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Piedmont's Debt Ratings Affirmed by Moody's, Outlook Stable

Zacks Equity Research

Piedmont Office Realty Trust, Inc.’s PDM ratings were recently affirmed by Moody's Investors Service, the rating division of Moody’s Corporation MCO.  Specifically, the senior unsecured debt and issuer ratings of the REIT’s operating partnership — Piedmont Operating Partnership L.P. — was affirmed at Baa2. Simultaneously, Moody’s assigned a (P) Baa2 rating to Piedmont’s unsecured shelf program and a (P)Baa3 rating to the preferred shelf program. The rating outlook is stable.

Key Rating and Outlook Rationale

Moody’s affirmation of rating indicates Piedmont’s ownership of a diversified portfolio of substantially-leased office properties in notable central business districts, urban infill and suburban markets.

In fact, the rating agency noted that the REIT’s assets in Atlanta accounted for 16.4% of its aggregate annualized base rent (“ABR”) at the end of the September-end quarter, while assets in New York, Minneapolis, Boston, Washington DC, Dallas and Orlando combined, accounted for around 70% of net operating income (NOI).

Additionally, continued efforts to sell non-core assets have resulted in lower exposure to other non-core markets, including Houston and Philadelphia. In fact, in October, the company sold 500 West Monroe Street, a trophy office building in the West Loop sub-market of downtown Chicago, for a gross price of $412 million. With this, the company reduced its footprint in Chicago to only one property.

Moreover, Piedmont’s presence in strategic markets has likely supported its impressive operating performance. In fact, Moody’s noted that over the first nine months of 2019, it reported an economic leased rate (on a cash basis) of 86.4% and GAAP same-store net operating income (NOI) growth of 2%. Rent growth has been strong, with releasing spreads (for signed leases for space that has been unoccupied one year or less) of 20.3%.

Also, Moody’s views the company’s moderate leverage metrics and strong fixed charge coverage as positives. The rating agency also acknowledges the REIT's large unencumbered asset base and adequate liquidity profile.

In fact, its leverage metrics have been in line with Moody's expectations for the credit. At the end of third-quarter 2019, effective leverage — debt and preferred as a percentage of gross assets — stood at 40.5%.

Additionally, the stable rating outlook takes into consideration the REIT's solid operating performance and prudent execution of its portfolio repositioning. The outlook also reflects Moody’s expectation that the company will be able to favorably access external capital sources to refinance near-term loan maturities and meet other capital needs.

On the downside, the company’s liquidity profile might weaken due to an aggressive dividend payout policy, continued stock buybacks and higher utilization of credit facilities. This will adversely impact the rating outlook.  Moody’s also noted Piedmont’s limited access to debt and equity markets over the past few years, as proceeds from asset sales were used for asset acquisitions.

Conclusion

This upgraded rating boosts Piedmont’s creditworthiness in the market and is likely to enhance investor confidence in the stock. In fact, such moves help companies enjoy favorable costs on debts and solid access to capital, and are, therefore, encouraging. 

Over the past six months, shares of this Zacks Rank #2 (Buy) company have gained 11.6%, as against the industry’s decline of 0.9%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


Other Stocks to Consider

Cousins Properties Incorporated CUZ currently carries a Zacks Rank of 2. The Zacks Consensus Estimate for the ongoing year’s funds from operations (FFO) per share climbed 1.4% to $2.94 in a month’s time.

EastGroup Properties, Inc. EGP also carries a Zacks Rank of 2, presently. The company’s FFO per share estimate for 2019 moved north to $4.94 over the past month.

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Moody's Corporation (MCO) : Free Stock Analysis Report
 
Cousins Properties Incorporated (CUZ) : Free Stock Analysis Report
 
EastGroup Properties, Inc. (EGP) : Free Stock Analysis Report
 
Piedmont Office Realty Trust, Inc. (PDM) : Free Stock Analysis Report
 
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