Piedmont Office Realty Trust(PDM) - 2023 Q4 - Annual Report

Part I Business Piedmont is a REIT focused on owning and operating Class A office properties, primarily in U.S. Sunbelt markets, with 51 properties totaling 16.6 million square feet and 87.1% leased as of December 31, 2023 - Piedmont is a REIT focused on owning and operating high-quality, Class A office properties primarily in major U.S. Sunbelt markets[27] Portfolio Overview as of December 31, 2023 | Metric | Value | | :--- | :--- | | In-service office properties | 51 | | Total square feet | ~16.6 million | | Leased Percentage | 87.1% | | Sunbelt Market Concentration (by ALR) | ~70% | | Largest Tenant Concentration (by ALR) | < 5% | - The company's primary strategies include redeveloping properties to enhance amenities, proactive asset management to maximize occupancy, recycling capital by selling non-core assets to fund new investments, and maintaining a conservative leverage strategy[31][32][36][37] - As of December 31, 2023, the company had 150 employees and emphasizes diversity, equity, and inclusion, including a scholarship program with Historically Black Colleges and Universities[38][40] Risk Factors The company faces material risks from economic changes, competition, tenant defaults, cybersecurity, anti-takeover provisions, REIT qualification, and debt financing - Business & Operations Risks: The company faces risks from economic and technological changes impacting office space demand (e.g., work-from-home), intense competition, tenant defaults, development and construction delays, cybersecurity incidents, and the physical and transitional effects of climate change[53][57][61][81][103] - Organization & Structure Risks: Anti-takeover provisions in organizational documents, charter limitations on stock ownership (9.8%), and the board's ability to take actions without stockholder approval may discourage changes in control[109][111][113] - Tax Risks: A primary risk is the potential failure to qualify as a REIT, which would result in corporate-level taxation and reduce distributable earnings, alongside exposure to changes in tax laws[124][128] - Debt Financing Risks: The company's indebtedness of approximately $2.1 billion as of year-end 2023 exposes it to risks from rising interest rates, which could increase debt service costs and make refinancing difficult, with restrictive covenants also limiting operational flexibility[137][140][142] Unresolved Staff Comments There were no unresolved SEC staff comments as of December 31, 2023 - There were no unresolved SEC staff comments as of December 31, 2023[161] Cybersecurity Piedmont manages cybersecurity risk through a formal program involving regular assessments, an incident response plan, third-party support, and board oversight - The company employs an enterprise risk management program that includes a specific cybersecurity risk assessment every eighteen months and an annual review of its Incident Response Plan[162] - A standing management committee, including the CFO and a third-party managed security service provider (MSSP), oversees cybersecurity strategy, risk assessments, and vulnerability testing[162][163] - The Audit Committee of the board of directors provides oversight for cybersecurity risk, receiving quarterly updates from management, with the committee chair holding a Certificate in Cybersecurity Oversight from the NACD[170] - While no material cybersecurity incidents have occurred, the company maintains a proactive approach including employee training, a business continuity plan, and an information security risk insurance policy[168] Properties Piedmont's portfolio as of December 31, 2023, included 51 office properties, 87.1% leased, with 70% of its $575.5 million ALR from Sunbelt markets Geographic Diversification of In-Service Portfolio (as of Dec 31, 2023) | Location | Annualized Lease Revenue (in thousands) | % of Total ALR | Percent Leased (%) | | :--- | :--- | :--- | :--- | | Atlanta | $163,389 | 28.4% | 91.1% | | Dallas | $112,753 | 19.6% | 80.4% | | Northern Virginia/Washington, D.C. | $66,190 | 11.5% | 77.9% | | Minneapolis | $65,381 | 11.4% | 89.6% | | Orlando | $59,582 | 10.4% | 95.0% | | New York | $49,142 | 8.5% | 87.3% | | Boston | $39,301 | 6.8% | 85.0% | | Total | $575,467 | 100.0% | 87.1% | Lease Expiration Schedule (as of Dec 31, 2023) | Year of Lease Expiration | Percentage of Annualized Lease Revenue (%) | | :--- | :--- | | 2024 | 7.4% | | 2025 | 12.1% | | 2026 | 11.2% | | 2027 | 9.3% | | 2028 | 11.8% | | Thereafter | 48.2% | - Annualized Lease Revenue (ALR) increased to $575.5 million as of December 31, 2023, from $555.3 million as of December 31, 2022[175] Legal Proceedings The company is not subject to any material pending legal proceedings, with routine litigation expected to be covered by insurance - The company is not subject to any material pending legal proceedings and expects routine litigation to be covered by insurance without material adverse effect[180] Mine Safety Disclosures This item is not applicable to the company - Not applicable[181] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Piedmont's common stock (PDM) trades on NYSE; the company reduced its quarterly dividend in 2023, made no share repurchases, and its stock underperformed key indices - The quarterly dividend was reduced from $0.21 per share for Q1 and Q2 2023 to $0.125 per share for Q3 and Q4 2023[186] - No shares were repurchased during 2023; the board-authorized stock repurchase program, with $150.5 million remaining capacity, expired in February 2024 with no additional purchases[187][194] Cumulative Total Return Performance (2018-2023) | Index | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Piedmont Office Realty Trust, Inc. | $100.00 | $135.92 | $104.01 | $123.38 | $65.70 | $56.04 | | FTSE NAREIT Equity Office | $100.00 | $131.42 | $107.19 | $130.77 | $81.58 | $83.23 | | FTSE NAREIT Equity REITs | $100.00 | $126.00 | $115.92 | $166.04 | $125.58 | $142.83 | | S&P 500 | $100.00 | $131.49 | $155.68 | $200.37 | $164.08 | $207.21 | [Reserved]](index=34&type=section&id=Item%206.%20%5BReserved%5D) This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations Piedmont reported a $48.4 million net loss in 2023, primarily due to reduced real estate gains and higher interest expense, while maintaining sufficient liquidity - Primary sources of liquidity are cash on hand, cash flow from operations, proceeds from dispositions, and borrowings under its $600 million unsecured line of credit, with the company believing it has sufficient liquidity for the foreseeable future[198] Capital Expenditures (in thousands) | Category | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Redevelopment/renovations | $57,630 | $59,435 | | Other capital expenditures (building/tenant improvements) | $100,561 | $61,924 | | Total capital expenditures | $158,191 | $121,359 | Results of Operations Summary (2023 vs 2022, in millions) | Metric | 2023 | 2022 | Variance | | :--- | :--- | :--- | :--- | | Total Revenues | $577.7 | $563.8 | $13.9 | | Interest Expense | ($101.3) | ($65.7) | ($35.6) | | Gain on sale of real estate assets | $1.9 | $151.7 | ($149.8) | | Net Income/(Loss) | ($48.4) | $146.8 | ($195.2) | Funds From Operations (FFO) Reconciliation (per diluted share) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | GAAP net income/(loss) per share | ($0.39) | $1.19 | | NAREIT FFO per share | $1.73 | $1.98 | | Core FFO per share | $1.74 | $2.00 | - Same Store NOI for 2023 increased 2.2% on a cash basis but decreased 1.0% on an accrual basis compared to 2022, with the cash basis increase driven by rental rate roll-ups and new lease commencements[249] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuations on its $2.1 billion variable-rate debt, largely fixed or hedged, with a 1.0% rate increase impacting annual interest expense by $3.7 million - The primary market risk is interest rate fluctuations on variable-rate debt, with the company aiming to limit this impact through a low-to-moderate level of borrowing and using fixed-rate debt and derivatives[263][264] - As of December 31, 2023, total consolidated debt was approximately $2.1 billion, with approximately $1.7 billion subject to fixed or effectively-fixed interest rates[137][267] - A 1.0% increase in variable interest rates on outstanding borrowings as of December 31, 2023, would increase annual interest expense by approximately $3.7 million[268] Financial Statements and Supplementary Data The company's audited consolidated financial statements and supplementary data are presented starting on page F-1 of the report - The financial statements and supplementary data are set forth beginning on page F-1 of the report[269] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no disagreements with the independent registered public accountants regarding accounting and financial disclosure in 2023 or 2022 - There were no disagreements with accountants during the years ended December 31, 2023 or 2022[270] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with an unqualified attestation report - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[271] - Based on an assessment using the 2013 COSO framework, management believes that the company's internal control over financial reporting was effective as of December 31, 2023[274] - Piedmont's independent registered public accounting firm, Deloitte & Touche LLP, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting[275][280] Other Information No director or officer adopted or terminated any Rule 10b5-1 trading plan or similar arrangement for company securities - No director or officer has adopted or terminated a Rule 10b5-1 trading plan or other similar trading arrangement[287] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - None[288] Part III Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the company's definitive proxy statement for the 2024 Annual Meeting of Stockholders - Information is incorporated by reference from the definitive proxy statement for the 2024 Annual Meeting of Stockholders[291] Executive Compensation Information for this item is incorporated by reference from the company's definitive proxy statement for the 2024 Annual Meeting of Stockholders - Information is incorporated by reference from the definitive proxy statement for the 2024 Annual Meeting of Stockholders[293] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information for this item is incorporated by reference from the company's definitive proxy statement for the 2024 Annual Meeting of Stockholders - Information is incorporated by reference from the definitive proxy statement for the 2024 Annual Meeting of Stockholders[294] Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from the company's definitive proxy statement for the 2024 Annual Meeting of Stockholders - Information is incorporated by reference from the definitive proxy statement for the 2024 Annual Meeting of Stockholders[295] Principal Accountant Fees and Services Information for this item is incorporated by reference from the company's definitive proxy statement for the 2024 Annual Meeting of Stockholders - Information is incorporated by reference from the definitive proxy statement for the 2024 Annual Meeting of Stockholders[296] Part IV Exhibit and Financial Statement Schedules This section lists the financial statements and exhibits filed with the report, with consolidated financial statements beginning on page F-5 - This section lists the financial statements and exhibits filed with the report; the consolidated financial statements begin on page F-5[298] Form 10-K Summary This item is not applicable - None[306]