Item 1. Business
ITEM 1. BUSINESS
General
Piedmont Office Realty Trust, Inc. (“Piedmont," "we," "our," or "us") (NYSE: PDM) is a Maryland corporation that operates in a manner so as to qualify as a real estate investment trust (“REIT”) for federal income tax purposes and engages in the ownership, management, development, redevelopment, and operation of high-quality, Class A office properties located primarily in select sub-markets within seven major U.S. office markets, with a majority of its revenue being generated from Sunbelt markets. Piedmont was incorporated in 1997 and commenced operations in 1998. Piedmont conducts business through its wholly-owned subsidiary, Piedmont Operating Partnership, L.P. (“Piedmont OP”), a Delaware limited partnership. Piedmont OP owns properties directly, through wholly-owned subsidiaries, and through various joint ventures which it controls. References to Piedmont herein shall include Piedmont and all of its subsidiaries, including Piedmont OP and its subsidiaries and joint ventures.
Operating Objectives and Strategy
As of December 31, 2021, we owned and operated 55 in-service office properties comprised of approximately 17.1 million square feet of primarily Class A office space which were approximately 86% leased. Additionally, we have one redevelopment asset comprising 127,000 square feet in Orlando, Florida. Collectively, approximately 96% of our ALR is generated from our properties located in select sub-markets within seven major U.S. office markets: Atlanta, Dallas, Washington, D.C., Minneapolis, Boston, Orlando, and New York, with over 60% produced by our Sunbelt markets. We lease space to a mixture of tenants, including credit-worthy corporate tenants, and our average lease size is approximately 15,000 square feet with an average lease term remaining of six years. Our diversified tenant base is primarily comprised of investment grade or nationally recognized corporations or governmental agencies, with the majority of our ALR derived from such tenants. No tenant accounts for more than 5% of our ALR.
Headquartered in Atlanta, Georgia, with regional and/or local management offices in each of our seven major markets, Piedmont values operational excellence and is a leading participant among REITs based on the number of buildings owned and managed with Building Owners and Managers Association ("BOMA") 360 designations. BOMA 360 is a program that evaluates six major areas of building operations and management and benchmarks a building's performance against industry standards. As of December 31, 2021, approximately 87% of our portfolio (based on ALR) has achieved such a designation, recognizing excellence in building operations and management. Our focus on operational excellence and fostering long-term relationships with our high-credit quality, diverse tenant base, who have been attracted to our high-quality, modernized, amenity-rich environments, has resulted in an approximate 67% tenant retention rate over the past ten years.
In addition to operational excellence, we also focus on environmental sustainability initiatives at our properties as further detailed below. Approximately 80% and 45% of our portfolio (based on ALR) has achieved and maintains Energy Star or Leadership in Energy and Environmental Design ("LEED") certification, respectively, and the entire portfolio has been awarded the WELL Health-Safety Rating through the International WELL Building Institute (IWBI). During 2021, we were one of only 69 U.S. companies selected, and the only REIT headquartered in the Southeast, to be named a 2021 Energy Star Partner of the Year.
Our primary operating objectives are to maximize the risk-adjusted return to our stockholders by increasing cash flow from operations, by achieving sustainable growth in Funds From Operations, and by growing net asset value by realizing long-term capital appreciation. We manage risk by owning almost exclusively Class A, geographically diverse, office properties which are among the most desirable in their respective office sub-markets. In addition to the creditworthiness of our tenants, we strive to ensure our tenants represent a broad spectrum of industry types with lease expirations that are laddered over many years. Operationally, we maintain a low leverage structure, utilizing unsecured financing facilities with laddered maturities. We utilize a national buying platform for property management support services to ensure optimal pricing for landlord and tenant services, as well as to consistently implement best practices and achieve sustainability standards. The strategies we intend to execute to achieve these objectives include:
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Recycling Capital Efficiently
We use our proven, disciplined capital recycling capabilities to maximize total return to our stockholders by selectively disposing of non-core assets and assets for which we believe full value potential during our ownership has been achieved, and redeploying the proceeds of those dispositions into new investment opportunities with higher overall return prospects. Our investment strategy focuses on properties located in select sub-markets within seven major U.S. office markets, with a particular focus on the Sunbelt markets, that were identified based on their positive economic and demographic growth trends so as to position our investments for long-term appreciation. We believe these sub-markets are generally characterized by their strong amenity base, desired location for large corporate users, above-average job and rental rate growth, proximity to robust housing options, market-leading transportation access and infrastructure, and limited competitive REIT ownership. Both our acquisition and development activities are targeted towards attractively priced, high quality, Class A office properties that complement our existing portfolio in such a manner that efficiencies can be gained and our market expertise can be maximized.
Proactive Asset Management, Leasing Capabilities and Property Management
Our proactive approach to asset and property management encompasses a number of operating initiatives designed to maximize occupancy and rental rates, including the following: maintaining local management offices in markets in which we have a significant presence; offering, or being located near, superior amenities that help our tenants attract and retain their employees; demonstrating our commitment to our tenants and being socially-responsible in our local communities while maintaining the environmentally-friendly, high quality nature of our properties; renovating our buildings to keep them modern, in superior operating condition, devoting resources to building and cultivating our relationships with commercial real estate executives; and to meet and exceed the needs of today's discerning tenants, as well as driving a significant volume of leasing transactions in a manner that provides optimal returns by using creative approaches, including early extensions, lease wrap-arounds and restructurings. We manage portfolio risk by structuring lease expirations to avoid, among other things, having multiple leases expire in the same market in a relatively short period of time; applying our leasing and operational expertise in meeting the specialized requirements of federal, state and local government agencies to attract and retain these types of tenants; evaluating potential tenants based on third party and internal assessments of creditworthiness; and using our purchasing power and market knowledge to reduce our operating costs and those of our tenants.
Financing Strategy
We employ a conservative leverage strategy by typically maintaining a debt-to-gross assets ratio of between 30% to 40%, and a targeted debt to EBITDA of low 6x and below. To effectively manage our long-term leverage strategy, we continue to analyze various sources of debt capital to prudently ladder debt maturities and to determine which sources will be the most beneficial to our investment strategy at any particular point in time.
Use of Joint Ventures to Improve Returns and Mitigate Risk
We may selectively enter into strategic joint ventures with third parties to acquire, develop, redevelop or dispose of properties, thereby potentially reducing the amount of capital required by us to make investments, diversifying our sources of capital, enabling us to creatively acquire and control targeted properties, and allowing us to reduce our investment concentration in certain properties and/or markets without disrupting our operating performance or local operating capabilities.
Redevelopment and Repositioning of Properties
As circumstances warrant, we may redevelop or reposition properties within our portfolio, including the creation of additional amenities for our tenants to increase both occupancy and rental rates and thereby improve returns on our invested capital, as well as to maintain and enhance the competitive positioning of our properties in their respective marketplaces.
Operating our Properties in an Environmentally Responsible Manner
We are dedicated to enhancing the communities in which we operate. We strive to own and manage workplaces that are environmentally conscious, productive, and healthy for our tenants, employees, and local communities by:
• empowering our property teams with the data and tools they need to sustainably manage their buildings;
• leveraging industry partnerships with BOMA, Energy Star, and U.S. Green Building Council, to verify and advance the environmental performance of our assets; and
• implementing programs that continually improve our environmental performance and manage our climate change risk; and
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• setting performance targets that demonstrate our commitment to sustainable practices.
To combat the risk that increased pricing of electricity, natural gas, off-site energy sources, water rates, and insurance rates could increase the operating costs of our properties and to mitigate the transitional and physical risks associated with climate change (See Item 1A. Risk Factors below for more information), we have set goals to reduce property energy and water consumption and greenhouse gas emissions and improve landfill diversion rates. To reduce the risk that increasing stringent building and energy codes could increase construction, capital, and maintenance costs, we continue to update our buildings with energy efficient equipment to stay ahead of future code changes in both landlord and tenant-controlled spaces. We also closely engage with our tenants regarding our environmental initiatives and encourage them to reduce energy use within their leased spaces. Additionally, we periodically incorporate the issuance of green bonds to acquire, develop, redevelop, and renovate buildings to reduce operating costs, meet recognized sustainable development standards, and reduce our environmental impact. As our environmental programs have been ongoing for several years under the coordinated supervision of our National Director of Sustainability, we currently do not anticipate incurring any unusually large or material capital expenditures within any given year in order to meet these goals.
Further details concerning Piedmont's environmental and climate risk management strategy and programs can be found in our annual ESG report located on our website, www.piedmontreit.com under the "ESG" section. The information contained on our website is not incorporated herein by reference.
Human Capital and Social Involvement
As of December 31, 2021, we had 134 employees, with 47 of our employees working in our corporate office located in Atlanta, Georgia. Our remaining employees work in regional and/or local management offices located in our seven major markets. These employees are involved in acquiring, developing, redeveloping, leasing, and managing our portfolio of properties. We outsource various functions where cost efficiencies can be achieved, such as certain areas of information technology, construction, building engineering, and leasing. Approximately 66% of our workforce is salaried, with the remaining 34% compensated on an hourly basis.
We strive and are committed to hiring and supporting a diverse workforce that fosters skilled and motivated people working together to deliver results in support of our core business values. We encourage all employees, tenants, and vendors to mutually respect one another's diversity in order to maintain a cohesive work environment that values fairness and equal treatment. In 2021, we continued our training programs for our employees, managers, and contractors including professional training on workplace harassment and cybersecurity. In addition, employees received diversity and inclusion, ethics, and pandemic health training. Select managers also received individual management development. We intend to provide an environment that is diverse, equitable, unbiased, pleasant, healthy, comfortable, and free from intimidation, hostilities, or other offenses that might interfere with work performance. We apply this policy to all of our employees, suppliers, and vendors, regardless of their geographic location.
Piedmont has established the Piedmont Wayne Woody ("PWW") Foundation, a foundation created in honor of our late Chairman of the Board, W. Wayne Woody, to distribute charitable contributions to nonprofit organizations that fit our charitable giving criteria and demonstrate fiscal and administrative stability and are not discriminatory or political. During 2021 through the PWW Foundation, Piedmont established the "Piedmont Office Realty Trust Scholarship Program" in partnership with two Historically Black Colleges and Universities to provide need-based, scholastic support to selected rising sophomores interested in pursuing a career related to the real estate industry.
In addition to financial contributions through the PWW Foundation, Piedmont recognizes the value and benefit of employee volunteerism and fully appreciates its positive impact on the community, its employees, and ultimately, Piedmont by promoting team building, collaboration, and unity. Our employees have partnered with Piedmont to donate thousands of dollars and hours annually to numerous organizations.
Further details concerning Piedmont's workforce and social and community involvement initiatives can be found in our annual ESG report located on our website, www.piedmontreit.com under the "ESG" section. The information contained on our website is not incorporated herein by reference.
Competition
We compete for tenants for our high-quality assets in major U.S. markets by fostering strong tenant relationships and by providing quality customer service including: leasing, asset management, property management, and construction management services. We also face significant competition for attractive investment opportunities from a large number of other real estate
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investors, including investors with significant capital resources such as domestic and foreign corporations and financial institutions, publicly traded and privately held REITs, private institutional investment funds, investment banking firms, life insurance companies and pension funds. In each market where we operate, we face competition from other office providers. However, we do not face the same competitors in every market. This competition, along with market-specific vacancy rates and the condition of available, leasable square footage, affects the rental rates and concessions that we negotiate with our tenants. Our competitors, along with these other market factors, also influence the price we pay to acquire properties, and the proceeds we receive when we dispose of a building.
Government Regulations
All real property and the operations conducted on real property are subject to various federal, state, and local laws and regulations. Under the Americans with Disabilities Act (“ADA”) for example, places of public accommodation must meet certain federal requirements related to access and use by disabled persons. We may incur substantial costs to comply with the ADA or any other legislation. Noncompliance with ADA could result in the imposition of fines by the federal government or the award of damages to private litigants.
Furthermore, under various federal, state, and local environmental laws, ordinances, and regulations, we may be liable for the cost to remove or remediate hazardous or toxic substances, wastes, or petroleum products on, under, from, or in such property. These costs, and the costs of compliance with these laws, ordinances and regulations, could be substantial and liability under these laws may attach whether or not the owner or operator knew of, or was responsible for, the presence of such contamination. Some of these laws and regulations may impose joint and several liability on tenants, owners, or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. The presence of hazardous substances, or the failure to properly remediate these substances, may hinder our ability to sell, rent, or pledge such property as collateral for future borrowings.
While we believe that we are currently in material compliance with these laws and regulatory requirements, compliance with new laws or regulations or stricter interpretation of existing laws by agencies or the courts may require us to incur material expenditures or may impose additional liabilities on us, including environmental liabilities. In addition, there are various local, state, and federal fire, health, life-safety, and similar regulations with which we may be required to comply, and which may subject us to liability in the form of fines or damages for noncompliance. If we were required to make significant expenditures under applicable regulations, our financial condition, results of operations, cash flows and ability to satisfy our debt service obligations and to pay distributions could be adversely affected. See Item 1A. Risk Factors for further discussion of the risks associated with compliance with regulations and environmental concerns.
Segment Information
As of December 31, 2021, our reportable segments are determined based on geographic markets in which we have significant investments. We consider geographic location when evaluating our portfolio composition and in assessing the ongoing operations and performance of our properties. See Note 16 , Segment Information, to the accompanying consolidated financial statements.
Concentration of Credit Risk
We are dependent upon the ability of our current tenants to pay their contractual rent amounts as the rents become due. The inability of a tenant to pay future rental amounts would have a negative impact on our results of operations. As of December 31, 2021, our tenants come from broadly diversified industry sectors and no individual tenant represented more than 5% of our ALR.
Other Matters
We have contracts with various governmental agencies, exclusively in the form of operating leases in buildings we own. See Item 1A. Risk Factors for further discussion of the risks associated with these contracts.
Information Regarding Disclosures Presented
ALR, a non-GAAP measure, is calculated by multiplying (i) current rental payments (defined as base rent plus operating expense reimbursements, if payable by the tenant on a monthly basis under the terms of a lease that has been executed, but excluding (a) rental abatements and (b) rental payments related to executed but not commenced leases for space that was covered by an existing lease), by (ii) 12. In instances in which contractual rents or operating expense reimbursements are collected on an annual, semi-annual, or quarterly basis, such amounts are multiplied by a factor of 1, 2, or 4, respectively, to
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calculate the annualized figure. For leases that have been executed but not commenced relating to unleased space, ALR is calculated by multiplying (i) the monthly base rental payment (excluding abatements) plus any operating expense reimbursements for the initial month of the lease term, by (ii) 12. Unless stated otherwise, this measure excludes revenues associated with development properties and properties taken out of service for redevelopment, if any.
Website Address
Access to copies of each of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and other filings with the Securities and Exchange Commission (the "SEC"), including any amendments to such filings, may be obtained free of charge from the following website, www.piedmontreit.com, or directly from the SEC’s website at www.sec.gov. These filings are available promptly after we file them with, or furnish them to, the SEC. Information contained on our website or that can be accessed through our website is not incorporated by reference into this Annual Report on Form 10-K.
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