Piedmont Office Realty Trust, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Piedmont owns, manages, develops and redevelops office properties, primarily in U.S. Sunbelt markets. At quarter-end, it held 51 in-service properties and one redevelopment asset; the in-service portfolio totaled approximately 16.6 million square feet and was 86.7% leased.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $147.0 million | $144.1 million | $432.4 million | $416.6 million |
| Net income/(loss) applicable to Piedmont | $(17.0) million | $3.3 million | $(20.4) million | $71.3 million |
| Net income/(loss) per diluted share | $(0.14) | $0.03 | $(0.16) | $0.58 |
| Property NOI | $87.1 million | $85.1 million | $256.2 million | $250.2 million |
| NAREIT FFO per diluted share | $0.42 | $0.50 | $1.32 | $1.50 |
| AFFO | $39.9 million | $43.5 million | $121.2 million | $131.0 million |
- Cash flow: Nine-month operating cash flow was $160.5 million, versus $164.0 million. Investing activities used $137.0 million, including $113.4 million of capital expenditures. Financing activities used $32.1 million, including $92.8 million of dividends paid. Cash, cash equivalents and restricted cash totaled $11.0 million at period-end; unrestricted cash was $5.0 million.
- Debt and liquidity: Total debt was $2.05 billion at September 30, 2023, including $196.7 million of secured mortgage debt; the weighted-average effective rate was 5.46%. Debt fair value was estimated at $1.87 billion. The $600 million credit line had $443 million available, with $157 million drawn. Stockholders’ equity was $1.77 billion and total liabilities were $2.31 billion.
Material changes versus prior periods
- Q3 revenue rose $2.9 million year over year, while Q3 Property NOI increased $2.0 million. For the first nine months, revenue increased $15.9 million and Property NOI increased $6.1 million.
- Net results deteriorated substantially: Q3 interest expense rose $10.1 million and nine-month interest expense rose $27.9 million, driven mainly by higher interest rates and, for the nine-month period, a higher average debt balance. Q3 also included an $11.0 million non-cash goodwill impairment and an $0.8 million debt-extinguishment loss.
- The prior-year nine-month comparison included a $50.7 million gain on real estate sales; no comparable gain was recorded in 2023. This, along with higher interest expense and the impairment, contributed to the year-to-date swing to a net loss.
- Same Store NOI increased 5.3% on a cash basis and 1.7% on an accrual basis in Q3. For the first nine months, it increased 1.3% on a cash basis but decreased 1.6% on an accrual basis.
- Q3 leasing totaled approximately 302,000 square feet, including 170,000 square feet of new leases. Leases on space vacant one year or less produced rent roll-ups of 11.7% cash and 10.3% accrual in Q3. Executed leases for vacant space not yet commenced or under abatement represented approximately $36 million of additional annual cash revenue.
Outlook, risks and notable items
- Management said it believes liquidity is sufficient for the foreseeable future. It expected to extend the $215 million floating-rate term loan, due January 2024, by one year to January 2025, and planned to repay the remaining $50.2 million of 2024 notes at maturity in March 2024 using cash, property dispositions and/or credit-line borrowings. These are expectations, not completed actions in this filing.
- Management reduced the annual dividend from $0.84 to $0.50 per share beginning in Q3 2023, estimating roughly $40 million of annual cash savings. A $0.125-per-share Q4 dividend was declared, payable January 2, 2024. Approximately $150.5 million of share-repurchase authorization remained available through February 2024; no Q3 repurchases occurred.
- In Q3, Piedmont recorded an $11.0 million goodwill impairment for its Minneapolis reporting unit after a stock-price decline triggered an interim assessment. The valuation relied on projected cash flows and other significant unobservable assumptions.
- Interest-rate exposure is significant: $572 million was outstanding on floating-rate facilities at quarter-end. Management estimated that a 1 percentage-point increase in rates on existing variable-rate borrowings would increase annual interest expense by approximately $5.7 million. The company reported compliance with debt covenants.
- Key risks include office demand and work-from-home trends, leasing and tenant credit, refinancing and rising rates, inflation, property investment needs, and potential loss of uninsured bank deposits. The filing reported no material pending legal proceedings and no material changes to internal controls.
- No quantified earnings or operating guidance was provided in the supplied filing text. Forward-looking statements are subject to risks and assumptions, including economic conditions and office-space demand.
Important facts for investors to verify
- Progress on the expected term-loan extension and repayment of the $50.2 million 2024 note balance, as well as available credit-line capacity and refinancing costs.
- Whether occupancy gains, new leases and the stated $36 million of potential annual cash revenue convert to collected rent, considering commencement delays and abatements.
- Future interest expense, variable-rate exposure and covenant headroom, particularly if rates remain elevated or debt balances change.
- Whether NOI and cash-based same-store performance sustain improvement, given the weaker nine-month accrual-based same-store result and regional weakness, including Boston.
- Assumptions underlying the Minneapolis goodwill impairment and any further impairment assessments; also distinguish GAAP earnings from non-GAAP FFO, Core FFO, AFFO and NOI measures.