Office landlord offers glimpse of what’s to come

Piedmont Realty Trust

24/07/2023 18:30

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are their own.)
       NEW YORK, July 24 (Reuters Breakingviews) - Piedmont
Office Realty Trust  PDM.N  is sifting through the rubble. The
$910 million owner of high-quality office buildings in Boston,
Dallas and beyond just borrowed at 9.25%, more than twice the
interest rate it’s replacing. Considering the broader industry
wreckage, the property owner, whose shares have tumbled 45% over
the past year, actually made out OK. 
    Like many of its peers, Piedmont had a large chunk of debt
due next year. The “large wall” of refinancing is one reason
boss Brent Smith pulled the trigger. The company’s interest
expenses will now equate to more than its pre-tax profit by the
end of this year, according to analyst estimates gathered by
Refinitiv. It’s an ominous sign for U.S. office landlords facing
$60 billion of debt maturing at the end of 2023 and 2024, per
data miner RCA. 
    Real estate investors mainly want to be sure the yield from
their properties, known as the capitalization rate, is higher
than the cost of borrowing. Office prices have fallen so much
that cap rates are approaching 10%, according to Jonathan Litt,
founder of activist hedge fund Land and Buildings Investment
Management. Pricier debt means less income, but if rents have
stabilized and interest rates keep rising, Piedmont was wise to
start reconstructing its balance sheet sooner rather than
later.(By Lauren Silva Laughlin)
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 (Editing by Jeffrey Goldfarb and Sharon Lam)
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