Piedmont Office Realty Trust, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Piedmont is a REIT focused on office properties in seven major U.S. markets. It owned 57 in-service properties totaling approximately 17.2 million square feet; the portfolio was 86.9% leased.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $131.7 million | $135.4 million | $403.5 million | $399.0 million |
| Net income applicable to Piedmont | $8.9 million | $8.4 million | $210.1 million | $66.8 million |
| Diluted EPS | $0.07 | $0.07 | $1.66 | $0.53 |
| Interest expense | $12.7 million | $16.1 million | $41.9 million | $46.8 million |
| Operating cash flow | Not separately reported for the quarter | $138.8 million | $160.2 million |
Profitability and operating measures: Q3 total expenses were $110.0 million, about 83% of revenue. Nine-month expenses rose to $334.0 million from $326.2 million, exceeding revenue growth. Same-store NOI for nine months declined 0.7% on a cash basis and increased 0.9% on an accrual basis. Nine-month FFO was $172.4 million versus $164.3 million; Core FFO was $181.7 million versus $167.5 million; AFFO was $101.1 million versus $130.8 million. These are company-defined non-GAAP measures and are not directly comparable across all issuers.
Liquidity and debt: At September 30, cash and cash equivalents were $24.0 million ($25.7 million including restricted cash), and the full $500 million revolving credit facility was undrawn and available. Debt carrying value was $1.617 billion, compared with $1.481 billion at year-end 2019; its estimated fair value was $1.651 billion. Weighted-average effective debt rate was 3.03%. Management reported compliance with debt covenants and no scheduled debt maturity until Q3 2021. Nine-month investing cash outflow was $153.0 million and financing cash inflow was $24.5 million.
Material changes and unusual items
- Q3 revenue fell $3.7 million year over year, mainly from lower tenant reimbursements and parking income; new leasing partly offset the decline. Q3 net income increased modestly, helped by lower interest expense.
- Nine-month net income includes a $191.0 million gain on the June sale of 1901 Market Street. The sale generated approximately $350.8 million in net proceeds. Piedmont also recorded a $9.3 million loss on early repayment of the property’s mortgage.
- In August, Piedmont issued $300 million of 3.15% senior notes due 2030 and used the proceeds to repay a $300 million term loan. It also reduced the spread on its $250 million 2018 term loan.
- In February, Piedmont acquired the Dallas Galleria Office Towers and adjacent land for approximately $396.2 million; the properties were 95% leased at acquisition.
- Other comprehensive loss for the first nine months was $26.0 million, principally reflecting losses on interest-rate hedges. A $19.9 million loss on settled forward swaps is being amortized into interest expense over the ten-year term of the new notes.
Management commentary, outlook and risks
- Management said COVID-19 had not materially affected financial condition, results, liquidity or operating-property impairments to date. Properties remained open and operational, and approximately 99% of billed contractual rent was collected during Q3.
- About 60 tenant agreements primarily deferred $6.7 million of 2020 rent into Q4 2020 or 2021. Piedmont recorded an approximately $4.8 million general reserve for potential collectibility issues; management cautioned that it may not cover future losses.
- Same-store leased occupancy was approximately 88%, down from 91% 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 ongoing. A related approximately $44 million tenant allowance commitment is to be accrued as expenditures occur.
- Management reported no quantitative earnings guidance. It said future dividends and capital allocation will depend on cash generation, capital needs, debt obligations, acquisitions, property sales and REIT distribution requirements. The Board declared a Q4 dividend of $0.21 per share, payable January 4, 2021.
- Key risks include a prolonged COVID-19 downturn, tenant defaults or delayed rent repayment, lower office-space demand and work-from-home trends, financing-market volatility, interest-rate exposure, and LIBOR transition. A 1 percentage-point increase in rates on existing variable-rate borrowings was estimated to increase annual interest expense by approximately $4.5 million.
- Subsequent to quarter-end, Piedmont sold three New Jersey properties for approximately $130 million and acquired a connected Orlando office property for $20 million for redevelopment. Management reported no material pending legal proceedings and effective disclosure controls.
Investor verification points
- Track collection and repayment of the $6.7 million deferred rent and whether the $4.8 million reserve proves adequate.
- Assess leasing and occupancy trends, especially the 60 Broad Street renewal, holdover exposure and associated tenant-improvement spending.
- Separate recurring operating performance from the $191.0 million property-sale gain and compare GAAP results with FFO, Core FFO and AFFO definitions.
- Review liquidity, debt maturities, covenant headroom and refinancing conditions, including exposure to variable rates and LIBOR replacement provisions.
- Evaluate the effects of post-quarter property sales, the Orlando acquisition and redevelopment plans on portfolio concentration and cash needs.