Piedmont Realty Trust, Inc. quarterly report, Q1 FY2020

Business context and reporting period

Piedmont Office Realty Trust, Inc. (NYSE: PDM) is a REIT focused on office properties in seven U.S. markets. This unaudited Form 10-Q covers the three months ended March 31, 2020, compared with the first quarter of 2019. At quarter-end, Piedmont owned 58 in-service properties totaling about 18.0 million square feet, 89.6% leased.

Financial and operating results

GAAP net income fell sharply mainly because Q1 2019 included a $37.9 million gain on property sales; Q1 2020 recorded only $3,000 of such gains. Total expenses rose to $113.3 million from $105.4 million, with amortization increasing by $5.9 million, primarily from acquired lease intangibles. Net income was about 6.4% of revenue in Q1 2020 versus 37.8% in Q1 2019, largely reflecting the prior-year sale gain. FFO increased despite the GAAP earnings decline. AFFO decreased principally because non-incremental capital expenditures were $34.8 million versus $3.4 million, including leasing costs related to the New York State lease.

Balance sheet, debt and liquidity

At March 31, 2020, total assets were $3.92 billion and total liabilities were $2.14 billion. Cash and cash equivalents were $7.9 million; cash, cash equivalents and restricted cash totaled $9.7 million. Total debt was $1.93 billion, up from $1.48 billion at year-end 2019. The weighted-average effective debt rate was 3.01%; debt fair value was estimated at $1.97 billion. Interest-rate swaps had a $26.7 million liability, compared with $5.1 million at year-end.

Piedmont acquired Dallas Galleria office towers and adjacent developable land for approximately $396 million, funded with cash and borrowings. It drew $300 million under a new unsecured term loan and used the proceeds to repay line-of-credit borrowings; $152 million remained drawn on its $500 million credit line at quarter-end. Management reported approximately $350 million of remaining borrowing capacity and said it was in compliance with debt covenants. The company had no scheduled debt maturities before Q3 2021, assuming extension of the 2020 term loan.

Material changes and management outlook

• Rental revenue growth reflected acquisitions since early 2019 and new leases at higher rents. Same-store NOI rose 2.2% on a cash basis and 4.2% on an accrual basis.
• On March 31, Piedmont contracted to sell 1901 Market Street for $360 million, less customary closing costs, with closing expected in summer 2020. Management expected to use $160 million of proceeds to repay the property mortgage and the balance to reduce its credit-line borrowings.
• COVID-19 had not materially affected reported results or caused material property impairments by quarter-end, according to management. A limited number of tenants, particularly in food, travel, retail and coworking, sought rent relief; Piedmont granted some deferrals of up to three months, generally repayable later in 2020 or in 2021 with interest. Management expected lower parking and operating-expense reimbursement revenue in the near term and cautioned that a prolonged downturn could materially affect tenant credit and future results.
• No numeric full-year earnings or operating guidance is provided. Management said future dividends depend on operating cash flow, capital needs, access to financing and REIT distribution requirements. The board declared a Q2 dividend of $0.21 per share, payable June 19, 2020.
• Other material commitments include an unrecorded $55.2 million tenant allowance for the approximately 20-year renewal and expansion of the State of New York lease at 60 Broad Street. The City of New York lease covering approximately 313,000 square feet was under advanced renewal negotiations.
• Variable-rate debt, LIBOR transition, refinancing conditions and possible longer-term changes in office-space demand are risks. A 1 percentage-point increase in variable rates on quarter-end borrowings would increase annual interest expense by about $9.0 million. The company reported no material pending legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls.

Key facts investors should verify

1. Whether COVID-related rent deferrals are repaid as scheduled and whether tenant credit deterioration, occupancy or leasing demand affects collections and property values.
2. Completion and net proceeds of the 1901 Market Street sale, including repayment of the $160 million mortgage and credit-line balance.
3. Debt refinancing and extension terms, covenant headroom, variable-rate exposure and the valuation impact of interest-rate swaps.
4. Progress and capital costs for the State of New York and City of New York lease renewals, including the $55.2 million tenant allowance commitment.
5. Whether FFO, AFFO and same-store NOI trends persist, and how elevated capital spending affects cash available for dividends and investment.