What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2021-02-17 compared with 2020-02-19 · 185 added, 138 removed, 259 unchanged (55% of the section changed)

3 unchanged sentences

of this report.

During 2020, all of our properties remained open and fully operational for tenants to utilize as they deemed appropriate.

Given our low-leverage operating model of long-term leases to creditworthy tenants, to date the COVID-19 pandemic has not materially impacted our financial condition or results of operations, our overall liquidity position and outlook, or caused material impairments in our portfolio of operating properties.

Our revenues increased year over year;

several capital transactions were successfully completed;

and our Core Funds From Operations increased approximately 6% in 2020 compared to the prior year.

In response to the COVID-19 pandemic, we have completed stress testing of our various financial covenants assuming decreases in rental and parking income as appropriate and determined that we still have significant capacity with respect to all our covenant ratios.

During the fourth quarter of 2020, we collected approximately 99% of our billed contractual rents on a monthly basis.

We continued to experience the repercussions of the COVID-19 pandemic during the fourth quarter of 2020, including the residual effect of forced closures and other restrictions that have had a material adverse effect on the global economy and the regional U.S.

economies in which Piedmont operates.

Specifically, the pandemic and its impact on the U.S., as well as the global economy, has negatively impacted the trading price of Piedmont's common stock and some of Piedmont's tenants' ability to pay their rent.

As of the date of this filing, we have entered into approximately 70 agreements with various tenants that primarily deferred approximately $7.1 million of 2020 rent payments into fourth quarter of 2020 or the year ending December 31, 2021.

The vast majority of tenants in repayment periods for prior deferrals have been performing well, with approximately $1.3 million of the $7.1 million already collected.

Nonetheless, Piedmont has established an approximately $4.6 million general reserve for potential collectibility issues.

There can be no assurances that this amount will be sufficient to cover any future losses of rental income should these tenants be unable to pay back deferred rents when such rents become due.

The long-term impacts of the COVID-19 pandemic remain unknown.

A prolonged economic downturn or recession resulting from the pandemic could adversely affect many of Piedmont's tenants which could, in turn, adversely impact Piedmont's business, financial condition and results of operations.

Piedmont will continue to work closely with its tenants and address their concerns on a case-by-case basis, seeking solutions that address immediate cash flow interruptions while maintaining long term lease obligations.

Liquidity and Capital Resources

On February 12, 2020, we acquired the "Dallas Galleria Office Towers", three Class A office towers totaling approximately 1.4 million square feet of office space, associated parking garages, and a 1.9 acre land parcel located within a 3.7 million square foot mixed-use development in Dallas, Texas that includes the the Galleria Dallas retail destination, encompassing over 30 dining options and 1.5 million square feet of shopping, along with the 448-room Westin Galleria Hotel, for a net purchase price of approximately $396 million, or approximately $275 per square foot.

The acquisition was initially funded with cash on hand and borrowings under our $500 Million 2018 Line of Credit.

As a result, we entered into an additional, short-term, $150 million bank availability loan.

Over the next several months, we intend to use cash flows generated from the operation of our properties, proceeds from selective property dispositions, and proceeds from both our $500 Million Unsecured 2018 Line of Credit and $150 million term loan (if necessary) as our primary sources of immediate liquidity.

We intend to pay down the line of credit using the net proceeds from the anticipated sale of 1901 Market Street in Philadelphia, Pennsylvania.

In addition, when necessary we may seek new secured or unsecured borrowings from third party lenders or issue securities as additional sources of capital.

We intend to use cash on hand, cash flows generated from the operation of our properties, net proceeds from the disposition of select properties, and proceeds from our $500 Million Unsecured 2018 Line of Credit as our primary sources of immediate liquidity.

During the fourth quarter of 2020, we sold our last three properties in New Jersey (consisting of 600 Corporate Drive and 200 and 400 Bridgewater Crossing, collectively the "New Jersey Portfolio"), and used a portion of the proceeds to purchase an asset in downtown Orlando, Florida.

We have approximately $462 million of capacity on our $500 million line of credit available as of filing.

When necessary, we may seek new secured or unsecured borrowings from third party lenders or issue securities as additional sources of capital.

The nature and timing of these additional sources of capital will be highly dependent on market conditions.

2 unchanged sentences

December 31, 2020 December 31, 2019

Capital expenditures for new development $ 30 $ 78

Capital expenditures for redevelopment/ renovations $ 18,600 $ 11,901

3 unchanged sentences

(1) Of the total amounts paid, approximately $0.6 million and $2.7 million related to soft costs such as capitalized interest, payroll, and other general and administrative expenses for the year ended December 31, 2020 and 2019, respectively.

"Capital expenditures for new development" relate to initial capital costs for potential new office development projects at certain of our existing land parcels.

"Capital expenditures for redevelopment/renovations" during the year ended December 31, 2019 primarily related to a redevelopment project to upgrade amenities at our US Bancorp building in Minneapolis, Minnesota, as well as a redevelopment project to upgrade common areas, amenities, and parking, at our Two Pierce Place building in Itasca, Illinois.

Expenditures during the year ended December 31, 2018 primarily related to the redevelopment project at Two Pierce Place.

Given that our operating model frequently results in leases for large blocks of space to credit-worthy tenants, our leasing success can result in capital outlays which vary from one reporting period to another based upon the specific leases executed.

For example, for leases executed during the year ended December 31, 2019, we committed to spend approximately $5.86 per square foot per year of lease term for tenant improvement allowances and lease commissions (net of expiring lease commitments), as compared to $5.64 per square foot per year of lease term (net of expired lease commitments) for the year ended December 31, 2018.

As of the date of this filing, we had one individually significant tenant improvement commitment related to the approximately 20-year, approximately 520,000 square foot renewal and expansion of the State of New York's lease at our 60 Broad Street building in New York City that was executed during the fourth quarter of 2019.

In conjunction with

Index to Financial Statements

that lease, we anticipate spending approximately $5.50 per square foot per year of lease term over the next five years for market-based tenant improvement allowances.

"Capital expenditures for redevelopment/renovations" during the year ended December 31, 2020 primarily related to a redevelopment project to upgrade amenities at our 200 South Orange building in Orlando, Florida, as well as a redevelopment master plan project to upgrade common areas, amenities, and parking, at our Galleria buildings in Atlanta, Georgia.

Expenditures during the year ended December 31, 2019 primarily related to a redevelopment project to upgrade amenities at our US Bancorp building in Minneapolis, Minnesota, as well as a redevelopment project to upgrade common areas, amenities, and parking, at our Two Pierce Place building in Itasca, Illinois.

"Other capital expenditures, including building and tenant improvements" include all other capital expenditures during the period and are typically comprised of tenant and building improvements necessary to lease, maintain, or provide enhancements to our existing portfolio of office properties, including tenant improvements totaling approximately $13.4 million for the 520,000 square foot, 20-year renewal and expansion of the State of New York at our 60 Broad Street building in New York City incurred during the year ended December 31, 2020.

For example, for leases executed during the year ended December 31, 2020, we committed to spend approximately $5.79 per square foot per year of lease term for tenant improvement allowances and lease commissions (net of expired lease commitments) as compared to $5.86 (net of expired lease commitments) for the year ended December 31, 2019.

As of December 31, 2020, we had one individually significant unrecorded tenant allowance commitment outstanding of approximately $38.2 million related to the State of New York's lease at our 60 Broad Street building mentioned above.

In addition to the amounts that we have already committed to as a part of executed leases, we also anticipate continuing to incur similar market-based tenant improvement allowances and leasing commissions in conjunction with procuring future leases for our existing portfolio of properties.

Both the timing and magnitude of expenditures related to future leasing activity are highly dependent on the competitive market conditions at the time of lease negotiations of the particular office market within which a given lease is signed.

In particular, we are currently in the process of negotiating the renewal of a majority of the current 320,000 square foot lease with the City of New York, at our 60 Broad Street building in New York City, that expires during 2020, and we anticipate spending significant capital for market-based tenant improvement allowances and leasing commissions over the next several years associated with the renewal.

Both the timing and magnitude of expenditures related to future leasing activity can vary due to a number of factors, including being highly dependent on the competitive market conditions at the time of lease negotiations of the particular office market within which a given lease is signed.

For example, we anticipate negotiating the long-term renewal of a majority of the City of New York's 313,000 square foot lease at our 60 Broad Street building.

Depending on the length of the lease term, we anticipate committing to spend significant capital for market-based tenant improvement allowances and leasing commissions associated with the renewal.

There are other uses of capital that may arise as part of our typical operations.

Subject to the identification and availability of attractive investment opportunities and our ability to consummate such acquisitions on satisfactory terms, acquiring new assets compatible with our investment strategy could also be a significant use of capital.

We may also use capital resources to repurchase additional shares of our common stock under our stock repurchase program when we believe the stock is trading at a significant discount to net asset value.

On February 19, 2020, Piedmont's Board of Directors extended the authorization of the stock repurchase program for up to $200 million in share repurchases through February 2022, at the discretion of management.

Finally, although we have no scheduled debt maturities until the third quarter of 2021, we expect to use capital to repay debt obligations when they become due or when we deem it prudent to refinance various obligations.

Subject to the identification and availability of attractive investment opportunities and our ability to consummate such acquisitions on satisfactory terms, acquiring new assets consistent with our investment strategy could also be a significant use of capital.

We may also use capital resources to repurchase additional shares of our common stock under our stock repurchase program when we believe the stock is trading disparately from our peers and at a significant discount to net asset value.

As of December 31, 2020 , we had approximately $169.3 million of board-authorized capacity remaining for future stock repurchases.

Finally, although we have no scheduled debt maturities until the third quarter of 2021, we may use capital to repay debt obligations when we deem it prudent to refinance various obligations.

The amount and form of payment (cash or stock issuance) of future dividends to be paid to our stockholders will continue to be largely dependent upon (i) the amount of cash generated from our operating activities;

6 unchanged sentences

With the fluctuating nature of cash flows and expenditures, we may periodically borrow funds on a short-term basis to cover timing differences in cash receipts and cash disbursements.

Index to Financial Statements

Results of Operations (2020 vs.

Net income applicable to common stockholders for the year ended December 31, 2020 was $232.7 million, or $1.85 per diluted share, as compared with net income applicable to common stockholders of $229.3 million, or $1.82 per diluted share, for the year ended December 31, 2019.

The year ended December 31, 2019 included approximately $188.1 million, or $1.49 per diluted share, of gains on sales of real estate assets net of impairment losses, whereas the prior year included approximately $75.7 million, or $0.58 per diluted share, of gains on sales of real estate assets.

Index to Financial Statements

Results for the year ended December 31, 2020 included approximately $205.7 million of gains on sales of real estate assets, whereas the prior year included approximately $188.1 million of gains on sales of real estate assets net of impairment losses, a $0.14 per diluted share increase from the prior year.

However, the increase was mostly offset by an increase in amortization expense related to acquired lease intangible assets as part of the net property acquisition activity subsequent to January 1, 2019.

Comparison of the accompanying consolidated statements of income for the year ended December 31, 2020 vs.

19 unchanged sentences

Rental and tenant reimbursement revenue increased approximately $8.0 million for the year ended December 31, 2020 as compared to the same period in the prior year.

The variance was primarily due to new leases at higher overall rental rates commencing during 2018 and 2019 in our existing portfolio.

Further, we recognized increased reimbursement revenue as a result of higher recoverable property operating costs, contributing approximately $1.0 million to the increase.

Property management fee revenue increased approximately $1.9 million for the year ended December 31, 2019 as compared to the same period in the prior year.

The increase was primarily due to construction management fees received from one of our former Independence Square properties during the year ended December 31, 2019, with such fees varying from year-to-year due to the variability of construction activity.

Other property related income decreased approximately $2.2 million for the year ended December 31, 2019 as compared to the same period in the prior year.

The decrease in parking revenue earned in 2019 when compared to the prior period is due to the sale of the 800 North Brand Boulevard building in November 2018, and the sale of the 500 West Monroe Street building in October 2019;

with both buildings generating large parking garage incomes.

Property operating costs increased approximately $2.1 million for the year ended December 31, 2019 as compared to the same period in the prior year.

Approximately $4.6 million of the increase was due to higher overall property operating costs in our existing portfolio, particularly parking, janitorial, and repairs and maintenance costs.

This increase was offset by approximately $2.8 million of lower overall expenses resulting from net disposition activity subsequent to January 1, 2018.

Depreciation expense decreased approximately $2.0 million for the year ended December 31, 2019 compared to the same period in the prior year.

Approximately $6.0 million of the decrease was attributable to net disposition activity subsequent to January 1, 2018;

however, this decrease was offset by approximately $4.0 million of depreciation on additional building and tenant improvements placed in service subsequent to January 1, 2018.

The favorable variance was primarily due to capital transaction activity subsequent to January 1, 2019 and new leases commencing at higher overall rental rates.

These increases were partially offset by the establishment of receivable reserves as a result of the COVID-19 pandemic during the year ended December 31, 2020, along with decreased portfolio occupancy.

Property management fee revenue decreased approximately $0.5 million for the year ended December 31, 2020 as compared to the same period in the prior year.

The decrease was primarily due to construction management fees received in the prior year from one of our former Independence Square properties, with such fees varying from period-to-period due to the variability of construction activity.

Other property related income decreased approximately $5.7 million for the year ended December 31, 2020 as compared to the same period in the prior year primarily due to the sale of the 500 West Monroe Street building with its 1,300-space parking

Index to Financial Statements

garage during the fourth quarter of 2019, as well as lower transient parking utilization at our buildings during 2020 as a result of the COVID-19 pandemic.

These decreases were partially offset by new parking revenue associated with acquisitions consummated subsequent to January 1, 2019.

Property operating costs increased approximately $3.5 million for the year ended December 31, 2020 as compared to the same period in the prior year.

This variance was primarily due to capital transaction activity subsequent to January 1, 2019, and higher property tax expense in certain markets, partially offset by lower utility and janitorial costs as a result of reduced building utilization across our portfolio as a result of the pandemic, along with decreased portfolio occupancy.

Depreciation expense increased approximately $4.6 million for the year ended December 31, 2020 compared to the same period in the prior year.

The increase was due primarily to additional building and tenant improvements placed in service subsequent to January 1, 2019, partially offset by a decrease in depreciation associated with capital transaction activity subsequent to January 1, 2019.

Amortization expense increased approximately $16.6 million for the year ended December 31, 2020 compared to the same period in the prior year.

Approximately $22.5 million of the increase was due to the amortization of lease intangible assets associated with properties acquired subsequent to January 1, 2018.

A significant portion of this increase was offset by certain lease intangible assets or other deferred costs at our existing properties becoming fully amortized as a result of the expiration of leases subsequent to January 1, 2018.

During the year ended December 31, 2019, we recognized impairment losses on real estate assets totaling approximately $8.9 million related to our 600 Corporate Drive asset in Lebanon, New Jersey, as well as an impairment loss recognized in conjunction with the disposition of The Dupree building in September 2019 (see Note 7 and Note 13 to the accompanying consolidated financial statements for more details).

General and administrative expenses increased approximately $8.2 million for the year ended December 31, 2019 as compared to the same period in the prior year primarily due to increased accruals of expense associated with potential performance-based equity compensation as a result of our relative stock performance during the current year.

The remainder of the increase is due to approximately $3.2 million of retirement and separation expenses recognized in June 2019 for the senior management transition.

Approximately $23.2 million of the increase was due to capital transaction activity completed subsequent to January 1, 2019.

This increase was partially offset by certain lease intangible assets or other deferred costs at our existing properties becoming fully amortized as a result of the expiration of leases subsequent to January 1, 2019.

During the prior year ended December 31, 2019, we recognized impairment losses on real estate assets totaling approximately $8.9 million related to our 600 Corporate Drive asset in Lebanon, New Jersey, as well as an impairment loss recognized in conjunction with the disposition of The Dupree building in September 2019 (see Note 7 and Note 13 to the accompanying consolidated financial statements for more details).

No impairment losses on real estate assets were recorded during the year ended December 31, 2020.

General and administrative expenses decreased approximately $10.4 million for the year ended December 31, 2020 as compared to the same period in the prior year with the current period reflecting decreased accruals for incentive and stock based compensation and the prior period reflecting certain one-time expenses associated with the senior management transition that took place on June 30, 2019, resulting in lower compensation at the executive level in the current period.

Other Income (Expense)

Interest expense increased approximately $0.6 million for the year ended December 31, 2019 as compared to the same period in the prior year primarily as a result of higher average balances outstanding during the current year.

The variance was partially offset by an increase in capitalized interest in the current year, as compared to the prior year, of approximately $0.8 million.

The loss on extinguishment of debt for the year ended December 31, 2018 was associated with the early repayment of our $170 Million Unsecured 2015 Term Loan and our $300 Million Unsecured 2013 Term Loan.

The loss includes the write-off of unamortized debt issuance costs, discounts, and costs related to the termination of interest rate swap agreements associated with the debt.

Gain on sale of real estate assets during the year ended December 31, 2019 reflected an approximately $33.2 million gain recognized on the sale of the One Independence Square building in Washington, D.C.

that closed in February 2019, an approximately $6.1 million adjustment of the gain on sale for the Two Independence Square building related to the reimbursement of certain previously disputed tenant improvement overages, and an approximately $157.7 million gain recognized on the sale of the 500 West Monroe Street building in Chicago, Illinois.

During the year ended December 31, 2018, gain on sale of real estate assets represents the approximately $30.4 million gain recognized on the sale of the 800 North Brand Boulevard building in Glendale, California in November 2018, as well as certain assets included in the sale of the 2017 Disposition Portfolio comprised of 14 non-core assets in various markets that closed in January 2018, which contributed an additional $45.3 million gain.

Interest expense decreased approximately $6.6 million for the year ended December 31, 2020 as compared to the same period in the prior year primarily as a result of lower interest rates during the current year, as well as the repayment of the $160 million mortgage debt in conjunction with our sale of the 1901 Market Street building in June 2020.

This variance was partially offset by a decrease in capitalized interest in the current year, as compared to the prior year, of approximately $1.2 million.

Other income increased approximately $1.0 million for the year ended December 31, 2020 as compared to the same period in the prior year.

The variance is primarily attributable to interest income recognized on notes receivable extended to the purchaser of our New Jersey Portfolio.

The notes receivable mature in October 2023 (see Note 13 to the accompanying consolidated financial statements for more details) and are secured by the 200 and 400 Bridgewater Crossing properties.

The loss on extinguishment of debt for the year ended December 31, 2020 was associated with the early repayment of the $160 Million Fixed-Rate Loan which was collateralized by the 1901 Market Street building.

The property was sold in June 2020.

The loss was comprised of a prepayment penalty and the write-off of unamortized debt issuance costs and discounts associated with the loan.

Gain on sale of real estate assets during the year ended December 31, 2020 includes a gain of approximately $191.0 million recognized on the sale of the 1901 Market Street building in Philadelphia, Pennsylvania and a gain of approximately $14.6 million recognized on the sale of the New Jersey Portfolio.

Gain on sale of real estate assets during the year ended December 31, 2019 includes approximately $33.2 million gain recognized on the sale of the One Independence Square building in Washington, D.C., an approximately $6.1 million adjustment of the gain on sale for the Two Independence Square building related to the reimbursement of certain previously disputed tenant improvement overages, and an approximately $157.7 million gain recognized on the sale of the 500 West Monroe Street building in Chicago, Illinois.

Index to Financial Statements

Results of Operations (2019 vs.

2 unchanged sentences

2018)" in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC on February 19, 2020, for a discussion of the results of operations for the year ended December 31, 2019 as compared to the year ended December 31, 2018.

Issuer and Guarantor Financial Information

During the years ended December 31, 2013 and 2014 and 2020, Piedmont, through its wholly-owned subsidiary Piedmont Operating Partnership, LP ("Piedmont OP" or the "Issuer"), issued senior unsecured notes payable of $350 million, $400 million, and $300 million, respectively (collectively, the "Notes").

The Notes are senior unsecured obligations of Piedmont OP and rank equally in right of payment with all of Piedmont OP's other existing and future senior unsecured indebtedness and are effectively subordinated in right of payment to all of Piedmont OP’s existing and future mortgage indebtedness and other secured indebtedness (to the extent of the value of the collateral securing such indebtedness) and to all existing and future indebtedness and other liabilities of Piedmont OP’s subsidiaries, whether secured or unsecured.

The Notes are fully and unconditionally guaranteed by Piedmont Office Realty Trust, Inc.

(the "Guarantor"), the parent entity that consolidates Piedmont OP and all other subsidiaries.

By execution of the guarantee, the Guarantor guarantees to each holder of the Notes that the principal and interest on the Notes will be paid in full when due, whether at the maturity dates of the respective loans, or upon acceleration, upon redemption, or otherwise, and interest on overdue principal and interest on any overdue interest, if any, on the Notes and all other obligations of the Issuer to the holders of the Notes will be promptly paid in full.

The Guarantor's guarantee of the Notes is its senior unsecured obligation and ranks equally in right of payment with all of the Guarantor's other existing and future senior unsecured indebtedness and guarantees.

The Guarantor’s guarantee of the notes is effectively subordinated in right of payment to all existing and future mortgage indebtedness and other secured indebtedness and secured guarantees of the Guarantor (to the extent of the value of the collateral securing such indebtedness and guarantees);

and all existing and future indebtedness and other liabilities, whether secured or unsecured, of the Guarantor’s subsidiaries.

In the event of the bankruptcy, liquidation, reorganization or other winding up of Piedmont OP or the Guarantor, assets that secure any of their respective secured indebtedness and other secured obligations will be available to pay their respective obligations under the Notes or the guarantee, as applicable, and their other respective unsecured indebtedness and other unsecured obligations only after all of their respective indebtedness and other obligations secured by those assets have been repaid in full.

The non-Guarantors are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due pursuant to the Notes, or to make any funds available therefore, whether by dividends, loans, distributions or other payments.

Pursuant to Rule 13-01 of Regulation S-X, Guarantors and Issuers of Guaranteed Securities Registered or Being Registered , the following tables present summarized financial information for Piedmont OP as Issuer and Piedmont Office Realty Trust, Inc.

as Guarantor on a combined basis after elimination of (i) intercompany transactions and balances among the Issuer and the Guarantor and (ii) equity in earnings from and investments in any subsidiary that is a non-Guarantor (in thousands):

Combined Balances of Piedmont OP and Piedmont Office Realty Trust, Inc.

as Issuer and Guarantor, respectively As of

December 31, 2020

December 31, 2019

Due from non-guarantor subsidiary $ 810 $ 810

Total assets $ 347,757 $ 364,734

Total liabilities $ 1,654,009 $ 1,343,881

For the Year Ended December 31, 2020

Total revenues $ 43,193

Net loss $ (50,803)

Index to Financial Statements

Net Operating Income by Geographic Segment

The chief operating decision maker ("CODM"), who is our President and Chief Executive Officer, evaluates our portfolio and assesses the ongoing operations and performance of our properties utilizing the following geographic segments:

Dallas, Atlanta, Washington, D.C., Minneapolis, Boston, Orlando, and New York.

These operating segments are also Piedmont’s reportable segments.

Additionally, as of December 31, 2020, Piedmont owns two properties in Houston and one property in Chicago that do not meet the definition of an operating or reportable segment as the CODM does not regularly review these properties for purposes of allocating resources or assessing performance, and Piedmont does not maintain a significant presence or anticipate further investment in these markets.

These three properties are included in "Corporate and other" below.

See Note 17 , Segment Information , to the accompanying consolidated financial statements for additional information and a reconciliation of Net income applicable to Piedmont to Net Operating Income ("NOI").

The following table presents NOI by geographic segment (in thousands):

Years Ended December 31,

Dallas $ 59,845 $ 29,438

Atlanta 60,276 47,287

Washington, D.C.

36,696 41,167

Minneapolis 33,588 35,610

Boston 41,722 44,016

Orlando 34,427 35,433

New York 38,990 44,036

Total reportable segments 305,544 276,987

Corporate and other 13,915 43,637

Total NOI $ 319,459 $ 320,624

Comparison of the Year Ended December 31, 2020 Versus the Year Ended December 31, 2019

NOI increased primarily as a result of the purchase of the Dallas Galleria Office Towers in February 2020.

NOI increased primarily due to a full year of operating income at the Galleria 400 and 600 buildings, as well as the commencement of leases across the Atlanta market.

Washington, D.C.

NOI decreased largely due to the sale of the One Independence Square property in February 2019, as well as the write-off of certain lease-related assets at our 3100 Clarendon Boulevard building during the year ended December 31, 2020.

NOI decreased primarily due to the sale of the New Jersey Portfolio in October 2020.

Corporate and other

NOI decreased primarily as a result of the sale of 1901 Market Street building in Philadelphia, Pennsylvania in June 2020, as well as the sale of the 500 West Monroe Street building in Chicago, Illinois in October 2019.

Index to Financial Statements

Funds From Operations ("FFO"), Core Funds From Operations ("Core FFO"), and Adjusted Funds From Operations (“AFFO”)

2 unchanged sentences

Management believes that accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time.

Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient alone.

As a result, we believe that the additive use of FFO, Core FFO, and AFFO, together with the required GAAP presentation, provides a more complete understanding of our performance relative to our competitors and a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities.

Index to Financial Statements

We calculate FFO in accordance with the current National Association of Real Estate Investment Trusts ("NAREIT") definition.

NAREIT currently defines FFO as follows:

Net income (computed in accordance with GAAP), excluding gains or losses from sales of depreciable real estate and impairment charges (including our proportionate share of gains from sales of property related to investments in unconsolidated joint ventures), plus the add back of depreciation and amortization on real estate assets (including our proportionate share of depreciation and amortization related to investments in unconsolidated joint ventures).

Net income (computed in accordance with GAAP), excluding gains or losses from sales of depreciable real estate and impairment charges, plus the add back of depreciation and amortization on real estate assets.

Other REITs may not define FFO in accordance with the NAREIT definition, or may interpret the current NAREIT definition differently than we do;

7 unchanged sentences

We calculate AFFO by starting with Core FFO and adjusting for non-incremental capital expenditures and acquisition-related costs and then adding back non-cash items including:

non-real estate depreciation, straight-line rent adjustments and fair value lease adjustments, non-cash components of interest expense and compensation expense, and by making similar adjustments for unconsolidated joint ventures.

non-real estate depreciation, straight-line rent adjustments and fair value lease adjustments, non-cash components of interest expense and compensation expense.

AFFO is a non-GAAP financial measure and should not be viewed as an alternative to net income calculated in accordance with GAAP as a measurement of our operating performance.

3 unchanged sentences

Index to Financial Statements

Reconciliations of net income to FFO, Core FFO, and AFFO are presented below (in thousands except per share amounts):

Reconciliations of net income to FFO, Core FFO, and AFFO for the years ended December 31, 2020, 2019, and 2018, respectively, are presented below (in thousands except per share amounts):

GAAP net income applicable to common stock $ 232,688 $ 1.85 $ 229,261 $ 1.82 $ 130,296 $ 1.00

7 unchanged sentences

(205,666) (1.63) (197,010) (1.56) (75,691) (0.58)

Gain on sale- unconsolidated partnerships

— — — — (3,683) (0.03)

NAREIT Funds From Operations applicable to common stock

2 unchanged sentences

— — 3,175 0.02 — —

Acquisition costs

Loss on extinguishment of debt

5 unchanged sentences

Depreciation of non real estate assets

1,216 872 813

Straight-line effects of lease revenue

4 unchanged sentences

(12,284) (8,323) (7,615)

Acquisition costs

Non-incremental capital expenditures (2)

4 unchanged sentences

(1) Based on weighted-average shares outstanding—diluted.

(2) Includes adjustments for wholly-owned properties, as well as such adjustments for our proportionate ownership in unconsolidated joint ventures.

(2) We define non-incremental capital expenditures as capital expenditures of a recurring nature related to tenant improvements, leasing commissions, and building capital that do not incrementally enhance the underlying assets' income generating capacity.

Tenant improvements, leasing commissions, building capital and deferred lease incentives incurred to lease space that was vacant at acquisition, leasing costs for spaces vacant for greater than one year, leasing costs for spaces at newly acquired properties for which in-place leases expire shortly after acquisition, improvements associated with the expansion of a building, and renovations that either enhance the rental rates of a building or change the property's underlying classification, such as from a Class B to a Class A property, are excluded from this measure.

Non-incremental capital expenditures for the year ended December 31, 2020 includes a $16 million leasing commission for the approximately 20-year, 520,000-square-foot renewal and expansion of the State of New York's lease at our 60 Broad Street building in New York City that was executed during the fourth quarter of 2019.

Index to Financial Statements

27 unchanged sentences

93,242 76,610 93,242 76,610

Depreciation and amortization attributable to noncontrolling interests 85 87 85 87

Impairment loss on real estate assets

14 unchanged sentences

(1,724) (228) (1,724) (228)

Non-cash general reserve for uncollectible accounts 4,553 —

Straight-line rent effects of lease revenue

(22,601) (10,411)

Straight-line effects of lease revenue attributable to noncontrolling interests (16) (9)

Amortization of lease-related intangibles

11 unchanged sentences

(1) We calculate Earnings Before Interest, Taxes, Depreciation, and Amortization- Real Estate ("EBITDAre") in accordance with the current National Association of Real Estate Investment Trusts (“NAREIT”) definition.

NAREIT currently defines EBITDAre as net income (computed in accordance with GAAP) adjusted for gains or losses from sales of property, impairment losses, depreciation on real estate assets, amortization on real estate assets, interest expense and taxes, along with the same adjustments for unconsolidated partnerships and joint ventures.

Some of the adjustments mentioned can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates.

1 unchanged sentence

We believe that EBITDAre is helpful to investors as a supplemental performance measure because it provides a metric for understanding our results from ongoing operations without taking into account the effects of non-cash expenses (such as depreciation and amortization) and capitalization and capital structure expenses (such as interest expense and taxes).

We also believe that EBITDAre can help facilitate comparisons of operating performance between periods and with other REITs.

We also believe that EBITDAre can help facilitate comparisons of operating performance between periods and

Index to Financial Statements

with other REITs.

However, other REITs may not define EBITDAre in accordance with the NAREIT definition, or may interpret the current NAREIT definition differently than us;

therefore, our computation of EBITDAre may not be comparable to that of such other REITs.

(2) We calculate Core Earnings Before Interest, Taxes, Depreciation, and Amortization ("Core EBITDA") as net income (computed in accordance with GAAP) before interest, taxes, depreciation and amortization and incrementally removing any impairment losses, gains or losses from sales of property and other significant infrequent items that create volatility within our earnings and make it

Index to Financial Statements

difficult to determine the earnings generated by our core ongoing business.

Core EBITDA is a non-GAAP financial measure and should not be viewed as an alternative to net income calculated in accordance with GAAP as a measurement of our operating performance.

3 unchanged sentences

(3) Presented net of related operating expenses incurred to earn such management fee revenue.

(4) Acquisitions consist of 501 West Church Street in Orlando, Florida, purchased on February 23, 2018;

9320 Excelsior Boulevard in Hopkins, Minnesota, purchased on October 25, 2018;

25 Burlington Mall Road in Burlington, Massachusetts, purchased on December 12, 2018;

Galleria 100 and land in Atlanta, Georgia, purchased on May 6, 2019;

and Galleria 400, Galleria 600 and land in Atlanta, Georgia, purchased on August 23, 2019.

(5) Dispositions consist of a 14-property portfolio sold on January 4, 2018 (comprised of 2300 Cabot Drive in Lisle, Illinois;

Windy Point I and II in Schaumburg, Illinois;

Suwanee Gateway One and land in Suwanee, Georgia;

1200 Crown Colony Drive in Quincy, Massachusetts;

Piedmont Pointe I and II in Bethesda, Maryland;

1075 West Entrance Drive and Auburn Hills Corporate Center in Auburn Hills, Michigan;

5601 Hiatus Road in Tamarac, Florida;

2001 NW 64th Street in Ft.

Lauderdale, Florida;

Desert Canyon 300 in Phoenix, Arizona;

5301 Maryland Way in Brentwood, Tennessee;

and 2120 West End Avenue in Nashville, Tennessee);

800 North Brand Boulevard in Glendale, California, sold on November 29, 2018;

One Independence Square in Washington, D.C., sold on February 28, 2019;

The Dupree in Atlanta, Georgia, sold on September 4, 2019, and 500 West Monroe Street in Chicago, Illinois, sold on October 28, 2019.

(6) Other investments consist of active or recently completed redevelopment and development projects for which some portion of operating expenses were capitalized during the current and/or prior year reporting periods and land.

The operating results from Two Pierce Place in Itasca, Illinois, are included in this line item.

(4) Acquisitions consist of Galleria 100 in Atlanta, Georgia, purchased on May 6, 2019;

Galleria 400 and Galleria 600 in Atlanta, Georgia, purchased on August 23, 2019;

One Galleria Tower, Two Galleria Tower and Three Galleria Tower in Dallas, Texas, purchased on February 12, 2020;

and 222 South Orange Avenue in Orlando, Florida, purchased on October 29, 2020.

(5) Dispositions consist of One Independence Square in Washington, D.C., sold on February 28, 2019;

The Dupree in Atlanta, Georgia, sold on September 4, 2019;

500 West Monroe Street in Chicago, Illinois, sold on October 28, 2019;

1901 Market Street in Philadelphia, Pennsylvania, sold on June 25, 2020;

and the New Jersey Portfolio sold on October 28, 2020 (consisting of 200 and 400 Bridgewater Crossing in Bridgewater, New Jersey, and 600 Corporate Drive in Lebanon, New Jersey).

(6) Other investments consist of active redevelopment and development projects, land, and recently completed redevelopment and development projects for which some portion of operating expenses were capitalized during the current and/or prior year reporting periods.

The operating results from Two Pierce Place in Itasca, Illinois and 222 South Orange Avenue in Florida are included in this line item.

Our portfolio is a geographically diverse group of properties located primarily in select sub-markets within seven major Eastern U.S.

office markets.

office markets, with a majority of our ALR being generated from the Sunbelt.

We typically lease space to large, credit-worthy corporate or governmental tenants on a long-term basis.

As of December 31, 2019, our average lease is approximately 20,000 square feet with seven years of lease term remaining.

As of December 31, 2020, our average lease is between 15,000 and 20,000 square feet with six years of lease term remaining.

Consequently, leased percentage, as well as rent roll ups and roll downs, which we experience as a result of re-leasing, can fluctuate widely between buildings and between tenants, depending on when a particular lease is scheduled to commence or expire.

Leased Percentage

As of December 31, 2019, our in-service portfolio of 54 office properties was 91.2% leased, down from 93.3% leased as of December 31, 2018, and scheduled lease expirations for the portfolio as a whole for the year ended December 31, 2020 are 8.8% of our ALR.

To the extent new leases for currently vacant space outweigh or fall short of scheduled expirations, such leases would increase or decrease our leased percentage, respectively.

Our leased percentage may also fluctuate with the impact of various occupancy levels in our net acquisition and disposition activity and we anticipate our leased percentage will decrease during early 2020 as a result of placing our recently re-developed, 42% leased asset, Two Pierce Place in Chicago, Illinois (approximately 487,000 square feet) in service on January 1, 2020.

On a same store basis, our portfolio was approximately 88% leased as of December 31, 2020, as compared to 91% leased as of December 31, 2019.

Other than the City of New York's 313,000 square foot lease that is currently in holdover status at 60 Broad Street in New York, we have no leases greater than 1% of our ALR expiring during the eighteen month period following December 31, 2020.

We remain in advanced discussions for the renewal of substantially all of the City of New York's leased square footage.

To the extent new leases for currently vacant space outweigh or fall short of scheduled expirations, such leases would increase or decrease our overall leased percentage, respectively.

Impact of Downtime, Abatement Periods, and Rental Rate Changes

1 unchanged sentence

The downtime between a lease expiration and the new lease's commencement can negatively impact Property NOI and Same Store NOI comparisons (both accrual and cash basis).

In addition, office leases, both new and lease renewals, often contain upfront rental and/or operating expense abatement periods which delay the cash flow benefits of the lease even after the new lease or renewal has commenced and will continue to negatively impact Property NOI and Same Store NOI on a cash basis until such abatements expire.

As of December 31, 2019, we had approximately 348,000 square feet of executed leases related to currently vacant space that had not yet commenced and approximately 660,000 square feet of commenced leases that were in some form of rental and/or operating expense abatement.

In addition, office leases, both new and renewal, often contain upfront rental and/or operating expense abatement periods which delay the cash flow benefits of the lease even after the new lease or renewal has commenced and will continue to negatively impact Property NOI and Same Store NOI on a cash basis until such abatements expire.

As of December 31, 2020, we had approximately 1 million square feet of executed leases for vacant space yet to commence or under rental abatement.

If we are unable to replace expiring leases with new or renewal leases at rental rates equal to or greater than the expiring rates, rental rate roll downs could occur and negatively impact Property NOI and Same Store NOI comparisons.

As mentioned above, our geographically diverse portfolio and the magnitude of some of our tenant's leased space can result in rent roll ups and roll downs that can fluctuate widely on a building-by-building and a quarter-to-quarter basis.

For the portfolio in general during the year ended December 31, 2019, we experienced a 9.8% and 21.6% roll up on executed leases in stated cash and accrual rents, respectively, from new leases and renewals for space that was vacant one year or less, as compared to a 2.4% and 9.1% roll up

During the year ended December 31, 2020, we experienced a 3.5% and 10.2% roll up in cash and accrual rents, respectively, on leases executed during the period for space vacant one year or less.

Index to Financial Statements

on executed leases in stated cash and accrual rents, respectively, for similar space during the year ended December 31, 2018.

The significant roll up in accrual rents during the year ended December 31, 2019 was significantly impacted by the approximately 520,000 square foot, 20-year renewal of the State of New York's lease at 60 Broad Street in New York City.

Same Store NOI increased 5.7% and 2.5% on a cash and accrual basis, respectively, for the year ended December 31, 2019 as compared to the year ended December 31, 2018.

The increase in cash basis Same Store NOI was attributable to the expiration of lease abatements.

The slight increase in accrual basis Same Store NOI was related to the commencement of leases with higher straight-line rents and higher average occupancy levels during the year ended December 31, 2019, offset by down times between leases at certain assets.

Property NOI and Same Store NOI comparisons for any given period may still fluctuate as a result of the mix of net leasing activity in individual properties during the respective period.

Same Store NOI decreased by 1.7% and 0.2% on a cash and accrual basis, respectively, for the year ended December 31, 2020 as compared to the year ended December 31, 2019.

The decrease in cash basis Same Store NOI was primarily attributable to the deferral, net of subsequent collections, of approximately $5.8 million of 2020 rental payments.

Additional contributors to the decreases were a reduction in transient parking revenue as a result of the pandemic and decreased portfolio occupancy in 2020 when compared to 2019.

Property NOI and Same Store NOI comparisons for any given period fluctuate as a result of the mix of net leasing activity in individual properties during the respective period.

Election as a REIT

24 unchanged sentences

Valuation of Real Estate Assets

We continually monitor events and changes in circumstances that could indicate that the carrying amounts of the real estate and related intangible assets, both operating properties and properties under construction, in which we have an ownership interest,

When indicators of potential impairment are present, we assess whether the respective carrying values will be recovered from the undiscounted future operating cash flows expected from the use of the asset and its eventual disposition for assets held for use, or from the estimated fair value, less costs

Index to Financial Statements

either directly or through investments in joint ventures, may not be recoverable.

to sell, for assets held for sale.

In the event that the expected undiscounted future cash flows for assets held for use or the estimated fair value, less costs to sell, for assets held for sale do not exceed the respective asset carrying value, we adjust such assets to the respective estimated fair values and recognize an impairment loss.

20 unchanged sentences

Accounting Pronouncements Adopted during the Year Ended December 31, 2020

During the year ended December 31, 2019, we adopted Accounting Standards Update No.

2016-02, Leases (Topic 842) , as well as various associated updates and amendments, which together comprise the requirements for lease accounting under Accounting Standards Codification 842 ("ASC 842").

ASC 842 fundamentally changed the definition of a lease, as well as the accounting for operating leases, by requiring lessees to recognize a liability to make lease payments and a right-of-use asset representing the right to use the leased asset over the term of the lease.

ASC 842 also prohibits the capitalization of internal direct payroll costs associated with negotiating and executing leases.

Accounting for leases by lessors is substantially

Reference Rate Reform Relief

Accounting Standards Update No.

2020-04, Reference Rate Reform (Topic 848) ("ASU 2020-04"), was issued in March 2020.

ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts.

The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur.

During the year ended December 31, 2020, we elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives.

Application of these expedients preserves the presentation of derivatives consistent with past presentation.

We continue to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.

Index to Financial Statements

unchanged from prior practice as lessors continue to recognize lease revenue on a straight-line basis.

Substantially all of our leases are with tenants (as lessees) in buildings owned and operated by us (as lessor).

Operating leases where we are the lessee consist primarily of office space in buildings owned by a third party.

The accounting for these leases resulted in recording immaterial right-of-use assets and lease liabilities.

In conjunction with adopting ASC 842, we adopted certain optional practical expedients, transition amendments, or made accounting policy elections as further detailed in Note 2 to our accompanying consolidated financial statements.

Stock Compensation to Nonemployees

During the year ended December 31, 2019, we adopted ASU No.

2018-07, Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting ("ASU 2018-07").

The provisions of ASU 2018-07 align accounting for stock based compensation for non-employees for goods and services with existing accounting for similar compensation for employees.

ASU 2018-07 requires an entity to remeasure liability-classified awards that have not been settled by the date of adoption and equity-classified awards for which a measurement date has not been established through a cumulative-effect adjustment to retained earnings as of January 1, 2019.

Our only awards affected by ASU 2018-07 are equity-classified award grants to our independent board of directors, which have been historically recognized in the same manner prescribed by the newly adopted standard.

As such, there was no cumulative effect adjustment recognized upon adoption.

Other Recent Accounting Pronouncements

The FASB has issued ASU No.

Financial Instruments- Credit Loss Amendments

On January 1, 2020, we adopted ASU No.

2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments , as well as ASU No.

3 unchanged sentences

The provisions of the Credit Loss Amendments replace the "incurred loss" approach with an "expected loss" model for impairing trade and other receivables, held-to-maturity debt securities, net investment in leases, and off-balance-sheet credit exposures, which will generally result in earlier recognition of allowances for credit losses.

Additionally, the provisions change the classification of credit losses related to available-for-sale securities to an allowance, rather than a direct reduction of the amortized cost of the securities.

Further, the FASB has issued ASU No.

Both ASU 2018-19 and the Credit Loss Amendments are effective in the first quarter of 2020, with early adoption permitted as of January 1, 2019.

We are currently evaluating the potential impact of adoption;

however, substantially all of our receivables are operating lease receivables and as such, we do not anticipate any material impact to our consolidated financial statements as a result of adoption of the Credit Loss Amendments and ASU 2018-19.

However, the Financial Accounting Standards Board (the "FASB") also issued ASU No.

2018-19 Codification Improvements to Topic 326, Financial Instruments - Credit Losses, which is effective concurrent with the Credit Loss Amendments, and excludes receivables arising from operating leases from the scope of the Credit Loss Amendments and affirms that such receivables should be evaluated for collectibility as prescribed by Accounting Standards Codification 842 Leases .

As s ubstantially all of our receivables are operating lease receivables there was no material impact to our accompanying consolidated financial statements or disclosures as a result of adoption of the Credit Loss Amendments.

During the year ended December 31, 2020, the FASB issued a Staff Q&A on Topic 842 and Topic 840 (lease accounting guidance):

Accounting for lease concessions related to the effects of the COVID-19 pandemic .

Generally, changes to payment terms not contemplated by the lease contract should be accounted for under Topic 842 as a lease modification.

The FASB staff has provided relief from this modification guidance through an accounting policy election, provided that changes to the payment terms do not result in a substantial increase in the rights of either the lessee or the lessor under the lease.

We have elected not to apply the relief provided by the FASB Staff, and have instead accounted for all rent relief agreements as result of COVID-19 as lease modifications.

See further details concerning rent relief agreements with our tenants in Note 8 to our accompanying consolidated financial statements.

Related-Party Transactions and Agreements

There were no related-party transactions during the three years ended December 31, 2020, other than a consulting agreement with our former Chief Investment Officer ("CIO"), Raymond L.

Owens retired effective June 30, 2017, but will remain a consultant for us until June 30, 2020 and will earn $18,500 per month.

During the year ended December 31, 2019, we incurred approximately $222,000 related to this consulting agreement.

Owens retired effective June 30, 2017, and remained a consultant for us until June 30, 2020, earning $18,500 per month.

During the years ended December 31, 2020, 2019, and 2018, Piedmont recognized approximately $ 0.1 million, $ 0.2 million, and $ 0.3 million, respectively, of expense related to this consulting agreement.

Additionally, during the year ended December 31, 2019, we entered into employment or retirement agreements with certain of our current and former executive officers as more fully described in our Definitive Proxy Statement and Current Report on Form 8-K filed on March 19, 2019.

9 unchanged sentences

(1) Contractual obligations do not include amounts committed for tenant or capital improvements under leases where Piedmont is the lessor.

However, see Note 8 to our accompanying consolidated financial statements for details concerning our material lease commitments.

Index to Financial Statements

(2) Amounts include principal payments only and balances outstanding as of December 31, 2019, not including unamortized issuance discounts, debt issuance costs paid to lenders, or estimated fair value adjustments.

However, see Note 8 to our accompanying consolidated financial statements for details concerning our material lease commitments, the timing of which may fluctuate.

Additionally, Piedmont does not have material obligations as lessee under operating lease agreements as of December 31, 2020.

(2) Amounts include principal payments only and balances outstanding as of December 31, 2020, not including approximately $10.6 million of net unamortized issuance discounts, debt issuance costs paid to lenders, or estimated fair value adjustments.

We made interest payments, including payments under our interest rate swaps, of approximately $50.7 million during the year ended December 31, 2020, and expect to pay interest in future periods on outstanding debt obligations based on the rates and terms disclosed herein and in Note 4 to our accompanying consolidated financial statements.

(3) Piedmont does not have any ground leases, nor does Piedmont have any material obligations as lessee under operating lease agreements as of December 31, 2019.

See Note 8 to our accompanying consolidated financial statements for material amounts committed for tenants improvements, the timing of which may fluctuate.

(4) Includes the Amended and Restated $300 Million Unsecured 2011 Term Loan which has a stated variable rate;

however, we have entered into interest rate swap agreements which effectively fix, exclusive of changes to our credit rating, the rate on this facility to 3.20% through January 15, 2020.

As of the date of this filing, this facility is a variable rate facility.

(3) Includes the balance outstanding as of December 31, 2020 of the $500 Million Unsecured 2018 Line of Credit.

However, we may extend the term for up to one additional year (through two available six month extensions to a final extended maturity date of September 29, 2023) provided we are not then in default and upon payment of extension fees.

Index to Financial Statements

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis