Piedmont Office Realty Trust, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing, not a standalone fourth-quarter report. Piedmont is a REIT focused on Class A office properties, primarily across seven Eastern U.S. markets.
Business context and portfolio
- Owned 54 in-service properties totaling approximately 16.4 million square feet, plus one redevelopment asset; the in-service portfolio was 86.8% leased, down from 89.7% in 2019.
- Approximately 96% of annualized lease revenue (ALR) came from Dallas, Atlanta, Washington, D.C., Minneapolis, Boston, Orlando, and New York. No tenant exceeded 5.1% of ALR; the largest were U.S. Bancorp (5.1%) and the State of New York (5.0%).
- In-service ALR was $515.1 million, up from $496.2 million; ALR per leased square foot was $36.12 versus $33.91.
Financial performance and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $535.0 million | $533.2 million |
| Net income attributable to Piedmont | $232.7 million; $1.85 per diluted share | $229.3 million; $1.82 per diluted share |
| NAREIT FFO applicable to common stock | $229.6 million; $1.82 per diluted share | $222.9 million; $1.77 per diluted share |
| Core FFO applicable to common stock | $238.9 million; $1.89 per diluted share | $226.1 million; $1.79 per diluted share |
| Adjusted FFO (AFFO) | $137.4 million | $165.7 million |
| Net cash provided by operating activities | $193.3 million | $208.5 million |
| Total NOI | $319.5 million | $320.6 million |
| Same-store NOI, cash basis / accrual basis | $227.1 million / $244.6 million | $231.0 million / $245.0 million |
| Capital expenditures | $112.6 million | $103.6 million |
| Cash and cash equivalents at year-end | $7.3 million | $13.5 million |
| Outstanding debt at year-end | $1.622 billion | $1.481 billion |
Management reported a 34.4% debt-to-gross-assets ratio. The $500 million unsecured credit facility had $5 million drawn at year-end and approximately $462 million of capacity available as of the filing date. Contractual debt principal was $1.633 billion, including $327.6 million due in 2021. The company reported compliance with debt covenants. Cash dividends declared were $0.84 per share for 2020, or $0.21 quarterly.
Material changes versus 2019
- Revenue increased modestly, but occupancy declined. Rental and tenant reimbursement revenue rose $8.0 million, partly offset by lower other property income, including reduced transient parking activity during the pandemic.
- Net income included $205.7 million of property-sale gains, versus $197.0 million in 2019. The 2020 figure included a $191.0 million gain on the sale of 1901 Market Street and a $14.6 million gain on the New Jersey portfolio. Thus, reported net income was substantially affected by dispositions.
- Core FFO rose approximately 6%, while AFFO fell about 17% and operating cash flow declined. Same-store NOI decreased 1.7% on a cash basis and 0.2% on an accrual basis.
- Debt increased by approximately $141 million. Piedmont issued $300 million of 3.15% senior notes due 2030, used to repay interim acquisition financing; it also repaid the $160 million mortgage on 1901 Market Street upon sale, recording a $9.3 million debt-extinguishment loss.
- Acquisitions included the Dallas Galleria Office Towers for approximately $396.2 million and 222 South Orange Avenue in Orlando for $20.0 million. Property sales generated $360.1 million of proceeds. The New Jersey sale included $118.5 million of seller notes receivable, bearing stated rates of 6% and 13.55%.
Outlook, commentary, and risks
- Management said COVID-19 had not materially affected year-end financial condition, results, liquidity outlook, or operating-property impairments to date. It reported collecting approximately 99% of billed contractual rents in the fourth quarter.
- Approximately 70 tenant agreements primarily deferred $7.1 million of 2020 rent into late 2020 or 2021; $1.3 million had been collected by the filing date. Piedmont recorded a $4.6 million general reserve, and cautioned it might not cover future losses.
- Work-from-home trends, tenant credit deterioration, office demand, leasing costs, and occupancy remain uncertain. Same-store occupancy was approximately 88%, versus 91% a year earlier. The City of New York’s 313,000-square-foot lease at 60 Broad Street was in holdover status; Piedmont reported advanced renewal discussions.
- A $38.2 million tenant allowance commitment remained for the State of New York’s approximately 520,000-square-foot renewal and expansion. Management also anticipated significant leasing costs if it renews the City of New York lease.
- Management provided no quantified earnings or FFO guidance. It said it would continue to work with affected tenants and declared a first-quarter 2021 dividend of $0.21 per share.
- Key risks include prolonged COVID-related disruption and lasting changes in office-space demand; lease expirations and tenant defaults; concentration in office properties and selected markets; refinancing and interest-rate exposure; and transition from LIBOR. Approximately $555 million of debt and $100 million of swap notional referenced LIBOR at year-end. A 1 percentage-point increase in rates on existing variable-rate borrowings was estimated to increase annual interest expense by approximately $4.6 million.
Important facts for investors to verify
- Collection and repayment status of deferred rent, adequacy of the $4.6 million reserve, and any subsequent tenant credit deterioration.
- Occupancy, leasing spreads, and renewal terms at 60 Broad Street, particularly the City of New York holdover lease and the associated tenant-improvement commitment.
- Recurring cash generation and dividend coverage: reconcile AFFO and operating cash flow with recurring capital needs and the $0.84 annual dividend.
- Debt maturities and refinancing plans, available credit-facility capacity, covenant headroom, and LIBOR transition terms.
- Performance of the seller-financed notes receivable and the execution and returns of the Dallas and Orlando acquisitions.
FFO, Core FFO, AFFO, NOI, and ALR are non-GAAP or company-defined measures and may not be comparable across REITs. The filing’s audited financial statements received an unqualified opinion; the auditor also reported effective internal control over financial reporting.