Piedmont Office Realty Trust, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; unaudited. Piedmont owned interests in 74 consolidated office properties and five buildings held through unconsolidated joint ventures, totaling approximately 20.7 million square feet; consolidated properties were 86.4% leased. Amounts below are in millions except per-share data and percentages.
Financial results and key metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $134.8 | $131.7 | $269.1 | $262.7 |
| Real estate operating income | $33.4 | $35.7 | $71.8 | $70.4 |
| Income from continuing operations | $18.8 | $20.3 | $39.8 | $38.7 |
| Net income attributable to Piedmont | $35.4 | $30.7 | $50.0 | $67.9 |
| Basic and diluted EPS | $0.21 | $0.18 | $0.30 | $0.39 |
| FFO per diluted share | $0.37 | $0.35 | $0.72 | $0.70 |
| Core FFO per diluted share | $0.35 | $0.35 | $0.71 | $0.70 |
| AFFO per diluted share | $0.20 | $0.21 | $0.42 | $0.50 |
Q2 real estate operating margin was approximately 24.8%, versus 27.1% a year earlier; the six-month margin was approximately 26.7%, versus 26.8%. Q2 net income included $16.3 million of property-sale gains, $1.3 million of litigation-settlement insurance recovery, and $2.3 million of net casualty recoveries. Six-month net income also included a $6.4 million impairment charge on 1111 Durham Avenue.
- Cash flow: Six-month operating cash flow was $88.4 million, compared with $68.6 million. Investing used $298.0 million, principally for acquisitions and capital expenditures; financing provided $207.2 million. Cash fell by $2.5 million to $10.5 million.
- Debt and liquidity: Debt was $1.71 billion at June 30, up from $1.42 billion at year-end. Weighted-average debt rate was 4.22%; approximately $987.5 million was secured debt and $721.6 million unsecured. The $500 million unsecured revolver had $73 million drawn; management reported approximately $394.6 million available at filing, with $19.4 million reserved for letters of credit. Debt fair value was estimated at $1.73 billion.
- Capital returns: The company paid $0.40 per share in dividends during the first half and repurchased $17.8 million of shares under its program. The board declared a Q3 dividend of $0.20 per share, payable September 20, 2013.
Material changes versus comparable periods
- Q2 revenue increased $3.1 million and six-month revenue increased $6.4 million, with higher rental income from acquisitions and new lease commencements. Tenant reimbursements declined, partly due to abatements on a large renewal at 500 W. Monroe.
- Q2 continuing-operations income declined $1.4 million, while six-month continuing-operations income rose $1.1 million. The quarter faced the expiration of a 330,000-square-foot Washington, D.C. lease, increased interest expense and depreciation, partly offset by acquired-property income and insurance recoveries.
- Six-month net income fell $17.9 million, largely because prior-year discontinued operations included larger property-sale gains. Q2 net income rose year over year, also reflecting a larger sale gain.
- Same-store NOI (cash basis) declined 1.3% in Q2 year over year. Leased percentage improved from 85.0% at June 30, 2012 to 86.4% at June 30, 2013.
- During the first half, Piedmont acquired Arlington Gateway in Washington, D.C. for $175.6 million and 5 & 15 Wayside Road in Boston for $69.3 million. It issued $350 million of 3.40% senior notes due 2023 and used proceeds in part to repay revolver borrowings.
Outlook, risks, and unusual items
- Management expected 2013 same-store NOI to decline approximately 0% to 2%. It cited lease roll-downs, rent abatements and the large One Independence Square lease expiration, while anticipating occupancy and cash NOI improvement as signed leases commence and abatements end.
- Approximately 0.4 million square feet of signed leases had not commenced, and 1.6 million square feet of commenced leases were in some form of rent abatement. Five blocks of Washington, D.C. and Chicago space exceeding 200,000 square feet were being marketed for re-leasing.
- Management identified $575 million of secured debt due in 2014 and anticipated refinancing it, subject to market conditions. The company had no debt maturing in 2013. It used interest-rate swaps to fix the $300 million term loan at 2.69% and held $280 million of forward-starting swaps for potential future debt issuance.
- Existing lease commitments included approximately $99.4 million of anticipated non-incremental tenant improvements, much of which could be requested over the next several years, and $28.2 million of incremental capital commitments. Timing and amounts of future leasing concessions remain uncertain.
- Key risks include office-market weakness, lease expirations/defaults and re-leasing competition, tenant concentration, financing availability and substantial debt, interest-rate exposure, possible impairments, government tenant funding changes, and continued REIT qualification. A 1 percentage-point rise in variable rates on debt outstanding at quarter-end would increase annual interest expense by approximately $0.7 million.
- The company recorded a $6.4 million impairment on 1111 Durham Avenue before selling it for approximately $4.0 million gross proceeds. It also reported a $7.5 million litigation settlement paid early in 2013 and expects additional insurance recoveries; no material litigation outcome was identified as likely to adversely affect results or financial condition.
- After quarter-end, Piedmont agreed to buy JV partners’ interests in three properties for $14.7 million, with closing expected in Q3. Management said disclosure controls were effective and reported no material change in internal controls.
Important facts for investors to verify
- Whether reported occupancy gains translate into rent-paying occupancy and same-store NOI, given signed leases not yet commenced and active abatements.
- Leasing progress and required concessions for the large Washington, D.C. and Chicago spaces, including the effect of the lost One Independence Square tenant.
- Funding needs and cash timing for tenant improvements, capital expenditures, dividends, repurchases, and the 2014 debt maturities.
- Refinancing terms and available revolver capacity, including covenant compliance and the impact of interest-rate or credit-rating changes.
- Actual insurance recoveries related to the litigation settlement and Hurricane Sandy, and whether further impairments or disposition gains arise.
- Completion and economics of the announced $14.7 million joint-venture interest purchase and the company’s ability to maintain REIT qualification.