Piedmont Office Realty Trust, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Piedmont owns and operates primarily Sunbelt Class A office properties as a REIT. At quarter-end, it had 52 in-service properties and one redevelopment asset, totaling approximately 16.1 million square feet; the in-service portfolio was 87.0% leased, up from 85.5% at December 31, 2021.
Financial results and position
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Total revenue | $136.1 million | $129.3 million; up 5.3% |
| Net income attributable to Piedmont | $60.0 million; $0.49 per diluted share | $9.3 million; $0.08 per diluted share |
| Gain on real estate sales | $50.7 million | None |
| Net operating income (NOI) | $82.4 million | $77.7 million; up 6.1% |
| Same-store NOI | Accrual basis: up 2.5%; cash basis: up 5.1% | Year-over-year |
| NAREIT FFO | $62.9 million; $0.51 per share | $60.1 million; $0.48 per share |
| Adjusted FFO | $38.6 million | $37.9 million |
| Operating cash flow | $39.8 million | $46.8 million |
| Capital expenditures | $32.6 million | $25.8 million |
Property operating costs were $53.6 million, depreciation $31.5 million, amortization $22.3 million, and interest expense $13.9 million. Cash, cash equivalents, and restricted cash totaled $8.7 million at quarter-end. Total assets were $3.70 billion and stockholders’ equity was $1.83 billion.
Debt, net of discounts and issuance costs, was $1.67 billion, down from $1.88 billion at year-end. Outstanding borrowings were unsecured and interest-only until maturity; the weighted-average effective rate was 3.22%. The company reported compliance with debt covenants. Its $500 million revolving credit facility had $81 million drawn at quarter-end and $416 million of capacity available as of the filing date.
Material changes and drivers
- Net income rose sharply, primarily because of the $50.7 million gain on sales of Two Pierce Place and 225/235 Presidential Way. The gain is not indicative of recurring operating earnings.
- Revenue increased $6.9 million, driven by capital recycling, rental rate increases, higher tenant reimbursements, and improved parking activity. Property operating costs also rose, reflecting higher tenant utilization and recoverable operating expenses.
- NOI increased in Atlanta, principally following the 999 Peachtree acquisition, and in Washington, D.C., following lease commencements. Orlando NOI declined as prior-year lease termination income did not recur.
- Investing cash flow included $143.6 million of property sale proceeds and $118.5 million from repayment of notes receivable. The company used cash to repay $296.0 million of debt, including repayment of its revolver with proceeds from the notes.
Outlook, risks, and notable items
- No numerical earnings or occupancy guidance was provided. Management said leasing activity had improved as the economy recovered, while pandemic-related leasing weakness in 2020 and early 2021 had moderated earnings growth and weighed on occupancy and rent growth.
- Approximately 1.0 million square feet of executed leases for vacant space had not yet commenced or remained under rent abatement. Lease expirations for the remainder of 2022 represented approximately 4.6% of annualized lease revenue. Management reported rent roll-ups of 12.9% on an accrual basis and 4.8% on a cash basis for leases executed on space vacant for one year or less.
- Management identified office demand, tenant credit and lease renewals, inflation, rising interest rates, development costs and delays, and COVID-19 effects as risks. A 1 percentage-point increase in variable rates on existing borrowings would increase annual interest expense by approximately $2.3 million. Management said most debt was fixed or effectively fixed.
- The revolving credit facility matures in September 2022, with two six-month extension options subject to conditions and fees; management reported no other scheduled debt maturities until Q2 2023. USD LIBOR is scheduled to cease after June 2023; the company said its credit agreements contain fallback provisions.
- A $15.1 million unrecorded tenant allowance commitment relates to the State of New York’s approximately 20-year, 520,000-square-foot renewal and expansion at 60 Broad Street. The company declared a Q2 2022 dividend of $0.21 per share, payable June 17, 2022.
- The company reported no material pending legal proceedings and no known material changes to the risk factors in its 2021 Form 10-K. Disclosure controls were assessed as effective.
Investor verification points
- Separate recurring operating performance from the $50.7 million property-sale gain; review FFO and AFFO alongside GAAP earnings.
- Track occupancy, lease commencements and abatements, renewal spreads, and the 2022 expiration schedule.
- Confirm liquidity and refinancing plans for the revolving facility, and monitor floating-rate exposure and LIBOR transition terms.
- Assess the cash demands of tenant improvements, leasing costs, and the $15.1 million New York tenant allowance commitment against operating cash flow and dividends.
- Review the effects of property dispositions and note repayments on future revenue, NOI, and debt balances.