Piedmont Office Realty Trust, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods. Financial figures below are in U.S. dollars. Piedmont is a REIT focused on commercial office properties. At quarter-end it owned 71 consolidated office properties comprising 21.0 million square feet; the portfolio was 88.8% leased.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $146.7 million | $138.6 million | $296.5 million | $274.9 million |
| Real estate operating income | $20.8 million | $26.6 million | $49.0 million | $51.8 million |
| Income from continuing operations | $3.4 million | $9.3 million | $12.5 million | $18.4 million |
| Net income attributable to Piedmont | $30.0 million | $12.3 million | $49.2 million | $21.7 million |
| diluted EPS | $0.20 | $0.08 | $0.32 | $0.14 |
| Cash from operating activities | — | — | $94.8 million | $108.9 million |
Revenue increased 5.9% in Q2 and 7.9% for the first half, reflecting acquisitions, lease commencements, increased occupancy and tenant reimbursements. Operating income declined as property costs, depreciation and amortization rose, and Q2 included a $5.4 million impairment charge. Net income included gains on property sales of $26.6 million in Q2 and $36.7 million for the first half; thus, the increase in reported net income does not represent comparable growth in ongoing operations.
For the first half, NAREIT FFO was $119.6 million ($0.78 per diluted share), versus $115.8 million ($0.75); Core FFO was $119.9 million ($0.78), versus $111.7 million ($0.72); and AFFO was $91.3 million ($0.59), versus $55.1 million ($0.36). These are non-GAAP measures defined by the company.
Debt, liquidity and capital allocation
- Total debt carrying value was $2.32 billion at June 30, 2015, compared with $2.28 billion at December 31, 2014. Cash and cash equivalents were $9.0 million. Debt fair value was estimated at $2.33 billion.
- Piedmont replaced its $500 million revolving credit facility with a new facility maturing in June 2019, with two possible six-month extensions. $303 million was outstanding at quarter-end; the LIBOR spread was 1.00%. The company reported compliance with debt covenants.
- New financing included a $160 million mortgage loan at 3.48%, maturing in 2022, and a $170 million unsecured term loan maturing in 2018. Management said no debt matured before April 2016. Most debt was fixed-rate or effectively fixed-rate; a 1 percentage-point increase in variable rates on quarter-end borrowings would add an estimated $4.8 million of annual interest expense, absent debt paydown.
- First-half operating cash flow was $94.8 million; investing activities used $34.5 million and financing activities used $63.6 million. Capital expenditures were $62.6 million, and dividends paid were $64.8 million.
- The company authorized a further $200 million share repurchase plan, with $190.8 million of capacity remaining at June 30. A continuous at-the-market equity program permits up to $250 million of common stock sales.
Material changes, outlook and notable items
- Property NOI on a cash basis increased 10.8% in Q2 and 14.2% in the first half; same-store NOI increased 10.6% and 13.1%, respectively. Management expected positive same-store NOI growth in 2015, citing lease commencements and the expiration of rent abatements. These are non-GAAP measures.
- Management reported 0.6 million square feet of executed leases for vacant space that had not commenced and 1.1 million square feet of commenced leases still in abatement. Lease-up delays, abatements, expirations and rental-rate changes can affect property income.
- Eastpoint I and II were classified as held for sale, triggering a $5.4 million impairment. Their sale closed July 28 for $18.5 million. Other 2015 dispositions included three properties sold in Q2; the Copper Ridge Center sale included a $45.4 million secured buyer note bearing 8.45% interest and maturing December 31, 2015, subject to extension options.
- After quarter-end, Piedmont contracted to sell Aon Center for a gross $712 million, with expected net proceeds of approximately $640 million after specified lease-related items. Management said proceeds were intended primarily for debt reduction and potentially strategic acquisitions or selective repurchases. The transaction was expected to close early in Q4; it was not yet completed at the filing date.
- Development and redevelopment require further spending: Enclave Place had an estimated $39–$44 million remaining for construction and lease-up; 500 TownPark was expected to cost $28–$30 million; and 3100 Clarendon Boulevard had an estimated $29–$31 million remaining. Existing lease commitments included $49.1 million of potential non-incremental tenant improvements over five years and $26.6 million of incremental tenant improvements.
- The board declared a Q3 dividend of $0.21 per common share, payable September 18, 2015 to holders of record August 28. The filing reported no material pending legal proceedings, no material change in previously disclosed risk factors, and effective disclosure controls.
Important facts for investors to verify
- Whether the Aon Center sale closed on the anticipated terms and how proceeds were allocated among debt repayment, acquisitions and repurchases.
- Whether leasing, occupancy and abatement expirations deliver the expected 2015 same-store NOI growth, given vacant and not-yet-commenced space.
- Cash flow available for dividends and capital needs, including committed tenant improvements, development costs and the share repurchase program.
- Debt maturities, variable-rate exposure, refinancing terms and continued covenant compliance.
- The collectability and repayment timing of the $45.4 million Copper Ridge buyer note, including any use of its extension options.