Piedmont Office Realty Trust, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Amounts below are in millions of dollars unless noted. The filing identifies the registrant as Piedmont Office Realty Trust, Inc.
Business context
Piedmont is a REIT focused on owning, acquiring, developing, and managing office properties, primarily in eight Eastern U.S. markets. At quarter-end it owned 53 in-service properties totaling approximately 16.2 million square feet, leased 93.2% (versus 89.2% a year earlier), plus one redevelopment asset.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $129.7 | $137.6 | $388.8 | $434.7 |
| Real estate operating income | $31.7 | $28.8 | $85.2 | $97.5 |
| Net income applicable to Piedmont | $16.1 | $126.1 | $84.9 | $164.9 |
| Diluted EPS | $0.13 | $0.87 | $0.65 | $1.13 |
| Core FFO per diluted share (non-GAAP) | $0.45 | $0.42 | $1.29 | $1.33 |
| AFFO (non-GAAP) | $45.5 | $52.4 | $130.7 | $157.4 |
Q3 real estate operating income was 24.4% of revenue, up from 20.9% a year earlier; the nine-month margin was 21.9%, versus 22.4%. Same-store NOI increased 8.5% on a cash basis and 6.5% on an accrual basis in Q3; nine-month growth was 5.0% and 1.5%, respectively.
- Cash flow: Operating cash flow was $138.3 for the first nine months, compared with $176.4 in 2017. Investing activities provided $327.3, including $419.6 of property-sale proceeds; financing activities used $466.2. Cash and cash equivalents were $6.8 at quarter-end, plus $1.4 of restricted cash and escrows.
- Debt and liquidity: Debt totaled $1.715 billion, with a 3.71% weighted-average effective rate. Total debt was down modestly from $1.727 billion at year-end 2017. Management reported $202 million of unused capacity under the new $500 million unsecured credit line as of the filing date and compliance with debt covenants.
- Balance sheet: Total assets were $3.624 billion and total liabilities $1.890 billion at September 30. Common shares outstanding fell to 128.4 million from 142.4 million at year-end, primarily reflecting repurchases.
Material changes and unusual items
- Q3 net income fell sharply year over year because Q3 2017 included approximately $113.2 million of property and joint-venture sale gains; Q3 2018 had no property sales. Excluding gains, Q3 2018 benefited from higher occupancy, rental-rate growth, and acquired properties.
- Nine-month revenue declined $45.9 million, primarily from net property dispositions. The 2018 period included $45.2 million of gains on sales, compared with $116.0 million in 2017, and a $1.7 million loss on extinguishment of debt related to early repayment of two term loans.
- Piedmont sold a 14-property portfolio in January 2018 and acquired 501 West Church Street in Orlando for $28.2 million. On October 25, it acquired 9320 Excelsior Boulevard in Minnesota for $49.4 million; the building was fully leased to Cargill.
- The company repurchased approximately $266 million of common stock during the first nine months. It had $123.5 million remaining under its board-authorized repurchase program at quarter-end.
- Piedmont replaced its revolving credit facility, extended a $300 million term loan maturity to November 2021, repaid two term loans totaling $470 million, and entered into a new $250 million seven-year term loan. It reported no scheduled debt maturities until 2021.
Outlook, risks, and contingencies
- No numerical earnings or FFO guidance is provided. Management expected to use operating cash flow, selective dispositions, and credit-line capacity for near-term liquidity. It anticipated approximately $160 million of net proceeds from the expected Q4 2018 sale of 800 North Brand Boulevard; the filing reports the property as held for sale.
- The board declared a Q4 dividend of $0.21 per common share, payable January 3, 2019 to holders of record November 30, 2018. Future dividends depend on cash generation, capital needs, access to financing, and REIT distribution requirements.
- Lease-related commitments included $47.0 million of potential non-incremental tenant improvements over five years and $34.9 million of incremental improvements for executed leases. Approximately 547,000 square feet of signed leases for vacant space had not commenced; 759,000 square feet of commenced leases had rental or expense abatements. Lease expirations represented 11.9% of annualized lease revenue in 2019.
- Variable-rate exposure remains: management estimated a 1 percentage-point rate increase on existing variable-rate borrowings would add approximately $3.4 million to annual interest expense. Interest-rate swaps hedge much of the term-loan exposure.
- Other risks include office-market and tenant demand, large tenant lease events or defaults, leasing downtime and concessions, property-sale execution, capital needs, and REIT qualification. Management reported no material pending legal proceedings, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the planned sale of 800 North Brand Boulevard closed as expected and generated the anticipated net proceeds.
- How much of the reported same-store NOI growth reflects durable leasing and occupancy improvements versus lease-abatement expirations, and the resulting cash-flow profile.
- Execution and funding of tenant-improvement commitments, including the timing of the $47.0 million and $34.9 million commitments.
- Actual credit-line availability, variable-rate balances, refinancing terms, and compliance with debt covenants as maturities approach.
- Capital allocation after substantial share repurchases, including the sustainability of dividends and any further buybacks or acquisitions.
FFO, Core FFO, AFFO, and NOI are non-GAAP measures; the filing cautions that definitions may differ across REITs. Nine-month results are not necessarily indicative of full-year performance.