Piedmont Office Realty Trust, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Amounts are in U.S. dollars; financial statement figures are unaudited. The registrant’s filing name is Piedmont Office Realty Trust, Inc. (NYSE: PDM).
Business context
Piedmont owns, manages, develops and operates Class A office properties, primarily in Sunbelt markets. At quarter-end, it owned 53 in-service properties and one redevelopment asset, with approximately 16.8 million square feet; the in-service portfolio was 86.8% leased, versus 85.5% at December 31, 2021. Average remaining lease term was approximately six years.
During the quarter, Piedmont acquired 1180 Peachtree Street in Atlanta, a 691,092-square-foot property that was 95% leased, for a net contractual price of approximately $465.7 million, including assumption of a $197 million mortgage. In the first quarter, it sold two properties for net proceeds of $143.6 million and received $118.5 million from repayment of two notes receivable.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $144.1 million | $131.1 million | $416.6 million | $390.5 million |
| Net income applicable to Piedmont | $3.3 million | $11.3 million | $71.3 million | $30.6 million |
| Diluted EPS | $0.03 | $0.09 | $0.58 | $0.25 |
| Property NOI | $85.1 million | $79.2 million | $250.2 million | $235.7 million |
| Operating cash flow | Not presented for quarter | $164.0 million | $165.0 million |
Q3 property NOI margin was approximately 59.1% of revenue, compared with 60.4% a year earlier; nine-month NOI margin was approximately 60.1%, versus 60.4%. These margins are calculated from the filing’s NOI and revenue figures. Same-store NOI was effectively flat year over year in Q3; for the nine months, it increased 2.2% on a cash basis and 1.8% on an accrual basis.
Nine-month net income included a $50.7 million gain on property sales; excluding that item, GAAP net income was lower than reported. Q3 net income declined despite revenue growth, primarily due to higher depreciation and amortization, increased interest expense and lower other income. Revenue growth reflected acquisitions, leasing-related rent increases and higher tenant reimbursements.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $164.0 million. Investing activities used $120.4 million, including the acquisition and $95.5 million of capital expenditures; financing activities used $39.6 million, including $103.8 million of dividends paid.
- Cash and cash equivalents were $10.7 million at September 30, 2022; cash, restricted cash and escrows totaled $12.8 million.
- Total debt was $2.145 billion, compared with $1.878 billion at year-end 2021. The weighted-average effective rate was 3.69%. Debt fair value was estimated at $1.997 billion, below its carrying value.
- The $600 million unsecured revolving credit facility had $162 million outstanding, leaving $438 million of nominal unused capacity. Its maturity is June 2026, with extension options. Piedmont reported compliance with its debt covenants.
- Near-term maturities include the $200 million floating-rate term loan due January 2023 (with extension options) and $350 million of senior notes due June 2023. Management intends to address these through asset sales, refinancing, operating cash, cash on hand and/or revolving-credit draws.
Outlook, commentary and risks
Management stated it believes liquidity is sufficient for obligations for the foreseeable future. It expects select non-strategic property sales over the coming quarters to help fund the Atlanta acquisition and maintain an approximately leverage-neutral balance sheet. No numeric earnings or revenue guidance is provided.
Approximately 1.2 million square feet of executed leases for vacant space had not yet commenced or remained under rental abatement, representing about $38 million of additional annual cash revenue when realized. For leases executed in Q3 on space vacant one year or less, rent roll-ups were 33.1% cash and 37.6% accrual; excluding a significant Dallas renewal and extension, they were 9.9% and 12.6%, respectively.
Key risks discussed include office demand changes, including work-from-home trends; tenant renewals, defaults and lease downtime; inflation and operating costs; rising interest rates and refinancing; and development, redevelopment and leasing costs. A 1 percentage-point rise in rates on existing variable-rate borrowings was estimated to add approximately $5.1 million of annual interest expense. Management reported no material change in previously disclosed risk factors, no material pending legal proceedings, and no revenue reductions from tenant audits or disputes during the periods presented.
The board declared a fourth-quarter 2022 dividend of $0.21 per common share, payable January 3, 2023 to holders of record November 25, 2022. Disclosure controls were assessed as effective; no material changes to internal control over financial reporting were reported.
Important facts for investors to verify
- Whether Piedmont can refinance or repay the January and June 2023 maturities on acceptable terms, and how it will manage floating-rate exposure.
- Leasing progress, occupancy and commencement of the 1.2 million square feet of executed leases, including realization of the stated $38 million annual cash revenue.
- Whether planned property dispositions occur at expected proceeds and support the stated leverage-neutral objective.
- How recurring operating performance compares with GAAP net income, given the material property-sale gain in the nine-month period and the company’s non-GAAP NOI, FFO and AFFO measures.
- Future capital requirements for redevelopment, tenant improvements and leasing commissions, alongside dividend and share-repurchase decisions.