Piedmont Office Realty Trust(US:PDM)2024-04-30 20:20markdown [Cautionary Note Regarding Forward-Looking Statements](index=3&type=section&id=Forward-Looking%20Statements) This section highlights that the report contains forward-looking statements based on management's beliefs and assumptions, which are subject to known and unknown risks and uncertainties [Cautionary Note Regarding Forward-Looking Statements](index=3&type=section&id=3.1%20Cautionary%20Note%20Regarding%20Forward-Looking%20Statements) This section highlights that the report contains forward-looking statements based on management's beliefs and assumptions, which are subject to known and unknown risks and uncertainties - **Forward-looking statements** are based on management's beliefs and assumptions, subject to various known and unknown risks and uncertainties[10](index=10&type=chunk)[11](index=11&type=chunk) - Key risk factors include economic, regulatory, socio-economic (e.g., work from home), and technological changes impacting the real estate market, competition, lease terminations/defaults, **impairment charges**, illiquidity of real estate investments, development delays, cybersecurity incidents, and inflation[12](index=12&type=chunk)[15](index=15&type=chunk) - Management does not undertake any obligation to publicly update **forward-looking statements** in light of new information or future events[14](index=14&type=chunk) [PART I. Financial Information](index=5&type=section&id=PART%20I%20Financial%20Information) This part presents the company's unaudited consolidated financial statements and management's discussion and analysis of financial condition and results of operations [Item 1. Consolidated Financial Statements](index=5&type=section&id=Item%201.%20Consolidated%20Financial%20Statements) This section presents **Piedmont Office Realty Trust, Inc.'s** unaudited consolidated financial statements for the three months ended **March 31, 2024** and **2023**, including balance sheets, statements of operations, comprehensive loss, stockholders' equity, and cash flows [Consolidated Balance Sheets](index=6&type=section&id=Consolidated%20Balance%20Sheets) Consolidated Balance Sheet Highlights (in thousands) | Metric | March 31, 2024 | December 31, 2023 | | :-------------------------------- | :------------- | :---------------- | | Total real estate assets | $3,452,475 | $3,512,527 | | Cash and cash equivalents | $3,544 | $825 | | Total assets | $3,993,996 | $4,057,082 | | Unsecured debt, net | $1,875,042 | $1,858,717 | | Secured debt | $195,028 | $195,879 | | Total liabilities | $2,312,084 | $2,334,110 | | Total stockholders' equity | $1,681,912 | $1,722,972 | [Consolidated Statements of Operations](index=7&type=section&id=Consolidated%20Statements%20of%20Operations) Consolidated Statements of Operations Highlights (in thousands, except per share) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Rental and tenant reimbursement revenue | $139,081 | $136,829 | | Total revenues | $144,538 | $142,367 | | Property operating costs | $59,444 | $57,791 | | Depreciation | $38,869 | $35,797 | | Amortization | $18,120 | $22,031 | | Impairment charges | $18,432 | — | | General and administrative | $7,612 | $7,691 | | Total expenses | $142,477 | $123,310 | | Interest expense | $(29,714) | $(22,077) | | Net loss applicable to Piedmont | $(27,763) | $(1,367) | | Net loss per common share | $(0.22) | $(0.01) | [Consolidated Statements of Comprehensive Loss](index=8&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Loss) Consolidated Statements of Comprehensive Loss (in thousands) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------------------------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Net loss applicable to Piedmont | $(27,763) | $(1,367) | | Effective portion of gain/(loss) on derivative instruments (cash flow hedges) | $2,431 | $(1,103) | | Minus: Reclassification of net gain included in net income | $(1,103) | $(484) | | Other comprehensive income/(loss) | $1,328 | $(1,587) | | Comprehensive loss applicable to Piedmont | $(26,435) | $(2,954) | [Consolidated Statements of Stockholders' Equity](index=9&type=section&id=Consolidated%20Statements%20of%20Stockholders'%20Equity) Consolidated Statements of Stockholders' Equity Highlights (in thousands) | Metric | Balance, December 31, 2023 | Balance, March 31, 2024 | | :-------------------------------- | :------------------------- | :---------------------- | | Total Stockholders' Equity | $1,722,972 | $1,681,912 | | Dividends to common stockholders | $(15,479) | $(25,965) | | Net loss applicable to Piedmont | $(27,763) | $(1,367) | | Other comprehensive income/(loss) | $1,328 | $(1,587) | [Consolidated Statements of Cash Flows](index=10&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash provided by operating activities | $23,361 | $40,398 | | Net cash used in investing activities | $(1,967) | $(45,402) | | Net cash (used in)/provided by financing activities | $(17,835) | $160,180 | | Net increase in cash, cash equivalents, and restricted cash and escrows | $3,559 | $155,176 | | Cash, cash equivalents, and restricted cash and escrows, end of period | $7,765 | $174,776 | [Condensed Notes to Consolidated Financial Statements](index=11&type=section&id=Condensed%20Notes%20to%20Consolidated%20Financial%20Statements) [Note 1. Organization](index=11&type=section&id=Note%201.%20Organization) - **Piedmont Office Realty Trust, Inc. (NYSE: PDM)** is a **Maryland corporation** operating as a **REIT**, focused on ownership, management, development, redevelopment, and operation of **high-quality, Class A office properties** primarily in major U.S. **Sunbelt markets**[32](index=32&type=chunk) - As of **March 31, 2024**, **Piedmont** owned **49 in-service office properties** and **two redevelopment assets**, comprising **16.0 million square feet** and **87.8% leased**[33](index=33&type=chunk) [Note 2. Summary of Significant Accounting Policies](index=11&type=section&id=Note%202.%20Summary%20of%20Significant%20Accounting%20Policies) - The consolidated financial statements are prepared in accordance with **SEC rules and GAAP**, with all intercompany balances and transactions eliminated[34](index=34&type=chunk)[35](index=35&type=chunk)[36](index=36&type=chunk) - **Piedmont** has elected to be taxed as a **REIT**, generally not subject to federal income taxes if it distributes at least **90%** of its annual **REIT** taxable income[38](index=38&type=chunk) Rental and Tenant Reimbursement Revenue (in thousands) | Type of Payment | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :---------------- | :-------------------------------- | :-------------------------------- | | Fixed payments | $113,313 | $112,560 | | Variable payments | $25,768 | $24,269 | | Total | $139,081 | $136,829 | - New accounting pronouncements (ASU 2023-07 on Segment Reporting and ASU 2023-09 on Income Tax Disclosure) are being evaluated, but no material impact on consolidated financial statements is anticipated[40](index=40&type=chunk)[41](index=41&type=chunk) [Note 3. Debt](index=13&type=section&id=Note%203.%20Debt) - **Piedmont** entered into a **new $200 million unsecured, syndicated bank term loan** with a **3-year term** maturing **January 29, 2027**, with an **effective rate of 6.22%** as of **March 31, 2024**[42](index=42&type=chunk) - The company repaid **$100 million** on the **$200 Million Unsecured 2022 Term Loan Facility** and **$190 million** on the **$215 Million Unsecured 2023 Term Loan**, extending the remaining **$25 million** of the latter to **January 31, 2025**[44](index=44&type=chunk) - The remaining **$50.2 million balance** of the **$400 Million Unsecured Senior Notes due 2024** was repaid using proceeds from **real estate asset dispositions**[45](index=45&type=chunk) Summary of Indebtedness (in thousands) | Facility Type | Amount Outstanding (Mar 31, 2024) | Amount Outstanding (Dec 31, 2023) | Weighted Average Effective Rate (Mar 31, 2024) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :--------------------------------- | | Secured (Fixed) | $195,028 | $195,879 | 4.10% | | Unsecured (Variable and Fixed) | $1,875,042 | $1,858,717 | 5.99% | | Total Debt | $2,070,070 | $2,054,596 | 5.81% | - **Piedmont** made **interest payments** of **$46.0 million** for the three months ended **March 31, 2024**, compared to **$23.4 million** for the same period in **2023**[47](index=47&type=chunk)[48](index=48&type=chunk) [Note 4. Derivative Instruments](index=15&type=section&id=Note%204.%20Derivative%20Instruments) - **Piedmont** uses **interest rate swap agreements** as **cash flow hedges** to manage **interest rate risk exposure** from **variable rate debt**, aiming to **stabilize interest expense**[50](index=50&type=chunk)[51](index=51&type=chunk) - During **Q1 2024**, **Piedmont** entered into **two interest rate swap agreements** to partially hedge the **$200 Million Unsecured 2024 Term Loan**, with a maximum hedging period of **22 months**[52](index=52&type=chunk) Interest Rate Derivatives Outstanding (in millions) | Associated Debt Instrument | Total Notional Amount (Mar 31, 2024) | | :------------------------- | :----------------------------------- | | $250 Million Unsecured 2018 Term Loan | $250 | | $200 Million Unsecured 2024 Term Loan | $80 | | Total | $330 | Gain/(Loss) on Interest Rate Derivatives (in thousands) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :---------------------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Amount of gain/(loss) recognized in OCI | $2,431 | $(1,103) | | Amount of previously recorded gain reclassified from OCI into interest expense | $1,103 | $484 | - **$2.3 million** is estimated to be reclassified from OCI as a decrease in **interest expense** over the next twelve months[54](index=54&type=chunk) [Note 5. Fair Value Measurement of Financial Instruments](index=16&type=section&id=Note%205.%20Fair%20Value%20Measurement%20of%20Financial%20Instruments) Fair Value of Financial Instruments (in thousands) | Financial Instrument | Carrying Value (Mar 31, 2024) | Estimated Fair Value (Mar 31, 2024) | Level Within Fair Value Hierarchy | | :------------------- | :---------------------------- | :---------------------------------- | :-------------------------------- | | Cash and cash equivalents | $3,544 | $3,544 | Level 1 | | Tenant receivables, net | $10,338 | $10,338 | Level 1 | | Restricted cash and escrows | $4,221 | $4,221 | Level 1 | | Interest rate swaps | $4,148 | $4,148 | Level 2 | | Accounts payable and accrued expenses | $13,903 | $13,903 | Level 1 | | Debt, net | $2,070,070 | $1,970,703 | Level 2 | - The **Fair value of debt** is estimated using **discounted cash flow analysis** and **observable market-based inputs (Level 2)**[56](index=56&type=chunk)[57](index=57&type=chunk) - **Interest rate swaps are carried at estimated fair value**, determined using **discounted cash flow analysis** and **observable market-based inputs (Level 2)**, with **credit risk** factored in but not materially impacting fair value[58](index=58&type=chunk) [Note 6. Impairment Charges](index=17&type=section&id=Note%206.%20Impairment%20Charges) - **Piedmont** recognized an **impairment charge** of **$17.5 million** for the **750 West John Carpenter Freeway building** in **Irving, Texas**, due to a **shortened intended hold period**[59](index=59&type=chunk) - An additional **impairment loss** of **$0.9 million** was recognized in conjunction with the sale of **One Lincoln Park** in **Dallas, Texas**[60](index=60&type=chunk) [Note 7. Commitments and Contingencies](index=17&type=section&id=Note%207.%20Commitments%20and%20Contingencies) - **Piedmont** is committed to funding **tenant improvements, leasing commissions, and building improvements** under existing lease agreements, with **one individually significant tenant allowance commitment greater than $10 million** as of **March 31, 2024**[61](index=61&type=chunk) - **No reductions in tenant reimbursement revenues occurred** during the three months ended **March 31, 2024** or **2023** due to tenant audits/disputes[62](index=62&type=chunk) [Note 8. Property Dispositions](index=18&type=section&id=Note%208.%20Property%20Dispositions) - During **Q1 2024**, **Piedmont** sold the **One Lincoln Park building** in **Dallas, Texas**, for **net sale proceeds** of **$53.3 million**, which were used to repay **debt**[63](index=63&type=chunk) [Note 9. Stock Based Compensation](index=18&type=section&id=Note%209.%20Stock%20Based%20Compensation) - **Stock-based compensation** includes **deferred stock award units** (vesting over three or four years for employees, one year for independent directors) and multi-year **performance share programs** contingent on **TSR performance** relative to a peer group[64](index=64&type=chunk)[65](index=65&type=chunk) Stock Award Activity Highlights (in thousands, except per share) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :---------------------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Weighted-Average Grant Date Fair Value per share of Deferred Stock Granted | $6.55 | $10.03 | | Total Grant Date Fair Value of Deferred Stock Vested | $3,801 | $4,073 | - **$17.9 million** of **unrecognized compensation cost** related to unvested and potential stock awards remained, to be recorded over a **weighted-average vesting period** of **1.8 years**[67](index=67&type=chunk) [Note 10. Supplemental Disclosures for the Statement of Consolidated Cash Flows](index=20&type=section&id=Note%2010.%20Supplemental%20Disclosures%20for%20the%20Statement%20of%20Consolidated%20Cash%20Flows) Non-Cash Investing and Financing Activities (in thousands) | Activity | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Tenant improvements funded by tenants | $5,590 | $2,318 | | Accrued capital expenditures and deferred lease costs | $25,731 | $15,709 | | Change in accrued dividends | $(15,142) | $(25,358) | Reconciliation of Cash, Cash Equivalents, and Restricted Cash and Escrows (in thousands) | Metric | March 31, 2024 | March 31, 2023 | | :-------------------------------------------------------------------------------- | :------------- | :------------- | | Total cash, cash equivalents, and restricted cash and escrows, beginning of period | $4,206 | $19,600 | | Total cash, cash equivalents, and restricted cash and escrows, end of period | $7,765 | $174,776 | [Note 11. Earnings Per Share](index=20&type=section&id=Note%2011.%20Earnings%20Per%20Share) - **Earnings per share** is computed using **basic weighted-average common shares outstanding** due to **net losses** recognized for both the three months ended **March 31, 2024** and **2023**[69](index=69&type=chunk) [Note 12. Segment Information](index=20&type=section&id=Note%2012.%20Segment%20Information) - **Piedmont's chief operating decision maker (CODM)** evaluates performance based on **geographic segments**: **Atlanta, Dallas, Orlando, Northern Virginia/Washington, D.C., Minneapolis, New York, and Boston**[70](index=70&type=chunk) - **Accrual-based net operating income (NOI)** by **geographic segment** is the **primary performance measure**, calculated by deducting **property operating costs** from **lease revenues** and **other property related income**[71](index=71&type=chunk) Accrual-Based Lease Revenue and Other Property Related Income by Segment (in thousands) | Segment | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Atlanta | $41,770 | $39,217 | | Dallas | $28,705 | $28,282 | | Orlando | $15,349 | $15,414 | | Northern Virginia/Washington, D.C. | $15,581 | $14,899 | | Minneapolis | $13,117 | $14,961 | | New York | $13,691 | $13,485 | | Boston | $11,143 | $10,251 | | Total reportable segments | $139,356 | $136,509 | | Other | $5,182 | $5,858 | | Total Revenues | $144,538 | $142,367 | NOI by Geographic Reportable Segment (in thousands) | Segment | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Atlanta | $26,143 | $25,186 | | Dallas | $16,535 | $15,776 | | Orlando | $9,014 | $9,265 | | Northern Virginia/Washington, D.C. | $9,311 | $8,980 | | Minneapolis | $6,630 | $8,222 | | New York | $7,249 | $7,371 | | Boston | $7,182 | $6,333 | | Total reportable segments | $82,064 | $81,133 | | Other | $3,142 | $3,366 | | Total NOI | $85,206 | $84,499 | - **Atlanta NOI increased** due to new leases at **Galleria on the Park**, while **Minneapolis NOI decreased** due to a **lease expiration** and property designation as a **redevelopment asset**[106](index=106&type=chunk)[107](index=107&type=chunk) - **Boston NOI increased** due to **Microsoft's expansion** at the **5 & 15 Wayside Road building**[108](index=108&type=chunk) [Note 13. Subsequent Event](index=22&type=section&id=Note%2013.%20Subsequent%20Event) - On **April 24, 2024**, **Piedmont's** board of directors declared a **dividend** of **$0.125 per common share** for the **second quarter of 2024**, payable on **June 14, 2024**, to **stockholders of record as of May 24, 2024**[75](index=75&type=chunk) - The **financial statements are unaudited** and prepared in accordance with **SEC rules and GAAP**, reflecting **management's necessary adjustments** for fair presentation[16](index=16&type=chunk)[34](index=34&type=chunk) - **Piedmont operates as a REIT**, owning **49 in-service office properties** and **two redevelopment assets**, totaling **16.0 million square feet** and **87.8% leased** as of **March 31, 2024**[32](index=32&type=chunk)[33](index=33&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=23&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's discussion and analysis of **Piedmont's** financial condition and results of operations for the three months ended **March 31, 2024**, compared to the same period in **2023** - **Net loss applicable to common stockholders** for **Q1 2024** was **$27.8 million ($0.22 per share)**, significantly higher than **$1.4 million ($0.01 per share)** in **Q1 2023**, primarily due to an **$18.4 million impairment charge** and **$7.6 million increased interest expense**[87](index=87&type=chunk) - **Total revenues increased** by **$2.2 million**, driven by higher **rental and tenant reimbursement revenue** due to **rental rate roll-ups**, **lease commencements**, and **increased tenant reimbursements**[88](index=88&type=chunk)[89](index=89&type=chunk) - **Property operating costs increased** by **$1.7 million** due to higher recoverable operating expenses as **tenant utilization and leased percentage increased**[91](index=91&type=chunk) - **Interest expense increased** by **$7.6 million**, mainly due to **higher interest rates on floating-rate debt** and **refinancing at higher rates**[95](index=95&type=chunk) [Liquidity and Capital Resources](index=23&type=section&id=Liquidity%20and%20Capital%20Resources) - **Primary sources of immediate liquidity** include **cash on hand**, **cash flows from operations**, proceeds from **property dispositions**, and **borrowings** under the **$600 Million Unsecured 2022 Line of Credit**[78](index=78&type=chunk) - **Next scheduled debt maturities** are **$25 million of the $215 Million Unsecured 2023 Term Loan** and the **$250 Million Unsecured 2018 Term Loan**, both due in **Q1 2025**, with repayment anticipated from existing **credit lines**, **dispositions**, or **new borrowings**[78](index=78&type=chunk) Capital Expenditures (in thousands) | Type of Expenditure | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Capital expenditures for redevelopment/renovations | $17,522 | $12,633 | | Other capital expenditures, including building and tenant improvements | $28,541 | $23,551 | | Total capital expenditures | $46,063 | $36,184 | - For leases executed in **Q1 2024**, committed **tenant improvement allowances** and **lease commissions** were **$5.13 per square foot per year** of **lease term**, down from **$6.18** in **Q1 2023**[82](index=82&type=chunk) - The amount and form of **future dividends** depend on **cash flow**, **debt repayments**, **development projects**, **acquisitions**, **capital expenditures**, and **REIT status requirements**[85](index=85&type=chunk) [Results of Operations](index=26&type=section&id=Results%20of%20Operations) Selected Consolidated Statements of Operations Data (in millions) | Metric | March 31, 2024 | % of Revenues (2024) | March 31, 2023 | % of Revenues (2023) | Variance | | :-------------------------------- | :------------- | :------------------- | :------------- | :------------------- | :------- | | Rental and tenant reimbursement revenue | $139.1 | | $136.8 | | $2.3 | | Total revenues | $144.5 | 100% | $142.3 | 100% | $2.2 | | Property operating costs | $59.5 | 41% | $57.8 | 41% | $1.7 | | Depreciation | $38.9 | 27% | $35.8 | 24% | $3.1 | | Amortization | $18.1 | 13% | $22.0 | 15% | $(3.9) | | Impairment charges | $18.4 | 13% | — | —% | $18.4 | | General and administrative | $7.6 | 5% | $7.7 | 5% | $(0.1) | | Total expenses | $142.5 | | $123.3 | | $19.2 | | Interest expense | $(29.7) | 20% | $(22.1) | 15% | $(7.6) | | Net loss | $(27.8) | (19)% | $(1.4) | —% | $(26.4) | - **Rental and tenant reimbursement revenue increased** by **$2.3 million** due to **rental rate roll-ups**, **lease commencements**, and higher **tenant reimbursements**[89](index=89&type=chunk) - **Depreciation expense increased** by **$3.1 million** due to additional building and tenant improvements placed in service, while **amortization expense decreased** by **$3.9 million** as certain **lease intangible assets** became fully amortized[92](index=92&type=chunk)[93](index=93&type=chunk) - A **$0.4 million loss on early extinguishment of debt** was recognized from the payoff of the **$100 million** balance on the **$200 Million Unsecured 2022 Term Loan Facility**[97](index=97&type=chunk) [Issuer and Guarantor Financial Information](index=28&type=section&id=Issuer%20and%20Guarantor%20Financial%20Information) - **Piedmont OP** has **$1.2 billion** in **senior unsecured notes outstanding**, fully and unconditionally guaranteed by **Piedmont**, the parent entity[99](index=99&type=chunk)[100](index=100&type=chunk) - **Piedmont's guarantee ranks equally** with its other **senior unsecured indebtedness** but is effectively subordinated to any future **secured indebtedness**[100](index=100&type=chunk) Combined Financial Information of Piedmont OP and Piedmont (in thousands) | Metric | As of March 31, 2024 | As of December 31, 2023 | | :-------------------- | :------------------- | :---------------------- | | Total assets | $285,895 | $285,116 | | Total liabilities | $1,911,103 | $1,926,434 | | Metric | For the Three Months Ended March 31, 2024 | | :-------------------- | :---------------------------------------- | | Total revenues | $11,611 | | Net loss | $(27,824) | [Net Operating Income by Geographic Segment](index=29&type=section&id=Net%20Operating%20Income%20by%20Geographic%20Segment) - **Piedmont's CODM** assesses performance using **geographic segments**: **Atlanta, Dallas, Orlando, Northern Virginia/Washington, D.C., Minneapolis, New York, and Boston**[104](index=104&type=chunk) Accrual-Basis NOI by Geographic Segment (in thousands) | Segment | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Atlanta | $26,143 | $25,186 | | Dallas | $16,535 | $15,776 | | Orlando | $9,014 | $9,265 | | Northern Virginia/Washington, D.C. | $9,311 | $8,980 | | Minneapolis | $6,630 | $8,222 | | New York | $7,249 | $7,371 | | Boston | $7,182 | $6,333 | | Total reportable segments | $82,064 | $81,133 | | Other | $3,142 | $3,366 | | Total NOI | $85,206 | $84,499 | - **Atlanta NOI increased** due to new leases at **Galleria on the Park**, while **Minneapolis NOI decreased** due to a **lease expiration** and property designation as a **redevelopment asset**[106](index=106&type=chunk)[107](index=107&type=chunk) - **Boston NOI increased** due to **Microsoft's expansion** at the **5 & 15 Wayside Road building**[108](index=108&type=chunk) [Funds From Operations ("FFO"), Core Funds From Operations ("Core FFO"), and Adjusted Funds From Operations ("AFFO")](index=29&type=section&id=Funds%20From%20Operations%20(%22FFO%22),%20Core%20Funds%20From%20Operations%20(%22Core%20FFO%22),%20and%20Adjusted%20Funds%20From%20Operations%20(%22AFFO%22)) **FFO**, **Core FFO**, and **AFFO** are **non-GAAP financial measures** used to provide a more complete understanding of performance for real estate companies, supplementing **GAAP net income/(loss)** Reconciliation of Net Loss to FFO, Core FFO, and AFFO (in thousands, except per share) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | GAAP net loss applicable to common stock | $(27,763) | $(1,367) | | NAREIT Funds From Operations applicable to common stock | $47,367 | $56,344 | | Core Funds From Operations applicable to common stock | $47,753 | $56,344 | | Adjusted Funds From Operations applicable to common stock | $24,741 | $36,792 | | NAREIT Funds From Operations per share (diluted) | $0.38 | $0.46 | | Core Funds From Operations per share (diluted) | $0.39 | $0.46 | - **Non-incremental capital expenditures**, which do not enhance **income-generating capacity**, were **$20.6 million** in **Q1 2024**, up from **$14.5 million** in **Q1 2023**[115](index=115&type=chunk) [Property and Same Store Net Operating Income](index=31&type=section&id=Property%20and%20Same%20Store%20Net%20Operating%20Income) **Property NOI** and **Same Store NOI** are **non-GAAP measures** used to assess **operating results**, focusing on income generated by properties without administrative overhead Property NOI and Same Store NOI (in thousands) | Metric | Cash Basis (Mar 31, 2024) | Cash Basis (Mar 31, 2023) | Accrual Basis (Mar 31, 2024) | Accrual Basis (Mar 31, 2023) | | :-------------------- | :------------------------ | :------------------------ | :--------------------------- | :--------------------------- | | Property NOI | $80,295 | $77,496 | $85,206 | $84,499 | | Same Store NOI | $79,570 | $75,721 | $84,060 | $82,327 | | Change period over period in Same Store NOI | 5.1% | N/A | 2.1% | N/A | - The **leased percentage of the portfolio increased** to **87.8%** as of **March 31, 2024**, from **87.1%** as of **December 31, 2023**, with **500,000 square feet** of **leasing completed** in **Q1 2024**[121](index=121&type=chunk) - **Piedmont** experienced an **8.0% cash rent roll-up** and an **18.6% accrual rent roll-up** on **executed leases** for space vacant one year or less during **Q1 2024**[123](index=123&type=chunk) - As of **March 31, 2024**, there were **1.3 million square feet** of **executed leases** for vacant space yet to commence or under **rental abatement**, representing **$42 million** of **future additional annual cash rents**[122](index=122&type=chunk) [Election as a REIT](index=34&type=section&id=Election%20as%20a%20REIT) **Piedmont** has elected to be taxed as a **REIT** and intends to continue to qualify, requiring distribution of at least **90%** of its **adjusted REIT taxable income** - Failure to qualify as a **REIT** could materially adversely affect **net income** and **cash available for distribution**[125](index=125&type=chunk) [Inflation](index=34&type=section&id=Inflation) **Piedmont** is exposed to **inflation risk**, but most tenant leases include provisions like **rent steps** and **reimbursement billings** for **operating expenses**, **real estate taxes**, and **insurance** to mitigate this risk - Due to the **long-term nature of leases**, **reimbursement rates** may not readjust frequently enough to fully cover inflation[126](index=126&type=chunk) [Application of Critical Accounting Estimates](index=34&type=section&id=Application%20of%20Critical%20Accounting%20Estimates) The preparation of financial statements requires management to make judgments and estimates, particularly in assessing **impairment**, **goodwill recoverability**, and **collectability of receivables** - **No material changes** to **critical accounting policies and estimates** occurred during the three months ended **March 31, 2024**[127](index=127&type=chunk) [Commitments and Contingencies](index=34&type=section&id=Commitments%20and%20Contingencies) **Piedmont** is subject to certain **Commitments and Contingencies**, as further explained in **Note 7** to the consolidated financial statements[128](index=128&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=35&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section discusses **Piedmont's** exposure to **market risk**, primarily **interest rate risk**, due to fluctuations in prevailing market interest rates - **Piedmont's primary market risk exposure** is **interest rate risk**, stemming from **borrowings** under its **$600 Million Unsecured 2022 Line of Credit**, **$120 million** of the **$200 Million 2024 Unsecured Term Loan**, and the **$25 million** remaining balance on its **$215 Million Unsecured 2023 Term Loan**[129](index=129&type=chunk) - The company's **risk management objectives** include limiting the impact of interest rate changes on earnings and cash flow through a **low-to-moderate level of borrowings** and managing **rate variability**[130](index=130&type=chunk) - As of **March 31, 2024**, **total outstanding debt** subject to **fixed or effectively fixed interest rates** was **$1.7 billion**, with an **average effective interest rate** of **5.66%**[132](index=132&type=chunk) - **Total outstanding debt** subject to **variable interest rates** was **$361 million**, with an **average effective interest rate** of **6.55%**[133](index=133&type=chunk) - A **1.0% increase** in **variable interest rates** on existing outstanding **borrowings** as of **March 31, 2024**, would **increase interest expense** by **$3.6 million** on a **per annum basis**[133](index=133&type=chunk) [Item 4. Controls and Procedures](index=34&type=section&id=Item%204.%20Controls%20and%20Procedures) This section confirms management's conclusion that **Piedmont's disclosure controls and procedures were effective** as of **March 31, 2024**, providing reasonable assurance that required information is recorded, processed, summarized, and reported timely - Management, including the **Principal Executive Officer** and **Principal Financial Officer**, concluded that **disclosure controls and procedures were effective** as of **March 31, 2024**[134](index=134&type=chunk) - **Disclosure controls** provide **reasonable assurance** that information required to be disclosed is accumulated and communicated timely[134](index=134&type=chunk) - There were **no material changes in internal control over financial reporting** during the quarter ended **March 31, 2024**[135](index=135&type=chunk) [PART II. Other Information](index=37&type=section&id=PART%20II%20Other%20Information) [Item 1. Legal Proceedings](index=37&type=section&id=Item%201.%20Legal%20Proceedings) **Piedmont** is not subject to any **material pending legal proceedings**, though it is involved in routine litigation arising from its real estate operations - **Piedmont** is **not subject to any material pending legal proceedings**[137](index=137&type=chunk) - **Routine litigation** arising from real estate operations is expected to be **covered by insurance** and **not materially affect financial condition, results of operations, or liquidity**[137](index=137&type=chunk) [Item 1A. Risk Factors](index=37&type=section&id=Item%201A.%20Risk%20Factors) This section states that there have been **no known material changes** to the **risk factors** previously disclosed in the company's **Annual Report on Form 10-K** for the year ended **December 31, 2023** - **No known material changes** from the **risk factors** previously disclosed in the **Annual Report on Form 10-K** for the year ended **December 31, 2023**[138](index=138&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=37&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section indicates that there were **no unregistered sales of equity securities** during the **first quarter of 2024** - There were **no unregistered sales of equity securities** during the **first quarter of 2024**[142](index=142&type=chunk) [Item 3. Defaults Upon Senior Securities](index=37&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This item is marked as **Not applicable**, indicating no defaults upon senior securities - **Not applicable**[139](index=139&type=chunk) [Item 4. Mine Safety Disclosures](index=37&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is marked as **Not applicable**, indicating no mine safety disclosures - **Not applicable**[140](index=140&type=chunk) [Item 5. Other Information](index=37&type=section&id=Item%205.%20Other%20Information) This item states that there is no other information to report - **None**[141](index=141&type=chunk) [Item 6. Exhibits](index=37&type=section&id=Item%206.%20Exhibits) This section lists all **Exhibits** filed with the **Form 10-Q**, including articles of amendment, bylaws, various stock award agreements, debt agreements, certifications, and **XBRL** documents - **Exhibits** include **corporate governance documents** (Articles of Amendment, Bylaws), **compensatory plans** (Employee and Director Deferred Stock Award Agreements, Performance Share Award Agreement), and **debt agreements** (Term Loan Agreement)[143](index=143&type=chunk) - **Certifications** from the **Principal Executive Officer** and **Principal Financial Officer** pursuant to **Sections 302 and 906** of the **Sarbanes-Oxley Act of 2002** are also included[143](index=143&type=chunk) - **XBRL (eXtensible Business Reporting Language) documents** are provided for interactive data filing[143](index=143&type=chunk)[146](index=146&type=chunk) [Signatures](index=39&type=section&id=Signatures) This section contains the required signatures for the **Form 10-Q**, confirming its submission by duly authorized officers of **Piedmont Office Realty Trust, Inc.** - The report is signed by **Robert E. Bowers, Chief Financial Officer and Executive Vice President**, on behalf of **Piedmont Office Realty Trust, Inc.**, dated **April 30, 2024**[148](index=148&type=chunk)