million for the three months endedMarch 31, 2022 as compared to the same period in the prior year, primarily reflecting increased accruals for potential performance based compensation. Other Income (Expense) Interest expense increased approximately$1.3 million for the three months endedMarch 31, 2022 as compared to the same period in the prior year primarily due to a higher average balance in the current period on the$500 Million Unsecured 2018 Line of Credit, as well as an increase in interest rates on this floating rate debt.
Gain on sale of real estate assets during the three months ended
mainly includes the gain recognized on the sale of 225 &
25 -------------------------------------------------------------------------------- Table of Contents Issuer and Guarantor Financial Information Piedmont, through its wholly-owned subsidiaryPiedmont Operating Partnership, LP ("Piedmont OP" or the "Issuer"), has issued senior unsecured notes payable of$350 million that mature in 2023,$400 million that mature in 2024, and two separate issuances of$300 million , that mature in 2030 and 2032, respectively, (collectively, the "Notes"). The Notes are senior unsecured obligations of Piedmont OP and rank equally in right of payment with all of Piedmont OP's other existing and future senior unsecured indebtedness and would be effectively subordinated in right of payment to any of Piedmont OP's future mortgage or other secured indebtedness (to the extent of the value of the collateral securing such indebtedness) and to all existing and future indebtedness and other liabilities of Piedmont OP's subsidiaries, whether secured or unsecured. The Notes are fully and unconditionally guaranteed byPiedmont Office Realty Trust, Inc. (the "Guarantor"), the parent entity that consolidates Piedmont OP and all other subsidiaries. By execution of the guarantee, the Guarantor guarantees to each holder of the Notes that the principal and interest on the Notes will be paid in full when due, whether at the maturity dates of the respective loans, or upon acceleration, upon redemption, or otherwise, and interest on overdue principal and interest on any overdue interest, if any, on the Notes and all other obligations of the Issuer to the holders of the Notes will be promptly paid in full. The Guarantor's guarantee of the Notes is its senior unsecured obligation and ranks equally in right of payment with all of the Guarantor's other existing and future senior unsecured indebtedness and guarantees. The Guarantor's guarantee of the Notes is effectively subordinated in right of payment to any future mortgage or other secured indebtedness or secured guarantees of the Guarantor (to the extent of the value of the collateral securing such indebtedness and guarantees); and all existing and future indebtedness and other liabilities, whether secured or unsecured, of the Guarantor's subsidiaries. In the event of the bankruptcy, liquidation, reorganization or other winding up of Piedmont OP or the Guarantor, assets that secure any of their respective secured indebtedness and other secured obligations will be available to pay their respective obligations under the Notes or the guarantee, as applicable, and their other respective unsecured indebtedness and other unsecured obligations only after all of their respective indebtedness and other obligations secured by those assets have been repaid in full.
The Non-Guarantors are separate and distinct legal entities and have no obligation, conditional or otherwise, to pay any amounts due under the Notes, or to make funds available therefor, whether in the form of dividends. , loans, distributions or other payments.
Pursuant to Rule 13-01 of Regulation S-X, Guarantors and Issuers of Guaranteed Securities Registered or Being Registered, the following tables present summarized financial information for Piedmont OP asIssuer andPiedmont Office Realty Trust, Inc. as Guarantor on a combined basis after elimination of (i) intercompany transactions and balances among the Issuer and the Guarantor and (ii) equity in earnings from and investments in any subsidiary that is a non-Guarantor (in thousands): Combined Balances of Piedmont OP and Piedmont Office As of As of
Due from non-guarantor subsidiary $ 900 $ 900 Total assets$ 351,984 $ 352,788 Total liabilities$ 1,702,643 $ 1,945,846 For the Three Months Ended March 31, 2022 Total revenues $ 12,508 Net loss $ (12,265) 26
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Net Operating Income by Geographic Segment
Our President and Chief Executive Officer has been identified as our chief
operating decision maker ("CODM"), as defined by GAAP. Our CODM evaluates
Piedmont's portfolio and assesses the ongoing operations and performance of its
properties utilizing the following geographic segments: Dallas , Atlanta ,
Washington, D.C. , Minneapolis , Boston , Orlando , and New York . These operating
segments are also our reportable segments. As of March 31, 2022 , we also owned
two properties in Houston that do not meet the definition of an operating or
reportable segment as the CODM does not regularly review these properties for
purposes of allocating resources or assessing performance. Further, we do not
maintain a significant presence or anticipate further investment in this market.
These two properties are the primary contributors to NOI included in "Other"
below. See Note 11 to the accompanying consolidated financial statements for
additional information and a reconciliation of Net income applicable to Piedmont
to accrual-based net operating income ("NOI").
The following table presents the NOI by geographic sector (in thousands):
Three Months Ended
March 31, 2022 March 31, 2021
Dallas $ 16,099 $ 16,877
Atlanta 18,555 14,996
Boston 10,473 10,824
Washington, D.C. 10,047 8,573
Minneapolis 7,914 8,155
Orlando 8,499 10,350
New York 7,757 7,296
Total reportable segments 79,344 77,071
Other 3,037 587
Total NOI $ 82,381 $ 77,658
Comparison of the three months ended
RON increased primarily due to the acquisition of
NOI increased due to the commencement of certain leases subsequent to the three months endedMarch 31, 2021 , primarily at400 Virginia Avenue and3100 Clarendon Boulevard .Orlando NOI decreased primarily due to lease termination income recognized during the three months endedMarch 31, 2021 at200 South Orange Avenue that did not recur during the three months endedMarch 31, 2022 .
Other
The RON increased mainly due to the expiration in
Funds from Operations (“FFO”), Basic Funds from Operations (“Base FFO”) and Adjusted Funds from Operations (“AFFO”)
Net income calculated in accordance with GAAP is the starting point for
calculating FFO, Core FFO, and AFFO. These metrics are non-GAAP financial
measures and should not be viewed as an alternative measurement of our operating
performance to net income. Management believes that accounting for real estate
assets in accordance with GAAP implicitly assumes that the value of real estate
assets diminishes predictably over time. Since real estate values have
historically risen or fallen with market
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conditions, many industry investors and analysts have considered the
presentation of operating results for real estate companies that use historical
cost accounting alone to be insufficient. As a result, we believe that the
additive use of FFO, Core FFO, and AFFO, together with the required GAAP
presentation, provides a more complete understanding of our performance relative
to our competitors and a more informed and appropriate basis on which to make
decisions involving operating, financing, and investing activities.
We calculate FFO in accordance with the current National Association of Real
Estate Investment Trusts ("NAREIT") definition. NAREIT currently defines FFO as
Net income (calculated in accordance with GAAP), excluding depreciation and
amortization related to real estate, gains and losses from the sale of certain
real estate assets, gains and losses from change in control, and impairment
write-downs of certain real estate assets and investment in entities when the
impairment is directly attributable to decreases in the value of depreciable
real estate held by the entity. Other REITs may not define FFO in accordance
with the NAREIT definition, or may interpret the current NAREIT definition
differently than we do; therefore, our computation of FFO may not be comparable
to the computation made by other REITs.
We calculate Core FFO by starting with FFO, as defined by NAREIT, and adjusting
for gains or losses on the extinguishment of swaps and/or debt and any
significant non-recurring or infrequent items. Core FFO is a non-GAAP financial
measure and should not be viewed as an alternative to net income calculated in
accordance with GAAP as a measurement of our operating performance. We believe
that Core FFO is helpful to investors as a supplemental performance measure
because it excludes the effects of certain infrequent or non-recurring items
which can create significant earnings volatility, but which do not directly
relate to our core recurring business operations. As a result, we believe that
Core FFO can help facilitate comparisons of operating performance between
periods and provides a more meaningful predictor of future earnings potential.
Other REITs may not define Core FFO in the same manner as us; therefore, our
computation of Core FFO may not be comparable to the computation made by other
REITs.
We calculate AFFO by starting with Core FFO and adjusting for non-incremental
capital expenditures and non-cash items including: non-real estate depreciation,
straight-lined rent and fair value lease adjustments, non-cash components of
interest expense and compensation expense. AFFO is a non-GAAP financial measure
and should not be viewed as an alternative to net income calculated in
accordance with GAAP as a measurement of our operating performance. We believe
that AFFO is helpful to investors as a meaningful supplemental comparative
performance measure of our ability to make incremental capital investments in
new properties or enhancements to existing properties that improve revenue
growth potential. Other REITs may not define AFFO in the same manner as us;
therefore, our computation of AFFO may not be comparable to the computation of
other REITs.
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Reconciliations of net income to FFO, Core FFO, and AFFO are presented below (in
thousands except per share amounts):
Three Months Ended
March 31, Per March 31, Per
2022 Share(1) 2021 Share(1)
GAAP net income applicable to common stock $ 59,964 $ 0.49 $ 9,344 $
0.08
Depreciation of real estate assets 31,332 0.25 27,812
0.22
Amortization of lease-related costs 22,240 0.18 22,900
0.18
Gain on sale of real estate assets (50,673) (0.41) -
–
NAREIT Funds From Operations and Core Funds From Operations applicable to ordinary shares
$ 62,863 $ 0.51 $ 60,056 $
0.48
Adjustments:
Amortization of debt issue costs, fair market value adjustments of notes payable and debt discounts
778 654 Depreciation of non real estate assets 173 282 Straight-line effects of lease revenue (2,577) (4,103) Stock-based compensation adjustments (552) 1,111 Amortization of lease-related intangibles (3,162) (2,792) Non-incremental capital expenditures (2) (18,947) (17,347) Adjusted Funds From Operations applicable to common stock$ 38,576 $ 37,861 Weighted-average shares outstanding - diluted 123,510 124,450
(1)Based on the weighted average number of shares outstanding – diluted.
(2)We define non-incremental capital expenditures as capital expenditures of a recurring nature related to tenant improvements, leasing commissions, and building capital that do not incrementally enhance the underlying assets' income generating capacity. Tenant improvements, leasing commissions, building capital and deferred lease incentives incurred to lease space that was vacant at acquisition, leasing costs for spaces vacant for greater than one year, leasing costs for spaces at newly acquired properties for which in-place leases expire shortly after acquisition, improvements associated with the expansion of a building, and renovations that either enhance the rental rates of a building or change the property's underlying classification, such as from a Class B to a Class A property, are excluded from this measure.
Property and same store net operating income
Property Net Operating Income ("Property NOI") is a non-GAAP measure which we
use to assess our operating results. We calculate Property NOI beginning with
Net income (calculated in accordance with GAAP) before interest, income-related
federal, state, and local taxes, depreciation and amortization and removing any
impairments and gains or losses from sales of property and other significant
infrequent items that create volatility within our earnings and make it
difficult to determine the earnings generated by our core ongoing business.
Furthermore, we remove general and administrative expenses, income associated
with property management performed by us for other organizations, and other
income or expense items such as interest income from loan investments or costs
from the pursuit of non-consummated transactions. For Property NOI (cash basis),
the effects of non-cash general reserve for uncollectible accounts,
straight-lined rents and fair value lease revenue are also eliminated; while
such effects are not adjusted in calculating Property NOI (accrual basis).
Property NOI is a non-GAAP financial measure and should not be viewed as an
alternative to net income calculated in accordance with GAAP as a measurement of
our operating performance. We believe that Property NOI, on either a cash or
accrual basis, is helpful to investors as a supplemental comparative performance
measure of income generated by our properties alone without our administrative
overhead. Other REITs may not define Property NOI in the same manner as we do;
therefore, our computation of Property NOI may not be comparable to that of
other REITs.
We calculate Same Store Net Operating Income ("Same Store NOI") as Property NOI
attributable to the properties (excluding undeveloped land parcels) that were
(i) owned by us during the entire span of the current and prior year reporting
periods; (ii) that were not being developed or redeveloped during those periods;
and (iii) for which no operating expenses were capitalized during those periods.
Same Store NOI, on either a cash or accrual basis, is a non-GAAP financial
measure and should not be viewed as an alternative to net income calculated in
accordance with GAAP as a measurement of our operating performance. We believe
that Same Store NOI is helpful to investors as a supplemental comparative
performance measure of the income
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generated from the same group of properties from one period to the next. Other
REITs may not define Same Store NOI in the same manner as we do; therefore, our
computation of Same Store NOI may not be comparable to that of other REITs.
The following table sets forth a reconciliation of net income calculated in
accordance with GAAP to EBITDAre, Core EBITDA, Property NOI, and Same Store NOI,
on both a cash and accrual basis, for the three months ended March 31, 2022 and
2021 (in thousands):
Cash Basis Accrual Basis
Three Months Ended Three Months Ended
March 31, March 31, March 31, March 31,
2022 2021 2022 2021
Net income applicable to Piedmont (GAAP)
Net loss applicable to noncontrolling interest - (1) - (1) Interest expense 13,898 12,580 13,898 12,580 Depreciation 31,505 28,094 31,505 28,094 Amortization 22,240 22,900 22,240 22,900 Depreciation and amortization attributable to noncontrolling interests 22 21 22 21 Gain on sale of real estate assets (50,673) - (50,673) - EBITDAre(1) and Core EBITDA(2)$ 76,956 $ 72,938 $ 76,956 $ 72,938 General & administrative expenses 7,595 7,251 7,595 7,251 Management fee revenue (3) (362) (390) (362) (390) Other income (1,808) (2,141) (1,808) (2,141) Non-cash general reserve for uncollectible accounts - 412 Straight-line effects of lease revenue (2,577)
(4,103)
Straight line effects of lease revenue attributable to noncontrolling interests (1) 1 Amortization of lease-related intangibles (3,162) (2,792) Property NOI$ 76,641 $ 71,176 $ 82,381 $ 77,658 Net operating (income)/loss from: Acquisitions (4) (2,697) - (3,837) - Dispositions (5) (475) (1,220) (547) (1,502) Other investments (6) 189 154 247 211 Same Store NOI$ 73,658 $ 70,110 $ 78,244 $ 76,367 Change period over period in Same Store NOI 5.1 % N/A 2.5 % N/A 30
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(1)We calculate EBITDAre in accordance with the current NAREIT definition. NAREIT currently defines EBITDAre as net income (computed in accordance with GAAP) adjusted for gains or losses from sales of property, impairment losses, depreciation on real estate assets, amortization on real estate assets, interest expense and taxes, along with the same adjustments for joint ventures. Some of the adjustments mentioned can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates. EBITDAre is a non-GAAP financial measure and should not be viewed as an alternative to net income calculated in accordance with GAAP as a measurement of our operating performance. We believe that EBITDAre is helpful to investors as a supplemental performance measure because it provides a metric for understanding our results from ongoing operations without taking into account the effects of non-cash expenses (such as depreciation and amortization) and capitalization and capital structure expenses (such as interest expense and taxes). We also believe that EBITDAre can help facilitate comparisons of operating performance between periods and with other REITs. However, other REITs may not define EBITDAre in accordance with the NAREIT definition, or may interpret the current NAREIT definition differently than us; therefore, our computation of EBITDAre may not be comparable to that of such other REITs. (2)We calculate Core EBITDA as net income (computed in accordance with GAAP) before interest, taxes, depreciation and amortization and incrementally removing any impairment losses, gains or losses from sales of property and other significant infrequent items that create volatility within our earnings and make it difficult to determine the earnings generated by our core ongoing business. Core EBITDA is a non-GAAP financial measure and should not be viewed as an alternative to net income calculated in accordance with GAAP as a measurement of our operating performance. We believe that Core EBITDA is helpful to investors as a supplemental performance measure because it provides a metric for understanding the performance of our results from ongoing operations without taking into account the effects of non-cash expenses (such as depreciation and amortization), as well as items that are not part of normal day-to-day operations of our business. Other REITs may not define Core EBITDA in the same manner as us; therefore, our computation of Core EBITDA may not be comparable to that of other REITs.
(3) Presented net of related operating expenses incurred to earn such management fee income.
(4)Acquisitions consist of999 Peachtree Street inAtlanta, Georgia , purchased onOctober 22, 2021 , and additional developable land adjacent to ourAtlanta Galleria project onNovember 19, 2021 . (5)Dispositions consist ofTwo Pierce Place inItasca, Illinois , sold onJanuary 25, 2022 , and225 and 235 Presidential Way inWoburn, Massachusetts , sold onJanuary 28, 2022 . (6)Other investments include active out-of-service redevelopment and development projects, land, and recently completed redevelopment and development projects. The operating results from222 South Orange Avenue inOrlando, Florida , are included in this line item. Overview Our portfolio is a group of properties located within identified growth submarkets in large metropolitan cities concentrated primarily in the Sunbelt. We typically lease space to large, creditworthy corporate or governmental tenants on a long-term basis. As ofMarch 31, 2022 , our average lease was approximately 15,000 square feet with approximately six years of lease term remaining. Consequently, leased percentage, as well as rent roll ups and roll downs, which we experience as a result of re-leasing, can fluctuate widely between buildings and between tenants, depending on when a particular lease is scheduled to commence or expire.
Percentage rented
Our portfolio was 87.0% leased as ofMarch 31, 2022 , as compared to 85.5% leased as ofDecember 31, 2021 and scheduled lease expirations for the portfolio as a whole for the remainder of 2022 represent approximately 4.6% of our ALR. As the economy has continued to recover from the impacts of the COVID-19 pandemic, leasing activity across our portfolio has improved. To the extent new leases for currently vacant space outweigh or fall short of scheduled expirations, such leases would increase or decrease our overall leased percentage, respectively.
Impact of downtime, discount periods and rental rate changes
Commencement of new leases typically occurs 6-18 months after the lease execution date, after refurbishment of the space is completed. The downtime between a lease expiration and the new lease's commencement can negatively impact Property NOI and Same Store NOI comparisons (both accrual and cash basis). In addition, office leases, both new and renewal, often contain upfront rental and/or operating expense abatement periods which delay the cash flow benefits of the lease even after the new lease or renewal has commenced and negatively impact Property NOI and Same Store NOI on a cash basis until such abatements expire. As ofMarch 31, 2022 , we had approximately 1,000,000 square feet of executed leases for vacant space yet to commence or under rental abatement. If we are unable to replace expiring leases with new or renewal leases at rental rates equal to or greater than the expiring rates, rental rate roll downs could occur and negatively impact Property NOI and Same Store NOI comparisons. As mentioned above, 31 -------------------------------------------------------------------------------- Table of Contents our geographically diverse portfolio and the magnitude of some of our tenant's leased space can result in rent roll ups and roll downs that can fluctuate widely on a building-by-building and a quarter-to-quarter basis. During the three months endedMarch 31, 2022 , we experienced a 12.9% and 4.8% roll up in accrual and cash rents, respectively, on executed leases related to space vacant one year or less. Same Store NOI increased by 5.1% and 2.5% on a cash and accrual basis, respectively, for the three months endedMarch 31, 2022 . The primary drivers of the increases in both metrics were increased rental rates and the expiration of abatements at certain of our properties. Property NOI and Same Store NOI comparisons for any given period fluctuate as a result of the mix of net leasing activity in individual properties during the respective period.
Election as REIT
We have elected to be taxed as a REIT under the Code and have operated as such beginning with our taxable year endedDecember 31, 1998 . To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our adjusted REIT taxable income, computed without regard to the dividends-paid deduction and by excluding net capital gains attributable to our stockholders, as defined by the Code. As a REIT, we generally will not be subject to federal income tax on income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we may be subject to federal income taxes on our taxable income for that year and for the four years following the year during which qualification is lost and/or penalties, unless theIRS grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders. However, we believe that we are organized and operate in such a manner as to qualify for treatment as a REIT and intend to continue to operate in the foreseeable future in such a manner that we will remain qualified as a REIT for federal income tax purposes. We have elected to treat one of our wholly-owned subsidiaries as a taxable REIT subsidiary. This subsidiary performs non-customary services for tenants of buildings that we own and real estate and non-real estate related-services; however, any earnings related to such services performed by our taxable REIT subsidiary are subject to federal and state income taxes. In addition, for us to continue to qualify as a REIT, our investments in taxable REIT subsidiaries cannot exceed 20% of the value of our total assets.
Inflation
We are exposed to inflation risk, as income from long-term leases is the primary source of our cash flows from operations. There are provisions in the majority of our tenant leases that are intended to protect us from, and mitigate the risk of, the impact of inflation. These provisions include rent steps, reimbursement billings for operating expense pass-through charges, real estate tax, and insurance reimbursements on a per square-foot basis, or in some cases, annual reimbursement of operating expenses above certain per square-foot allowances. However, due to the long-term nature of the leases, the leases may not readjust their reimbursement rates frequently enough to fully cover inflation.
Application of critical accounting estimates
Our accounting policies have been established to conform with GAAP. The preparation of financial statements in conformity with GAAP requires management to use judgement in the application of accounting policies, including making estimates and assumptions. These judgements affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgement or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied, thus, resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses. Refer to our Annual Report on Form 10-K for the year endedDecember 31, 2021 for a discussion of our critical accounting policies. There have been no material changes to these policies during the three months endedMarch 31, 2022 .
Commitments and contingencies
We are subject to certain commitments and contingencies with regard to certain transactions. Refer to Note 6 to our consolidated financial statements for further explanation. Examples of such commitments and contingencies include:
• Commitments under existing leases; and
• Contingencies related to tenant audits/disputes.
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