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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________________________________ 

FORM 10-Q

_______________________________________________________________________________________  

(Mark One)

☒			QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT of 1934

For the Quarterly Period Ended September 30, 2021

OR

☐			TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT of 1934

For the Transition Period From                      To                     

Commission file number 001-34626

Piedmont Office Realty Trust, Inc.

(Exact name of registrant as specified in its charter)

 ____________________________________________________ 

Maryland						58-2328421
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification Number)

5565 Glenridge Connector Ste. 450

Atlanta, Georgia 30342

(Address of principal executive offices) (Zip Code)

(770) 418-8800

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of exchange on which registered

Common Stock, $0.01 par value

PDM

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  x No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

x

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐ No   x

Number of shares outstanding of the Registrant’s

common stock, as of October 26, 2021:

124,136,822 shares

---

Table of Contents

FORM 10-Q

PIEDMONT OFFICE REALTY TRUST, INC.

TABLE OF CONTENTS

 

									Page No.
PART I			Financial Information
			Item 1.			Consolidated Financial Statements			5
						Consolidated Balance Sheets (Unaudited)—September 30, 2021 and December 31, 2020			6
						Consolidated Statements of Income (Unaudited) for the Three and Nine Months Ended September 30, 2021 and 2020			7
						Consolidated Statements of Comprehensive Income/(Loss) (Unaudited) for the Three and Nine Months Ended September 30, 2021 and 2020			8
						Consolidated Statements of Stockholders' Equity (Unaudited) for the Three and Nine Months Ended September 30, 2021 and 2020			9
						Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2021 and 2020			11
						Condensed Notes to Consolidated Financial Statements (Unaudited)			12
			Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
			Item 3.			Quantitative and Qualitative Disclosures About Market Risk			39
			Item 4.			Controls and Procedures			40
PART II.			Other Information
			Item 1.			Legal Proceedings			41
			Item 1A.			Risk Factors			41
			Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds			41
			Item 3.			Defaults Upon Senior Securities			41
			Item 4.			Mine Safety Disclosures			41
			Item 5.			Other Information			41
			Item 6.			Exhibits			42

2

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Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Form 10-Q may constitute forward-looking statements within the meaning of the federal securities laws. In addition, Piedmont Office Realty Trust, Inc. ("Piedmont," "we," "our," or "us"), or its executive officers on Piedmont’s behalf, may from time to time make forward-looking statements in reports and other documents Piedmont files with the Securities and Exchange Commission or in connection with other written or oral statements made to the press, potential investors, or others. Statements regarding future events and developments and Piedmont’s future performance, as well as management’s expectations, beliefs, plans, estimates, or projections relating to the future, are forward-looking statements. Forward-looking statements include statements preceded by, followed by, or that include the words “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. Examples of such statements in this report include descriptions of our real estate, financings, and operating objectives; discussions regarding future dividends and share repurchases; discussions regarding the potential uses of capital and means to secure additional sources of capital; and discussions regarding the potential impact of economic conditions on our real estate and lease portfolio, among others.

These statements are based on beliefs and assumptions of Piedmont’s management, which in turn are based on information available at the time the statements are made. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding the demand for office space in the markets in which Piedmont operates, competitive conditions, and general economic conditions. These assumptions could prove inaccurate. The forward-looking statements also involve risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. Many of these factors are beyond Piedmont’s ability to control or predict. Such factors include, but are not limited to, the following:

•Economic, regulatory, socio-economic changes, and/or technology changes (including accounting standards) that impact the real estate market generally, or that could affect patterns of use of commercial office space;

•The impact of competition on our efforts to renew existing leases or re-let space on terms similar to existing leases;

•Changes in the economies and other conditions affecting the office sector in general and specifically the seven markets in which we primarily operate where we have high concentrations of our Annualized Lease Revenue (see definition below);

•Lease terminations, lease defaults, or changes in the financial condition of our tenants, particularly by one of our large lead tenants;

•Adverse market and economic conditions, including any resulting impairment charges on both our long-lived assets or goodwill resulting therefrom;

•The success of our real estate strategies and investment objectives, including our ability to identify and consummate suitable acquisitions and divestitures;

•The illiquidity of real estate investments, including regulatory restrictions to which real estate investment trusts ("REITs") are subject and the resulting impediment on our ability to quickly respond to adverse changes in the performance of our properties;

•The risks and uncertainties associated with our acquisition and disposition of properties, many of which risks and uncertainties may not be known at the time of acquisition or disposition;

•Development and construction delays and resultant increased costs and risks;

•Our real estate development strategies may not be successful;

•Future acts of terrorism, civil unrest, or armed hostilities in any of the major metropolitan areas in which we own properties, or future cybersecurity attacks against any of our tenants;

•Risks related to the occurrence of cyber incidents, or a deficiency in our cybersecurity, which could negatively impact our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships;

•Costs of complying with governmental laws and regulations;

•Uninsured losses or losses in excess of our insurance coverage, and our inability to obtain adequate insurance coverage at a reasonable cost;

•Additional risks and costs associated with directly managing properties occupied by government tenants, including an increased risk of default by government tenants during periods in which state or federal governments are shut down or on furlough;

•Significant price and volume fluctuations in the public markets, including on the exchange which we listed our common stock;

•Changes in interest rates and changes in the method pursuant to which the LIBOR rates are determined and the planned phasing out of USD LIBOR after June 2023;

•High interest rates which could affect our ability to finance or refinance properties;

•The effect of future offerings of debt or equity securities or changes in market interest rates on the value of our common stock;

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•Uncertainties associated with environmental and other regulatory matters;

•Potential changes in the political environment and reduction in federal and/or state funding of our governmental tenants;

•Changes in the financial condition of our tenants directly or indirectly resulting from geopolitical developments that could negatively affect international trade, the termination or threatened termination of existing international trade agreements, or the implementation of tariffs or retaliatory tariffs on imported or exported goods;

•The effect of any litigation to which we are, or may become, subject;

•Additional risks and costs associated with owning properties occupied by tenants in particular industries, such as oil and gas, hospitality, travel, co-working, etc., including risks of default during start-up and during economic downturns;

•Changes in tax laws impacting REITs and real estate in general, as well as our ability to continue to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), or other tax law changes which may adversely affect our stockholders;

•The future effectiveness of our internal controls and procedures;

•Actual or threatened public health epidemics or outbreaks, such as the ongoing COVID-19 pandemic, and governmental and private measures taken to combat such health crises, which may affect our personnel, tenants, tenants' operations and ability to pay lease obligations, demand for office space, and the costs of operating our assets;

•The adequacy of our general reserve related to tenant lease-related assets established as a result of the COVID-19 pandemic, as well as the impact of any increase in this reserve or the establishment of any other reserve in the future; and

•Other factors, including the risk factor described in Item 1A. of this Quarterly Report on Form 10-Q, as well as the risk factors discussed under Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2020.

Management believes these forward-looking statements are reasonable; however, undue reliance should not be placed on any forward-looking statements, which are based on current expectations. Further, forward-looking statements speak only as of the date they are made, and management undertakes no obligation to update publicly any of them in light of new information or future events.

Information Regarding Disclosures Presented

Annualized Lease Revenue ("ALR"), a non-GAAP measure, is calculated by multiplying (i) current rental payments (defined as base rent plus operating expense reimbursements, if payable by the tenant on a monthly basis under the terms of a lease that has been executed, but excluding (a) rental abatements and (b) rental payments related to executed but not commenced leases for space that was covered by an existing lease), by (ii) 12. In instances in which contractual rents or operating expense reimbursements are collected on an annual, semi-annual, or quarterly basis, such amounts are multiplied by a factor of 1, 2, or 4, respectively, to calculate the annualized figure. For leases that have been executed but not commenced relating to unleased space, ALR is calculated by multiplying (i) the monthly base rental payment (excluding abatements) plus any operating expense reimbursements for the initial month of the lease term, by (ii) 12. Unless stated otherwise, this measure excludes revenues associated with development properties and properties taken out of service for redevelopment, if any.

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PART I.     FINANCIAL INFORMATION

ITEM 1.    CONSOLIDATED FINANCIAL STATEMENTS.

The information presented in the accompanying consolidated balance sheets and related consolidated statements of income, comprehensive income/(loss), stockholders’ equity, and cash flows reflects all adjustments that are, in management’s opinion, necessary for a fair and consistent presentation of financial position, results of operations, and cash flows in accordance with GAAP.

The accompanying financial statements should be read in conjunction with the notes to Piedmont’s financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this report on Form 10-Q and with Piedmont’s Annual Report on Form 10-K for the year ended December 31, 2020. Piedmont’s results of operations for the nine months ended September 30, 2021 are not necessarily indicative of the operating results expected for the full year.

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PIEDMONT OFFICE REALTY TRUST, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except for share and per share amounts)

			September 30, 2021						December 31, 2020
Assets:
Real estate assets, at cost:
Land			$	476,717					$	476,716
Buildings and improvements, less accumulated depreciation of $829,832 and $751,521 as of September 30, 2021 and December 31, 2020, respectively			2,429,537						2,371,521
Intangible lease assets, less accumulated amortization of $80,072 and $67,850 as of September 30, 2021 and December 31, 2020, respectively			68,873						90,594
Construction in progress			48,226						56,749
Real estate assets held for sale, net			62,104						60,454
Total real estate assets			3,085,457						3,056,034
Cash and cash equivalents			8,189						7,331
Tenant receivables, net of allowance for doubtful accounts of $4,965 and $4,553 as of September 30, 2021 and December 31, 2020, respectively			8,678						8,448
Straight-line rent receivables			159,871						148,797
Note receivable			118,500						118,500
Restricted cash and escrows			6,093						1,883
Prepaid expenses and other assets			24,915						23,277
Goodwill			98,918						98,918
Deferred lease costs, less accumulated amortization of $195,255 and $171,817 as of September 30, 2021 and December 31, 2020, respectively			241,765						272,394
Other assets held for sale, net			8,262						4,228
Total assets			$	3,760,648					$	3,739,810
Liabilities:
Unsecured debt, net of discount and unamortized debt issuance costs of $12,899 and $10,932 as of September 30, 2021 and December 31, 2020, respectively			$	1,665,101					$	1,594,068
Secured debt, net of premiums and unamortized debt issuance costs of $0 and $326 as of September 30, 2021 and December 31, 2020, respectively			—						27,936
Accounts payable, accrued expenses and accrued capital expenditures			127,675						111,997
Dividends payable			—						25,683
Deferred income			73,614						36,891
Intangible lease liabilities, less accumulated amortization of $33,619 and $27,344 as of September 30, 2021 and December 31, 2020, respectively			26,924						35,440
Interest rate swaps			6,715						9,834
Total liabilities			1,900,029						1,841,849
Commitments and Contingencies (Note 6)			—						—
Stockholders’ Equity:
Shares-in-trust, 150,000,000 shares authorized; none outstanding as of September 30, 2021 or December 31, 2020			—						—
Preferred stock, no par value, 100,000,000 shares authorized; none outstanding as of September 30, 2021 or December 31, 2020			—						—
Common stock, $0.01 par value, 750,000,000 shares authorized; 124,135,626 and 123,839,419 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively			1,241						1,238
Additional paid-in capital			3,700,208						3,693,996
Cumulative distributions in excess of earnings			(1,822,441)						(1,774,856)
Accumulated other comprehensive loss			(20,036)						(24,100)
Piedmont stockholders’ equity			1,858,972						1,896,278
Noncontrolling interest			1,647						1,683
Total stockholders’ equity			1,860,619						1,897,961
Total liabilities and stockholders’ equity			$	3,760,648					$	3,739,810

See accompanying notes

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PIEDMONT OFFICE REALTY TRUST, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except for share and per share amounts)

 

			Three Months Ended												Nine Months Ended
			September 30,												September 30,
			2021						2020						2021						2020
Revenues:
Rental and tenant reimbursement revenue			$	127,427					$	128,280					$	380,306					$	391,681
Property management fee revenue			626						751						1,920						2,146
Other property related income			3,018						2,662						8,320						9,668
			131,071						131,693						390,546						403,495
Expenses:
Property operating costs			51,767						53,293						154,849						159,631
Depreciation			30,562						28,255						88,663						83,339
Amortization			20,373						22,990						63,978						70,970
General and administrative			6,955						5,469						22,417						20,049
			109,657						110,007						329,907						333,989
Other income (expense):
Interest expense			(12,450)						(12,725)						(37,375)						(41,942)
Other income			2,337						319						7,324						817
Loss on early extinguishment of debt			—						—						—						(9,336)
Gain/(loss) on sale of real estate assets			—						(340)						—						191,032
			(10,113)						(12,746)						(30,051)						140,571
Net income			11,301						8,940						30,588						210,077
Net loss applicable to noncontrolling interest			5						3						9						2
Net income applicable to Piedmont			$	11,306					$	8,943					$	30,597					$	210,079
Per share information – basic:
Net income applicable to common stockholders			$	0.09					$	0.07					$	0.25					$	1.67
Per share information – diluted:
Net income applicable to common stockholders			$	0.09					$	0.07					$	0.25					$	1.66
Weighted-average common shares outstanding – basic			124,135,556						126,028,762						124,056,908						125,955,097
Weighted-average common shares outstanding – diluted			124,627,409						126,385,035						124,471,786						126,302,051

See accompanying notes

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PIEDMONT OFFICE REALTY TRUST, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) (UNAUDITED)

(in thousands)

			Three Months Ended																								Nine Months Ended
			September 30,																								September 30,
			2021												2020												2021												2020
Net income applicable to Piedmont									$	11,306											$	8,943											$	30,597											$	210,079
Other comprehensive income/(loss):
Effective portion of gain/(loss) on derivative instruments that are designated and qualify as cash flow hedges (See Note 4)			582												(2,443)												1,848												(26,949)
Plus/(less): Reclassification of net loss included in net income (See Note 4)			750												810												2,216												989
Other comprehensive income/(loss)									1,332												(1,633)												4,064												(25,960)
Comprehensive income applicable to Piedmont									$	12,638											$	7,310											$	34,661											$	184,119

See accompanying notes

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PIEDMONT OFFICE REALTY TRUST, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

(in thousands, except per share amounts)

			Common  Stock												Additional Paid-In Capital						Cumulative Distributions in Excess of Earnings						Accumulated Other Comprehensive Income/(Loss)						Non- controlling Interest						Total Stockholders’ Equity
			Shares						Amount
Balance, June 30, 2021			124,132						$	1,241					$	3,698,656					$	(1,807,679)					$	(21,368)					$	1,658					$	1,872,508
Dividends to common stockholders ($0.21 per share) and stockholders of subsidiaries			—						—						—						(26,068)						—						(6)						(26,074)
Shares issued and amortized under the 2007 Omnibus Incentive Plan, net of tax			4						—						1,552						—						—						—						1,552
Net loss applicable to noncontrolling interest			—						—						—						—						—						(5)						(5)
Net income applicable to Piedmont			—						—						—						11,306						—						—						11,306
Other comprehensive income			—						—						—						—						1,332						—						1,332
Balance, September 30, 2021			124,136						$	1,241					$	3,700,208					$	(1,822,441)					$	(20,036)					$	1,647					$	1,860,619
			Common  Stock												Additional Paid-In Capital						Cumulative Distributions in Excess of Earnings						Accumulated Other Comprehensive Income/(Loss)						Non- controlling Interest						Total Stockholders’ Equity
			Shares						Amount
Balance, June 30, 2020			126,025						$	1,260					$	3,691,377					$	(1,723,147)					$	(23,360)					$	1,707					$	1,947,837
Dividends to common stockholders ($0.21 per share) and stockholders of subsidiaries			—						—						—						(26,466)						—						(6)						(26,472)
Shares issued and amortized under the 2007 Omnibus Incentive Plan, net of tax			4						—						1,257						—						—						—						1,257
Net loss applicable to noncontrolling interest			—						—						—						—						—						(3)						(3)
Net income applicable to Piedmont			—						—						—						8,943						—						—						8,943
Other comprehensive loss			—						—						—						—						(1,633)						—						(1,633)
Balance, September 30, 2020			126,029						$	1,260					$	3,692,634					$	(1,740,670)					$	(24,993)					$	1,698					$	1,929,929

See accompanying notes

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PIEDMONT OFFICE REALTY TRUST, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

(in thousands, except per share amounts)

			Common Stock												Additional Paid-In Capital						Cumulative Distributions in Excess of Earnings						Accumulated Other Comprehensive Income/(Loss)						Non- controlling Interest						Total Stockholders’ Equity
			Shares						Amount
Balance, December 31, 2020			123,839						$	1,238					$	3,693,996					$	(1,774,856)					$	(24,100)					$	1,683					$	1,897,961
Costs of issuance of common stock			—						—						(55)						—						—						—						(55)
Dividends to common stockholders ($0.63 per share) and stockholders of subsidiaries			—						—						—						(78,182)						—						(27)						(78,209)
Shares issued and amortized under the 2007 Omnibus Incentive Plan, net of tax			297						3						6,267						—						—						—						6,270
Net loss applicable to noncontrolling interest			—						—						—						—						—						(9)						(9)
Net income applicable to Piedmont			—						—						—						30,597						—						—						30,597
Other comprehensive income			—						—						—						—						4,064						—						4,064
Balance, September 30, 2021			124,136						$	1,241					$	3,700,208					$	(1,822,441)					$	(20,036)					$	1,647					$	1,860,619

			Common Stock												Additional Paid-In Capital						Cumulative Distributions in Excess of Earnings						Accumulated Other Comprehensive Income/(Loss)						Non- controlling Interest						Total Stockholders’ Equity
			Shares						Amount
Balance, December 31, 2019			125,783						$	1,258					$	3,686,398					$	(1,871,375)					$	967					$	1,726					$	1,818,974
Dividends to common stockholders ($0.63 per share), stockholders of subsidiaries, and dividends reinvested			—						—						(5)						(79,374)						—						(26)						(79,405)
Shares issued and amortized under the 2007 Omnibus Incentive Plan, net of tax			246						2						6,241						—						—						—						6,243
Net loss applicable to noncontrolling interest			—						—						—						—						—						(2)						(2)
Net income applicable to Piedmont			—						—						—						210,079						—						—						210,079
Other comprehensive loss			—						—						—						—						(25,960)						—						(25,960)
Balance, September 30, 2020			126,029						$	1,260					$	3,692,634					$	(1,740,670)					$	(24,993)					$	1,698					$	1,929,929

See accompanying notes

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PIEDMONT OFFICE REALTY TRUST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands) 

			Nine Months Ended
			September 30,
			2021						2020
Cash Flows from Operating Activities:
Net income			$	30,588					$	210,077
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			88,663						83,339
Amortization of debt issuance costs inclusive of settled interest rate swaps			2,396						1,319
Other amortization			58,743						64,076
Loss on early extinguishment of debt			—						349
General reserve for uncollectible accounts			412						4,831
Stock compensation expense			8,201						6,980
Gain on sale of real estate assets			—						(191,032)
Changes in assets and liabilities:
Increase in tenant and straight-line rent receivables			(13,448)						(30,898)
Increase in prepaid expenses and other assets			(2,815)						(3,745)
Cash received/(paid) upon settlement of interest rate swaps			623						(19,930)
Increase in accounts payable and accrued expenses			342						12,834
(Decrease)/increase in deferred income			(8,671)						610
Net cash provided by operating activities			165,034						138,810
Cash Flows from Investing Activities:
Acquisition of real estate assets and intangibles			—						(396,745)
Capitalized expenditures			(83,477)						(80,007)
Net sales proceeds from wholly-owned properties			—						350,807
Deferred lease costs paid			(10,324)						(27,011)
Net cash used in investing activities			(93,801)						(152,956)
Cash Flows from Financing Activities:
Debt issuance and other costs paid			(454)						(1,116)
Proceeds from debt			526,580						1,136,383
Repayments of debt			(484,610)						(1,001,711)
Discount paid due to loan modification			—						(525)
Costs of issuance of common stock			(55)						—
Value of shares withheld for payment of taxes related to employee stock compensation			(3,050)						(2,700)
Repurchases of common stock as part of announced plan			(685)						—
Dividends paid and discount on dividend reinvestments			(103,891)						(105,832)
Net cash (used in)/provided by financing activities			(66,165)						24,499
Net increase in cash, cash equivalents, and restricted cash and escrows			5,068						10,353
Cash, cash equivalents, and restricted cash and escrows, beginning of period			9,214						15,386
Cash, cash equivalents, and restricted cash and escrows, end of period			$	14,282					$	25,739

See accompanying notes

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PIEDMONT OFFICE REALTY TRUST, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(Unaudited)

1.    Organization

Piedmont Office Realty Trust, Inc. (“Piedmont”) (NYSE: PDM) is a Maryland corporation that operates in a manner so as to qualify as a real estate investment trust (“REIT”) for federal income tax purposes and engages in the ownership, management, development, redevelopment, and operation of high-quality, Class A office properties located primarily in select sub-markets within seven major Eastern U.S. office markets, with a majority of its revenue being generated from the Sunbelt. Piedmont was incorporated in 1997 and commenced operations in 1998. Piedmont conducts business through its wholly-owned subsidiary, Piedmont Operating Partnership, L.P. (“Piedmont OP”), a Delaware limited partnership. Piedmont OP owns properties directly, through wholly-owned subsidiaries, and through various joint ventures which it controls. References to Piedmont herein shall include Piedmont and all of its subsidiaries, including Piedmont OP and its subsidiaries and joint ventures.

As of September 30, 2021, Piedmont owned 54 in-service office properties and one redevelopment asset in select sub-markets located within the following seven major U.S. office markets: Dallas, Atlanta, Washington, D.C., Minneapolis, Boston, Orlando, and New York. As of September 30, 2021, Piedmont's 54 in-service office properties comprised approximately 16.4 million square feet (unaudited) of primarily Class A commercial office space and were approximately 86% leased.

2.    Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The consolidated financial statements of Piedmont have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”), including the instructions to Form 10-Q and Article 10 of Regulation S-X, and do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the statements for the unaudited interim periods presented include all adjustments, which are of a normal and recurring nature, necessary for a fair presentation of the results for such periods. Results for these interim periods are not necessarily indicative of a full year’s results.

Piedmont’s consolidated financial statements include the accounts of Piedmont, Piedmont’s wholly-owned subsidiaries, any variable interest entity ("VIE") of which Piedmont or any of its wholly-owned subsidiaries is considered to have the power to direct the activities of the entity and the obligation to absorb losses/right to receive benefits, or any entity in which Piedmont or any of its wholly-owned subsidiaries owns a controlling interest. In determining whether Piedmont or Piedmont OP has a controlling interest, the following factors, among others, are considered: equity ownership, voting rights, protective rights of investors, and participatory rights of investors. For further information, refer to the financial statements and footnotes included in Piedmont’s Annual Report on Form 10-K for the year ended December 31, 2020.

All intercompany balances and transactions have been eliminated upon consolidation.

Further, Piedmont has formed special purpose entities to acquire and hold real estate. Each special purpose entity is a separate legal entity. Consequently, the assets of these special purpose entities are not available to all creditors of Piedmont. The assets owned by these special purpose entities are being reported on a consolidated basis with Piedmont’s assets for financial reporting purposes only.

Use of Estimates

The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements and notes. The most significant of these estimates include the underlying cash flows and holding periods used in assessing impairment, judgements regarding the recoverability of goodwill, and the assessment of the collectibility of receivables. While Piedmont has made, what it believes to be, appropriate accounting estimates based on the facts and circumstances available as of the reporting date, actual results could materially differ from those estimates.

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Income Taxes

Piedmont has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, and has operated as such, beginning with its taxable year ended December 31, 1998. To qualify as a REIT, Piedmont must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of its annual REIT taxable income. As a REIT, Piedmont is generally not subject to federal income taxes, subject to fulfilling, among other things, its taxable income distribution requirement. Piedmont is subject to certain taxes related to the operations of properties in certain locations, as well as operations conducted by its taxable REIT subsidiary which have been provided for in the financial statements.

Operating Leases

Piedmont recognized the following fixed and variable lease payments, which together comprised rental and tenant reimbursement revenue in the accompanying consolidated statements of income for the three and nine months ended September 30, 2021 and 2020, respectively, as follows (in thousands):

			Three Months Ended												Nine Months Ended
			September 30, 2021						September 30, 2020						September 30, 2021						September 30, 2020
Fixed payments			$	105,592					$	108,071					$	315,971					$	329,281
Variable payments			21,835						20,209						64,335						62,400
Total Rental and Tenant Reimbursement Revenue			$	127,427					$	128,280					$	380,306					$	391,681

Operating leases where Piedmont is the lessee relate primarily to office space in buildings owned by third parties. For the three and nine months ended September 30, 2021 and 2020, Piedmont recognized approximately $20,000 and $60,000, respectively, of operating lease costs related to these office space leases. As of September 30, 2021, the remaining lease term of Piedmont's right of use asset is approximately one year, and the discount rate is 1.06%.

Reclassifications

Certain prior period amounts presented in the accompanying consolidated balance sheets have been reclassified as of December 31, 2020 to conform to the current period financial statement presentation. Such amounts relate to the 225 and 235 Presidential Way buildings, which were classified as held for sale as of June 30, 2021. (see Note 7).

3.    Debt

During the nine months ended September 30, 2021, Piedmont issued, through Piedmont OP, $300 million in aggregate principal amount of 2.75% Senior Notes due 2032 (the “$300 Million Unsecured Senior Notes due 2032”), which mature on April 1, 2032. Upon issuance of the $300 Million Unsecured Senior Notes due 2032, Piedmont OP received proceeds of approximately $298.5 million, reflecting a discount of approximately $1.5 million which will be amortized as interest expense using the effective interest method over the 10-year and 6-month term of the $300 Million Unsecured Senior Notes due 2032. In addition, in conjunction with the issuance, Piedmont settled one forward starting interest rate swap, consisting of a notional amount of $50 million. The settlement of the swap resulted in a gain of approximately $0.6 million that was recorded as accumulated other comprehensive income and will be amortized as a decrease in interest expense over the 10-year and 6-month term of the $300 Million Unsecured Senior Notes due 2032. See Note 4 for further detail. The proceeds from the $300 Million Unsecured Senior Notes due 2032 were used to fully repay, without penalty, the Amended and Restated $300 Million Unsecured 2011 Term Loan that was scheduled to mature in November 2021.

Interest on the $300 Million Unsecured Senior Notes due 2032 is payable semi-annually in arrears on April 1 and October 1 of each year, beginning on April 1, 2022. The $300 Million Unsecured Senior Notes due 2032 are fully and unconditionally guaranteed on a senior unsecured basis by Piedmont. Piedmont OP may, at its option, redeem the $300 Million Unsecured Senior Notes due 2032, in whole or in part, prior to January 1, 2032, at a redemption price equal to the greater of (i) 100% of the principal amount of the $300 Million Unsecured Senior Notes due 2032 to be redeemed and (ii) a “make-whole” amount, plus any unpaid accrued interest. In addition, at any time on or after January 1, 2032, Piedmont OP may, at its option, redeem the $300 Million Unsecured Senior Notes due 2032, in whole or in part, at a redemption price equal to 100% of the principal amount of the $300 Million Unsecured Senior Notes due 2032 to be redeemed plus unpaid accrued interest. The $300 Million Unsecured Senior Notes due 2032 are subject to certain typical covenants that, subject to certain exceptions: (a) limit the ability of Piedmont and Piedmont OP to, among other things, incur additional secured and unsecured indebtedness; (b) limit the ability of Piedmont and Piedmont OP to merge, consolidate, sell, lease or otherwise dispose of their properties and assets substantially

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as an entirety; and (c) require Piedmont to maintain a pool of unencumbered assets. The $300 Million Unsecured Senior Notes due 2032 are also subject to customary events of default which, if any of them occurs, would permit or require the principal of and accrued interest on the $300 Million Unsecured Senior Notes due 2032 to become or to be declared due and payable.

The following table summarizes the terms of Piedmont’s indebtedness outstanding as of September 30, 2021 and December 31, 2020 (in thousands):

Facility (1)						Stated Rate						Effective Rate (2)						Maturity						Amount Outstanding as of
																								September 30, 2021						December 31, 2020
Secured (Fixed)
$35 Million Fixed-Rate Loan						5.55		%				—		%				9/1/2021			(3)			$	—					$	27,610
Net premium and unamortized debt issuance costs																								—						326
Subtotal																								—						27,936
Unsecured (Variable and Fixed)
Amended and Restated $300 Million Unsecured 2011 Term Loan						LIBOR +  1.00%						—		%				11/30/2021			(4)			—						300,000
$500 Million Unsecured 2018 Line of Credit (5)						LIBOR + 0.90%						0.99		%				9/30/2022			(6)			78,000						5,000
$350 Million Unsecured Senior Notes due 2023						3.40		%				3.43		%				6/01/2023						350,000						350,000
$400 Million Unsecured Senior Notes due 2024						4.45		%				4.10		%				3/15/2024						400,000						400,000
$250 Million Unsecured 2018 Term Loan						LIBOR + 0.95%						2.04		%	(7)			3/31/2025						250,000						250,000
$300 Million Unsecured Senior Notes due 2030						3.15		%				3.90		%				8/15/2030						300,000						300,000
$300 Million Unsecured Senior Notes due 2032						2.75		%				2.78		%	(8)			4/1/2032						300,000						—
Discounts and unamortized debt issuance costs																								(12,899)						(10,932)
Subtotal/Weighted Average (9)						3.18		%																1,665,101						1,594,068
Total																								$	1,665,101					$	1,622,004

(1)All of Piedmont’s outstanding debt as of September 30, 2021 is interest-only until maturity.

(2)Effective rate after consideration of settled or in-place interest rate swap agreements and issuance discounts.

(3)Repaid on June 1, 2021 without penalty.

(4)Repaid on September 20, 2021 without penalty.

(5)On a periodic basis, Piedmont may select from multiple interest rate options, including the prime rate and various-length LIBOR locks on all or a portion of the principal. All LIBOR selections are subject to an additional spread over the selected rate based on Piedmont’s current credit rating.

(6)Piedmont may extend the term for up to one additional year (through two available six month extensions to a final extended maturity date of September 29, 2023) provided Piedmont is not then in default and upon payment of extension fees.

(7)The facility has a stated variable rate; however, Piedmont has entered into interest rate swap agreements which effectively fix, exclusive of changes to Piedmont's credit rating, $100 million of the principal balance to 3.56% through the maturity date of the loan. For the remaining variable portion of the loan, Piedmont may periodically select from multiple interest rate options, including the prime rate and various-length LIBOR locks on all or a portion of the principal. All LIBOR selections are subject to an additional spread over the selected rate based on Piedmont’s current credit rating. The rate presented is the weighted-average rate for the effectively fixed and variable portions of the debt outstanding as of September 30, 2021 (see Note 4 for more detail).

(8)The $300 Million Unsecured Senior Notes due 2032 have a fixed coupon rate of 2.75%, however, as a result of the issuance of the notes at a discount and after consideration of the impact of a settled interest rate swap agreement, the effective interest rate on this debt is 2.78%.

(9)Weighted average is based on contractual balance of outstanding debt and the stated or effectively fixed interest rates as of September 30, 2021.

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Piedmont made interest payments on all debt facilities, including interest rate swap cash settlements, of approximately $16.2 million and $12.8 million for the three months ended September 30, 2021 and 2020, respectively, and approximately $41.5 million and $41.8 million for the nine months ended September 30, 2021 and 2020, respectively. Also, Piedmont capitalized interest of approximately $1.0 million and $0.2 million for the three months ended September 30, 2021 and 2020, respectively, and approximately $2.7 million and $0.6 million for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, Piedmont believes it was in compliance with all financial covenants associated with its debt instruments.

See Note 5 for a description of Piedmont’s estimated fair value of debt as of September 30, 2021.

4.    Derivative Instruments

Risk Management Objective of Using Derivatives

In addition to operational risks which arise in the normal course of business, Piedmont is exposed to economic risks such as interest rate, liquidity, and credit risk. In certain situations, Piedmont has entered into derivative financial instruments such as interest rate swap agreements and other similar agreements to manage interest rate risk exposure arising from current or future variable rate debt transactions. Interest rate swap agreements involve the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Piedmont’s objective in using interest rate derivatives is to add stability to interest expense and to manage its exposure to interest rate movements.

Cash Flow Hedges of Interest Rate Risk

Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for Piedmont making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. During the three months ended September 30, 2021, Piedmont entered into, and subsequently settled, one forward starting interest rate swap agreement with a notional value of $50 million to hedge the risk of changes in the interest-related cash flows associated with the issuance of the $300 Million Unsecured Senior Notes due 2032 (see Note 3). The settlement resulted in a gain of approximately $0.6 million, which was recorded as accumulated OCI and is being amortized as an offset to interest expense over the following ten years.

The maximum length of time over which Piedmont is hedging its exposure to the variability in future cash flows for forecasted transactions is 42 months. A detail of Piedmont’s interest rate derivatives outstanding as of September 30, 2021 is as follows:

Interest Rate Derivatives:

Number of Swap Agreements

Associated Debt Instrument

Total Notional Amount (in millions)

Effective Date

Maturity Date

Interest rate swaps

2

$250 Million Unsecured 2018 Term Loan

$

100

3/29/2018

3/31/2025

Piedmont presents its interest rate derivatives on its consolidated balance sheets on a gross basis as interest rate swap assets and interest rate swap liabilities. A detail of Piedmont’s interest rate derivatives on a gross and net basis as of September 30, 2021 and December 31, 2020, respectively, is as follows (in thousands):

Interest rate swaps classified as:			September 30, 2021						December 31, 2020
Gross derivative assets			$	—					$	—
Gross derivative liabilities			(6,715)						(9,834)
Net derivative liability			$	(6,715)					$	(9,834)

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The gain/(loss) on Piedmont's interest rate derivatives, including previously settled forward swaps, that was recorded in other comprehensive income ("OCI") and the accompanying consolidated statements of income as a component of interest expense for the three and nine months ended September 30, 2021 and 2020, respectively, is as follows (in thousands):

			Three Months Ended												Nine Months Ended
Interest Rate Swaps in Cash Flow Hedging Relationships			September 30, 2021						September 30, 2020						September 30, 2021						September 30, 2020
Amount of gain/(loss) recognized in OCI			$	582					$	(2,443)					$	1,848					$	(26,949)
Amount of previously recorded loss reclassified from OCI into interest expense			$	(750)					$	(810)					$	(2,216)					$	(989)
Total amount of interest expense presented in the consolidated statements of income			$	(12,450)					$	(12,725)					$	(37,375)					$	(41,942)

Piedmont estimates that approximately $2.9 million will be reclassified from OCI as an increase in interest expense over the next twelve months. Piedmont recognized no hedge ineffectiveness on its cash flow hedges during the three and nine months ended September 30, 2021 and 2020, respectively.

Additionally, see Note 5 for fair value disclosures of Piedmont's derivative instruments.

Credit-risk-related Contingent Features

Piedmont has agreements with its derivative counterparties that contain a provision whereby if Piedmont defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then Piedmont could also be declared in default on its derivative obligations. If Piedmont were to breach any of the contractual provisions of the derivative contracts, it could be required to settle its liability obligations under the agreements at their termination value of the estimated fair values plus accrued interest, or approximately $6.8 million as of September 30, 2021. Additionally, Piedmont has rights of set-off under certain of its derivative agreements related to potential termination fees and amounts payable under the agreements, if a termination were to occur.

5.    Fair Value Measurement of Financial Instruments

Piedmont considers its cash and cash equivalents, tenant receivables, notes receivable, restricted cash and escrows, accounts payable and accrued expenses, interest rate swap agreements, and debt to meet the definition of financial instruments. The following table sets forth the carrying and estimated fair value for each of Piedmont’s financial instruments, as well as its level within the GAAP fair value hierarchy, as of September 30, 2021 and December 31, 2020, respectively (in thousands):

			September 30, 2021																		December 31, 2020
Financial Instrument			Carrying Value						Estimated Fair Value						Level Within Fair Value Hierarchy						Carrying Value						Estimated Fair Value						Level Within Fair Value Hierarchy
Assets:
Cash and cash equivalents (1)			$	8,189					$	8,189					Level 1						$	7,331					$	7,331					Level 1
Tenant receivables, net (1)			$	8,678					$	8,678					Level 1						$	8,448					$	8,448					Level 1
Notes receivable			$	118,500					$	120,577					Level 2						$	118,500					$	118,500					Level 2
Restricted cash and escrows (1)			$	6,093					$	6,093					Level 1						$	1,883					$	1,883					Level 1
Liabilities:
Accounts payable and accrued expenses (1)			$	10,953					$	10,953					Level 1						$	45,345					$	45,345					Level 1
Interest rate swaps			$	6,715					$	6,715					Level 2						$	9,834					$	9,834					Level 2
Debt, net			$	1,665,101					$	1,735,059					Level 2						$	1,622,004					$	1,690,377					Level 2

(1)For the periods presented, the carrying value of these financial instruments, net of applicable allowance, approximates estimated fair value due to their short-term maturity.

Piedmont's notes receivable and debt were carried at book value as of September 30, 2021 and December 31, 2020; however, Piedmont's estimate of the fair value of each of these financial instruments as of each period end is disclosed in the table above.

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Piedmont issued notes receivable in conjunction with the sale of properties to an unrelated third-party buyer in October 2020. As the facts and circumstances as of December 31, 2020 were substantially unchanged since the issuance of the notes receivable in October 2020, Piedmont determined that the book value of the notes approximated their estimated fair value as of December 31, 2020. Piedmont uses widely accepted valuation techniques including discounted cash flow analysis based on the contractual terms of its notes receivables and debt, including the period to maturity of each note receivable and debt facility, and uses observable market-based inputs for similar loan and debt facilities which have transacted recently in the market. Scaling adjustments are made to these inputs to make them applicable to the remaining life of Piedmont's notes receivables and outstanding debt. Consequently, the estimated fair values of the notes receivable as of September 30, 2021 and debt as of both December 31, 2020 and September 30, 2021 are considered to be based on significant other observable inputs (Level 2). Piedmont has not changed its valuation technique for estimating the fair value of its notes receivable or debt.

Piedmont’s interest rate swap agreements presented above, and as further discussed in Note 4, are classified as “Interest rate swap” liabilities in the accompanying consolidated balance sheets and were carried at estimated fair value as of September 30, 2021 and December 31, 2020. The valuation of these derivative instruments was determined using widely accepted valuation techniques including discounted cash flow analysis based on the contractual terms of the derivatives, including the period to maturity of each instrument, and uses observable market-based inputs, including interest rate curves and implied volatilities. Therefore, the estimated fair values determined are considered to be based on significant other observable inputs (Level 2). In addition, Piedmont considered both its own and the respective counterparties’ risk of nonperformance in determining the estimated fair value of its derivative financial instruments by estimating the current and potential future exposure under the derivative financial instruments that both Piedmont and the counterparties were at risk for as of the valuation date. The credit risk of Piedmont and its counterparties was factored into the calculation of the estimated fair value of the interest rate swaps; however, as of September 30, 2021 and December 31, 2020, this credit valuation adjustment did not comprise a material portion of the estimated fair value. Therefore, Piedmont believes that any unobservable inputs used to determine the estimated fair values of its derivative financial instruments are not significant to the fair value measurements in their entirety, and does not consider any of its derivative financial instruments to be Level 3 liabilities.

6.    Commitments and Contingencies

Commitments Under Existing Lease Agreements

As a recurring part of its business, Piedmont is typically required under its executed lease agreements to fund tenant improvements, leasing commissions, and building improvements. In addition, certain agreements contain provisions that require Piedmont to issue corporate or property guarantees to provide funding for capital improvements or other financial obligations. As of September 30, 2021, Piedmont had one individually significant unrecorded tenant allowance commitment of approximately $21.8 million for the approximately 20-year, 520,000 square foot renewal and expansion on behalf of Piedmont's largest tenant, the State of New York at the 60 Broad Street building in New York City. This commitment will be accrued and capitalized as the related expenditures are incurred.

Contingencies Related to Tenant Audits/Disputes

Certain lease agreements include provisions that grant tenants the right to engage independent auditors to audit their annual operating expense reconciliations. Such audits may result in different interpretations of language in the lease agreements from that made by Piedmont, which could result in requests for refunds of previously recognized tenant reimbursement revenues, resulting in financial loss to Piedmont. There were no reductions in rental and reimbursement revenues related to such tenant audits/disputes during the three or nine months ended September 30, 2021 or 2020.

Contingencies Related to the COVID-19 Pandemic

The long-term impacts of the COVID-19 pandemic on our tenants and the global economy remain unclear and any adverse affect on certain of Piedmont's tenant's operating results or future leasing decisions could, in turn, adversely impact Piedmont's business, financial condition and results of operations.

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7.    Assets Held for Sale

Piedmont is under a binding contract to sell the 225 and 235 Presidential Way assets in Woburn, Massachusetts for $129.0 million, or $293 per square foot. Consequently, the assets, which are assigned to the Boston geographic reportable segment, met the criteria for held for sale classification and the assets of these properties as of September 30, 2021 and December 31, 2020 are presented as held for sale for comparability in the accompanying consolidated balance sheets. The sale of the properties is expected to close early in 2022, subject to customary closing conditions. Details of amounts held for sale as of September 30, 2021 and December 31, 2020 are presented below (in thousands):