Piedmont Office Realty Trust, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. The filing identifies the registrant as Piedmont Office Realty Trust, Inc. (NYSE: PDM). Piedmont owns, manages, develops, and operates primarily Class A office properties across seven U.S. markets. At quarter-end it owned 54 in-service properties and one redevelopment asset; the in-service portfolio comprised about 16.4 million square feet and was 85.9% leased.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $131.1 million | $131.7 million | $390.5 million | $403.5 million |
| Net income applicable to Piedmont | $11.3 million | $8.9 million | $30.6 million | $210.1 million |
| Diluted EPS | $0.09 | $0.07 | $0.25 | $1.66 |
| NOI (company-defined, non-GAAP) | $79.2 million | $78.2 million | $235.7 million | $243.4 million |
| Operating cash flow | — | $165.0 million | $138.8 million |
Q3 net margin was approximately 8.6%, compared with 6.8% a year earlier; NOI as a share of revenue was approximately 60.4%, versus 59.4%. For the nine-month period, net income was sharply lower year over year mainly because 2020 included a $191.0 million gain on sale of real estate and a $9.3 million early debt-extinguishment loss. Nine-month rental and tenant reimbursement revenue declined $11.4 million, while interest expense fell $4.5 million and other income rose $6.5 million, primarily from interest on seller-financing notes.
Debt, liquidity, and capital
- Debt principal outstanding was approximately $1.678 billion at September 30; reported net carrying value was $1.665 billion. The weighted-average stated or effectively fixed rate was 3.18%.
- Piedmont issued $300 million of 2.75% senior notes due 2032, using the proceeds to repay its $300 million term loan due November 2021. It also repaid a $35 million mortgage in June. All outstanding debt was interest-only until maturity, and management reported compliance with financial covenants.
- Cash and cash equivalents were $8.2 million; cash, cash equivalents, and restricted cash totaled $14.3 million. The company reported $202 million of remaining capacity on its $500 million revolving credit line as of the filing date.
- Cash dividends paid during the first nine months were $103.9 million. A fourth-quarter dividend of $0.21 per share was declared after quarter-end, payable January 4, 2022. Approximately $169.3 million remained available under the share repurchase authorization; no shares were repurchased in Q3.
- Capital expenditures were $83.5 million for the first nine months. An additional unrecorded tenant allowance commitment of approximately $21.8 million relates to the State of New York lease at 60 Broad Street.
Material changes, outlook, and risks
- Q3 revenue was slightly lower year over year, but net income and NOI improved. Management attributed the quarterly improvement to rental-rate growth, lower operating expenses—particularly real estate taxes—and expiration of certain expense-recovery abatements. These gains were partly offset by lower occupancy.
- Leased occupancy declined from approximately 86.8% at December 31, 2020 to 85.9% at September 30, 2021. Management said leasing activity had improved as the economy recovered, while pandemic-related leasing weakness in 2020 and the first half of 2021 continued to weigh on occupancy and rental growth. About 770,000 square feet of executed leases for vacant space had yet to commence or remained under rent abatement.
- Same-store NOI increased year over year for both the quarter and nine months: 5.0% and 2.8% on an accrual basis, respectively; 11.6% and 6.7% on a cash basis. These are non-GAAP measures and company-defined.
- Management said COVID-19 had not materially affected financial condition, overall liquidity, or caused material impairments, but tenant impacts and long-term effects on leasing and the economy remained uncertain. There is no specific earnings or occupancy guidance in the filing.
- Principal risks include office-space demand and leasing conditions, tenant defaults or financial deterioration, interest-rate exposure, inflation not fully offset by lease reimbursements, and pandemic effects. A newly identified risk was the proposed federal vaccination-or-testing rule for employers with at least 100 employees, which could cause employee attrition; its effects were uncertain.
- Two Woburn, Massachusetts properties were under binding contract for $129.0 million, with closing expected in early 2022 subject to customary conditions. After quarter-end, Piedmont acquired a 622,000-square-foot Atlanta office building for $223.9 million; it was approximately 77% leased.
- The company had no material pending legal proceedings, reported no material changes to internal control over financial reporting, and stated it had no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether occupancy and leasing activity continued to recover, including commencement and rent-abatement timing for the 770,000 square feet of signed leases.
- Expected net proceeds and closing status for the Woburn property sale, and financing and leasing assumptions for the post-quarter Atlanta acquisition.
- Debt maturities, revolver renewal plans, variable-rate exposure, and the transition arrangements for LIBOR-referenced borrowings.
- Cash available after dividends, capital spending, and the $21.8 million tenant allowance commitment; also review the basis and sustainability of non-GAAP FFO, AFFO, and NOI measures.
- COVID-19 effects on tenants and office demand, as well as any operational or staffing impact from the proposed vaccination-or-testing regulation.