Piedmont Office Realty Trust, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Piedmont is a U.S. office-property REIT. At quarter-end it held interests in 74 consolidated office properties, five buildings through unconsolidated joint ventures, and two industrial buildings. Its consolidated office portfolio comprised about 20.5 million square feet and was 85.0% leased.
Key financial results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $133.7 million | $135.6 million | $266.4 million | $266.5 million |
| Real estate operating income | $35.9 million | $35.5 million | $70.5 million | $75.8 million |
| Income from continuing operations | $20.5 million | $17.5 million | $38.8 million | $47.7 million |
| Net income attributable to Piedmont | $30.7 million | $21.0 million | $67.9 million | $55.0 million |
| Diluted EPS | $0.18 | $0.12 | $0.39 | $0.32 |
| FFO per diluted share | $0.35 | $0.38 | $0.70 | $0.79 |
| AFFO per diluted share | $0.21 | $0.29 | $0.50 | $0.62 |
Q2 real estate operating margin was approximately 26.8% of revenue, compared with 26.2% a year earlier; the six-month margin was approximately 26.4%, versus 28.4%. Net income benefited from property-sale gains: discontinued operations included gains of $10.0 million in Q2 and $27.8 million for the six-month period.
For the six months, operating cash flow was $68.6 million, compared with $115.2 million in 2011. Investing activities used $1.2 million, while financing activities used $180.2 million. Cash and equivalents fell to $26.9 million from $139.7 million at year-end 2011; restricted cash and escrows were $48.0 million.
At June 30, total debt was $1.401 billion, down from $1.473 billion at December 31, 2011. Total liabilities were $1.602 billion and stockholders’ equity was $2.727 billion. The reported weighted-average debt rate was 4.28%; nearly all debt was fixed or effectively fixed, except borrowings under the unsecured facility.
Changes versus prior comparable periods
- Q2 revenue declined about $1.8 million; higher rental income was more than offset by lower tenant reimbursements and other rental income. Six-month revenue was essentially unchanged.
- Continuing-operations income rose in Q2 but fell for the six-month period. Six-month results faced higher property operating costs and depreciation, and lacked prior-year one-time income items, including a VIE consolidation gain and lease-termination income.
- Q2 net income and six-month net income increased despite weaker six-month continuing results, primarily because of gains on property disposals. FFO and AFFO per share declined in both comparisons.
- Interest expense decreased modestly, reflecting debt repayments, while rental income from acquired properties and newly commenced leases supported revenue. Lower occupancy at certain properties and rent/reimbursement abatements offset some growth.
Liquidity, outlook, risks and unusual items
- The $500 million unsecured facility was scheduled to mature August 30, 2012. Management said it anticipated closing a comparable replacement facility before maturity. The balance sheet shows $113 million drawn at June 30; the MD&A reports $153 million outstanding as of the filing, with approximately $323.6 million of capacity then available, including capacity reserved for letters of credit.
- Management identified tenant improvements and leasing commissions as significant future cash needs, including approximately $136 million of potential contractual tenant-improvement obligations over remaining lease terms, mostly expected over several years. Re-leasing costs for large tenants and competitive leasing conditions may also pressure cash flow.
- The board reduced the quarterly dividend to $0.20 per share beginning in Q1 2012 ($0.80 annualized). It declared another $0.20-per-share dividend for Q3, payable September 21, 2012. The board had authorized up to $300 million of share repurchases through November 2013; approximately $46.2 million had been expended through June 30, including related transaction fees.
- Piedmont sold the Portland Portfolio in March and 26200 Enterprise Way in May 2012. The Portland sale included a $19 million unsecured buyer note bearing 8.73% interest and maturing October 31, 2012. Sale gains are nonrecurring and are not expected to make discontinued-operations results comparable in future periods.
- A securities lawsuit carries a disclosed reasonably possible gross loss range of $0–$159 million plus prejudgment interest, before allocation among defendants and potential insurance recovery of up to $12.3 million. A second lawsuit remains pending; management assessed its then-current risk of material loss as remote.
- Other risks include office demand, leasing and renewal conditions, tenant defaults, market weakness, interest-rate exposure, REIT qualification, and the replacement of the near-term credit facility. Management reported no impairment of real estate or goodwill as of June 30, and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the replacement unsecured facility closed on acceptable terms before the August 30, 2012 maturity, and how the reported $113 million quarter-end draw reconciles to the $153 million filing-date amount.
- Actual portfolio leasing, occupancy, rental rates, and tenant-improvement/leasing costs, especially for large leases and properties experiencing downtime.
- Cash generation and liquidity after restricted escrow funds, property-sale proceeds, dividends, and repurchases are considered.
- Collection of the $19 million Portland sale note by its October 31, 2012 maturity and any developments in the disclosed litigation.
- The sustainability of operating results excluding property-sale gains and other nonrecurring items; Piedmont cautioned that interim results are not necessarily indicative of full-year results and provided no specific earnings guidance.