Piedmont Realty Trust, Inc. (PDM) Q3 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call highlights strong financial performance, with increased leasing and rental rates, and significant future cash rent expectations. The Q&A reveals confidence in FFO growth, successful debt refinancing, and strategic acquisitions. Despite some uncertainties in asset dispositions and specific lease details, the overall sentiment is positive, with strong leasing activity and favorable market conditions supporting growth.

Key Financial Performance

Core FFO per diluted share $0.35 for Q3 2025, compared to $0.36 for Q3 2024, representing a $0.01 decrease year-over-year. The decrease is attributed to the sale of 3 projects during the past 12 months and higher net interest expense due to refinancing activities. This was partially offset by growth in operations from higher economic occupancy and rental rate growth.

AFFO Approximately $26.5 million for Q3 2025. No year-over-year comparison or reasons for change were provided.

Leasing activity 724,000 square feet of total leasing during Q3 2025, including over 0.5 million square feet of new tenant leases. This represents the largest amount of new tenant leasing completed in a single quarter in over a decade. Year-to-date leasing reached approximately 1.8 million square feet, with over 900,000 square feet of 2025 new leasing related to currently vacant space. This level of absorption is expected to contribute $0.10 to $0.15 per share of incremental annualized earnings.

In-service lease percentage Increased by 50 basis points quarter-over-quarter to 89.2% in Q3 2025. This improvement is attributed to strong leasing activity and tenant demand.

Rental rate growth Rental rates for space vacant less than a year reflected almost 9% and just over 20% roll-ups on a cash and accrual basis, respectively, in Q3 2025. This growth is due to repositioning of the portfolio and strong tenant demand.

Cash basis same-store NOI Turned positive in Q3 2025 as previously executed leases began to reach the end of their abatement period. Over $35 million of annualized revenue currently in abatement is expected to start paying cash in 2026, contributing to continued improvement in same-store cash metrics.

Weighted average starting cash rent Nearly $42 per square foot in Q3 2025, essentially unchanged from the previous quarter. This stability is attributed to consistent leasing activity and strong market conditions.

Leasing capital spend $6.76 per square foot in Q3 2025, slightly up compared to the trailing 12 months. The increase is due to higher leasing concessions for new tenant activity compared to renewals.

Net effective rents $21.26 per square foot in Q3 2025, reflecting a 2.5% increase from the previous quarter. This growth is attributed to strong leasing activity and favorable market conditions.

Out-of-service portfolio lease percentage Increased from 31% to 54% in Q3 2025, with projections to reach 60% to 70% by year-end. This improvement is due to strong market receptivity and tenant demand for redeveloped assets.

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Operating Highlights

Office demand turnaround: U.S. office demand turned positive in Q3 2025 after nearly 4 years of losses, with 12 million more square feet occupied than returned to landlords.

Leasing activity: Record levels of leasing across Piedmont's portfolio, with 5 of its operating markets experiencing positive absorption.

New tenant leasing: 105 million square feet leased in the U.S. in Q3 2025, nearing pre-pandemic averages.

Large tenant leasing: Surge in large tenant leasing due to limited availability of premium space.

Rental rate growth: Piedmont increased rental rates by as much as 20% in 2025, with some projects achieving $48 per square foot.

Leasing volume: Piedmont leased over 10% of its portfolio in the last 2 quarters and 80% since 2020, totaling almost 12 million square feet.

Lease commencements: Backlog of uncommenced leases reached $40 million annually, with most commencing by 2026.

In-service lease percentage: Increased to 89.2% in Q3 2025, with a goal of 89%-90% by year-end.

Out-of-service portfolio: Leased over 50% and approaching 70%, with stabilization expected by 2026.

Same-store NOI: Turned positive in Q3 2025, with $35 million in annualized revenue in abatement due to start paying cash in 2026.

Portfolio repositioning: Piedmont's strategy of renovating and amenitizing buildings has driven tenant demand and rental rate increases.

Debt refinancing: Amended revolving credit facility and term loan to lower interest rates, with plans to refinance high-interest debt for future savings.

Disposition strategy: Focused on selling non-core assets, with some transactions contingent on rezoning approvals.

Future acquisitions: Evaluating opportunities in Dallas and other markets, with plans to be more active in 2026.

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Risk or Challenges

Market Conditions: Despite positive leasing trends, there is an uncertain economic outlook and slow hiring, which could impact tenant demand for office space.

Supply Chain and Construction: Office construction has been reduced by 20% from the second quarter, and new supply is not a factor in most markets, potentially limiting future growth opportunities.

Regulatory and Legal Delays: Delays in the planning process for New York City's long-term lease extension could spill over into 2026, impacting revenue projections.

Debt and Financing Risks: The company has high-interest debt, such as 9.25% bonds, which could impact financial performance if not refinanced effectively.

Competitive Pressures: The limited availability of high-quality office space is driving competition among tenants, which could strain resources and operational focus.

Strategic Execution Risks: The company is heavily reliant on achieving high leasing percentages and increasing rental rates to meet financial goals, which may not materialize as planned.

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Guidance & Outlook

Revenue and Earnings Growth: Piedmont anticipates sustainable earnings growth, with confidence in delivering mid-single-digit FFO growth or better in 2026 and 2027. The backlog of uncommenced leases has reached almost $40 million on an annualized basis, with most leases commencing by the end of 2026.

Leasing Activity and Occupancy: The company expects its in-service and out-of-service portfolios to achieve 90% leased by next year, with the out-of-service assets reaching stabilization by the end of 2026. Leasing momentum remains strong, with over 400,000 square feet in the legal stage and a robust pipeline of proposals.

Rental Rate Growth: Piedmont projects significant rental rate growth, with rental rates increasing by as much as 20% during the year. The company estimates that more than half of the portfolio's in-place rents are at least 20% below market, providing a long runway for rental rate growth.

Market Trends and Demand: The office sector is experiencing a recovery, with pent-up demand driving record levels of leasing. Limited availability of high-quality space and reduced office construction are creating favorable market dynamics for rental growth.

Debt Refinancing and Financial Position: Piedmont plans to opportunistically refinance above-market rate debt to drive FFO and cash flow growth. The company expects all unsecured debt maturing for the remainder of the decade to be refinanced at lower interest rates, potentially generating significant interest savings.

Capital Expenditures and Investments: The company is focused on pruning non-core assets and evaluating acquisition opportunities, particularly in Dallas and other markets. Piedmont intends to position itself for more active transactions in 2026.

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Shareholder Return Plan

Dividends: Examples of forward-looking statements include those related to Piedmont's future revenue and operating income, dividends and financial guidance, future financing, leasing and investment activity and the impacts of this activity on the company's financial and operational results.

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Key Q&A

Q:Is the 2.2% expansion versus contraction rate specific to the Piedmont portfolio?

A:No, the 2.2% figure refers to the JLL report on large users (25,000 square feet or greater) in the U.S. data set, not specific to the Piedmont portfolio. However, Piedmont has seen more expansions than contractions, with 16 expansions versus 2 contractions in the past quarter, resulting in a net positive of 40,000 square feet.

Q:What is the behavior of larger tenants (25,000 to 50,000 square feet) in terms of space utilization?

A:The behavior is mixed. Some companies are consolidating to bring employees together for collaboration, while others are slightly reducing space to move to higher-quality spaces with higher rents. Piedmont had 15 deals of 25,000 square feet or larger last quarter, totaling 800,000 square feet, and currently has 18 proposals of similar size.

Q:What is the outlook for occupancy growth and FFO growth over the next two years?

A:Management expects mid-single-digit FFO growth at a steady state over the next two years, driven by prior leasing success and known move-outs. Larger expirations in 2026 are well-known, and management feels confident about renewals, particularly in Atlanta.

Q:What is the source of the expected earnings growth next year?

A:The expected earnings growth is organic, based on a static portfolio with no acquisitions, dispositions, or refinancings. Debt refinancing, which could provide additional upside, is not included in the growth projection.

Q:What are the gating factors for debt refinancing?

A:There are no specific gating factors, but processes and timing windows for market activity must be considered. The spread between the 9.25% bonds and potential refinancing rates is about 400 basis points, which could result in $21 million in interest savings or $0.17 per share.

Q:What types of acquisitions is Piedmont considering?

A:Piedmont is considering two types of acquisitions: (1) Opportunistic deals with lower yields, higher vacancies, and significant capital needs, often in partnership with others; and (2) Value-add deals on balance sheet with mid-teens IRRs, starting with GAAP yields of 8.5%-10% and potential to grow yields by 300 basis points over a few years. Current opportunities total approximately $1.3 billion.

Q:What is the status of non-core asset dispositions?

A:Dispositions remain challenging due to market conditions. Piedmont is focused on selling non-core assets in markets like D.C., Houston, and New York City. An asset in D.C. is currently in the market, and others will be reintroduced in 2026. Leasing activity is expected to improve underwriting conditions for these assets.

Q:Why was the New York City lease pushed back, and is there concern about the tenant's renewal?

A:The delay is due to the complexity of the lease involving multiple agencies and administrative processes. Management is not overly concerned about the tenant leaving, given the unique building features, limited competitive options, and an $8 million annual holdover penalty.

Q:How will the $75 million of pending cash rent flow through in 2026?

A:Approximately 70% of the $75 million will be realized in 2026, with most of it commencing in the middle of the year. This includes $40 million of yet-to-commence leases and $35 million of cash rent, with about 60%-70% of each expected to be realized next year.

Q:How does Piedmont reconcile broader economic trends like layoffs with its leasing success?

A:Piedmont attributes its leasing success to its focus on professional services tenants, competitive pricing compared to new construction, and compelling renovations and service models. Tour activity and proposals remain strong, indicating continued demand despite broader economic concerns.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on the New York City lease delay, citing the live nature of the transaction. Additionally, while they discussed potential acquisitions and dispositions, they did not provide concrete timelines or commitments, leaving some uncertainty about execution.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

PDM Transcript

Piedmont Realty Trust, Inc. (PDM) Q3 2025 Earnings Call Transcript

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The company shows strong leasing success and rental rate increases, indicating robust demand. Despite a slight decline in core FFO, future cash rent prospects are strong. The Q&A reveals strategic focus on Sunbelt markets and asset pruning, suggesting growth potential. Dividend suspension for growth and debt repurchase savings are positive, though some management responses lack clarity. Overall, the positive aspects outweigh negatives, predicting a stock price increase.

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The earnings call highlighted several concerns: suspension of dividends, increased leverage, and economic volatility, which overshadowed positive aspects like rental rate growth. The Q&A reinforced cautious sentiment due to macroeconomic uncertainties and management's reluctance to provide specific guidance. Although the company aims for long-term growth, these factors are likely to negatively impact the stock price in the short term.

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The earnings call reveals several negative factors: suspension of dividends, increased leverage risks, macroeconomic uncertainty, and a decrease in Core FFO per share. Despite strong leasing momentum, these issues, combined with cautious guidance and regulatory concerns, suggest a negative sentiment. The Q&A section highlights management's cautious stance and lack of clarity on key metrics, further supporting a negative outlook. The stock price is likely to decrease between -2% and -8% over the next two weeks.

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