Piedmont Office Realty Trust, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Piedmont is an office REIT operating primarily in seven Eastern U.S. markets. At quarter-end, it owned 55 in-service properties totaling approximately 17.0 million square feet, leased at 91.9% (93.3% at December 31, 2018).
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $135.4 million | $129.7 million | $399.0 million | $388.8 million |
| Net income applicable to Piedmont | $8.4 million | $16.1 million | $66.8 million | $84.9 million |
| Diluted EPS | $0.07 | $0.13 | $0.53 | $0.65 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $160.2 million | $138.3 million |
| NAREIT FFO per diluted share | $0.45 | $0.45 | $1.30 | $1.27 |
| Core FFO per diluted share | $0.45 | $0.45 | $1.33 | $1.29 |
| AFFO | $36.7 million | $45.5 million | $130.8 million | $130.7 million |
Q3 net margin was approximately 6.2%, compared with 12.4% a year earlier; nine-month net margin was approximately 16.7%, versus 21.8%. Same-store NOI increased 5.0% on a cash basis and 0.5% on an accrual basis in Q3; for the nine-month period, increases were 5.0% and 2.0%, respectively.
Cash flow and liquidity: Nine-month investing cash outflow was $219.2 million, including $326.1 million of real estate acquisitions, partly offset by $181.0 million of property sale proceeds. Financing cash flow was positive $65.0 million. Cash and cash equivalents were $10.3 million at September 30; cash plus restricted cash was $12.1 million.
Debt: Debt carrying value was $1.879 billion, up from $1.685 billion at year-end 2018; estimated fair value was $1.923 billion. The weighted-average effective rate was 3.61%. Approximately $1.4 billion was fixed or effectively fixed; outstanding debt maturities began in Q3 2021. Management reported covenant compliance. The filing states approximately $484 million of unused line capacity as of filing, while its debt table reports $398 million drawn on a $500 million revolver at quarter-end; investors should verify the availability figure and its basis.
Material changes and notable items
- Revenue increased, led by higher rental and tenant reimbursement revenue, new leases and acquisitions. Q3 rental and reimbursement revenue rose $6.1 million year over year; nine-month revenue rose $9.7 million.
- Q3 net income fell $7.7 million. Management attributed the decline mainly to higher amortization on acquired properties and a $2.0 million impairment on The Dupree building. Nine-month net income declined $18.1 million, reflecting higher expenses and a smaller gain on property sales.
- Acquired Galleria 100 in May and Galleria 400 and 600 in August, with adjacent land; combined net contractual purchase prices were approximately $326 million. The assets were 91% and 84% leased, respectively, at acquisition.
- The Dupree was sold on September 4, after a $2.0 million impairment. The company also sold One Independence Square in February and recognized a $33.2 million gain on that sale.
- After quarter-end, 500 West Monroe sold on October 28 for $412 million. Piedmont said proceeds repaid substantially all of the revolver balance.
- General and administrative costs rose $8.2 million year over year for the nine-month period, including $3.2 million of retirement and separation costs tied to the June senior-management transition, plus higher performance-based compensation accruals.
Outlook, risks and contingencies
- No numerical earnings or FFO guidance is provided. Management identifies operating cash flow, property dispositions and its credit line as liquidity sources; future dividends, acquisitions, repurchases and capital spending depend on cash needs and market conditions.
- The Board declared a Q4 dividend of $0.21 per share, payable January 3, 2020. The same quarterly rate was paid during the first three quarters of 2019.
- The State of New York executed an approximately 20-year, 523,000-square-foot renewal and expansion at 60 Broad Street. Management expects tenant improvements and leasing commissions of about $7 per square foot per year of lease term over five years. Scheduled expirations for the balance of 2019 represented 7.3% of annualized lease revenue, mostly related to this tenant’s lease.
- Leasing and occupancy remain important risks: 591,000 square feet of executed leases for vacant space had not commenced, and 468,000 square feet of commenced leases were in rental or expense abatement. Lease downtime, abatements, rent roll-downs and tenant improvement costs may affect results and cash flow.
- Other disclosed risks include office-space demand and competition, tenant defaults or concentration, economic conditions in Piedmont’s markets, variable-rate borrowing and LIBOR transition, development costs, and continued REIT qualification. A 1 percentage-point increase in variable rates on quarter-end borrowings was estimated to increase annual interest expense by approximately $5.0 million.
- No material pending legal proceedings or off-balance-sheet arrangements were reported. Tenant audit and lease disputes generated net recoveries of $0.7 million in the three and nine months ended September 30, 2019. Management reported no individually significant unrecorded tenant allowance commitments.
- Adoption of the new lease accounting standard had a negligible income effect; the company did not expect the upcoming credit-loss standard to have a material impact.
Important facts for investors to verify
- Revolver availability: reconcile the stated approximately $484 million of unused capacity with the $500 million facility and $398 million reported outstanding at September 30.
- Post-quarter debt reduction: confirm the amount of 500 West Monroe sale proceeds applied to the revolver and remaining variable-rate exposure.
- Leasing outlook: monitor portfolio occupancy, the commencement of signed vacant-space leases, abatement expirations and the 60 Broad Street lease economics.
- Recurring earnings and distributions: assess AFFO, same-store NOI, capital spending and dividend coverage alongside GAAP net income and sale gains.
- Expense and risk trends: track acquired-property amortization, performance-based compensation, tenant improvement requirements and interest-rate exposure.