Piedmont Office Realty Trust, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. The filing identifies the registrant as Piedmont Office Realty Trust, Inc. Piedmont owned interests in 74 consolidated office properties and five buildings through unconsolidated joint ventures; its consolidated portfolio comprised approximately 20.5 million square feet and was 87.0% leased.
Key financial results
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $134.9 million | $132.5 million | $400.3 million | $397.9 million |
| Real estate operating income | $33.9 million | $36.3 million | $104.1 million | $111.5 million |
| Income from continuing operations | $10.9 million | $20.5 million | $49.4 million | $67.6 million |
| Net income attributable to Piedmont | $10.8 million | $51.0 million | $78.8 million | $106.0 million |
| FFO per diluted share | $0.33 | $0.40 | $1.03 | $1.19 |
| Core FFO per diluted share | $0.37 | $0.40 | $1.07 | $1.19 |
| AFFO per diluted share | $0.12 | $0.29 | $0.62 | $0.91 |
Amounts are rounded; FFO, Core FFO and AFFO are non-GAAP measures. Q3 real estate operating margin was approximately 25%, compared with 27% a year earlier; the nine-month margin was approximately 26%, compared with 28%.
- Cash flow: Nine-month cash from operations was $142.6 million, down from $176.2 million. Investing activities used $38.9 million and financing activities used $222.6 million. Cash and cash equivalents fell to $20.8 million at September 30 from $139.7 million at year-end 2011.
- Balance sheet and debt: Total assets were $4.286 billion, total liabilities $1.621 billion, and stockholders’ equity $2.665 billion. Debt was $1.436 billion, down from $1.473 billion at year-end 2011; estimated debt fair value was $1.488 billion. Debt maturities were reported as beginning in 2014.
- Liquidity: A new four-year, $500 million unsecured revolving facility replaced the expiring facility. At September 30, $148.5 million was outstanding; the filing later reports $153.5 million outstanding as of the filing date and approximately $327.1 million available after reserving capacity for letters of credit. Piedmont reported compliance with all facility covenants.
Material changes and management commentary
- Q3 continuing income fell primarily because Piedmont recorded a $7.5 million litigation-settlement charge. Revenue grew modestly, but higher depreciation and amortization, property costs and general and administrative expense contributed to lower operating income.
- For the first nine months, rental income increased $10.7 million, mainly from acquired properties and new leases. This was partly offset by lower tenant reimbursements related to lease expirations and lower other rental income, including fewer lease-termination fees than in 2011.
- Management cited intense competition for tenants, lease rollover, lower market rents and larger tenant-improvement packages. The sale of 35 West Wacker Drive, certain leases at lower rents, and downtime while re-tenanting properties pressured 2012 cash flow. The board reduced the quarterly dividend to $0.20 per share beginning in Q1 2012; it declared another $0.20 dividend for Q4, payable December 21, 2012.
- Management expects capital needs to include approximately $122.0 million of potential non-incremental tenant improvements over existing lease terms and $63.1 million of commitments for incremental capital expenditures. Re-leasing several large tenants approaching expiration over the next 12–18 months may require additional tenant improvements and leasing commissions.
- The board authorized up to $300 million of share repurchases through November 2013. Approximately $83.4 million, including transactions fees and repurchases from December 2011, had been spent through September 30, 2012.
Outlook, risks and unusual items
- No specific earnings or operating guidance is provided. Management’s outlook depends on leasing conditions, property dispositions and acquisitions, capital needs, access to financing and REIT distribution requirements. Management cautions that nine-month results are not necessarily indicative of full-year results.
- On October 11, 2012, Piedmont reached agreements in principle to settle two securities class-action cases for total payments of $7.5 million by Piedmont and its insurer, subject to court approval and definitive agreements. The full charge was recorded in Q3; insurance recoveries had not been determined or recorded.
- Property sales generated $27.6 million in gains during the first nine months, reported in discontinued operations. A $19.0 million note receivable from the Portland Portfolio sale bore interest at 8.73% and was due October 31, 2012.
- Other disclosed exposures include tenant-improvement and leasing obligations, potential tenant audit disputes, variable-rate debt, and the risk of reduced demand, rents or property values. The filing reported no real estate impairment as of September 30, 2012, and no material change in previously disclosed risk factors.
- Approximately $22.5 million of tax-deferred sale proceeds was held in escrow pending replacement-property acquisitions. If replacement properties were not identified within the required timeframe, the proceeds would return to Piedmont as unrestricted cash.
Important facts for investors to verify
- Progress and final terms of the two proposed litigation settlements, court approval, and any insurer reimbursement.
- Current revolver borrowings, available capacity, covenant headroom and upcoming debt maturities.
- Leasing progress and occupancy, particularly the large tenant expirations and re-leasing activity management identified.
- Timing and actual funding of tenant-improvement and capital-expenditure commitments, and their effect on AFFO and dividend coverage.
- Collection of the $19.0 million sale note and disposition of the $22.5 million tax-deferred exchange escrow funds.
- Dividend sustainability: the filing reports cash flows and capital requirements but does not provide a specific future dividend forecast.