Piedmont Office Realty Trust, Inc. (NYSE: PDM) — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited consolidated results. Piedmont owns, manages, and develops Class A office properties, primarily in U.S. Sunbelt markets. At quarter-end it held 51 in-service properties and one redevelopment asset; the in-service portfolio totaled approximately 16.7 million square feet and was 86.2% leased.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $143.1 million | $136.3 million | $285.4 million | $272.5 million |
| Net income (loss) attributable to Piedmont | $(2.0) million | $8.0 million | $(3.4) million | $67.9 million |
| Net income (loss) per diluted share | $(0.02) | $0.06 | $(0.03) | $0.55 |
| Accrual-basis property NOI | $84.7 million | $82.7 million | $169.2 million | $165.1 million |
| Core FFO per diluted share | $0.45 | $0.50 | $0.90 | $1.01 |
| AFFO applicable to common stock | $44.4 million | $48.9 million | $81.2 million | $87.5 million |
Q2 revenue increased approximately 5% year over year, while accrual-basis NOI increased 2.4%. Operating cash flow for the first half was $95.2 million, compared with $91.8 million; capital expenditures were $71.7 million, versus $59.1 million. Cash, cash equivalents, and restricted cash totaled $10.2 million at June 30, 2023, down from $19.6 million at year-end 2022. The quarterly dividend was $0.21 per share.
Total debt was approximately $2.049 billion, including $197 million of secured debt; unsecured debt was reported net of discounts and issuance costs. Debt fair value was estimated at $1.868 billion. The $600 million revolving credit facility had $200 million drawn, leaving nominal capacity of $400 million, subject to its terms. The company reported compliance with debt covenants.
Changes and operating trends
- Interest expense rose $9.7 million in Q2 and $17.8 million for the first half, primarily because of higher rates on variable-rate debt and a higher average debt balance.
- Q2 GAAP results also reflected higher depreciation, primarily from property and improvement additions. For the first half of 2022, a $50.7 million real estate sale gain boosted reported earnings; there was no comparable gain in 2023.
- First-half rental and reimbursement revenue increased $10.2 million, with management citing 2022 portfolio activity and higher tenant reimbursements as building utilization increased. Higher operating costs, including janitorial, security, utilities, and real estate taxes, partly offset revenue growth.
- Same-store NOI for the first half declined 0.7% on a cash basis and 3.3% on an accrual basis. For Q2, it increased 0.2% on a cash basis but declined 3.7% on an accrual basis. Management attributed the accrual decline partly to occupancy, lease abatements, and executed leases not yet commenced.
- During Q2, Piedmont completed approximately 581,000 square feet of leasing, including 236,000 square feet of new leases. It reported approximately 1.3 million square feet of executed leases for vacant space that had not commenced or was under abatement, representing about $37 million of additional annual cash revenue.
Liquidity, outlook, and risks
Piedmont repaid its $350 million notes due June 2023 using cash and revolver borrowings, and entered into a $215 million floating-rate term loan. The loan matures January 31, 2024, with an option to extend to January 2025. The next identified major note maturity is $400 million due March 2024. Management expects to address it through refinancing, property dispositions, operating cash, and/or revolver borrowings, depending on market conditions, and believes liquidity is sufficient for obligations for the foreseeable future. The filing provides no quantified earnings or revenue guidance.
Variable-rate facilities had stated rates of 6.00% to 6.20% at quarter-end. Management estimated that a 1 percentage-point increase in rates on then-outstanding variable-rate borrowings would add approximately $6.2 million of annual interest expense. Principal risks discussed include office-space demand and work-from-home trends, tenant retention and credit, leasing costs and downtime, inflation, interest rates and refinancing conditions, and the ability to maintain REIT qualification. Piedmont also disclosed exposure of cash deposits above FDIC-insured levels, although it reported no loss from recent bank failures. Routine litigation was disclosed; management did not expect it to materially affect results or liquidity.
Important facts for investors to verify
- Refinancing and repayment plans for the $400 million March 2024 notes and the $215 million term loan, including available revolver capacity and financing costs.
- Occupancy, lease commencements and abatements, tenant retention, and whether the approximately $37 million of indicated annual cash revenue is realized.
- Variable-rate debt exposure, interest expense, covenant headroom, and the effects of additional rate changes.
- Cash available after capital spending and dividends, and whether NOI and same-store trends improve or continue to weaken.
- How non-GAAP measures such as NOI, Core FFO, and AFFO are defined and reconciled; they are not substitutes for GAAP results and may not be comparable with other REITs.