Piedmont Office Realty Trust, Inc. — FY 2012 Form 10-K
Reporting period: Year ended December 31, 2012; the filing also reports unaudited fourth-quarter results. The registrant is Piedmont Office Realty Trust, Inc. (NYSE: PDM), a self-managed office REIT focused on primarily Class A properties and creditworthy corporate and government tenants.
Business and portfolio
At year-end, Piedmont owned 74 office properties across 17 metropolitan areas, plus interests in five properties through unconsolidated joint ventures. Its 74 directly or consolidated properties comprised 20.5 million square feet and were 87.5% leased, up from 86.5% a year earlier; stabilized-portfolio occupancy, excluding specified value-add properties, was 90.5%. Annualized lease revenue (ALR) was $554.0 million, nearly unchanged from $557.9 million in 2011. Chicago, Washington, D.C., and New York together generated 59.7% of ALR.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Total revenue | $536.4 million | $533.5 million |
| Real estate operating income | $139.8 million (26.1% of revenue) | $143.9 million (27.0%) |
| Income from continuing operations | $63.8 million; $0.38 diluted/share | $85.1 million; $0.49 diluted/share |
| Net income attributable to Piedmont | $93.2 million; $0.55 diluted/share | $225.0 million; $1.30 diluted/share |
| Operating cash flow | $223.3 million | $270.3 million |
| FFO / Core FFO / AFFO | $230.4 million / $243.2 million / $138.0 million | $271.3 million / $271.6 million / $202.6 million |
Revenue growth reflected higher rental income, partly offset by lower tenant reimbursements and lease-termination income. Same-store NOI (cash basis) fell 4.4% to $285.2 million. Cash from operations decreased; investing activities used $65.8 million, and financing activities used $284.2 million, including $136.4 million of dividends and distributions and $88.5 million of stock repurchases. Year-end cash was $13.0 million, versus $139.7 million at year-end 2011.
Total assets were $4.25 billion, stockholders’ equity $2.64 billion, and outstanding debt $1.42 billion at year-end. Debt to total assets was approximately 33%. The new $500 million unsecured revolving facility had $129 million drawn at year-end; the filing separately reports $155 million outstanding as of filing time and approximately $325.6 million then available after letters of credit. There was no debt maturity in 2013; $575 million was due in 2014. Weighted-average debt interest rate was 4.30%.
Cash dividends were $0.80 per share in 2012, versus $1.26 in 2011. The board declared a first-quarter 2013 dividend of $0.20 per share. The 2012 distribution comprised 73% investment income, 16% capital gains, and 11% return of capital.
Changes, outlook, risks, and unusual items
- Net income fell substantially as 2011 included $122.7 million of property-sale gains in discontinued operations. In 2012, discontinued operations included $27.6 million of property-sale gains.
- Continuing-operations diluted EPS declined partly because 2012 included a $7.5 million litigation settlement charge and $5.2 million net casualty loss from Hurricane Sandy. Sandy-related costs were approximately $9.2 million, partly offset by $4.0 million of insurance recoveries; further recoveries were anticipated.
- Management cited substantial lease rollover and concessions as pressures on cash NOI. It expected executed leases not yet commenced and expiring rent-abatement periods to support stronger future same-store NOI growth, but provided no quantified earnings or NOI guidance in the supplied filing text.
- Near-term capital demands include $111.9 million of anticipated non-incremental tenant-improvement commitments and $63.8 million of incremental commitments associated with new leases. Management noted that three Washington, D.C. space blocks exceeding 200,000 square feet would face leasing negotiations over the next 18 months and could require significant concessions.
- Piedmont sold seven properties in 2012, exited two markets, and disposed of its final two industrial assets. It continued a strategy of concentrating in major office markets and maintaining relatively low leverage. In February 2013 it contracted to buy a Washington, D.C. office property for approximately $175.6 million.
- Two securities class actions were agreed in principle to settle for $7.5 million total, payable by Piedmont and its insurer. Preliminary approval was granted in January 2013, with final approval still pending at filing. The filing says insurance recovery was not yet determined.
- Key risks include office-market weakness, tenant defaults or nonrenewals, concentrated exposure to Chicago, Washington, D.C., and New York, refinancing and interest-rate risk, large leasing-capital requirements, environmental and regulatory liabilities, and continued REIT qualification. Management and the auditor reported effective internal control over financial reporting; the financial statements received an unqualified audit opinion.
Important facts for investors to verify
- Whether the class-action settlements received final court approval and how much of the $7.5 million was ultimately recovered from insurers.
- Leasing outcomes, occupancy, rent concessions, and cash NOI trends as major expirations and signed-but-not-commenced leases roll through.
- Funding and refinancing plans for the $575 million due in 2014, including the status and terms of any replacement unsecured debt.
- Actual tenant-improvement and leasing-commission spending versus the $111.9 million and $63.8 million commitments, and the cost of the proposed Washington, D.C. acquisition.
- Whether the expected additional Hurricane Sandy insurance recoveries were received and how subsequent cash flows support the dividend.