Piedmont Office Realty Trust, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. The filing identifies the registrant as Piedmont Office Realty Trust, Inc. (NYSE: PDM). It owned interests in 75 consolidated office properties and five buildings through unconsolidated joint ventures; its consolidated portfolio totaled approximately 20.9 million square feet and was 86.0% leased.
Financial performance and position
- Revenue: $134.3 million, up 2.5% from $131.1 million. Rental income rose to $108.0 million from $103.9 million; tenant reimbursements declined to $25.7 million from $26.5 million.
- Operating results: Real estate operating income was $38.3 million versus $34.7 million, with a margin of approximately 28.5% versus 26.5%. Income from continuing operations increased to $20.9 million from $18.4 million; continuing-operations diluted EPS was $0.13 versus $0.11.
- Net income: $14.7 million, or $0.09 per diluted share, compared with $37.2 million, or $0.22, in Q1 2012. The prior-year quarter included an approximately $17.8 million property-sale gain; Q1 2013 included a $6.4 million impairment charge.
- REIT operating measures: FFO was $60.2 million ($0.36 per diluted share), nearly flat year over year. Core FFO was $61.6 million ($0.37 per share), versus $60.0 million ($0.35). AFFO fell to $36.6 million ($0.22 per share) from $50.1 million ($0.29), principally reflecting higher non-incremental capital expenditures. Same-store cash NOI was $75.5 million, down 0.1%.
- Cash flow: Operating activities provided $43.0 million versus $37.9 million. Investing activities used $287.8 million, mainly for real estate acquisitions; financing activities provided $249.4 million. Cash and cash equivalents ended the quarter at $17.6 million, up from $13.0 million at year-end.
- Debt and liquidity: Debt totaled $1.700 billion at March 31, up from $1.417 billion at December 31, 2012. At quarter-end, $412 million was drawn on the $500 million unsecured line; management later reported $422 million outstanding and approximately $58.6 million available after letters of credit. Debt fair value was estimated at $1.750 billion. No debt matured in 2013; $575 million of secured debt was due in 2014.
- Balance sheet: Total assets were $4.539 billion and stockholders’ equity was $2.623 billion at quarter-end.
Material changes and notable items
- Acquired Arlington Gateway in Washington, D.C. for $175.6 million and 5 & 15 Wayside Road in the Boston area for $69.3 million. Both were funded using the unsecured credit line.
- Rental income benefited from new leases and renewals in existing properties, as well as Arlington Gateway. Lower reimbursements included abatements on a large 500 W. Monroe lease renewal.
- Sold 1111 Durham Avenue for approximately $4.0 million and recorded a $6.4 million impairment before sale. After quarter-end, on May 1, Piedmont completed the sale of 1200 Enclave Parkway for approximately $48.8 million.
- Declared a Q2 2013 dividend of $0.20 per common share, payable June 21 to holders of record May 31.
- Two securities-litigation settlements received final court approval on April 18, 2013. The company had recorded a $7.5 million settlement charge in 2012.
Outlook, risks and contingencies
- No formal earnings guidance was provided. Management said same-store cash NOI had been held back by lease expirations, uncommenced replacement leases and rent-abatement periods; it expected stronger NOI growth as signed leases commenced and abatements ended. At quarter-end, approximately 0.4 million square feet of signed leases had not commenced and 2.0 million square feet of commenced leases were subject to some form of abatement.
- Management anticipated refinancing the $575 million of 2014 secured maturities and line borrowings with unsecured debt, subject to market conditions. It used interest-rate swaps to hedge exposure and lock a portion of potential future borrowing costs. A 1 percentage-point increase in variable rates on quarter-end borrowings would add approximately $4.1 million of annual interest expense.
- Potential tenant-improvement commitments included $98.5 million of non-incremental expenditures over existing lease terms, most expected to be requested over the next several years, and $42.3 million of incremental commitments. Three Washington, D.C. spaces exceeding 200,000 square feet were approaching lease negotiations in 2013; concession costs and timing were uncertain.
- Principal stated risks included weak office demand, rents and property values; major-tenant defaults or lease rollover; competition; financing availability; exposure in key office markets; government funding and regulatory changes; impairment risk; and maintaining REIT qualification. Management reported no known material changes to the risk factors in its 2012 Form 10-K.
- Management stated disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Investor verification priorities
- Confirm the amount and timing of 2014 debt refinancing, line-of-credit availability and any related financing terms.
- Track leasing, occupancy, rent commencements and abatements, especially the large Washington, D.C. rollover blocks, and compare subsequent same-store NOI.
- Assess the cash requirements and timing of the $98.5 million and $42.3 million tenant-improvement commitments, alongside AFFO and dividends.
- Review acquisition performance and the completed 1200 Enclave Parkway disposition, including any resulting changes to portfolio income.
- Distinguish recurring operating performance from sale gains, impairment charges, acquisition costs and other adjustments when evaluating earnings and FFO/AFFO.