Piedmont Office Realty Trust, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. The filing identifies the registrant as Piedmont Office Realty Trust, Inc. As of September 30, Piedmont held interests in 79 office properties, five buildings through unconsolidated joint ventures, and two industrial buildings. Its 79 office properties comprised approximately 21.8 million square feet and were 86.4% leased.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $134.4 million | $134.1 million | $404.1 million | $397.8 million |
| Real estate operating income | $37.4 million | $49.5 million | $115.1 million | $133.1 million |
| Income from continuing operations | $21.6 million | $35.3 million | $71.2 million | $87.4 million |
| Net income attributable to Piedmont | $51.0 million | $40.6 million | $106.0 million | $91.7 million |
| Diluted EPS | $0.29 | $0.23 | $0.61 | $0.54 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $176.2 million | $203.9 million |
| AFFO per diluted share | $0.29 | $0.39 | $0.91 | $1.10 |
Q3 real estate operating margin was approximately 28%, versus 37% a year earlier; for the nine months it was approximately 28%, versus 33%. Net income included $29.5 million of income from discontinued operations in Q3, including gains on property sales; it therefore does not reflect continuing-property performance alone. Nine-month discontinued-operations income was $34.9 million.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $16.1 million, down from $56.7 million at December 31, 2010. Total assets were $4.61 billion and stockholders’ equity was $2.72 billion.
- Balance-sheet line of credit and notes payable were $1.545 billion. Including $120 million of debt classified with assets held for sale, debt was approximately $1.665 billion. The filing estimated fair value of debt, including held-for-sale debt, at approximately $1.7 billion.
- At September 30, $327 million was drawn on the $500 million unsecured facility, at a blended stated rate of 0.84%. As of the filing, Piedmont reported $342 million outstanding and approximately $132.6 million available, including capacity reserved for letters of credit.
- Most debt was fixed-rate or rate-capped. The 500 W. Monroe loans totaling $185 million were floating-rate loans capped at 2.19% LIBOR. Piedmont extended the unsecured facility and the 500 W. Monroe loan maturities to August 2012. Management said there were no pending maturities until June 2012.
- Nine-month investing cash outflow was $126.7 million and financing cash outflow was $90.0 million. Operating cash flow was below the $165.6 million of dividends paid.
Material changes and notable items
- Revenue increased modestly, but continuing income and operating income fell. Acquisitions added rental revenue, while lease expirations, lower rental rates and reduced leased space at certain properties offset growth. Acquired properties and related lease intangibles also increased operating, depreciation and amortization expenses.
- During the nine-month period, Piedmont acquired several properties and gained control of Chicago’s 500 W. Monroe Building through foreclosure of mezzanine debt. Consolidation produced a noncash gain of approximately $1.5 million; the company also recognized approximately $2.6 million of previously deferred property operating income.
- Piedmont sold Eastpointe Corporate Center and 5000 Corporate Court in 2011, recognizing combined gains of approximately $26.8 million. Separately, it agreed to sell its approximately 96.5% interest in 35 W. Wacker for approximately $401 million, with closing expected in Q4 2011. The sale was pending at September 30.
- Nine-month FFO was $205.4 million ($1.19 per diluted share), compared with $203.7 million ($1.20). Core FFO was $206.3 million ($1.19) versus $213.7 million ($1.26); AFFO was $156.9 million ($0.91) versus $186.6 million ($1.10). These are non-GAAP measures defined by the company.
Outlook, risks and contingencies
- Management said it did not expect the $1.26 annual dividend rate to be fully covered by operating cash flows in 2011 or 2012. In a September 22 letter, it indicated an anticipated reduction to a rate closer to estimated 2012 taxable income of $0.80 per share, subject to board approval. On November 2, the board declared a Q4 dividend of $0.315 per share.
- After quarter-end, the board authorized up to $300 million of common-stock repurchases over two years. Repurchases are discretionary and depend on market conditions and other factors.
- Management anticipated approximately $145.3 million of potential tenant-improvement obligations over lease terms, including $34.6 million associated with 35 W. Wacker; most was expected to be funded over five years. Leasing costs may remain elevated as large leases approach expiration in 2012 and 2013.
- Key stated risks include tenant defaults or lease terminations, competition and pressure on rents, weaker economic or office-market conditions, interest-rate exposure, financing availability, and potential impairment charges. Management reported no real-estate impairment at September 30 and no goodwill impairment indicators.
- Two securities lawsuits remained ongoing. Management considered the risk of material loss remote but acknowledged that litigation carries a risk of financial loss. The filing reported no material changes to previously disclosed risk factors and stated that disclosure controls were effective.
Important facts for investors to verify
- Whether the 35 W. Wacker sale closed as expected, its final proceeds and gain, and the effect of the disposition on recurring income and debt.
- The board’s eventual dividend decision and the extent to which operating cash flow and AFFO support distributions.
- Availability and terms of refinancing for 2012 maturities, including the unsecured facility and 500 W. Monroe loans, and actual remaining borrowing capacity.
- Lease renewal, occupancy and rental-rate trends, especially for large leases expiring in 2012–2013, and the realized cost of tenant improvements and leasing commissions.
- Performance of recently acquired or newly consolidated properties, including 500 W. Monroe, and whether reported gains and other nonrecurring income obscure underlying operating trends.