Piedmont Office (NYSE:PDM) Realty Trust disclosed its third-quarter 2023 earnings, highlighting a robust leasing performance and a positive sustainability rating. The real estate investment trust reported total leasing of approximately 302,000 square feet in Q3, including 170,000 square feet of new tenant leasing. The company also announced over 600,000 square feet of leasing in October alone, featuring a notable renewal of US Bank's 447,000 square foot headquarters in Minneapolis. Piedmont anticipates reaching approximately 87% leased by the end of the year.
Key takeaways from the earnings call:
- Piedmont announced significant leasing activity across its operating markets, with an average lease size of 13,000 square feet and a weighted average lease term of seven years.
- The company extended its lease with US Bank for their downtown Minneapolis LEED Gold US Corp Center, adding 447,000 square feet for a 10-year term.
- In Atlanta, Piedmont completed 22 deals accounting for 153,000 square feet, half of which were new leases. In Dallas, the company finalized 15 deals for almost 100,000 square feet, over half of which were new deals.
- Piedmont's leasing pipeline remains healthy, with over 600,000 square feet already signed this month, including a new 77,000 square foot lease with GE Vernova.
- Core FFO per diluted share for Q3 2023 was $0.43, compared to $0.50 in Q3 2022. The company reduced its annual dividend from $0.84 to $0.50 per share to mitigate increased interest expenses.
- Piedmont expects to provide complete guidance for 2024 in early February.
Piedmont's leasing activity was particularly strong in Atlanta and Dallas, with the Galleria on the Park property in Atlanta and the employment growth in Dallas driving leasing activity. Despite the lease extension with US Bank, the bank will be moving a 340,000-square-foot suburban hub from Piedmont's Meridian Gold Crossing Complex to its Excelsior classic location. Piedmont owns a building in the Excelsior complex and has informed US Bank that it will be available for them if they need additional space.
Piedmont also revealed its financial results, including a decrease in Core FFO per diluted share to $0.43 in Q3 2023 from $0.50 in Q3 2022. To offset increased interest expenses, the company reduced its annual dividend from $0.84 to $0.50 per share. Despite strong leasing efforts and rising rental rates, Piedmont anticipates that higher interest rates and potential dispositions will impact its 2024 results.
Regarding its portfolio, Piedmont sees about 80-85% of it as core and plans to make incremental improvements, potentially selling properties in New York and reinvesting in the Sunbelt region. The company expects occupancy to reach its lowest point in mid-2024, with a strong leasing pipeline to support future growth. Piedmont also discussed offering seller financing for a Houston asset, with interest rates in the range of 7% to 8%.
The company's CEO, Brent Smith, expressed optimism in the office sector and invited further discussions with interested parties. He also mentioned that the company is well-capitalized and aims to bring a fresh and hospitality-focused approach to the market. Despite challenges in the TC market, Piedmont believes it can effectively compete.
The company also addressed a backlog of leases totaling 0.5 million square feet that is yet to come in, and another 0.5 million square feet that has commenced but is not generating revenue. These leases are expected to improve the FFO perspective. Regarding the Houston transactions, the company plans to continue offering seller financing at around 55% LTV and market rates. The company believes the office sector has been oversold and sees Piedmont as a great opportunity for investors.
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