Piedmont Office Realty Trust(PDM) - 2023 Q3 - Quarterly Report

Registrant Information This section provides details on Piedmont Office Realty Trust, Inc.'s filing of its Quarterly Report on Form 10-Q, including its filer status and outstanding common stock Filing Details Piedmont Office Realty Trust, Inc. filed its Quarterly Report on Form 10-Q for the period ended September 30, 2023, confirming compliance with filing requirements and its status as a large accelerated filer. As of October 27, 2023, 123,713,423 shares of common stock were outstanding - Registrant is Piedmont Office Realty Trust, Inc., a Maryland corporation, with Commission file number 001-34626[2] - The report is a Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the period ended September 30, 2023[2] Filer Status | Filer Status | | | | | :--- | :--- | :--- | :--- | | Large accelerated filer | x | Accelerated filer | ☐ | | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | | | | Emerging growth company | ☐ | - Number of shares outstanding of the Registrant's common stock, as of October 27, 2023: 123,713,423 shares[5] Cautionary Note Regarding Forward-Looking Statements and Disclosures This section outlines the forward-looking nature of statements within the report, emphasizing inherent risks and uncertainties that could impact actual results Forward-Looking Statements This section highlights that the report contains forward-looking statements based on management's beliefs and assumptions, which involve known and unknown risks and uncertainties that could cause actual results to differ materially. Key risk factors include economic, regulatory, and technological changes impacting real estate, competition, lease defaults, impairment charges, and risks associated with acquisitions, dispositions, and debt - Statements regarding future events, developments, and performance, as well as management's expectations, beliefs, plans, estimates, or projections, are forward-looking statements[10] - These statements are based on beliefs and assumptions of management, which could prove inaccurate, and involve known and unknown risks and uncertainties that could cause actual results to differ materially[11] - Key risk factors include: - Economic, regulatory, socio-economic (e.g., work from home), and technological changes impacting the real estate market[12][16] - Impact of competition on lease renewals or re-letting space[12][16] - Lease terminations, defaults, contractions, or changes in tenant financial condition[12][16] - Impairment charges on long-lived assets or goodwill[12][16] - Illiquidity of real estate investments and regulatory restrictions on REITs[12][16] - Risks associated with acquisition and disposition of properties, development delays, and cybersecurity incidents[12][16] - Costs of complying with governmental laws and regulations, uninsured losses, and risks with government tenants[12][16] - Significant price and volume fluctuations in public markets and risks associated with incurring mortgage and other indebtedness, including rising interest rates[12][16] - Inflation and potential recession impacts[12][16] Information Regarding Disclosures Presented This section defines Annualized Lease Revenue (ALR) as current rental payments multiplied by 12, excluding abatements and certain non-commenced leases, and specifies calculation methods for different payment frequencies and unleased space - Annualized Lease Revenue ("ALR") is calculated by multiplying current rental payments (base rent plus operating expense reimbursements, excluding abatements and certain non-commenced leases) by 12[15] - For contractual rents or operating expense reimbursements collected annually, semi-annually, or quarterly, amounts are multiplied by a factor of 1, 2, or 4, respectively[15] - For executed but not commenced leases on unleased space, ALR is calculated by multiplying the initial monthly base rental payment (excluding abatements) plus any operating expense reimbursements by 12[15] PART I. FINANCIAL INFORMATION This part presents Piedmont's unaudited consolidated financial statements and related notes, offering a comprehensive view of its financial position and performance Item 1. Consolidated Financial Statements This section presents Piedmont's unaudited consolidated financial statements, including balance sheets, statements of operations, comprehensive income, stockholders' equity, and cash flows, prepared in accordance with GAAP. It also includes condensed notes providing detailed information on organization, accounting policies, debt, derivatives, fair value measurements, goodwill impairment, commitments, stock-based compensation, cash flow disclosures, earnings per share, segment information, and a subsequent event Consolidated Balance Sheets The consolidated balance sheets provide a snapshot of the company's assets, liabilities, and equity as of September 30, 2023, and December 31, 2022 Consolidated Balance Sheet Highlights (in thousands) | Item | Sep 30, 2023 (Unaudited) | Dec 31, 2022 | | :-------------------------------- | :----------------------- | :------------- | | Total real estate assets | $3,502,576 | $3,500,624 | | Cash and cash equivalents | $5,044 | $16,536 | | Total assets | $4,073,778 | $4,085,525 | | Unsecured debt, net | $1,853,598 | $1,786,681 | | Secured debt | $196,721 | $197,000 | | Total liabilities | $2,306,713 | $2,236,270 | | Total stockholders' equity | $1,767,065 | $1,849,255 | Consolidated Statements of Operations This section details the company's revenues, expenses, and net income or loss for the three and nine months ended September 30, 2023 and 2022 Consolidated Statements of Operations Highlights (in thousands, except per share amounts) | Item | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Total Revenues | $146,986 | $144,100 | $432,425 | $416,558 | | Total Expenses | $136,157 | $123,860 | $382,922 | $353,357 | | Interest expense | $(27,361) | $(17,244) | $(72,827) | $(44,917) | | Net income/(loss) applicable to Piedmont | $(17,002) | $3,331 | $(20,357) | $71,261 | | Net income/(loss) applicable to common stockholders (per share) | $(0.14) | $0.03 | $(0.16) | $0.58 | | Weighted-average common shares outstanding – basic | 123,696,475 | 123,395,381 | 123,639,797 | 123,329,626 | - Net loss applicable to Piedmont for the three months ended September 30, 2023, was $(17,002) thousand, a significant decrease from net income of $3,331 thousand in the prior year period[23] - For the nine months ended September 30, 2023, net loss applicable to Piedmont was $(20,357) thousand, compared to net income of $71,261 thousand in the prior year period[23] Consolidated Statements of Comprehensive Income/(Loss) This statement presents the net income or loss and other comprehensive income components, leading to total comprehensive income or loss for the periods presented Consolidated Statements of Comprehensive Income/(Loss) Highlights (in thousands) | Item | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income/(loss) applicable to Piedmont | $(17,002) | $3,331 | $(20,357) | $71,261 | | Other comprehensive income | $259 | $2,856 | $1,961 | $8,960 | | Comprehensive income/(loss) applicable to Piedmont | $(16,743) | $6,187 | $(18,396) | $80,221 | Consolidated Statements of Stockholders' Equity This section outlines changes in stockholders' equity, including common stock, additional paid-in capital, and accumulated other comprehensive income, for the periods presented Consolidated Statements of Stockholders' Equity Highlights (in thousands, except per share amounts) | Item | Balance, Sep 30, 2023 | Balance, Dec 31, 2022 | | :-------------------------------- | :-------------------- | :-------------------- | | Common Stock (Shares) | 123,696 | 123,440 | | Common Stock (Amount) | $1,237 | $1,234 | | Additional Paid-In Capital | $3,714,629 | $3,711,005 | | Cumulative Distributions in Excess of Earnings | $(1,943,652) | $(1,855,893) | | Accumulated Other Comprehensive Income/(Loss) | $(6,718) | $(8,679) | | Total Stockholders' Equity | $1,767,065 | $1,849,255 | - Total stockholders' equity decreased from $1,849,255 thousand as of December 31, 2022, to $1,767,065 thousand as of September 30, 2023[30] - Dividends to common stockholders for the nine months ended September 30, 2023, totaled $(67,402) thousand ($0.545 per share)[30] Consolidated Statements of Cash Flows This statement details the cash inflows and outflows from operating, investing, and financing activities for the nine months ended September 30, 2023 and 2022 Consolidated Statements of Cash Flows Highlights (in thousands) | Item | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $160,531 | $163,984 | | Net cash used in investing activities | $(136,995) | $(120,352) | | Net cash used in financing activities | $(32,109) | $(39,648) | | Net (decrease)/increase in cash, cash equivalents, and restricted cash and escrows | $(8,573) | $3,984 | | Cash, cash equivalents, and restricted cash and escrows, end of period | $11,027 | $12,844 | - Net cash provided by operating activities slightly decreased from $163,984 thousand in 2022 to $160,531 thousand in 2023[32] - Net cash used in investing activities increased from $(120,352) thousand in 2022 to $(136,995) thousand in 2023, primarily due to higher capitalized expenditures[32] Condensed Notes to Consolidated Financial Statements These notes provide essential details and explanations supporting the consolidated financial statements, covering accounting policies, debt, derivatives, and other key financial aspects Note 1. Organization This note describes Piedmont Office Realty Trust, Inc. as a Maryland REIT focused on Class A office properties in U.S. Sunbelt markets - 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[35] - As of September 30, 2023, Piedmont owned 51 in-service office properties and one redevelopment asset, comprising approximately 16.6 million square feet and 86.7% leased[36] Note 2. Summary of Significant Accounting Policies This note outlines the key accounting principles and policies used in preparing the consolidated financial statements, including GAAP compliance and REIT taxation election - Consolidated financial statements are prepared in accordance with SEC rules and GAAP, with interim periods including all normal and recurring adjustments[37] - 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[41] Rental and Tenant Reimbursement Revenue (in thousands) | Item | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Fixed payments | $115,250 | $114,280 | $340,048 | $334,256 | | Variable payments | $26,284 | $25,292 | $75,818 | $69,379 | | Total Rental and Tenant Reimbursement Revenue | $141,534 | $139,572 | $415,866 | $403,635 | Note 3. Debt This note details the company's debt structure, including senior notes, term loan facilities, and their associated terms and interest rates - Piedmont OP issued $400 million of 9.250% senior notes due 2028, with net proceeds used to fund the purchase of $350 million of 4.45% senior notes due 2024 and repay borrowings under the $600 Million Unsecured 2022 Line of Credit[43][44] - A new $215 million, floating-rate, unsecured term loan facility was entered into, maturing January 31, 2024, with an option to extend for one year[47] - The $250 million unsecured 2018 term loan facility was amended to convert its reference interest rate from LIBOR to SOFR[49] Summary of Indebtedness Outstanding (in thousands) | Facility | Effective Rate (Sep 30, 2023) | Maturity | Amount Outstanding as of Sep 30, 2023 | Amount Outstanding as of Dec 31, 2022 | | :-------------------------------- | :---------------------------- | :------- | :------------------------------------ | :------------------------------------ | | Secured (Fixed) | 4.10% | 10/1/2028 | $196,721 | $197,000 | | Unsecured (Variable and Fixed) Weighted Average | 5.60% | Various | $1,853,598 | $1,786,681 | | Total/Weighted Average | 5.46% | Various | $2,050,319 | $1,983,681 | Note 4. Derivative Instruments This note describes Piedmont's use of interest rate swap agreements as cash flow hedges to manage interest rate risk and stabilize interest expense - 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[54][55] - All remaining LIBOR-designated interest rate swap agreements were amended to SOFR to match underlying debt terms[56] Interest Rate Derivatives Outstanding (in millions) | Associated Debt Instrument | Number of Swap Agreements | Total Notional Amount | | :-------------------------------- | :------------------------ | :-------------------- | | $250 Million Unsecured 2018 Term Loan | 2 | $100 | | $250 Million Unsecured 2018 Term Loan | 3 | $75 | | $250 Million Unsecured 2018 Term Loan | 3 | $75 | | Total | | $250 | Gain/(Loss) on Interest Rate Derivatives (in thousands) | Item | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Amount of gain recognized in OCI | $1,248 | $2,662 | $4,270 | $7,507 | | Amount of previously recorded gain/(loss) reclassified from OCI into interest expense | $989 | $(194) | $2,309 | $(1,453) | Note 5. Fair Value Measurement of Financial Instruments This note provides fair value measurements for Piedmont's financial instruments, including cash, interest rate swaps, and debt, categorized by valuation hierarchy levels - Piedmont's financial instruments include cash, tenant receivables, restricted cash, interest rate swaps, and debt[60] Fair Value of Financial Instruments (in thousands) | Financial Instrument | Carrying Value (Sep 30, 2023) | Estimated Fair Value (Sep 30, 2023) | Level Within Fair Value Hierarchy | Carrying Value (Dec 31, 2022) | Estimated Fair Value (Dec 31, 2022) | | :-------------------------------- | :------------------------------ | :---------------------------------- | :-------------------------------- | :------------------------------ | :---------------------------------- | | Cash and cash equivalents | $5,044 | $5,044 | Level 1 | $16,536 | $16,536 | | Interest rate swaps | $5,841 | $5,841 | Level 2 | $4,183 | $4,183 | | Debt, net | $2,050,319 | $1,868,624 | Level 2 | $1,983,681 | $1,825,723 | - Debt and interest rate swaps are valued using discounted cash flow analysis with observable market-based inputs (Level 2), considering contractual terms and interest rate curves[61][62] Note 6. Goodwill Impairment Charge This note details the approximately $11.0 million goodwill impairment charge recorded for the Minneapolis reporting unit during Q3 2023 - During Q3 2023, Piedmont recorded an approximately $11.0 million goodwill impairment charge for its Minneapolis reporting unit due to the carrying value exceeding its estimated fair value[64][65] - The fair value measurement was based on Level 3 valuations, involving projections of discounted future cash flows with unobservable assumptions like capitalization rates (8.50% to 9.00%) and discount rates (8.50% to 9.25%)[66] Note 7. Commitments and Contingencies This note outlines Piedmont's commitments for tenant improvements and leasing commissions, and confirms no material reductions in rental revenues from disputes - Piedmont is committed to funding tenant improvements, leasing commissions, and building improvements under existing lease agreements[67] - No reductions in rental and reimbursement revenues related to tenant audits/disputes occurred during the three and nine months ended September 30, 2023 or 2022[68] Note 8. Stock Based Compensation This note details the company's stock-based compensation plans, including deferred stock awards and performance share programs, and the associated expense recognized - Stock-based compensation includes deferred stock award units (vesting over 3-4 years or 1 year for directors) and multi-year performance share programs contingent on TSR performance relative to peers[69][70] Stock Award Activity Highlights (Shares) | Item | As of Dec 31, 2022 | As of Sep 30, 2023 | | :-------------------------------- | :----------------- | :----------------- | | Unvested and Potential Stock Awards | 729,424 | 1,151,718 | | Deferred Stock Awards Granted (9M 2023) | N/A | 987,094 | | Performance Stock Awards Granted (9M 2023) | N/A | 424,922 | | Performance Stock Awards Vested (9M 2023) | N/A | (90,064) | | Deferred Stock Awards Vested (9M 2023) | N/A | (334,020) | - Piedmont recognized approximately $2.1 million and $6.0 million in stock compensation expense for the three and nine months ended September 30, 2023, respectively[73] Note 9. Supplemental Disclosures for the Statement of Consolidated Cash Flows This note provides additional details on non-cash investing and financing activities and a reconciliation of cash, cash equivalents, and restricted cash and escrows Non-Cash Investing and Financing Activities (in thousands) | Item | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Tenant improvements funded by tenants | $30,790 | $2,928 | | Accrued capital expenditures and deferred lease costs | $17,458 | $18,424 | | Change in accrued dividends | $(25,358) | $(26,048) | Reconciliation of Cash, Cash Equivalents, and Restricted Cash and Escrows (in thousands) | Item | 2023 | 2022 | | :-------------------------------- | :----- | :----- | | Beginning of period | $19,600 | $8,860 | | End of period | $11,027 | $12,844 | Note 10. Earnings Per Share This note explains the calculation of basic and diluted earnings per share, including the treatment of anti-dilutive shares - Basic EPS is net income/(loss) available to common stockholders divided by weighted average common shares outstanding; diluted EPS includes potential dilution from unvested stock awards[76] - Weighted average outstanding anti-dilutive shares excluded from diluted EPS calculation were approximately 1,388,320 for Q3 2023 and 1,216,637 for 9M 2023[76] Weighted-Average Common Shares (in thousands) | Item | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Weighted-average common shares – basic | 123,696 | 123,395 | 123,640 | 123,330 | | Weighted-average common shares – diluted | 123,696 | 123,697 | 123,640 | 123,631 | Note 11. Segment Information This note presents financial information by geographic segment, with accrual-based net operating income (NOI) as the primary performance measure - Piedmont's CODM evaluates performance using geographic segments: Atlanta, Dallas, Orlando, Washington, D.C./Northern Virginia, Minneapolis, New York, and Boston[78] - 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[79] Total Revenues by Geographic Segment (in thousands) | Segment | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Atlanta | $40,433 | $34,026 | $119,860 | $92,558 | | Dallas | $28,619 | $28,379 | $84,680 | $81,881 | | Orlando | $15,234 | $15,131 | $46,112 | $43,513 | | Washington, D.C./Northern Virginia | $15,251 | $15,608 | $45,029 | $46,980 | | Minneapolis | $16,700 | $15,470 | $47,125 | $45,987 | | New York | $13,940 | $14,525 | $40,674 | $42,461 | | Boston | $10,875 | $14,735 | $31,642 | $44,797 | | Total reportable segments | $141,052 | $137,874 | $415,122 | $398,177 | | Other | $5,934 | $6,226 | $17,303 | $18,381 | | Total Revenues | $146,986 | $144,100 | $432,425 | $416,558 | NOI by Geographic Segment (in thousands) | Segment | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Atlanta | $25,965 | $21,627 | $77,247 | $58,354 | | Dallas | $16,334 | $15,325 | $47,313 | $47,189 | | Orlando | $8,895 | $8,865 | $27,446 | $26,206 | | Washington, D.C./Northern Virginia | $9,183 | $9,712 | $27,156 | $29,851 | | Minneapolis | $9,166 | $8,072 | $25,622 | $23,950 | | New York | $7,565 | $7,959 | $22,286 | $23,901 | | Boston | $6,422 | $9,646 | $19,213 | $29,922 | | Total reportable segments | $83,530 | $81,206 | $246,283 | $239,373 | | Other | $3,544 | $3,893 | $9,956 | $10,794 | | Total NOI | $87,074 | $85,099 | $256,239 | $250,167 | Note 12. Subsequent Event This note discloses the declaration of a Q4 2023 dividend of $0.125 per common share by Piedmont's board on October 25, 2023 - On October 25, 2023, Piedmont's board declared a Q4 2023 dividend of $0.125 per common share, payable January 2, 2024, to stockholders of record as of November 24, 2023[82] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's discussion and analysis of Piedmont's financial condition and results of operations, covering liquidity, capital resources, operational performance comparisons, guarantor information, segment NOI, non-GAAP financial measures (FFO, Core FFO, AFFO, Property NOI, Same Store NOI), portfolio overview, and critical accounting estimates. It highlights a net loss for the period, increased interest expense, and a goodwill impairment charge, alongside strategic capital management and dividend adjustments Liquidity and Capital Resources This section discusses Piedmont's sources of liquidity, capital expenditure plans, and strategies for managing debt and dividends - Primary immediate liquidity sources include cash on hand, cash flows from operations, potential property dispositions, and borrowings under the $600 Million Unsecured 2022 Line of Credit, which had $443 million available as of September 30, 2023[85] - Piedmont anticipates exercising the one-year extension option on the $215 Million Unsecured 2023 Term Loan (due January 2024) to January 2025[85] - The remaining $50.2 million of $400 Million Unsecured Senior Notes due 2024 will be repaid upon maturity in March 2024 using cash on hand and credit line borrowings[85] Capital Expenditures (in thousands) | Type | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Redevelopment/renovations | $40,634 | $47,172 | | Other capital expenditures (building & tenant improvements) | $72,758 | $48,335 | | Total capital expenditures | $113,392 | $95,507 | - Committed to spend approximately $6.20 per square foot per year of lease term for tenant improvement allowances and lease commissions for leases executed during the nine months ended September 30, 2023, up from $4.93 in the prior year[89] - The annual dividend was reduced from $0.84 per share to $0.50 per share starting Q3 2023, reducing cash used for dividends by approximately $40 million annually[92] Results of Operations This section analyzes the company's financial performance, highlighting changes in revenues, expenses, and net income or loss for the reported periods Overview This overview summarizes the key drivers behind the net loss for Q3 2023, including increased interest expense and a goodwill impairment charge - Net loss applicable to common stockholders for Q3 2023 was approximately $17.0 million ($0.14 per diluted share), compared to net income of $3.3 million ($0.03 per diluted share) for Q3 2022[93] - The decrease in net income was driven by a $10.1 million increase in interest expense, an $11.0 million non-cash goodwill impairment charge, and an $0.8 million loss on early extinguishment of debt[93] Comparison of Three Months Ended September 30, 2023 vs 2022 This section compares the financial performance for the three months ended September 30, 2023, against the same period in 2022, detailing revenue and expense variances Selected Financial Data (Three Months Ended Sep 30, in millions) | Item | 2023 | % of Revenues | 2022 | % of Revenues | Variance | | :-------------------------------- | :--- | :------------ | :--- | :------------ | :------- | | Total revenues | $146.9 | 100 % | $144.0 | 100 % | $2.9 | | Property operating costs | $59.8 | 41 % | $59.0 | 41 % | $0.8 | | Depreciation | $38.1 | 26 % | $34.9 | 24 % | $3.2 | | Amortization | $20.2 | 14 % | $23.3 | 16 % | $(3.1) | | Goodwill impairment charge | $11.0 | 7 % | — | — % | $11.0 | | Interest expense | $(27.4) | 19 % | $(17.2) | 12 % | $(10.2) | | Net income/(loss) | $(17.0) | (12)% | $3.3 | 2 % | $(20.3) | - Rental and tenant reimbursement revenue increased by $2.0 million, primarily due to capital recycling activity and higher tenant reimbursements from increased building utilization[95] - Interest expense increased by $10.2 million, mainly due to higher interest rates[101] Comparison of Nine Months Ended September 30, 2023 vs 2022 This section compares the financial performance for the nine months ended September 30, 2023, against the same period in 2022, detailing revenue, expense, and gain on sale variances Selected Financial Data (Nine Months Ended Sep 30, in millions) | Item | 2023 | % of Revenues | 2022 | % of Revenues | Variance | | :-------------------------------- | :--- | :------------ | :--- | :------------ | :------- | | Total revenues | $432.3 | 100 % | $416.5 | 100 % | $15.8 | | Property operating costs | $176.0 | 41 % | $166.3 | 40 % | $9.7 | | Depreciation | $110.4 | 25 % | $98.8 | 24 % | $11.6 | | Amortization | $63.5 | 15 % | $67.0 | 16 % | $(3.5) | | Goodwill impairment charge | $11.0 | 3 % | — | — % | $11.0 | | Interest expense | $(72.8) | 16 % | $(44.9) | 11 % | $(27.9) | | Gain on sale of real estate assets | — | — % | $50.7 | 12 % | $(50.7) | | Net income/(loss) | $(20.4) | (5)% | $71.3 | 17 % | $(91.7) | - Rental and tenant reimbursement revenue increased by $12.2 million, driven by capital recycling and higher tenant reimbursements[105] - Interest expense increased by $27.9 million, primarily due to increased interest rates and a higher average debt balance[112] - A $50.7 million gain on sale of real estate assets was recognized in 2022, primarily from the sale of 225 & 235 Presidential Way buildings, with no comparable gain in 2023[115] Issuer and Guarantor Financial Information This section provides combined financial information for Piedmont OP and Piedmont, Inc., detailing outstanding senior unsecured notes and the nature of Piedmont's guarantee - Piedmont OP has approximately $1.1 billion in senior unsecured notes outstanding, fully and unconditionally guaranteed by Piedmont[116][117] - Piedmont's guarantee ranks equally with its other senior unsecured indebtedness but is effectively subordinated to any future secured debt[117] Combined Balances of Piedmont OP and Piedmont, Inc. (in thousands) | Item | As of Sep 30, 2023 | As of Dec 31, 2022 | | :-------------------------------- | :----------------- | :----------------- | | Total assets | $312,479 | $325,884 | | Total liabilities | $1,890,513 | $1,845,551 | | Total revenues (9M 2023) | $36,842 | N/A | | Net loss (9M 2023) | $(72,634) | N/A | Net Operating Income by Geographic Segment This section analyzes Net Operating Income (NOI) across Piedmont's various geographic segments, highlighting performance drivers and changes - Piedmont's CODM assesses performance using geographic segments: Atlanta, Dallas, Orlando, Washington, D.C./Northern Virginia, Minneapolis, New York, and Boston[121] Accrual-Basis NOI by Geographic Segment (in thousands) | Segment | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Atlanta | $25,965 | $21,627 | $77,247 | $58,354 | | Dallas | $16,334 | $15,325 | $47,313 | $47,189 | | Orlando | $8,895 | $8,865 | $27,446 | $26,206 | | Washington, D.C./Northern Virginia | $9,183 | $9,712 | $27,156 | $29,851 | | Minneapolis | $9,166 | $8,072 | $25,622 | $23,950 | | New York | $7,565 | $7,959 | $22,286 | $23,901 | | Boston | $6,422 | $9,646 | $19,213 | $29,922 | | Total reportable segments | $83,530 | $81,206 | $246,283 | $239,373 | | Other | $3,544 | $3,893 | $9,956 | $10,794 | | Total NOI | $87,074 | $85,099 | $256,239 | $250,167 | - Atlanta NOI increased primarily due to the acquisition of 1180 Peachtree Street during the third quarter of 2022[123] - Washington, D.C. NOI decreased due to the early termination of certain leases at Arlington Gateway in late 2022[124] - Boston NOI decreased primarily due to the disposition of the 225 and 235 Presidential Way assets in January 2022 and the disposition of the Cambridge Portfolio in December 2022[125] Funds From Operations (FFO), Core Funds From Operations (Core FFO), and Adjusted Funds From Operations (AFFO) This section defines and reconciles non-GAAP financial measures (FFO, Core FFO, and AFFO) used to evaluate the operating performance of real estate companies - FFO, Core FFO, and AFFO are non-GAAP financial measures used to provide a more complete understanding of operating performance for real estate companies[126] - FFO is calculated per NAREIT definition, Core FFO adjusts FFO for non-recurring items, and AFFO further adjusts Core FFO for non-incremental capital expenditures and non-cash items[127][128][129] Reconciliation of Net Income/(Loss) to FFO, Core FFO, and AFFO (in thousands, except per share amounts) | Item | Three Months Ended Sep 30, 2023 | Per Share | Three Months Ended Sep 30, 2022 | Per Share | Nine Months Ended Sep 30, 2023 | Per Share | Nine Months Ended Sep 30, 2022 | Per Share | | :-------------------------------- | :------------------------------ | :-------- | :------------------------------ | :-------- | :----------------------------- | :-------- | :----------------------------- | :-------- | | GAAP net income/(loss) applicable to common stock | $(17,002) | $(0.14) | $3,331 | $0.03 | $(20,357) | $(0.16) | $71,261 | $0.58 | | NAREIT Funds From Operations applicable to common stock | $51,896 | $0.42 | $61,352 | $0.50 | $163,775 | $1.32 | $185,835 | $1.50 | | Core Funds From Operations applicable to common stock | $52,716 | $0.43 | $61,352 | $0.50 | $164,595 | $1.33 | $185,835 | $1.50 | | Adjusted Funds From Operations applicable to common stock | $39,939 | N/A | $43,482 | N/A | $121,175 | N/A | $130,958 | N/A | Property and Same Store Net Operating Income This section presents Property NOI and Same Store NOI, non-GAAP measures used to assess the operating performance of the company's property portfolio - Property NOI is a non-GAAP measure assessing operating results by adjusting net income for interest, depreciation, amortization, impairments, gains/losses from sales, and other infrequent items[132] - Same Store NOI focuses on properties owned throughout both current and prior reporting periods, excluding those out of service for development[134] Reconciliation to Property NOI and Same Store NOI (in thousands) | Item | Three Months Ended Sep 30, 2023 (Cash Basis) | Three Months Ended Sep 30, 2022 (Cash Basis) | Nine Months Ended Sep 30, 2023 (Cash Basis) | Nine Months Ended Sep 30, 2022 (Cash Basis) | | :-------------------------------- | :------------------------------------------- | :------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Net income/(loss) applicable to Piedmont (GAAP basis) | $(17,002) | $3,331 | $(20,357) | $71,261 | | Property NOI | $81,575 | $77,285 | $237,862 | $229,574 | | Same Store NOI | $75,874 | $72,042 | $221,728 | $218,874 | | Change period over period in Same Store NOI | 5.3 % | N/A | 1.3 % | N/A | - Same Store NOI (cash basis) increased by 5.3% for the three months ended September 30, 2023, and 1.3% for the nine months ended September 30, 2023, primarily due to rental rate roll-ups and new leases commencing or abatements expiring[146][138] Portfolio Overview and Key Metrics This section provides an overview of the company's property portfolio, including leased percentage, impact of lease terms, REIT election, inflation, and critical accounting estimates Leased Percentage This section highlights the portfolio's occupancy rate and recent leasing activity, including new tenant leases - Portfolio occupancy increased to 86.7% leased as of September 30, 2023, up from 86.2% as of June 30, 2023[142] - Approximately 302,000 square feet of leasing was completed in Q3 2023, including 170,000 square feet of new tenant leases[142] Impact of Downtime, Abatement Periods, and Rental Rate Changes This section analyzes how lease commencement delays, rental abatements, and changes in rental rates affect the company's revenue and NOI - Lease commencement for new tenants typically occurs 6-18 months after execution, impacting Property NOI and Same Store NOI[143] - As of September 30, 2023, 1.1 million square feet of executed leases for vacant space were yet to commence or under rental abatement, representing approximately $36 million of additional annual cash revenue[144] - Experienced an 11.7% cash rent roll-up and 10.3% accrual rent roll-up on executed leases for space vacant one year or less during Q3 2023[145] - For the nine months ended September 30, 2023, experienced a 9.8% cash rent roll-up and 13.5% accrual rent roll-up on executed leases for space vacant one year or less[145] Election as a REIT This section confirms Piedmont's election to be taxed as a REIT since 1998, outlining the associated distribution requirements and asset limitations - Piedmont has elected to be taxed as a REIT since 1998, requiring distribution of at least 90% of its annual REIT taxable income to avoid federal income tax[147] - Investments in Taxable REIT Subsidiaries (TRS) cannot exceed 20% of total assets to maintain REIT qualification[147] Inflation This section addresses Piedmont's exposure to inflation risk and the mitigating provisions within its long-term lease agreements - Piedmont is exposed to inflation risk due to long-term leases, but most leases include provisions like rent steps and reimbursement billings for operating expenses, real estate taxes, and insurance to mitigate this risk[148] Application of Critical Accounting Estimates This section confirms that no material changes occurred in critical accounting policies during the nine months ended September 30, 2023 - Preparation of financial statements requires management judgment and estimates in applying GAAP, with no material changes to critical accounting policies during the nine months ended September 30, 2023[149] Commitments and Contingencies This section refers to Note 7 for further details on Piedmont's commitments and contingencies - Piedmont is subject to certain commitments and contingencies, as further explained in Note 7 to the consolidated financial statements[150] Item 3. Quantitative and Qualitative Disclosures About Market Risk Piedmont's primary market risk is interest rate risk, stemming from variable-rate debt facilities. The company manages this risk through a low-to-moderate level of borrowings and fixed/effectively-fixed interest rates on most debt. A 1.0% increase in variable interest rates would increase annual interest expense by approximately $5.7 million - Piedmont's primary market risk exposure is interest rate risk, particularly from borrowings under its $600 Million Unsecured 2022 Line of Credit, $200 Million 2022 Unsecured Term Loan Facility, and $215 Million Unsecured 2023 Term Loan[151] - Interest rate risk management objectives include limiting the impact of interest rate changes through low-to-moderate borrowings and managing rate variability, with most debt (approximately $1.5 billion) being fixed or effectively-fixed[152][154] - A 1.0% increase in variable interest rates on existing outstanding borrowings as of September 30, 2023, would increase interest expense by approximately $5.7 million annually[155] Variable Rate Debt Details (as of Sep 30, 2023) | Facility | Stated Rate | Total Interest Rate | | :-------------------------------- | :---------- | :------------------ | | $600 Million Unsecured 2022 Line of Credit | Adjusted SOFR + 0.84% | 6.24% | | $200 Million Unsecured 2022 Term Loan Facility | Adjusted SOFR + 1.00% | 6.43% | | $215 Million Unsecured 2023 Term Loan | Adjusted SOFR + 1.05% | 6.45% | Item 4. Controls and Procedures Management, including the Principal Executive Officer and Principal Financial Officer, concluded that Piedmont's disclosure controls and procedures were effective as of September 30, 2023, ensuring timely and accurate reporting. There were no material changes in internal control over financial reporting during the quarter - Management concluded that disclosure controls and procedures were effective as of September 30, 2023, providing reasonable assurance that required information is recorded, processed, summarized, and reported timely[156] - No material changes in internal control over financial reporting occurred during the quarter ended September 30, 2023[157] PART II. OTHER INFORMATION This part covers legal proceedings, risk factors, equity security sales, and other disclosures, providing additional context to the company's operations Item 1. Legal Proceedings Piedmont is not subject to any material pending legal proceedings, only routine litigation covered by insurance, which management does not expect to materially adversely affect financial condition, results of operations, or liquidity - Piedmont is not subject to any material pending legal proceedings, only routine litigation arising in the ordinary course of business[159] - Management expects routine legal proceedings to be covered by insurance and not to materially adversely affect financial condition, results of operations, or liquidity[159] Item 1A. Risk Factors A new risk factor has been identified regarding the potential loss of uninsured deposits in the event of bank failures, which could reduce available cash. No other material changes to previously disclosed risk factors were noted - A new risk factor highlights the potential for loss of deposits exceeding federally insured levels ($250,000) if banking institutions fail, which could reduce cash available for distributions, debt repayment, or investments[160][161] - No other known material changes from the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022[162] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or repurchases of common stock during the third quarter of 2023. Approximately $150.5 million remains available under the stock repurchase program through February 2024 - No unregistered sales of equity securities occurred during the third quarter of 2023[166] - No repurchases of common stock occurred during the third quarter of 2023[166] - Approximately $150.5 million remains available under the stock repurchase program to make share repurchases through February 2024[166] Item 3. Defaults Upon Senior Securities This item is not applicable for the reporting period - Not applicable[164] Item 4. Mine Safety Disclosures This item is not applicable for the reporting period - Not applicable[165] Item 5. Other Information No other information is reported under this item - None[166] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including organizational documents, debt instruments, certifications, and XBRL-related documents - Exhibit 4.1: Supplemental Indenture, dated as of July 20, 2023, by and among Piedmont Operating Partnership, LP, Piedmont Office Realty Trust, Inc. and U.S. Bank Trust Company, National Association, as trustee[167] - Exhibit 31.1 and 31.2: Certifications of Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002[167] - Exhibit 32.1 and 32.2: Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002[167] SIGNATURES This section formally concludes the report with the signature of the authorized financial officer, confirming its submission - The report was signed on October 30, 2023, by Robert E. Bowers, Chief Financial Officer and Executive Vice President (Principal Financial Officer and Duly Authorized Officer) of Piedmont Office Realty Trust, Inc.[169]