Piedmont Office Realty Trust, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; balance-sheet comparisons are with December 31, 2015. Amounts are in U.S. dollars unless stated otherwise.
Business context
Piedmont is a REIT focused on owning, developing, and managing commercial office properties. At quarter-end it held 65 office properties comprising 18.4 million square feet; the portfolio was 93.4% leased, versus 90.6% a year earlier. Approximately 87% of annualized lease revenue came from eight principal markets.
Financial and operating results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $138.5 million | $148.8 million | $411.8 million | $445.3 million |
| Real estate operating income/(loss) | $3.3 million | $(1.1) million | $47.2 million | $47.9 million |
| Net income/(loss) attributable to Piedmont | $(12.7) million | $(1.9) million | $77.7 million | $47.3 million |
| Diluted net income/(loss) per share | $(0.09) | $(0.01) | $0.53 | $0.31 |
| NAREIT FFO per diluted share | $0.41 | $0.41 | $1.22 | $1.19 |
| Core FFO per diluted share | $0.42 | $0.41 | $1.23 | $1.19 |
| AFFO | $50.5 million | $52.4 million | $143.7 million | $143.8 million |
| Same-store NOI, cash basis | $70.2 million; +4.5% | $67.2 million | $206.5 million; +3.9% | $198.7 million |
Revenue declined about 7% in both comparison periods, principally because of property sales, including Aon Center. Same-store NOI improved with higher occupancy, new lease commencements, and the expiration of rent abatements. GAAP net income for the nine months included $78.9 million of gains on property sales; results also included $30.9 million of real estate impairment charges. Q3’s $22.6 million impairment related to Rockville properties subsequently sold.
Operating cash flow was $172.0 million for the first nine months, compared with $134.3 million a year earlier. Investing activities used $31.6 million and financing activities used $139.9 million; cash ended at $6.0 million. Capital expenditures were $88.4 million.
Balance sheet, debt, and liquidity
- Total assets were $4.39 billion and total equity was $2.17 billion at September 30, 2016.
- Debt carrying value was $1.994 billion, compared with $2.030 billion at year-end 2015. The weighted-average stated/effective rate shown for total debt was 3.28%.
- Unsecured debt was $1.661 billion and secured debt was $333.0 million. Piedmont reported $152.0 million drawn on its $500 million unsecured line of credit, with $276 million of capacity available as of the filing date.
- Cash and cash equivalents were $6.0 million. Management said it was in compliance with debt covenants and had no debt maturing until Q4 2017 after repaying a $42.5 million loan.
- A 1 percentage-point increase in rates on existing variable-rate borrowings was estimated to raise annual interest expense by approximately $3.2 million. Interest-rate swaps had $900 million notional value.
Material changes, outlook, and other matters
- During the nine months Piedmont acquired One Wayside Road in Boston for $62.9 million and a 99% interest in the joint venture owning CNL Tower I & II in Orlando for $166.7 million. It sold several properties, generating $304.9 million of net proceeds; sale gains contributed materially to year-to-date GAAP income.
- After quarter-end, Piedmont acquired Galleria 200 in Atlanta for $69.6 million. The board declared a Q4 2016 dividend of $0.21 per common share, payable January 3, 2017.
- The 500 TownPark development was 80% pre-leased; remaining project costs were estimated at $16–$18 million, including leasing costs, with completion expected early in 2017. The filing provides no formal earnings or full-year financial guidance.
- Management described portfolio refinement and a focus on select submarkets. It cited lease-up and occupancy gains, while noting that downtime, rent abatements, lease expirations, and rental-rate changes can affect property cash flows. About 500,000 square feet of executed leases had not commenced and 900,000 square feet of commenced leases remained in an abatement period.
- Potential tenant-improvement commitments included $37.7 million of non-incremental commitments over five years and $31.3 million associated with executed leases. A tenant dispute had a reasonably possible loss range of $0–$1.8 million, net of reserves. Management reported no material pending legal proceedings and no known material change to previously disclosed risk factors.
- The $200 million share-repurchase authorization had approximately $70.2 million of capacity remaining. The 10-Q reported no material change in disclosure controls and procedures were considered effective.
Important facts for investors to verify
- How recurring property performance and same-store NOI develop after significant portfolio dispositions and acquisitions; distinguish these trends from sale gains and impairment charges.
- Leasing progress, occupancy, rent abatements, lease expirations, and the timing and cost of tenant improvements and leasing commissions.
- Liquidity and refinancing plans, including line-of-credit usage, debt maturities, variable-rate exposure, and covenant headroom.
- Whether development spending and planned leasing commitments remain within estimates, and whether the announced Atlanta acquisition contributes as expected.
- The outcome of the tenant dispute and any material changes to other contingencies or property impairment assumptions.