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 March 31, 2023
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
(Exact name of registrant as specified in its charter)
____________________________________________________
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |||||||
(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 | ||||||||||||
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.
| 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 April 27, 2023:
FORM 10-Q
PIEDMONT OFFICE REALTY TRUST, INC.
TABLE OF CONTENTS
| Page No. | |||||||||||
| PART I | Financial Information | ||||||||||
| Item 1. | |||||||||||
| Item 2. | |||||||||||
| Item 3. | |||||||||||
| Item 4. | |||||||||||
| PART II. | Other Information | ||||||||||
| Item 1. | |||||||||||
| Item 1A. | |||||||||||
| Item 2. | |||||||||||
| Item 3. | |||||||||||
| Item 4. | |||||||||||
| Item 5. | |||||||||||
| Item 6. | |||||||||||
2
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 our executive officers on our behalf, may from time to time make forward-looking statements in reports and other documents we file 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 our 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; 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 our 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 we operate, competitive conditions, and general economic conditions. These assumptions could prove inaccurate. The forward-looking statements also involve certain known and unknown 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 our ability to control or predict. Such factors include, but are not limited to, the following:
•Economic, regulatory, socio-economic (including work from home), technological (e.g. Metaverse, Zoom, etc), and other changes that impact the real estate market generally, the office sector or the patterns of use of commercial office space in general, or the markets where we primarily operate or have high concentrations of Annualized Lease Revenue (“ALR”) (see definition below);
•The impact of competition on our efforts to renew existing leases or re-let space on terms similar to existing leases;
•Lease terminations, lease defaults, lease contractions, or changes in the financial condition of our tenants, particularly by one of our large lead tenants;
•Impairment charges on our long-lived assets or goodwill resulting therefrom;
•The success of our real estate strategies and investment objectives, including our ability to implement successful redevelopment and development strategies or identify and consummate suitable acquisitions and divestitures;
•The illiquidity of real estate investments, including economic changes, such as rising interest rates, which could impact the number of buyers/sellers of our target properties, and 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, including the potential of supply chain disruptions, and resultant increased costs and risks;
•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 properties or 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, including environmental standards imposed on office building owners;
•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, such as potential changes in the political environment, a reduction in federal or state funding of our governmental tenants, or 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;
•Risks associated with incurring mortgage and other indebtedness, including changing capital reserve requirements on our lenders and rapidly rising interest rates in the public bond markets, could impact our ability to finance properties or refinance existing debt or significantly increase operating/financing costs;
•A downgrade in our credit rating could materially adversely affect our business and financial condition;
•The effect of future offerings of debt or equity securities on the value of our common stock;
3
•Additional risks and costs associated with inflation and continuing increases in the rate of inflation, including the possibility of a recession that could negatively impact our operations and the operations of our tenants and their ability to pay rent;
•Uncertainties associated with environmental and regulatory matters;
•Changes in the financial condition of our tenants directly or indirectly resulting from geopolitical developments that could negatively affect important supply chains and 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 COVID-19 pandemic, as well as governmental and private measures taken to combat such health crises, could have a material adverse effect on our business operations and financial results;
•The adequacy of our general reserve related to tenant lease-related assets or the establishment of any other reserve in the future; and
•Other factors, including the risk factor described in Item 1A. Risk Factors 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, 2022.
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
ALR 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.
4
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
The information presented in the accompanying consolidated balance sheets and related consolidated statements of operations, comprehensive income, 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 generally accepted accounting principles ("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, 2022. Piedmont’s results of operations for the three months ended March 31, 2023 are not necessarily indicative of the operating results expected for the full year.
5
PIEDMONT OFFICE REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share and per share amounts)
| (Unaudited) | |||||||||||
| March 31, 2023 | December 31, 2022 | ||||||||||
| Assets: | |||||||||||
| Real estate assets, at cost: | |||||||||||
Land | $ | $ | |||||||||
Buildings and improvements, less accumulated depreciation of $ | |||||||||||
Intangible lease assets, less accumulated amortization of $ | |||||||||||
Construction in progress | |||||||||||
| Total real estate assets | |||||||||||
| Cash and cash equivalents | |||||||||||
Tenant receivables, net of allowance for doubtful accounts of $ | |||||||||||
| Straight-line rent receivables | |||||||||||
| Restricted cash and escrows | |||||||||||
| Prepaid expenses and other assets | |||||||||||
| Goodwill | |||||||||||
Interest rate swaps | |||||||||||
Deferred lease costs, less accumulated amortization of $ | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities: | |||||||||||
Unsecured debt, net of discount and unamortized debt issuance costs of $ | $ | $ | |||||||||
Secured debt | |||||||||||
| Accounts payable, accrued expenses and accrued capital expenditures | |||||||||||
| Dividends payable | |||||||||||
| Deferred income | |||||||||||
Intangible lease liabilities, less accumulated amortization of $ | |||||||||||
| Interest rate swaps | |||||||||||
| Total liabilities | |||||||||||
| Stockholders’ Equity: | |||||||||||
Shares-in-trust, | |||||||||||
Preferred stock, | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Cumulative distributions in excess of earnings | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Piedmont stockholders’ equity | |||||||||||
| Noncontrolling interest | |||||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
See accompanying notes
6
PIEDMONT OFFICE REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except for share and per share amounts)
| Three Months Ended | |||||||||||
| March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Revenues: | |||||||||||
| Rental and tenant reimbursement revenue | $ | $ | |||||||||
| Property management fee revenue | |||||||||||
| Other property related income | |||||||||||
| Expenses: | |||||||||||
| Property operating costs | |||||||||||
| Depreciation | |||||||||||
| Amortization | |||||||||||
General and administrative | |||||||||||
| Other income (expense): | |||||||||||
| Interest expense | ( | ( | |||||||||
| Other income | |||||||||||
| Gain on sale of real estate assets | |||||||||||
| ( | |||||||||||
| Net income/(loss) | ( | ||||||||||
Net income applicable to noncontrolling interest | ( | ||||||||||
| Net income/(loss) applicable to Piedmont | $ | ( | $ | ||||||||
| Per share information – basic and diluted: | |||||||||||
| Net income/(loss) applicable to common stockholders | $ | ( | $ | ||||||||
| Weighted-average common shares outstanding – basic | |||||||||||
| Weighted-average common shares outstanding – diluted | |||||||||||
See accompanying notes
7
PIEDMONT OFFICE REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) (UNAUDITED)
(in thousands)
| Three Months Ended | |||||||||||||||||||||||
| March 31, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Net income/(loss) applicable to Piedmont | $ | ( | $ | ||||||||||||||||||||
| Other comprehensive income: | |||||||||||||||||||||||
Effective portion of gain/(loss) on derivative instruments that are designated and qualify as cash flow hedges (See Note 4) | ( | ||||||||||||||||||||||
| ( | |||||||||||||||||||||||
| Other comprehensive income/(loss) | ( | ||||||||||||||||||||||
Comprehensive income/(loss) applicable to Piedmont | $ | ( | $ | ||||||||||||||||||||
See accompanying notes
8
PIEDMONT OFFICE REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022
(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, 2022 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
Dividends to common stockholders ($ | — | — | — | ( | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Shares issued and amortized under the 2007 Omnibus Incentive Plan, net of tax | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||
| Net income applicable to noncontrolling interest | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Net loss applicable to Piedmont | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
| 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, 2021 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
Dividends to common stockholders ($ | — | — | — | ( | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Shares issued and amortized under the 2007 Omnibus Incentive Plan, net of tax | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Net income applicable to Piedmont | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2022 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
See accompanying notes
9
PIEDMONT OFFICE REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
| Three Months Ended | |||||||||||
| March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash Flows from Operating Activities: | |||||||||||
| Net income/(loss) | $ | ( | $ | ||||||||
| Adjustments to reconcile net income/(loss) to net cash provided by operating activities: | |||||||||||
| Depreciation | |||||||||||
Amortization of debt issuance costs inclusive of settled interest rate swaps | |||||||||||
| Other amortization | |||||||||||
| Reversal of general reserve for uncollectible accounts | ( | ||||||||||
| Stock compensation expense | |||||||||||
| Gain on sale of real estate assets | ( | ||||||||||
| Changes in assets and liabilities: | |||||||||||
| Increase in tenant and straight-line rent receivables | ( | ( | |||||||||
| Increase in prepaid expenses and other assets | ( | ( | |||||||||
| Decrease in accounts payable and accrued expenses | ( | ( | |||||||||
| Increase/(decrease) in deferred income | ( | ||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash Flows from Investing Activities: | |||||||||||
| Capitalized expenditures | ( | ( | |||||||||
| Net sales proceeds from wholly-owned properties | |||||||||||
| Proceeds from notes receivable | |||||||||||
| Deferred lease costs paid | ( | ( | |||||||||
| Net cash (used in)/provided by investing activities | ( | ||||||||||
| Cash Flows from Financing Activities: | |||||||||||
| Debt issuance and other costs paid | ( | ( | |||||||||
| Proceeds from debt | |||||||||||
| Repayments of debt | ( | ( | |||||||||
| Value of shares withheld for payment of taxes related to employee stock compensation | ( | ( | |||||||||
| Dividends paid | ( | ( | |||||||||
| Net cash provided by/(used in) financing activities | ( | ||||||||||
| Net increase/(decrease) in cash, cash equivalents, and restricted cash and escrows | ( | ||||||||||
| Cash, cash equivalents, and restricted cash and escrows, beginning of period | |||||||||||
| Cash, cash equivalents, and restricted cash and escrows, end of period | $ | $ | |||||||||
See accompanying notes
10
PIEDMONT OFFICE REALTY TRUST, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(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 major U.S. Sunbelt markets. 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 March 31, 2023, Piedmont owned 51 in-service office properties and one redevelopment asset, primarily located in major U.S. Sunbelt office markets. As of March 31, 2023, the in-service office properties comprised approximately 16.7 million square feet (unaudited) and were 86.1 % leased.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The consolidated financial statements of Piedmont are 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, 2022.
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 collectability 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.
11
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 operations for the three months ended March 31, 2023 and 2022, respectively, as follows (in thousands):
| Three Months Ended | |||||||||||
| March 31, 2023 | March 31, 2022 | ||||||||||
| Fixed payments | $ | $ | |||||||||
| Variable payments | |||||||||||
Total Rental and Tenant Reimbursement Revenue | $ | $ | |||||||||
Operating leases where Piedmont is the lessee relate primarily to office space in buildings owned by third parties. Piedmont's right of use asset and corresponding lease liability was approximately $0.1 0.2 20,000 2 years, and the discount rate is 3.86 %.
3. Debt
During the three months ended March 31, 2023, Piedmont entered into a new $215 million, floating-rate, unsecured term loan facility (the “$215 Million Unsecured 2023 Term Loan”). The term of the $215 Million Unsecured 2023 Term Loan is one year , with an option to extend for an additional one year for a final maturity date of January 31, 2025. Piedmont may prepay the loan in whole or in part, at any time without premium or penalty. The stated interest rate spread over Adjusted SOFR can vary from 0.85 % to 1.70 % based upon the then current credit rating of Piedmont. As of March 31, 2023, the applicable interest rate spread on the loan was 1.05 %.
The $215 Million Unsecured 2023 Term Loan has certain financial covenants that require, among other things, the maintenance of an unencumbered interest rate coverage ratio of at least 1.75 , an unencumbered leverage ratio of at least 1.60 , a fixed charge coverage ratio of at least 1.50 , a leverage ratio of no more than 0.60 , and a secured debt ratio of no more than 0.40 .
Additionally, during the three months ended March 31, 2023, Piedmont amended the $250 million, floating-rate, unsecured term loan facility (the "$250 Million Unsecured 2018 Term Loan") to convert the reference interest rate from LIBOR to SOFR, along with the various other related amendments necessary to affect this conversion.
12
The following table summarizes the terms of Piedmont’s indebtedness outstanding as of March 31, 2023 and December 31, 2022 (in thousands):
Facility (1) | Stated Rate | Effective Rate (2) | Maturity | Amount Outstanding as of | ||||||||||||||||||||||||||||
| March 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||
| Secured (Fixed) | ||||||||||||||||||||||||||||||||
$ | % | 10/1/2028 | $ | $ | ||||||||||||||||||||||||||||
| Subtotal | ||||||||||||||||||||||||||||||||
| Unsecured (Variable and Fixed) | ||||||||||||||||||||||||||||||||
$ | % | % | 6/01/2023 | |||||||||||||||||||||||||||||
$ | SOFR + | % | (3) | 1/31/2024 | (4) | |||||||||||||||||||||||||||
$ | % | % | 3/15/2024 | |||||||||||||||||||||||||||||
$ | SOFR + | % | (3) | 12/16/2024 | (5) | |||||||||||||||||||||||||||
$ | SOFR + | % | 3/31/2025 | |||||||||||||||||||||||||||||
$ | SOFR + | % | (3) | 6/30/2026 | (6) | |||||||||||||||||||||||||||
$ | % | % | 8/15/2030 | |||||||||||||||||||||||||||||
$ | % | % | 4/1/2032 | |||||||||||||||||||||||||||||
Discounts and unamortized debt issuance costs | ( | ( | ||||||||||||||||||||||||||||||
Subtotal/Weighted Average (7) | % | $ | $ | |||||||||||||||||||||||||||||
Total/Weighted Average (7) | % | $ | $ | |||||||||||||||||||||||||||||
(1)All of Piedmont’s outstanding debt as of March 31, 2023 is unsecured and interest-only until maturity, except for the $197 Million Fixed Rate Mortgage, secured by 1180 Peachtree Street, which will begin amortizing principal in October 2023.
(2)Effective rate after consideration of settled or in-place interest rate swap agreements and issuance discounts.
(3)On a periodic basis, Piedmont may select from multiple interest rate options, including the prime rate and various-length SOFR locks on all or a portion of the principal. All SOFR selections are subject to an additional spread over the selected rate based on Piedmont’s current credit rating.
(4)Piedmont may extend the term for an additional year to a final extended maturity date of January 31, 2025 provided Piedmont is not then in default and upon payment of extension fees.
(5)Piedmont may extend the term for additional months to a final extended maturity date of June 18, 2025, provided Piedmont is not then in default and all representations and warranties are true and correct in all material respects and upon payment of extension fees.
(6)Piedmont may extend the term for up to additional year (through two available six month extensions to a final extended maturity date of June 30, 2027) provided Piedmont is not then in default and upon payment of extension fees.
(7)Weighted average is based on contractual balance of outstanding debt and the stated or effectively fixed interest rates as of March 31, 2023.
Piedmont made interest payments on all debt facilities, including interest rate swap cash settlements, of approximately $23.4 million and $15.8 million for the three months ended March 31, 2023 and 2022, respectively. Also, Piedmont capitalized interest of approximately $1.2 million and $1.0 million for the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, Piedmont believes it was in compliance with all financial covenants associated with its debt instruments.
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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, specifically interest rate swap 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 March 31, 2023, Piedmont amended the two remaining LIBOR-designated interest rate swap agreements to change the reference rate from LIBOR to SOFR, in order to match the amended underlying debt terms (see Note 3 above). All of Piedmont's interest rate swap agreements are designated as effective cash flow hedges and are now designated using SOFR. The maximum length of time over which Piedmont is hedging its exposure to the variability in future cash flows for forecasted transactions is 24 months.
A detail of Piedmont’s interest rate derivatives outstanding as of March 31, 2023 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 | $ | $ | 3/29/2018 | 3/31/2025 | ||||||||||||||||||||||||||||
| Interest rate swaps | $ | 12/2/2022 | 3/31/2025 | |||||||||||||||||||||||||||||
| Interest rate swaps | $ | 12/12/2022 | 3/31/2025 | |||||||||||||||||||||||||||||
Total | $ | |||||||||||||||||||||||||||||||
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 March 31, 2023 and December 31, 2022, respectively, is as follows (in thousands):
| Interest rate swaps classified as: | March 31, 2023 | December 31, 2022 | |||||||||
| Gross derivative assets | $ | $ | |||||||||
| Gross derivative liabilities | ( | ||||||||||
| Net derivative asset | $ | $ | |||||||||
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The gain/(loss) on Piedmont's interest rate derivatives, including previously settled forward swaps, that was recorded in OCI and the accompanying consolidated statements of operations as a component of interest expense for the three months ended March 31, 2023 and 2022, respectively, is as follows (in thousands):
| Three Months Ended | |||||||||||
| Interest Rate Swaps in Cash Flow Hedging Relationships | March 31, 2023 | March 31, 2022 | |||||||||
| Amount of gain/(loss) recognized in OCI | $ | ( | $ | ||||||||
Amount of previously recorded gain/(loss) reclassified from OCI into interest expense | $ | $ | ( | ||||||||
Total amount of interest expense presented in the consolidated statements of operations | $ | ( | $ | ( | |||||||
Piedmont estimates that approximately $2.8 million will be reclassified from OCI as a decrease in interest expense over the next twelve months. 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 $0.4 million as of March 31, 2023. 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, 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 March 31, 2023 and December 31, 2022, respectively (in thousands):
| March 31, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||
| 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) | $ | $ | Level 1 | $ | $ | Level 1 | |||||||||||||||||||||||||||||
Tenant receivables, net (1) | $ | $ | Level 1 | $ | $ | Level 1 | |||||||||||||||||||||||||||||
Restricted cash and escrows (1) | $ | $ | Level 1 | $ | $ | Level 1 | |||||||||||||||||||||||||||||
| Interest rate swaps | $ | $ | Level 2 | $ | $ | Level 2 | |||||||||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||||||||
Accounts payable and accrued expenses (1) | $ | $ | Level 1 | $ | $ | Level 1 | |||||||||||||||||||||||||||||
| Interest rate swaps | $ | $ | Level 2 | $ | $ | Level 2 | |||||||||||||||||||||||||||||
| Debt, net | $ | $ | Level 2 | $ | $ | 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 debt was carried at book value as of March 31, 2023 and December 31, 2022; however, Piedmont's estimate of its fair value is disclosed in the table above. Piedmont uses widely accepted valuation techniques including discounted cash flow analysis based on the contractual terms of the debt facilities, including the period to maturity of each instrument, and uses observable market-based inputs for similar debt facilities which have transacted recently in the market. Therefore, the estimated fair values determined are considered to be based on significant other observable inputs (Level 2). Scaling adjustments are
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made to these inputs to make them applicable to the remaining life of Piedmont's outstanding debt. Piedmont has not changed its valuation technique for estimating the fair value of its debt.
Piedmont’s interest rate swap agreements presented above, and as further discussed in Note 4, are classified as “Interest rate swaps” in the accompanying consolidated balance sheets and were carried at estimated fair value as of March 31, 2023 and December 31, 2022. 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 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 March 31, 2023 and December 31, 2022, 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 derivatives to be Level 3 financial instruments.
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. Such commitments are accrued and capitalized as the related expenditures are incurred. In addition to the amounts that Piedmont has already committed to as a part of executed leases, Piedmont also anticipates continuing to incur similar market-based tenant improvement allowances and leasing commissions in conjunction with procuring future leases for its existing portfolio of properties. Both the timing and magnitude of expenditures related to future leasing activity can vary due to a number of factors and are highly dependent on the size of the leased square footage and the competitive market conditions of the particular office market at the time a lease is being negotiated.
Contingencies Related to Tenant Audits/Disputes
7. Stock Based Compensation
Annually, the Compensation Committee of Piedmont's Board of Directors has granted deferred stock award units to certain employees at its discretion. Employee awards typically vest ratably over or four years . In addition, Piedmont's independent directors receive an annual grant of deferred stock award units for services rendered and such awards vest over a one year service period.
Certain management employees' long-term equity incentive program is split between the deferred stock award units described above and a multi-year performance share program whereby actual awards are contingent upon Piedmont's total stockholder return ("TSR") performance relative to the TSR of a peer group of office REITs. The target incentives for these certain employees, as well as the peer group to be used for comparative purposes, are predetermined by the board of directors, advised by an outside compensation consultant. The number of shares earned, if any, are determined at the end of the multi-year performance period (or upon termination) and vest immediately. In the event that a participant's employment is terminated prior to the end of the multi-year period, in certain circumstances the participant may be entitled to a pro-rated award based on Piedmont's TSR relative performance as of the termination date. The grant date fair value of the multi-year performance share awards is estimated using the Monte Carlo valuation method and is recognized ratably over the performance period.
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A rollforward of Piedmont's equity based award activity for the three months ended March 31, 2023 is as follows:
| Shares | Weighted-Average Grant Date Fair Value | ||||||||||
Unvested and Potential Stock Awards as of December 31, 2022 | $ | ||||||||||
Deferred Stock Awards Granted | $ | ||||||||||
| Performance Stock Awards Granted | $ | ||||||||||
Change in Estimated Potential Share Awards based on TSR Performance | $ | ||||||||||
Performance Stock Awards Vested | ( | $ | |||||||||
Deferred Stock Awards Vested | ( | $ | |||||||||
Deferred Stock Awards Forfeited | ( | $ | |||||||||
Unvested and Potential Stock Awards as of March 31, 2023 | $ | ||||||||||
The following table provides additional information regarding stock award activity during the three months ended March 31, 2023 and 2022, respectively (in thousands, except per share amounts):
| Three Months Ended | |||||||||||
| March 31, 2023 | March 31, 2022 | ||||||||||
Weighted-Average Grant Date Fair Value per share of Deferred Stock Granted During the Period | $ | $ | |||||||||
Total Grant Date Fair Value of Deferred Stock Vested During the Period | $ | $ | |||||||||
Share-based Liability Awards Paid During the Period (1) | $ | $ | |||||||||
(1)Reflects the value of stock earned pursuant to the 2019-21 Performance Share Plan during the three months ended March 31, 2022.
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A detail of Piedmont’s outstanding stock awards and programs as of March 31, 2023 is as follows:
| Date of grant | Type of Award | Net Shares Granted (1) | Grant Date Fair Value | Vesting Schedule | Unvested Shares | ||||||||||||||||||||||||||||||
| May 3, 2019 | Deferred Stock Award | (2) | $ | Of the shares granted, | |||||||||||||||||||||||||||||||
| February 17, 2021 | Deferred Stock Award | $ | Of the shares granted, | ||||||||||||||||||||||||||||||||
| February 18, 2021 | 2021-2023 Performance Share Program | $ | Shares awarded, if any, will vest immediately upon determination of award in 2024. | (3) | |||||||||||||||||||||||||||||||
| February 10, 2022 | Deferred Stock Award | $ | Of the shares granted, | ||||||||||||||||||||||||||||||||
| February 17, 2022 | 2022-2024 Performance Share Program | $ | Shares awarded, if any, will vest immediately upon determination of award in 2025. | (3) | |||||||||||||||||||||||||||||||
| May 11, 2022 | Deferred Stock Award-Board of Directors | $ | Of the shares granted, | ||||||||||||||||||||||||||||||||
| February 13, 2023 | Deferred Stock Award | $ | Of the shares granted, | ||||||||||||||||||||||||||||||||
| February 23, 2023 | 2023-2025 Performance Share Program | $ | Shares awarded, if any, will vest immediately upon determination of award in 2026. | (3) | |||||||||||||||||||||||||||||||
| February 23, 2023 | Deferred Stock Award | $ | Of the shares granted, | ||||||||||||||||||||||||||||||||
| Total | |||||||||||||||||||||||||||||||||||
(1)Amounts reflect the total original grant to employees and independent directors, net of shares surrendered upon vesting to satisfy required minimum tax withholding obligations through March 31, 2023.
(2)Includes a special, one-time deferred stock award to Piedmont's Chief Executive Officer effective on July 1, 2019, the date of his promotion to the position, which vests in ratable installments over a five year period beginning July 1, 2020.
(3)Estimated based on Piedmont's cumulative TSR for the respective performance period through March 31, 2023. Share estimates are subject to change in future periods based upon Piedmont's relative TSR performance compared to its peer group of office REITs.
During the three months ended March 31, 2023 and 2022, Piedmont recognized approximately $1.8 million and $2.8 million, respectively, of compensation expense related to stock awards, of which $1.8 million and $1.7 million, respectively, is related to the amortization of unvested and potential stock awards and fair value adjustment for liability awards. During the three months ended March 31, 2023, 203,395 shares (net of shares surrendered upon vesting to satisfy required minimum tax withholding obligations) were issued to employees and independent directors. As of March 31, 2023, approximately $17.7 million of unrecognized compensation cost related to unvested and potential stock awards remained, which Piedmont will record in its consolidated statements of operations over a weighted-average vesting period of approximately two years .
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8. Supplemental Disclosures for the Statement of Consolidated Cash Flows
Certain non-cash investing and financing activities for the three months ended March 31, 2023 and 2022 (in thousands) are outlined below:
| Three Months Ended | |||||||||||
| March 31, 2023 | March 31, 2022 | ||||||||||
| Accrued capital expenditures and deferred lease costs | $ | $ | |||||||||
Change in accrued dividends | $ | ( | $ | ( | |||||||
| Accrued deferred financing costs | $ | $ | |||||||||
The following table provides a reconciliation of cash, cash equivalents, and restricted cash and escrows as presented in the accompanying consolidated statements of cash flows for the three months ended March 31, 2023 and 2022, to the consolidated balance sheets for the respective period (in thousands):
| 2023 | 2022 | |||||||||||||
| Cash and cash equivalents, beginning of period | $ | $ | ||||||||||||
| Restricted cash and escrows, beginning of period | ||||||||||||||
| Total cash, cash equivalents, and restricted cash and escrows as presented in the accompanying consolidated statement of cash flows, beginning of period | $ | $ | ||||||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||||||||
| Restricted cash and escrows, end of period | ||||||||||||||
| Total cash, cash equivalents, and restricted cash and escrows as presented in the accompanying consolidated statement of cash flows, end of period | $ | $ | ||||||||||||
Amounts in restricted cash and escrows typically represent: escrow accounts required for future property repairs; escrow accounts for the payment of real estate taxes as required under certain of Piedmont's debt agreements; earnest money deposited by a buyer to secure the purchase of one of Piedmont's properties; or security or utility deposits held for tenants as a condition of their lease agreement.
9. Earnings Per Share
There are no adjustments to “Net income/(loss) applicable to Piedmont” for the diluted earnings per share computations.
Net income/(loss) per share-basic is calculated as net income/(loss) available to common stockholders divided by the weighted average number of common shares outstanding during the period. Net income/(loss) per share-diluted is calculated as net income/(loss) available to common stockholders divided by the diluted weighted average number of common shares outstanding during the period, including unvested deferred stock awards. Diluted weighted average number of common shares reflects the potential dilution under the treasury stock method that would occur if the remaining unvested and potential stock awards vested and resulted in additional common shares outstanding. Unvested and potential stock awards which are determined to be anti-dilutive are not included in the calculation of diluted weighted average common shares. For the three months ended March 31, 2023 and 2022, Piedmont calculated and excluded weighted average outstanding anti-dilutive shares of 1,204,123 and 195,837 , respectively.
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The following table reconciles the denominator for the basic and diluted earnings per share computations shown on the consolidated statements of operations for the three months ended March 31, 2023 and 2022, respectively (in thousands):
| Three Months Ended | |||||||||||
| March 31, 2023 | March 31, 2022 | ||||||||||
| Weighted-average common shares – basic | |||||||||||
Plus: Incremental weighted-average shares from time-vested deferred and performance stock awards | |||||||||||
| Weighted-average common shares – diluted | |||||||||||
10. Segment Information
Piedmont's President and Chief Executive Officer has been identified as Piedmont's chief operating decision maker ("CODM"), as defined by GAAP. The CODM evaluates Piedmont's portfolio and assesses the ongoing operations and performance of its properties utilizing the following geographic segments: Atlanta, Dallas, Orlando, Washington, D.C./Northern Virginia, Minneapolis, New York, and Boston. These operating segments are also Piedmont’s reportable segments. As of March 31, 2023, Piedmont also owned two properties in Houston that do not meet the definition of an operating or reportable segment as the CODM does not regularly review these properties for purposes of allocating resources or assessing performance. Further, Piedmont does not maintain a significant presence or anticipate further investment in this market. These two properties are the primary contributors to accrual-based net operating income ("NOI") included in "Other" below. During the periods presented, there have been no material inter segment transactions. The accounting policies of the reportable segments are the same as Piedmont's accounting policies.
Accrual-based net operating income ("NOI") by geographic segment is the primary performance measure reviewed by Piedmont's CODM to assess operating performance and consists only of revenues and expenses directly related to real estate rental operations. NOI is calculated by deducting property operating costs from lease revenues and other property related income. NOI reflects property acquisitions and dispositions, occupancy levels, rental rate increases or decreases, and the
recoverability of operating expenses. Piedmont's calculation of NOI may not be directly comparable to similarly titled measures calculated by other REITs.
Asset value information and capital expenditures by segment are not reported because the CODM does not use these measures to assess performance.
The following table presents accrual-based lease revenue and other property related income included in NOI by geographic reportable segment (in thousands):
| Three Months Ended | |||||||||||
| March 31, 2023 | March 31, 2022 | ||||||||||
| Atlanta | $ | $ | |||||||||
| Dallas | |||||||||||
| Orlando | |||||||||||
| Washington, D.C./Northern Virginia | |||||||||||
| Minneapolis | |||||||||||
| New York | |||||||||||
| Boston | |||||||||||
| Total reportable segments | |||||||||||
| Other | |||||||||||
| Total Revenues | $ | $ | |||||||||
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The following table presents NOI by geographic reportable segment (in thousands):
| Three Months Ended | |||||||||||
| March 31, 2023 | March 31, 2022 | ||||||||||
| Atlanta | $ | $ | |||||||||
| Dallas | |||||||||||
| Orlando | |||||||||||
| Washington, D.C./Northern Virginia | |||||||||||
| Minneapolis | |||||||||||
| New York | |||||||||||
| Boston | |||||||||||
| Total reportable segments | |||||||||||
| Other | |||||||||||
| Total NOI | $ | $ | |||||||||
A reconciliation of Net income/(loss) applicable to Piedmont to NOI is presented below (in thousands):
| Three Months Ended | |||||||||||
| March 31, 2023 | March 31, 2022 | ||||||||||
| Net income/(loss) applicable to Piedmont | $ | ( | $ | ||||||||
Management fee revenue (1) | ( | ( | |||||||||
| Depreciation and amortization | |||||||||||