Piedmont Office Realty Trust, Inc. — FY 2021 Form 10-K
Reporting period: Year ended December 31, 2021; filed February 17, 2022. Piedmont is a REIT that owns, operates, redevelops, and manages primarily Class A office properties. The filing is an annual report, not a standalone fourth-quarter earnings report.
Business context and portfolio
At year-end, Piedmont owned 55 in-service office properties totaling approximately 17.1 million square feet, plus one redevelopment asset. The portfolio was 85.5% leased (reported as approximately 86%), versus approximately 87% a year earlier. About 96% of annualized lease revenue (ALR) came from seven markets, and more than 60% from Sunbelt markets. Average remaining lease term was approximately six years. No tenant exceeded 5% of ALR; US Bancorp and the State of New York each represented 5.0%.
Financial performance and liquidity
| Metric | FY 2021 | FY 2020 |
|---|---|---|
| Total revenue | $528.7 million | $535.0 million |
| Net income (loss) applicable to common stockholders | $(1.2) million; $(0.01) per diluted share | $232.7 million; $1.85 per diluted share |
| Net operating income (NOI) | $317.6 million | $319.5 million |
| NAREIT FFO per diluted share | $1.97 | $1.82 |
| Core FFO per diluted share | $1.97 | $1.89 |
| AFFO | $160.1 million | $137.4 million |
| Net cash from operating activities | $242.2 million | $193.3 million |
NOI was approximately 60.1% of revenue. Same-store NOI increased 6.5% on a cash basis and 3.4% on an accrual basis. Capital expenditures were $122.6 million, including $51.6 million for redevelopment and renovations. Cash, cash equivalents, and restricted cash totaled $8.9 million at year-end. The company reported $309 million of remaining capacity on its $500 million revolving credit facility as of the filing date.
Total debt principal was approximately $1.89 billion, up from approximately $1.78 billion at year-end 2020; the balance-sheet carrying amount of debt was $1.88 billion. Debt to gross assets was 37.1%. The weighted-average interest rate was 2.93%; approximately $1.5 billion was fixed or effectively fixed. The revolver had $290 million drawn and matured in September 2022, with extension options. Management reported covenant compliance and no other scheduled maturities until 2023, excluding the revolver.
Material changes and unusual items
- GAAP earnings fell sharply, primarily because 2021 included a $41.0 million impairment charge on Two Pierce Place, Chicago, following a shortened expected hold period. Piedmont sold that asset in January 2022 for approximately $24 million.
- FY 2020 included $205.7 million of property-sale gains and a $9.3 million debt-extinguishment loss; FY 2021 had neither. This makes the year-over-year GAAP net income comparison substantially affected by nonrecurring items.
- Revenue declined $6.3 million. Lower occupancy and continuing pandemic effects were partly offset by acquisitions, rent increases, and higher tenant reimbursements. NOI was nearly flat overall; growth in Dallas, Atlanta, and Boston was offset in part by declines in New York and other markets.
- Piedmont acquired 999 Peachtree Street in Atlanta for $223.9 million in October 2021. It issued $300 million of 2.75% senior notes due 2032, using proceeds to repay a $300 million term loan.
- During 2021, Piedmont repurchased approximately 1.1 million shares for about $18.9 million at an average $17.76 per share. The board extended the remaining repurchase authorization through February 2024.
- The company declared $0.21 per share for each 2021 quarter, or $0.84 for the year, and declared a further $0.21 first-quarter 2022 dividend.
Outlook, management commentary, and risks
Management said COVID-19 had not materially affected overall financial condition or liquidity, but pandemic-related leasing slowdowns—especially in 2020 and the first half of 2021—moderated earnings growth and occupancy. Leasing activity improved as the economy recovered; longer-term effects on tenants, leasing decisions, and the economy remained uncertain. Approximately 750,000 square feet of executed leases for vacant space had not yet commenced or remained under rent abatement. Management provided no specific earnings or occupancy guidance in the supplied filing text.
Key risks include structural changes in office-space demand, including remote work; leasing competition, vacancy and tenant defaults; concentration in office properties and seven principal markets; interest-rate and refinancing exposure; the LIBOR-to-SOFR transition; and climate, regulatory, cybersecurity, and insurance risks. The filing identifies a $4.0 million general reserve related to tenant lease assets and cautions that it may not cover future losses. A significant unrecorded tenant-improvement commitment of approximately $18.4 million relates to the State of New York lease at 60 Broad Street. The company also noted the sensitivity of property impairment estimates to assumptions about rents, lease-up periods, holding periods, and capitalization and discount rates.
Important facts for investors to verify
- Review the $41 million Two Pierce Place impairment, subsequent $24 million sale, and related effect on reported earnings.
- Confirm the revolver’s refinancing or extension status and available capacity; its year-end draw was $290 million and stated maturity was September 2022.
- Track occupancy, leasing commencements, abatements, and renewal discussions, including the 2022 lease expiry representing 1.2% of ALR.
- Assess debt maturities, variable-rate exposure, and the transition from LIBOR; management estimated a 1 percentage-point rate increase would add approximately $4.4 million of annual interest expense on year-end variable borrowings.
- Evaluate dividend coverage alongside recurring property capital needs, leasing costs, debt service, and REIT distribution requirements; FFO and AFFO are non-GAAP measures and are not interchangeable with cash available for dividends.
- Consider that 2020 earnings benefited from substantial property-sale gains, while 2021 results included the Chicago impairment; compare recurring operating measures as well as GAAP results.