Piedmont Office Realty Trust, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. The company owns and operates office properties across seven U.S. markets. At quarter-end it held 57 in-service properties totaling approximately 17.2 million square feet; the portfolio was 88.6% leased.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $134.6 million | $130.7 million | $271.8 million | $263.6 million |
| Net income applicable to Piedmont | $192.4 million | $8.2 million | $201.1 million | $58.4 million |
| Diluted earnings per share | $1.52 | $0.06 | $1.59 | $0.46 |
| NAREIT FFO per diluted share | $0.41 | $0.41 | $0.89 | $0.85 |
| Core FFO per diluted share | $0.49 | $0.43 | $0.96 | $0.88 |
Net income was dominated by a $191.4 million gain on the sale of 1901 Market Street. The sale generated approximately $350.8 million of net proceeds; the company reported a $360 million sale price. Q2 also included a $9.3 million loss on early debt extinguishment. Revenue growth reflected acquisitions and leasing, partly offset by COVID-related collectibility charges and weaker parking income. Amortization expense increased, largely from acquired lease intangibles; general and administrative expense fell, partly because the prior-year period included senior-management transition costs.
For the six months, operating cash flow was $90.6 million versus $91.9 million in 2019. Investing activities used $124.0 million, including property acquisitions and capital expenditures, while financing activities provided $56.3 million. Cash, cash equivalents and restricted cash totaled $38.2 million at June 30.
Debt, liquidity and capital
- Total debt carrying value was $1.621 billion, up from $1.481 billion at year-end 2019. The company drew a new $300 million unsecured term loan and repaid the secured loan on 1901 Market Street and outstanding line-of-credit borrowings.
- The $500 million revolving credit facility had no borrowings outstanding, and its full capacity was available as of the filing. Management reported covenant compliance and said stress tests showed substantial covenant headroom.
- Weighted-average effective interest rate on debt was 2.76%. A 1 percentage-point increase in variable rates on outstanding borrowings was estimated to add approximately $7.5 million to annual interest expense.
- Six-month capital expenditures were $55.0 million. A $53.6 million tenant-allowance commitment relates to the State of New York’s approximately 20-year, 520,000-square-foot renewal and expansion at 60 Broad Street.
- The company paid $0.42 per share in dividends during the first half and declared a Q3 dividend of $0.21 per share, payable September 18, 2020.
Operating trends, risks and outlook
- Management said approximately 99% of scheduled contractual rent was collected during Q2. It entered into rent-modification agreements with approximately 50 tenants, mostly small retail operators; most deferred three months of rent into later 2020 or, in some cases, 2021. The filing’s risk-factor discussion separately refers to approximately 60 tenants, so the stated count varies by disclosure.
- The company recorded an approximately $1.8 million Q2 charge against rental revenue for increased collectibility risk and established an approximately $4.9 million general reserve for potential future credit issues.
- Management said COVID-19 had not materially affected financial condition, results, liquidity or operating-property impairments to date, but emphasized that the longer-term impact remained uncertain. Risks include tenant defaults, prolonged economic weakness, altered office-space demand, work-from-home patterns, higher cleaning costs and less favorable financing conditions. All properties remained open and operational.
- Same-store NOI increased 1.7% on a cash basis and declined 2.3% on an accrual basis in Q2. For the first half, it increased 1.9% on a cash basis and 1.2% on an accrual basis. Same-store occupancy was approximately 90%, compared with 92% a year earlier. The City of New York’s 313,000-square-foot lease at 60 Broad Street was in holdover status; renewal discussions were advanced.
- No quantified full-year earnings or operating guidance is provided in the supplied filing text. Management’s comments describe uncertainty rather than a formal outlook.
Investor facts to verify
- Underlying recurring performance excluding the 1901 Market Street gain and debt-extinguishment charge; compare GAAP earnings with FFO, Core FFO and AFFO.
- Tenant rent collections, deferrals, reserve adequacy and subsequent receipts, especially as pandemic effects evolve.
- Renewal outcome and capital requirements for the City of New York leases at 60 Broad Street, including the $53.6 million committed allowance.
- Leasing, occupancy and rent trends, including potential changes in office demand and the portfolio’s 88.6% leased rate.
- Debt maturities, refinancing access, covenant headroom and exposure to variable rates and the transition away from LIBOR.