Piedmont Office Realty Trust, Inc. — FY 2014 Form 10-K
Reporting period: Year ended December 31, 2014; this is an annual filing, not a standalone quarterly report. The company is an office-focused REIT. The filing reports fourth-quarter results separately where noted below.
Business context and portfolio
- Owned 74 office properties and one redevelopment asset, plus an interest in one property through an unconsolidated joint venture. The portfolio was 87.7% leased, versus 87.2% at year-end 2013; average remaining lease term was about seven years.
- Annualized Lease Revenue (ALR) was $583.3 million, up from $569.8 million. Chicago, Washington, D.C., and New York generated 22.8%, 15.9%, and 14.0% of ALR, respectively.
- Approximately 73% of ALR came from investment-grade or nationally recognized companies or government agencies. No individual tenant accounted for 10% or more of revenue or future non-cancelable lease revenue.
Financial results and key metrics
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Total revenue | $566.3 million | $549.6 million |
| Real estate operating income | $107.8 million | $140.9 million |
| Income from continuing operations | $40.1 million; $0.27 per diluted share | $72.2 million; $0.44 per diluted share |
| Net income attributable to Piedmont | $43.3 million; $0.28 per diluted share | $98.7 million; $0.60 per diluted share |
| Funds From Operations (FFO) | $236.5 million; $1.53 per diluted share | $250.5 million; $1.52 per diluted share |
| Core FFO | $230.1 million; $1.49 per diluted share | $240.5 million; $1.46 per diluted share |
| Adjusted FFO (AFFO) | $118.2 million; $0.76 per diluted share | $117.0 million; $0.71 per diluted share |
| Cash from operating activities | $215.9 million | $215.1 million |
| Capital expenditures | $168.9 million | $176.0 million |
Revenue increased 3.0%, but real estate operating income fell and its share of revenue declined to 19% from 26%. Management attributed the reduction in continuing-operations earnings primarily to higher depreciation and amortization. FFO, Core FFO, and AFFO are non-GAAP measures and should be considered alongside GAAP results.
Fourth-quarter 2014 revenue was $146.7 million, real estate operating income was $28.8 million, continuing-operations income was $12.6 million, and net income attributable to Piedmont was $12.5 million ($0.08 per share). The quarterly common dividend was $0.21 per share.
Debt, liquidity, and capital allocation
- Year-end debt was $2.278 billion, versus $2.002 billion a year earlier; debt to gross assets was 38.2%. The weighted-average debt rate was 3.35%, compared with 3.80% in 2013. Earnings-to-fixed-charges ratio was 1.5, down from 2.1.
- Cash and cash equivalents were $12.3 million. Management reported approximately $48.6 million of remaining capacity on its $500 million unsecured line of credit at filing time.
- Near-term maturities included a $105 million mortgage in May 2015 and a $50 million unsecured term loan in April 2015. Management anticipated additional unsecured borrowing in the first half of 2015 to refinance debt, repay the term loan, and add liquidity.
- Management intended to market properties for sale, estimating $260–$270 million in proceeds over the following 10–12 months if transactions were completed. This was an expectation, not a completed sale.
- Operating cash flow was approximately flat year over year; investing activities used $266.9 million and financing activities provided $56.4 million. Dividends paid were $125.2 million. Year-end common dividend was $0.81 per share for 2014, versus $0.80 in 2013.
Material changes and management commentary
- Rental income rose $11.5 million, including $21.6 million from properties acquired in 2013–2014, partly offset by the expiration of a large government lease at 3100 Clarendon Boulevard. Tenant reimbursements rose $5.3 million.
- Property operating costs increased $18.8 million, reflecting acquisitions, higher taxes and maintenance, and severe winter weather. Depreciation increased $17.6 million and amortization increased $11.5 million, including costs related to acquisitions and lease terminations.
- Same Store NOI on a cash basis declined 5.8% to $266.4 million. Management said downtime, rental abatements, lower rents or reduced leased area on some renewals, and vacant space weighed on comparisons. It reported 0.4 million square feet of executed leases for vacant space not yet commenced and 1.3 million square feet of commenced leases still in abatement, and anticipated sequential Property NOI improvement in 2015 as leases commenced and abatements expired.
- Development and redevelopment spending included a Houston office tower, for which management expected another $38–$40 million to complete construction by Q3 2015, plus $21–$24 million in later leasing costs. At 3100 Clarendon Boulevard, management expected another $19–$20 million for completion and $21–$22 million in re-leasing costs.
- In January 2015, Piedmont acquired Park Place at Turtle Creek for $46.6 million and sold 3900 Dallas Parkway for $26.2 million. The board declared a Q1 2015 dividend of $0.21 per share.
Outlook, risks, and unusual items
- No formal earnings or FFO guidance is provided in the supplied filing text. Management’s outlook centers on leasing-up vacant space, the commencement of executed leases, and anticipated property sales and refinancing.
- Key operating risks include office-market concentration, particularly Chicago, Washington, D.C., and New York; competition for tenants; lease expirations, early termination rights, defaults, and concessions; and substantial currently vacant blocks in Chicago and Washington, D.C. About 6.6% of ALR had early termination rights exercisable in the following 12 months.
- Debt refinancing, interest-rate exposure, covenant compliance, and access to capital remain important risks. A 1% increase in rates on variable-rate debt outstanding at year-end was estimated to increase annual interest expense by approximately $4.8 million. Most debt was fixed or effectively fixed, while the line of credit and $50 million term loan were floating rate.
- Results included non-recurring net casualty and litigation recoveries of $7.0 million in 2014, versus $11.8 million in 2013; 2012 had a net loss of $12.7 million. Prior-year property-sale gains also made year-over-year net income comparisons less representative. The company adopted revised discontinued-operations presentation prospectively in 2014 and reclassified prior-period presentations where required.
- Other risks include development costs and delays, environmental and regulatory liabilities, uninsured casualty losses, cybersecurity, REIT qualification and tax-law changes. Management reported no material pending legal proceedings; routine litigation was not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether the planned property dispositions occurred and generated the anticipated proceeds, and whether those proceeds were used for debt repayment or other needs.
- How the April and May 2015 debt maturities were refinanced or repaid, including the terms and availability of new borrowing and line-of-credit capacity.
- Whether occupancy, lease commencements, abatements, and leasing costs developed as management expected, especially in Chicago and Washington, D.C.
- Whether Same Store NOI and cash available for distributions improved, and how recurring capital needs compare with AFFO and dividends.
- The impact of redevelopment and development commitments, tenant improvement obligations, and potential concessions on future cash requirements.