Piedmont Office Realty Trust, Inc. — FY 2018 Form 10-K
Reporting period: Year ended December 31, 2018; filed February 20, 2019. Piedmont is a REIT focused on owning, leasing, developing, and managing primarily Class A office properties.
Business context
At year-end, Piedmont owned 54 in-service properties totaling approximately 16.2 million square feet, leased 93.3% (up from 89.7% in 2017), with an average remaining lease term of about seven years. Eight core markets generated 92% of annualized lease revenue (ALR). No tenant represented more than 5.1% of ALR.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenue | $526.0 million | $574.2 million |
| Net income attributable to Piedmont | $130.3 million | $133.6 million |
| Diluted EPS | $1.00 | $0.92 |
| NAREIT FFO per diluted share | $1.72 | $1.75 |
| Core FFO per diluted share | $1.73 | $1.75 |
| Adjusted FFO | $171.5 million | $200.3 million |
| Cash from operating activities | $202.9 million | $242.8 million |
| Capital expenditures | $72.1 million | $79.8 million |
| Outstanding debt (period-end) | $1,685.5 million | $1,726.9 million |
Property operating costs were $209.3 million, or 40% of revenue, versus $222.4 million, or 39%, in 2017. Interest expense fell to $61.0 million from $68.1 million. Net income included $75.7 million in real estate sale gains; 2017 included $115.9 million in gains and a $46.5 million impairment charge. Cash, cash equivalents, and restricted cash totaled $6.0 million at year-end.
Debt was 36.2% of gross assets. The weighted-average debt rate was 3.76%; most debt was fixed-rate or effectively fixed through swaps. Piedmont reported $205 million drawn on its $500 million revolving facility and $258 million of unused capacity as of the filing date. The company stated it was in compliance with debt covenants. A 1 percentage-point rise in rates on year-end variable-rate borrowings was estimated to increase annual interest expense by approximately $3.1 million.
Material changes and operating developments
- Revenue declined $48.2 million, primarily because of property dispositions. Piedmont sold 15 properties during 2018, including a 14-property portfolio sale completed in January, and acquired three properties in its core markets.
- Same-store NOI increased 6.5% on a cash basis and 2.9% on an accrual basis. Management attributed improvement to higher occupancy, improved rental rates, and the expiration or commencement of certain large lease abatements.
- Net income per share rose despite lower revenue, helped by higher occupancy, gains on asset sales, and approximately 14.7 million fewer weighted-average shares following repurchases. Piedmont repurchased about 16.5 million shares during 2018 for approximately $301.7 million.
- Annual dividends declared were $0.84 per share, down from $1.34 in 2017, which included a $0.50 special dividend. The board declared a $0.21-per-share first-quarter 2019 dividend.
Outlook, risks, and contingencies
No quantitative earnings or operating guidance is provided. Management said the 2018 portfolio-concentration strategy was substantially completed and expects to fund operations and investment needs with property cash flows, selective dispositions, and revolving-credit capacity. Capital needs include ongoing property improvements and leasing costs. Existing executed-lease commitments included $45.6 million for non-incremental tenant improvements and $32.6 million for incremental tenant improvements.
Lease rollover is a near-term focus: 12.9% of ALR was scheduled to expire in 2019. About 40% of that expiring ALR related to the State of New York lease at 60 Broad Street, which was due to expire in the first quarter of 2019. Management reported advanced renewal discussions and anticipated a renewal with a slight reduction in starting cash rent and modestly less space; this was an expectation, not a completed renewal disclosed in this filing.
Key risks include office-market and tenant-credit exposure, leasing competition and re-leasing costs, concentrated exposure to eight markets, government tenant risks, property impairment, development and disposition execution, environmental and regulatory liabilities, and interest-rate and LIBOR transition risks. One Independence Square was classified as held for sale at year-end under a binding contract, with sale expected in first-quarter 2019. No material pending legal proceedings were reported. Management and the auditor concluded internal controls over financial reporting were effective; the financial statement audit opinion was unqualified.
Important facts for investors to verify
- Whether the New York State lease at 60 Broad Street renewed, and its final rent, space, concessions, and tenant-improvement costs.
- Actual proceeds and closing status for One Independence Square and the extent of further planned asset sales or acquisitions.
- Whether occupancy, same-store NOI, and cash rent growth continue after the portfolio dispositions and lease abatements.
- Cash available after dividends, capital spending, tenant improvements, and share repurchases; AFFO declined materially year over year.
- Debt maturities, revolver usage, covenant headroom, and exposure to variable rates and benchmark-rate transition.