Piedmont Office Realty Trust, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. The company owns and operates office properties, primarily in eight major U.S. markets, and is structured as a REIT. At quarter-end it held 54 in-service properties totaling approximately 16.3 million square feet, leased to 92.6% (versus 90.6% a year earlier), plus one 487,000-square-foot redevelopment asset.
Financial results and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $130.7 million | $129.2 million | $263.6 million | $259.1 million |
| Net income applicable to Piedmont | $8.2 million | $10.9 million | $58.4 million | $68.8 million |
| Diluted EPS | $0.06 | $0.09 | $0.46 | $0.52 |
| NAREIT FFO per diluted share | $0.41 | $0.41 | $0.85 | $0.83 |
| Core FFO per diluted share | $0.43 | $0.41 | $0.88 | $0.84 |
| AFFO | $42.4 million | $39.4 million | $94.1 million | $85.2 million |
Revenue increased 1.2% in Q2 and 1.7% for the first half, mainly on improved occupancy and new leases. Q2 net income fell about 25%, with management citing $3.2 million of retirement and separation costs tied to senior-management transition; higher amortization also weighed on results. First-half net income included $39.3 million of property-sale gains, compared with $45.2 million in 2018. Q2 net margin was approximately 6.2% versus 8.5% a year earlier; expense growth outpaced revenue growth. These GAAP results should be considered alongside the company’s non-GAAP FFO, Core FFO, AFFO, and NOI measures.
Cash flow, six months: Operating activities provided $91.9 million, up from $83.2 million. Investing activities provided $36.1 million, including $168.3 million of property-sale proceeds, against acquisition and capital spending. Financing activities used $124.9 million, including $79.9 million of dividends paid. Cash, cash equivalents, and restricted cash totaled $9.2 million at period-end; unrestricted cash was $7.7 million.
Debt and liquidity: Debt was $1.662 billion at June 30, down from $1.685 billion at year-end; estimated fair value was $1.696 billion. Weighted-average effective debt rate was 3.75%. The company reported $181 million drawn on its $500 million revolving line and $313 million of unused capacity as of the filing date. It reported no scheduled debt maturities until Q3 2021 and said it was in compliance with financial covenants. A 1 percentage-point increase in rates on existing variable-rate borrowings would increase annual interest expense by approximately $2.8 million.
Material changes and operating developments
- Same-store NOI increased 4.7% on a cash basis and 2.5% on an accrual basis for the first six months, year over year. Management attributed the improvement to occupancy gains, expired rent abatements, lease commencements, and higher net termination-fee income.
- Piedmont acquired Galleria 100 and adjacent land in Atlanta for a net contractual price of $95.1 million; the 414,293-square-foot property was 91% leased at acquisition.
- The company sold One Independence Square in Washington, D.C., in February for approximately $163.6 million net proceeds and recognized a $33.1 million gain. A further gain adjustment related to Two Independence Square also contributed to reported gains.
- First-half capital expenditures were $32.3 million, versus $26.5 million in 2018. The company reported approximately $74.1 million of remaining board-authorized share-repurchase capacity at June 30.
Outlook, risks, and contingencies
- The filing provides no specific earnings or FFO guidance. Management said operating cash flow, selective dispositions, and the revolver are primary liquidity sources; future dividends depend on cash generation, capital needs, access to capital, and REIT distribution requirements. The board declared a Q3 dividend of $0.21 per share, payable September 20, 2019.
- Lease expirations for the rest of 2019 represented 9.5% of annualized lease revenue; about half related to a 480,000-square-foot State of New York lease. Management reported advanced discussions on a substantial renewal, potentially for 18–20 years, but outcomes and related capital requirements remain uncertain.
- A $25.5 million tenant-improvement commitment is associated with the 17-year, 301,000-square-foot Transocean lease at Enclave Place; management expected funding by year-end 2019. The company also anticipated significant tenant-improvement and leasing-commission spending if the New York renewal proceeds.
- Principal risks include office-market and tenant conditions, lease renewals and downtime, interest-rate and LIBOR transition exposure, property disposition and acquisition execution, and inflation that may outpace lease expense-recovery provisions. Management reported no off-balance-sheet arrangements, no material pending legal proceedings, no known material risk-factor changes, and effective disclosure controls.
Important facts for investors to verify
- Progress and final terms of the State of New York lease renewal, including lease duration, rents, and required capital spending.
- Occupancy, lease commencements and expirations, abatements, and the effect of leasing costs on future cash flow and NOI.
- Revolver availability, variable-rate exposure, debt maturities, and the company’s ability to maintain covenant compliance.
- Recurring earnings and cash generation apart from property-sale gains and management-transition costs; review reconciliations and definitions of non-GAAP measures.
- Funding and timing of the Transocean tenant allowance and other portfolio capital expenditures, and the sustainability of the dividend.