Piedmont Office Realty Trust(PDM) - 2020 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - For Q2 2020, the company reported $0.49 per diluted share of core FFO, a 14% increase compared to Q2 2019, reflecting rental rate growth and capital recycling activities [36] - AFFO was approximately $45 million for the second quarter, exceeding the second quarter dividend [36] - Same-store NOI increased approximately 2% on a cash basis and over 5% on an accrual basis before deducting a general reserve of approximately $5 million [37] - General and administrative expenses decreased by $6.5 million compared to the same period in 2019 due to lower stock-based compensation accruals [38] - The average net debt to core EBITDA ratio was 6.2 times, expected to normalize to around 5.6 times in Q3 2020 [39] Business Line Data and Key Metrics Changes - The company collected approximately 99% of cash rents due for Q2 2020, net of $3.6 million in deferred rents [12] - Lease modification agreements were entered into with about 50 tenants, primarily retail, representing approximately 1% of annual revenues [13] - The sale of 1901 Market Street resulted in a gross sales price of approximately $360 million, impacting reported occupancy by lowering the overall lease percentage by 1% to approximately 89% [18][20] Market Data and Key Metrics Changes - The company’s portfolio consists of 57 Class A office properties, totaling 17.2 million square feet, primarily in urban infill and suburban mixed-use environments [22] - Approximately 96% of annualized lease revenue is now generated from properties in seven core operating markets [20] - The pandemic has accelerated trends such as population migration to suburbs and corporations relocating to lower-cost cities [21][25] Company Strategy and Development Direction - The company is focused on a strategic asset recycling program and has successfully exited the Philadelphia market [19] - The pandemic has led to a reevaluation of business strategy, emphasizing the importance of suburban locations and amenities to attract tenants [21][25] - The company aims to leverage its market positions in areas like Dallas, Atlanta, and Washington D.C. to meet the demand for flexible office space [27] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company’s ability to withstand the economic slowdown due to COVID-19, citing a strong tenant base and financial position [32] - The company is not providing guidance for 2020 due to uncertainties surrounding the pandemic but anticipates modest impacts on lease percentages and financial performance [41][42] - Management noted that new tenant leasing activity has slowed but is beginning to re-emerge, particularly in Sunbelt markets [30][44] Other Important Information - The company has approximately $30 million in cash and full availability of a $500 million line of credit, with no debt maturities until late 2021 [42] - A general reserve of approximately $5 million was established for potential future losses due to the pandemic [47] - The company is committed to supporting efforts to eliminate prejudice and discrimination in its communities [33][34] Q&A Session Summary Question: Clarification on NOI write-offs and reserves - Management explained that the $1.8 million reserve was specific to individual tenant accounts and included write-offs of straight-line rent receivables [54][58] - The $5 million general reserve was established as a precautionary measure for potential unidentified losses [58] Question: Impact of WeWork's construction delays - Management confirmed that WeWork is current on rental obligations and expects construction to commence in 2021, with rent payments starting as per lease terms [61][62] Question: Vacancy in D.C. market - Management noted that D.C. had a strong leasing pipeline pre-pandemic and is seeing a pickup in activity, particularly in technology and defense sectors [64][66] Question: Demand for walkable amenities - Management indicated that there is a growing demand for walkable, non-public transit-oriented locations, driven by millennial preferences for suburban living [70][75] Question: Long-term trends versus COVID impacts - Management believes the trends towards suburban living and hub-and-spoke models are long-term shifts accelerated by COVID-19 [82][84] Question: New York City lease negotiations - Management stated that negotiations are ongoing, with expectations for a shorter-term renewal while longer-term leases are delayed [85][87] Question: Overall impact of COVID-19 on financial performance - Management highlighted that the anticipated $10 million to $12 million impact on NOI is primarily due to delayed leasing and reserves established for potential losses [90][91]