Piedmont Office Realty Trust, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; financial statements are unaudited. The company is a REIT focused on Class A office properties, primarily in U.S. Sunbelt markets. At quarter-end, it owned 51 in-service properties and one redevelopment asset, with approximately 16.7 million square feet and 86.1% leased.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Total revenue | $142.4 million | $136.1 million; up 4.6% |
| Net income (loss) attributable to Piedmont | $(1.4) million; $(0.01) per diluted share | $60.0 million; $0.49 per diluted share |
| Accrual-basis property NOI | $84.5 million | $82.4 million; up 2.6% |
| Same-store NOI | Accrual: $77.2 million, down 2.8%; cash: $72.6 million, down 1.5% | Prior-period comparisons |
| NAREIT FFO / Core FFO | $56.3 million; $0.46 per diluted share | $62.9 million; $0.51 per diluted share |
| Adjusted FFO | $36.8 million | $38.6 million |
| Operating cash flow | $40.4 million | $39.8 million |
| Capital expenditures | $36.2 million | $32.6 million |
| Cash and cash equivalents | $170.6 million | $16.5 million at December 31, 2022 |
| Total debt | $2.198 billion | $1.984 billion at December 31, 2022 |
Revenue growth reflected higher tenant reimbursements, capital recycling and parking income. Higher property costs and depreciation offset part of that increase. Interest expense rose $8.2 million to $22.1 million, mainly because of higher average debt and increased rates on variable-rate borrowings. The prior-year quarter included a $50.7 million property-sale gain, principally from the sale of 225 and 235 Presidential Way; this largely explains the year-over-year swing in GAAP earnings. Accrual NOI margin was approximately 59.3% of revenue, versus 60.5% in Q1 2022.
Financial position, liquidity and material changes
- Debt increased by approximately $214 million during the quarter, including a new $215 million, one-year floating-rate term loan. Its initial maturity is January 2024, with an option to extend to January 2025, subject to conditions and fees.
- The company also has $350 million of senior notes due June 1, 2023 and $400 million due March 2024. Management expects to repay the 2023 notes using cash, property operating cash flow, potential asset-sale proceeds and/or its $600 million revolving credit facility, which had no balance outstanding at quarter-end. It expects to refinance the 2024 notes using one or more capital sources, depending on market conditions.
- Management stated it believes liquidity is sufficient for foreseeable obligations. Debt fair value was estimated at $2.018 billion, below its $2.198 billion carrying amount.
- Operating cash flow less reported capital expenditures was approximately $4.2 million. Financing activities provided $160.2 million net, largely reflecting debt proceeds, while investing activities used $45.4 million. Dividends paid were $51.3 million; the board declared a further $0.21-per-share dividend for Q2, payable June 16, 2023.
- Leased occupancy decreased from 86.7% at year-end 2022 to 86.1%, despite approximately 224,000 square feet of net new leasing. Executed leases for vacant space not yet commenced or subject to rent abatement represented approximately $40 million of additional annual cash revenue.
Outlook, risks and other notable items
- No quantitative full-year earnings or operating guidance is provided. Management notes that quarterly results are not necessarily indicative of full-year results.
- Leasing during the quarter produced rent roll-ups of 5.7% on a cash basis and 9.9% on an accrual basis for executed leases on space vacant one year or less. Management attributed lower same-store NOI mainly to lower occupancy and more leases in commencement or abatement periods.
- Interest-rate exposure is a key risk. A 1.0% increase in variable rates on quarter-end borrowings would increase annual interest expense by approximately $4.2 million. The $215 million term loan and $200 million term loan carried rates of 5.95% and 5.91%, respectively. Interest-rate swaps covered $250 million of debt notional.
- Management identifies office-space demand and work-from-home trends, tenant credit and lease renewals, inflation, rising rates, refinancing and property-market liquidity as risks. The filing also newly highlights potential losses on cash deposits above FDIC-insured limits if a depository institution fails; the company reported no loss from recent bank failures.
- There were no material pending legal proceedings reported, no share repurchases during the quarter, and no material changes to internal control over financial reporting. Disclosure controls were assessed as effective.
Important facts for investors to verify
- How the $350 million June 2023 notes were repaid after quarter-end, and the financing plan for the $400 million 2024 maturity.
- Whether occupancy, lease commencements and abatements improve, and whether the disclosed approximately $40 million of potential annual cash revenue is realized.
- Updated portfolio leasing, tenant credit and same-store NOI trends, including the impact of office demand and work-from-home patterns.
- Future variable-rate debt costs, covenant headroom and access to refinancing or asset-sale proceeds under changing market conditions.
- Cash balances and deposit concentrations relative to uninsured limits, along with capital spending and dividend coverage.