Piedmont Office Realty Trust, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Piedmont is a REIT focused on owning and operating U.S. office properties. It reported 69 office properties totaling 18.9 million square feet, with a 91.7% leased rate. Results are unaudited and the company cautions that the quarter is not necessarily indicative of full-year results.
Financial results and position
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Total revenue | $138.0 million | $149.8 million; down 7.9% |
| Net income attributable to Piedmont | $10.4 million; $0.07 per diluted share | $19.2 million; $0.12 per diluted share |
| Real estate operating income | $26.4 million; 19.1% of revenue | $28.2 million; 18.8% of revenue |
| Operating cash flow | $49.7 million | $43.8 million |
| FFO / Core FFO | $59.9 million / $59.9 million; $0.41 per diluted share for each | FFO $60.0 million; Core FFO $60.1 million; $0.39 per diluted share for each |
| AFFO | $43.6 million; $0.30 per diluted share | $45.6 million; $0.30 per diluted share |
| Cash and cash equivalents | $4.7 million at quarter-end | $5.4 million at December 31, 2015 |
| Total debt | $2.003 billion | $2.030 billion at December 31, 2015 |
Net cash decreased by $0.7 million during the quarter. Investing activities provided $16.0 million, including $45.4 million collected on a note from a prior property sale, while financing activities used $66.4 million. Capital expenditures were $26.5 million. The balance sheet showed $2.16 billion of total stockholders’ equity and $103.9 million of accounts payable, accrued expenses, and accrued capital expenditures.
Changes versus the prior comparable period
- Revenue declined $11.7 million, principally reflecting property dispositions during 2015, including the sale of Aon Center. Lower tenant reimbursements also reflected milder winter weather.
- Property operating costs fell $10.1 million, largely due to dispositions and lower snow-removal costs. Depreciation declined $4.4 million, while amortization increased $3.1 million, partly due to acquired lease intangibles.
- Interest expense fell $2.6 million, reflecting lower average debt and more favorable financing terms.
- Net income declined chiefly because Q1 2015 included a $10.1 million gain on the sale of 3900 Dallas Parkway. Property NOI on a cash basis fell 6.5%, while same-store NOI rose 1.0%.
- Operating cash flow increased $5.9 million. FFO was broadly flat in dollars and higher per share; AFFO was lower in dollars but unchanged per share.
Liquidity, debt, outlook, and risks
- During the quarter, Piedmont repaid a $125 million fixed-rate loan using its unsecured line of credit and cash; line borrowings increased by about $98 million. At March 31, $119 million was outstanding on the $500 million line. Management later reported that proceeds from three post-quarter property sales were applied to the line and that its full capacity was then available.
- Management identified operating cash flow, the $500 million credit line, and selective property sales as principal liquidity sources. It reported compliance with debt covenants. About $70.2 million remained under the $200 million share-repurchase authorization after Q1 repurchases of 461,500 shares for approximately $7.9 million.
- Interest-rate swaps with $900 million notional hedged specified variable-rate loans. The swap liability was $19.5 million, versus $10.0 million at year-end; Q1 other comprehensive loss was $9.8 million. Management estimated that a 1 percentage-point increase in rates on existing variable-rate borrowings would add about $2.9 million of annual interest expense.
- Leasing indicators included 0.6 million square feet of executed leases for vacant space not yet commenced and 1.4 million square feet of commenced leases still in abatement. Scheduled expirations represented 3.6% of annualized lease revenue for the remainder of 2016 and 7.8% for 2017.
- The 500 TownPark development was 80% pre-leased; completion was expected in early 2017, with $25–27 million of additional project costs, including leasing costs. Tenant-improvement commitments were $35.7 million for potential non-incremental work and $42.4 million for incremental work under executed leases.
- Subsequent to quarter-end, Piedmont declared a $0.21-per-share Q2 dividend and sold three properties for aggregate stated proceeds of $161.1 million. The filing identifies risks including office-market and leasing conditions, tenant defaults, property impairment, development costs, interest rates, REIT qualification, and significant tenant-improvement requirements. No material pending legal proceedings or material changes to previously disclosed risk factors were reported.
Guidance: The filing does not provide a clear full-year earnings or FFO forecast. Management’s outlook includes continued portfolio refinement and capital allocation among property investment, debt repayment, repurchases, and dividends; dividend decisions depend on cash flows, capital needs, and REIT requirements.
Important facts for investors to verify
- Reconcile the near-term mortgage maturity: the debt table lists a $42.5 million loan maturing October 11, 2016, while the liquidity discussion refers to a $42.5 million mortgage maturing in July 2016.
- Confirm the timing and application of the post-quarter property-sale proceeds and the resulting availability under the credit line; quarter-end borrowings were $119 million.
- Track occupancy, lease commencements and abatements, renewal economics, and the execution of leases for vacant space, as these affect cash NOI and leasing costs.
- Monitor capital spending and funding requests against the disclosed tenant-improvement commitments, development budget, and debt maturities.
- Assess the impact of variable-rate borrowing and swap valuations, as well as the company’s ability to sustain dividends and repurchases while meeting liquidity and REIT distribution needs.