Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Piedmont Office Realty Trust Inc (PDM, Financial) completed over one million square feet of leasing, the largest quarterly volume in over a decade.
- The company achieved double-digit rental rate growth with a 15% increase in cash rents and a 23% increase in accrual-based rents.
- Same-store NOI increased approximately 6% on a cash basis and roughly 4% on an accrual basis compared to the second quarter of 2023.
- Piedmont's balance sheet was strengthened by issuing $400 million in new five-year bonds, addressing all final debt maturities until 2027.
- The company has a backlog of 1.6 million square feet of leases yet to commence, equating to over $15 million of future annualized cash rents and over $30 million of future annualized NOI.
Negative Points
- Core FFO per diluted share for the second quarter of 2024 was $0.37, down from $0.45 per diluted share for the second quarter of 2023.
- Increased net interest expense and decreased operating income due to the sale of one Lincoln Park and the expiration of two large leases impacted financial results.
- Leasing capital spend was slightly higher than average at over $6 per square foot per lease year, driven by several large lease renewals in Dallas.
- The company's lease percentage was down slightly quarter-over-quarter, ending the second quarter at 87.3% leased compared to 87.1% at the end of 2023.
- The gap between the reported lease percentage and the economic lease percentage is now 850 basis points, the widest it has been in over eight years, indicating a delay in cash flow realization.
Q & A Highlights
Q: Appreciate the update on the leasing front. Good momentum there. Any update on the City of New York lease discussions and plans for that asset longer term?
A: With the renewal of Amazon and Ryan, our large lease expirations are now known up until 2026. The City of New York lease discussions are trending favorably towards a renewal. We plan to dispose of the asset once the capital market stabilizes in New York, likely sometime in 2025.
Q: Regarding the John Carpenter sale, what's the earnings effect of that sale? Are there plans for other under-leased assets?
A: The impact on earnings from the John Carpenter sale is minimal, around one cent. We evaluate older assets for their viability in the modern office environment. We feel good about the remaining portfolio and don't foresee significant pruning needed.
Q: How much capital would have been required to lease up the John Carpenter space?
A: It would have required approximately $100 per square foot in base building and tenant-related lease-up capital, including carrying costs.
Q: Can you break down the leasing pipeline between renewals and new leasing? Any market-specific commentary?
A: About half of the 250,000 square feet in late-stage activity is new leasing. In the proposal stage, 70% of the 2 million square feet is new activity, with significant demand in Minneapolis, Dallas, and Atlanta.
Q: What are the drivers behind the pickup in leasing activity?
A: Our focus on amenities and service has benefited retention. New tenant leasing activity, particularly from small and medium enterprises, has been strong. Professional services, financial, consumer goods, retail, and industrial sectors are driving demand.
Q: Can you elaborate on the signed but not commenced leases and their impact on earnings?
A: Historically, the gap between economic lease percentage and reported lease percentage is about 4-5%. We have a 3% gap now, which should close over time, contributing to earnings growth.
Q: Any updates on the redevelopment projects, particularly US Bancorp's move out?
A: We have three assets in redevelopment. One will be in service next year, while the other two in Minneapolis are undergoing renovations. The total capital spend is modest, around $12 million, with completion expected by mid-2025.
Q: What is the expected timeline for the redevelopment projects to contribute to earnings?
A: The redevelopment projects will take time, with significant leasing activity expected by the end of the year. We anticipate the capital spend to be completed by mid-2025, contributing to earnings growth thereafter.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
