Piedmont Office Realty Trust, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; financial statements are unaudited. Piedmont owned 53 in-service office properties and one redevelopment asset, totaling approximately 16 million square feet; the in-service portfolio was 91.3% leased. Its principal markets are Atlanta, Boston, Chicago, Dallas, Minneapolis, New York, Orlando, and Washington, D.C.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $129.9 million | $148.5 million |
| Real estate operating income | $27.6 million (21.3% of revenue) | $33.3 million (22.4%) |
| Net income applicable to Piedmont | $57.8 million | $15.1 million |
| Diluted EPS | $0.42 | $0.10 |
| Operating cash flow | $33.3 million | $50.3 million |
| FFO per diluted share | $0.41 | $0.45 |
| Core FFO per diluted share | $0.43 | $0.45 |
| AFFO | $45.8 million | $54.1 million |
Q1 2018 included a $45.2 million gain from property sales and a $1.7 million debt-extinguishment loss. Excluding the sale gain, GAAP net income is not directly comparable to reported net income; FFO and Core FFO provide supplemental, non-GAAP measures. Interest expense declined to $13.8 million from $18.1 million.
Cash, debt, and liquidity
- Cash and cash equivalents were $6.7 million at March 31, 2018; cash, cash equivalents, and restricted cash totaled $8.2 million.
- Net cash provided by operations was $33.3 million; investing activities provided $368.4 million, primarily from property-sale proceeds; financing activities used $402.2 million.
- Total debt, net of discounts and issuance costs, was $1.690 billion, versus $1.727 billion at December 31, 2017. Estimated fair value was $1.701 billion.
- The company sold 14 properties for $415.1 million in net cash proceeds and accepted a $3.2 million secured note. It used disposition proceeds and financing to repay $470 million of term loans, repurchase shares, and acquire a property.
- At the filing date, $266 million was available under the $500 million unsecured line of credit. Management identified property operating cash flows, selective dispositions, and the credit line as primary sources of near-term liquidity.
- Q1 capital expenditures were $12.8 million. Existing lease-related tenant improvement commitments included $34.7 million of non-incremental and $12.5 million of incremental expenditures.
Material changes and management commentary
- Revenue fell $18.6 million year over year, primarily because of property dispositions after March 31, 2017. Rental income declined $16.6 million.
- Same-store NOI increased 4.2% on a cash basis but decreased 0.2% on an accrual basis. Management attributed the cash-basis increase mainly to expiring rent abatements.
- In January, the company completed the sale of its 14-property disposition portfolio; it also acquired 501 West Church Street, a 182,461-square-foot Orlando property, for a contractual purchase price of $28 million.
- Piedmont repurchased approximately 12.5 million shares under its repurchase plan for about $231.9 million, averaging $18.56 per share. Approximately $156.4 million remained authorized for repurchases at quarter-end.
- The company paid a $0.50-per-share special dividend during Q1, related to a taxable gain from a 2017 property sale. The board declared a $0.21-per-share Q2 dividend, payable June 15, 2018.
- A new $250 million unsecured term loan matures March 31, 2025. Swaps fixed the rate on $150 million of that loan; the remaining $100 million was variable-rate. Total debt had a weighted-average stated rate of 3.69% at quarter-end.
Outlook, risks, and contingencies
The filing provides no quantified earnings or FFO guidance. Management said results for the quarter are not necessarily indicative of full-year results. It expected no material impact from lessor accounting under the forthcoming lease standard, but was still assessing lessee accounting effects. Management reported compliance with debt covenants and no off-balance-sheet arrangements.
Key risks include office-market and economic conditions, competition for lease renewals and re-leasing, tenant defaults or terminations, leasing downtime and abatements, capital needs for tenant improvements, interest-rate exposure, and the ability to execute acquisitions or dispositions. A 1 percentage-point increase in variable rates on existing borrowings was estimated to increase annual interest expense by approximately $3.1 million. The company disclosed $34.7 million of potential non-incremental tenant-improvement commitments over five years and routine litigation, which management did not expect to materially affect results or liquidity. Tenant audits and disputes reduced reimbursement revenue by $0.4 million in Q1.
Piedmont adopted new revenue-recognition standards retrospectively; management reported no change in the timing of affected revenue recognition, but reclassified certain revenue categories. It also adopted standards for financial instruments and hedging. Management stated that disclosure controls were effective and that there were no material changes in internal control during the quarter.
Important facts for investors to verify
- How much of the reported profit increase is attributable to the $45.2 million disposition gain, and how recurring operating measures trend against prior periods.
- Whether occupancy, leasing activity, and rent levels can sustain same-store performance as leases expire and abatements or downtime affect cash receipts.
- Debt maturity, credit-line usage, covenant headroom, and exposure to variable interest rates, especially as the line of credit approaches maturity.
- The timing and ultimate cost of tenant-improvement commitments, capital expenditures, share repurchases, and dividends relative to recurring cash generation.
- The collection and repayment of the $3.2 million secured note receivable, due June 30, 2018, subject to extension options.