Piedmont Office Realty Trust, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; the filing also provides unaudited fourth-quarter results. The filing identifies the registrant as Piedmont Office Realty Trust, Inc. (NYSE: PDM).
Business context
Piedmont is a self-managed office REIT focused primarily on Class A office properties in major U.S. markets. At year-end it owned and operated 78 office properties, plus interests in two buildings through an unconsolidated joint venture. The portfolio was 87.2% leased, with approximately seven years of average lease term remaining. About 90% of annualized lease revenue came from its primary markets; Chicago, Washington, D.C., and New York together represented 56.1%.
Financial performance and condition
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $554.5 million | $525.0 million |
| Real estate operating income | $140.2 million (25% of revenue) | $136.1 million (26%) |
| Income from continuing operations | $71.5 million; $0.44 per diluted share | $60.1 million; $0.35 per diluted share |
| Net income attributable to Piedmont | $98.7 million; $0.60 per diluted share | $93.2 million; $0.55 per diluted share |
| Funds from Operations (FFO) | $250.5 million; $1.52 per diluted share | $230.4 million; $1.35 per diluted share |
| Core FFO | $240.5 million; $1.46 per diluted share | $243.2 million; $1.43 per diluted share |
| Adjusted FFO (AFFO) | $117.0 million; $0.71 per diluted share | $138.0 million; $0.81 per diluted share |
| Cash from operating activities | $215.1 million | $220.9 million |
| Year-end total assets / stockholders’ equity | $4,666.1 million / $2,461.2 million | $4,254.9 million / $2,640.5 million |
| Year-end debt | $2,002.2 million | $1,416.5 million |
Investing activities used $495.8 million in 2013, including $366.2 million for real estate acquisitions and $176.0 million of capitalized expenditures. Financing activities provided $274.8 million. Cash and cash equivalents were $7.0 million at year-end. Management reported a 35.0% debt-to-gross-assets ratio and a 2.0x ratio of earnings to fixed charges.
Annualized lease revenue was $569.8 million at year-end, up from $554.0 million; revenue per leased square foot was $30.41 versus $30.89. The company paid $0.80 per share in 2013 dividends, unchanged from 2012. The 2013 distribution was classified as 64% investment income and 36% return of capital.
Material changes versus prior year
- Revenue rose $29.5 million, primarily from 2013 acquisitions and commencement of significant leases. Property operating costs increased $14.7 million and interest expense increased $8.6 million.
- Same-store NOI (cash basis) declined 0.9% to $291.9 million. Management said it would have grown 3.9% excluding the loss of the 330,000-square-foot government tenant at One Independence Square.
- Year-end occupancy edged down to 87.2% from 87.5%. New or expansion leasing covered 224,000 square feet, but was offset by the One Independence Square expiration.
- Debt increased by approximately $585.7 million, while the weighted-average interest rate declined to 3.80% from 4.30%. The company issued $350 million of 3.40% senior notes and entered into a $300 million delayed-draw term loan facility.
- FFO increased, but Core FFO was slightly lower and AFFO fell by about 15%, reflecting, among other items, higher non-incremental capital expenditures ($103.0 million versus $87.7 million).
Outlook, risks and unusual items
- Outlook: Management anticipated Same Store NOI could decline in the first half of 2014, then improve in the second half as leases commence, abatements expire, and vacant space is leased. It noted that a 220,000-square-foot government lease at 3100 Clarendon expired effective January 1, 2014, and that 2013 leases signed for recently occupied space carried initial cash rents about 7.6% lower once commenced and abatements ended. No specific full-year earnings or FFO guidance is provided.
- Liquidity and maturities: As of the filing date, management reported about $159.6 million of remaining capacity under its $500 million unsecured credit line. Of $575 million of debt due in 2014, the company drew the full $300 million delayed-draw term loan on January 30, 2014, used $225 million to repay Aon Center mortgage debt early, and applied $75 million to the credit line. It expected to refinance remaining 2014 maturities with unsecured debt, subject to market conditions. The year-end debt schedule and post-filing transactions should be distinguished when assessing liquidity.
- Capital needs: Contractual non-incremental tenant-improvement obligations were $85.1 million; incremental commitments were $19.5 million. Management expected approximately $85 million of spending over 18 months for a Houston office development and approximately $25 million for the 3100 Clarendon redevelopment. Vacant large blocks in Washington, D.C., and Chicago could require significant leasing concessions.
- Unusual items: 2013 results included $10.6 million of net casualty recoveries, mainly for Hurricane Sandy damage; a $1.3 million insurance recovery related to prior-year litigation settlements; real estate impairment charges of $1.2 million in continuing operations and $6.4 million in discontinued operations; and a $4.4 million other-than-temporary impairment of a joint-venture investment. The filing reports $27.3 million of discontinued-operations income, including $31.3 million of property-sale gains.
- Principal risks: Office-market weakness, tenant defaults or early terminations, leasing costs and concessions, and geographic concentration are key risks. Chicago, Washington, D.C., and New York generated 21.2%, 20.2%, and 14.7% of annualized lease revenue, respectively. Interest-rate, refinancing, covenant, impairment, environmental, government-tenant compliance, and REIT-qualification risks are also discussed. Management and the auditors reported effective internal controls; the auditor issued an unqualified opinion on the financial statements.
- Contingencies: The filing reports no material pending legal proceedings. Tenant audits and disputes generated approximately $1.2 million of additional expense in 2013. Tax years 2010–2013 remained open to examination; accrued tax liability for uncertain positions, including interest and penalties, was approximately $6.7 million.
Important facts for investors to verify
- Reconcile the 2014 debt maturity schedule with the January 2014 term-loan draw, Aon Center repayment, and remaining refinancing needs.
- Track occupancy and lease commencements, particularly the 3100 Clarendon vacancy, large vacant blocks in Washington, D.C. and Chicago, and the expiring or recently renewed major tenant leases.
- Assess the sustainability of AFFO relative to the $0.80 annual dividend, recurring capital spending, tenant-improvement obligations, and planned development and redevelopment expenditures.
- Review acquisition and disposition assumptions, the Sunset Hills Road sale contract, and valuation support for recorded property and joint-venture impairments.
- Confirm the timing and cost of the Houston project and 3100 Clarendon redevelopment, and whether remaining credit-line capacity and expected unsecured financing are available on acceptable terms.