Piedmont Realty Trust, Inc. quarterly report, Q2 FY2022

Piedmont Office Realty Trust, Inc. — Q2 2022 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2022. Piedmont owns and operates Class A office properties, primarily in the Sunbelt. At quarter-end, it held 52 in-service properties and one redevelopment asset; the in-service portfolio totaled approximately 16.1 million square feet and was 87.0% leased, up from 85.5% at December 31, 2021.

Financial performance and position

Metric	Q2 2022	Q2 2021	Six months 2022	Six months 2021
Total revenue	$136.3 million	$130.2 million	$272.5 million	$259.5 million
Net income applicable to Piedmont	$8.0 million	$9.9 million	$67.9 million	$19.3 million
Diluted earnings per share	$0.06	$0.08	$0.55	$0.15
Net operating income (NOI)	$82.7 million	$78.8 million	$165.1 million	$156.4 million
Adjusted funds from operations (AFFO)	$48.9 million	$41.7 million	$87.5 million	$79.5 million

Margins: Q2 NOI was approximately 60.7% of revenue, versus 60.5% a year earlier. GAAP net income was approximately 5.8% of revenue versus 7.6% in Q2 2021. First-half net income included a $50.7 million property-sale gain; without that item, the year-over-year headline increase is not representative of recurring earnings.
Cash flow: First-half operating cash flow was $91.8 million, compared with $100.2 million in 2021. Investing activities provided $193.3 million, including $143.6 million of property-sale proceeds and $118.5 million from note repayments. Financing activities used $286.1 million, including $77.9 million of dividends paid. Cash, cash equivalents and restricted cash ended the period at $7.9 million.
Debt and liquidity: Unsecured debt, net of issuance costs and discounts, was $1.675 billion at June 30, down from $1.878 billion at year-end. All outstanding debt was unsecured and interest-only until maturity; the weighted-average stated/effectively fixed rate was 3.38%. The company replaced its $500 million revolving facility with a $600 million facility maturing June 2026, with two possible six-month extensions. It reported covenant compliance. Management said liquidity was sufficient for foreseeable obligations.
Dividends: The company paid $0.42 per common share during the first half. A $0.21-per-share third-quarter dividend was declared after quarter-end.

Changes versus prior year

Q2 revenue increased $6.1 million, primarily from leasing and rental-rate activity, tenant reimbursements, and higher parking utilization. Q2 net income declined $2.0 million, mainly because prior-year results included interest income on notes receivable repaid in March 2022; higher interest expense also weighed on results.
First-half revenue rose $13.0 million and NOI rose $8.6 million. Same-store NOI increased 3.4% on a cash basis and 2.6% on an accrual basis. Executed leases on qualifying vacant space achieved rent roll-ups of 12.2% accrual and 2.5% cash in Q2; first-half roll-ups were 12.4% and 3.3%, respectively.
First-half net income increased $48.6 million, largely due to the $50.7 million gain on sales of Two Pierce Place and 225 and 235 Presidential Way. The company also received repayment of $118.5 million in notes receivable and used the proceeds to pay down its unsecured line of credit.
Interest expense increased $2.8 million in the first half, principally due to higher average revolving-credit borrowings and higher variable rates. At period-end, a 1 percentage-point rise in rates on then-outstanding variable-rate debt was estimated to add approximately $2.4 million in annual interest expense.

Outlook, risks and notable items

Piedmont contracted to acquire 1180 Peachtree Street in Atlanta for a net purchase price of $465 million, including assumption of a $197 million mortgage at 4.1%; closing was expected in Q3 2022. A $200 million delayed-draw floating-rate term loan was arranged in July to fund most of the cash portion temporarily. Management anticipated using future sales of non-strategic assets to fund the acquisition and maintain an approximately leverage-neutral balance sheet.
A $350 million senior-note maturity is due in June 2023. Management expects to address it through refinancing, cash, operating cash flow and/or its revolving facility.
Approximately 1.2 million square feet of executed leases for vacant space had not commenced or were under rent abatement, representing approximately $36 million of annual revenue. Lease commencements, downtime and abatements can delay cash-flow benefits.
Key risks cited include office-space demand and economic conditions, tenant defaults or lease reductions, inflation and rising rates, refinancing, property dispositions and acquisitions, redevelopment and construction costs, and the continuing effects of COVID-19. Long-term leases may not adjust expense reimbursements quickly enough to fully offset inflation.
The filing reports a $13.3 million unrecorded tenant-allowance commitment related to the State of New York lease renewal and expansion at 60 Broad Street. No material pending legal proceedings or known material changes to previously disclosed risk factors were reported. Disclosure controls were deemed effective.
No quantitative full-year earnings or operating guidance was provided. Management’s liquidity and acquisition expectations are forward-looking and subject to market conditions and execution risks.

Investor verification priorities

Separate recurring operating performance from the $50.7 million property-sale gain and compare GAAP income with NOI, FFO and AFFO, which are non-GAAP measures.
Verify completion and financing of the 1180 Peachtree acquisition, including the assumed mortgage, floating-rate loan and planned asset-sale funding.
Assess refinancing plans for the $350 million 2023 notes and exposure to variable interest rates, including covenant headroom.
Track leasing, occupancy, the $36 million of annual revenue tied to leases not yet commenced or under abatement, and the sustainability of reported rent roll-ups.
Monitor capital spending, leasing commitments, dividend coverage and cash available after property improvements and debt service.