Piedmont Office Realty Trust(PDM) - 2021 Q2 - Quarterly Report

PART I Financial Information Item 1. Consolidated Financial Statements This section presents Piedmont Office Realty Trust's unaudited consolidated financial statements, including balance sheets, income statements, and cash flows, for periods ending June 30, 2021 Consolidated Balance Sheets Total assets increased slightly to $3.76 billion as of June 30, 2021, while liabilities rose and equity decreased Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $3,758,311 | $3,739,810 | | Total real estate assets | $3,079,707 | $3,056,034 | | Cash and cash equivalents | $8,122 | $7,331 | | Total Liabilities | $1,885,803 | $1,841,849 | | Unsecured debt, net | $1,666,570 | $1,594,068 | | Secured debt, net | $— | $27,936 | | Total Stockholders' Equity | $1,872,508 | $1,897,961 | Consolidated Statements of Income Net income significantly decreased to $9.9 million in Q2 2021 due to the absence of a prior-year asset sale gain Consolidated Income Statement Highlights (in thousands, except per share data) | Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $130,218 | $134,631 | $259,475 | $271,802 | | Net Income Applicable to Piedmont | $9,947 | $192,427 | $19,291 | $201,136 | | Diluted EPS | $0.08 | $1.52 | $0.15 | $1.59 | - The significant decrease in net income for both the three and six months ended June 30, 2021, compared to 2020, is primarily driven by the absence of a large gain on the sale of real estate assets that occurred in 2020[23] Consolidated Statements of Cash Flows Operating cash flow increased to $100.2 million for H1 2021, while investing and financing activities used cash Cash Flow Summary for the Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $100,192 | $90,580 | | Net cash used in investing activities | ($61,577) | ($124,017) | | Net cash (used in)/provided by financing activities | ($38,129) | $56,289 | | Net increase in cash | $486 | $22,852 | Condensed Notes to Consolidated Financial Statements Notes detail accounting policies, debt, and commitments, with 54 properties totaling 16.4 million sq ft and 85.9% leased - As of June 30, 2021, Piedmont owned 54 in-service office properties and one redevelopment asset, comprising approximately 16.4 million square feet, with an occupancy rate of 85.9%[33] - The company has one individually significant unrecorded tenant allowance commitment of approximately $28.1 million for a 20-year, 520,000 square foot renewal and expansion for the State of New York at 60 Broad Street[53] - The 225 and 235 Presidential Way assets in Woburn, Massachusetts met the criteria for held for sale classification as of June 30, 2021, with the sale expected to close near the end of 2021[56] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition, liquidity, and operations, noting COVID-19's impact on leasing but not material financial condition - The COVID-19 pandemic has not materially impacted the company's financial condition or liquidity, but the related slowdown in 2020 leasing activity has negatively impacted occupancy levels and slowed earnings growth[73] - Primary sources of liquidity include cash on hand, cash flow from operations, proceeds from dispositions, and the $500 million Unsecured 2018 Line of Credit, which had $425 million of available capacity as of the filing date[74] Liquidity and Capital Resources Capital expenditures totaled $54.7 million for H1 2021, with a $300 million term loan maturing soon Capital Expenditures (in thousands) | Category | H1 2021 | H1 2020 | | :--- | :--- | :--- | | Redevelopment/renovations | $23,882 | $16,440 | | Other capital expenditures | $30,824 | $38,512 | | Total capital expenditures | $54,706 | $54,952 | - As of June 30, 2021, the company had approximately $169.3 million of board-authorized capacity remaining for future stock repurchases[79] Results of Operations Net income significantly declined in Q2 2021 due to prior-year asset sales; rental revenue decreased in H1 2021 - Q2 2021 vs Q2 2020: Rental revenue decreased by $4.2 million due to dispositions and lower occupancy. Amortization expense decreased by $3.7 million as certain lease intangibles became fully amortized. General and administrative expense increased by $2.3 million due to higher accruals for performance-based compensation[84][87][88] - H1 2021 vs H1 2020: Rental revenue decreased by $10.5 million. Property operating costs decreased by $3.3 million, partly due to reduced building utilization from COVID-19. Interest expense decreased by $4.3 million following a mortgage repayment in June 2020[95][97][101] Net Operating Income by Geographic Segment Total NOI decreased to $156.4 million for H1 2021, with Dallas increasing and New York/Corporate decreasing NOI by Geographic Segment - Six Months Ended June 30 (in thousands) | Segment | 2021 | 2020 | | :--- | :--- | :--- | | Dallas | $34,020 | $28,389 | | Atlanta | $29,598 | $29,934 | | Washington, D.C. | $17,659 | $19,435 | | Minneapolis | $16,467 | $16,766 | | Boston | $21,771 | $21,249 | | Orlando | $18,088 | $16,972 | | New York | $15,133 | $22,457 | | Total NOI | $156,441 | $165,218 | Funds From Operations (FFO), Core FFO, and AFFO Core FFO for Q2 2021 was $60.4 million ($0.48/share), slightly down from Q2 2020 FFO and Core FFO Reconciliation Highlights (in thousands, except per share) | Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 | | :--- | :--- | :--- | :--- | :--- | | GAAP net income | $9,947 | $192,427 | $19,291 | $201,136 | | NAREIT FFO | $60,353 | $52,267 | $120,409 | $112,142 | | Core FFO | $60,353 | $61,603 | $120,409 | $121,478 | | Core FFO per share | $0.48 | $0.49 | $0.97 | $0.96 | Property and Same Store Net Operating Income Same Store NOI increased by 4.3% (cash basis) and 1.7% (accrual basis) for H1 2021, with 85.9% leased occupancy Same Store NOI Growth (YoY) | Period | Cash Basis | Accrual Basis | | :--- | :--- | :--- | | Three Months Ended June 30, 2021 | 4.8% | 4.7% | | Six Months Ended June 30, 2021 | 4.3% | 1.7% | - The portfolio's leased percentage was 85.9% as of June 30, 2021, compared to 86.8% as of December 31, 2020[134] - For leases executed in H1 2021 for space vacant one year or less, the company experienced a 17.3% roll-up in accrual rents and a 7.7% roll-up in cash rents[136] Item 3. Quantitative and Qualitative Disclosures About Market Risk Primary market risk is interest rate fluctuations on variable-rate debt; a 1.0% increase would raise annual interest expense by $5.3 million - The primary market risk is interest rate risk associated with variable-rate debt, including the $500M Line of Credit and two unsecured term loans[144] - As of June 30, 2021, a hypothetical 1.0% increase in variable interest rates on existing outstanding borrowings would increase annual interest expense by approximately $5.3 million[148] - The company is monitoring the planned phase-out of USD LIBOR after June 2023 and notes its credit agreements contain 'fallback' language for establishing an alternate interest rate[144] Item 4. Controls and Procedures Disclosure controls and procedures were effective as of June 30, 2021, with no material changes in internal control - The Principal Executive Officer and Principal Financial Officer concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[149] - No changes in internal control over financial reporting occurred during the quarter ended June 30, 2021, that have materially affected, or are reasonably likely to materially affect, internal controls[150] PART II. Other Information Item 1. Legal Proceedings The company is not subject to any material pending legal proceedings, with routine litigation covered by insurance - Piedmont is not subject to any material pending legal proceedings and expects routine litigation to be covered by insurance without material adverse effect[152] Item 1A. Risk Factors No material changes to risk factors were reported since the 2020 Annual Report on Form 10-K - No material changes to risk factors were reported since the 2020 Form 10-K[153] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered equity sales or common stock repurchases occurred in Q2 2021; $169.3 million remains for repurchases - No unregistered sales of equity securities occurred in Q2 2021[158] - No shares of common stock were repurchased during Q2 2021. Approximately $169.3 million remains available under the stock repurchase program as of June 30, 2021[158] Item 3. Defaults Upon Senior Securities This section is not applicable to the company's current reporting - This item is not applicable[155] Item 4. Mine Safety Disclosures This section is not applicable to the company's current reporting - This item is not applicable[156] Item 5. Other Information No other information was reported under this item - No other information was reported under this item[157] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including corporate governance documents and certifications - The exhibits include certifications from the Principal Executive Officer and Principal Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[159]