Piedmont Office Realty Trust, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Financial statement amounts below are in millions of dollars unless otherwise stated. The company owns, develops, and manages U.S. commercial office properties and reports one operating segment. At quarter-end it had 68 office properties totaling 20.7 million square feet; the portfolio was 90.6% leased, up from 87.7% at December 31, 2014.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $148.8 | $144.6 | $445.3 | $419.5 |
| Income/(loss) from continuing operations | $(19.0) | $9.2 | $(6.5) | $27.5 |
| Net income/(loss) attributable to Piedmont | $(1.9) | $9.2 | $47.3 | $30.8 |
| Diluted net income/(loss) per share | $(0.01) | $0.06 | $0.31 | $0.20 |
| Cash provided by operating activities | Not reported by quarter | Not reported by quarter | $132.6 | $157.5 |
- Revenue and property operations: Nine-month revenue rose 6.1%. Cash-basis Property NOI increased 13.0% to $243.6 million, and same-store NOI rose 12.2% to $228.9 million. These are non-GAAP measures.
- FFO/AFFO: Nine-month diluted FFO was $1.19 per share versus $1.13; Core FFO was $1.19 versus $1.10; AFFO was $0.94 versus $0.50. Q3 AFFO was $0.35 per share versus $0.14.
- Cash flow and investment: Nine-month investing cash outflow was $34.2 million, compared with $201.3 million in 2014. Capital expenditures were $81.9 million, down from $122.8 million. Financing used $103.0 million, including $155.7 million of share repurchases and $95.9 million of dividends.
- Balance sheet at September 30: Total assets were $4.740 billion, liabilities $2.647 billion, and stockholders’ equity $2.093 billion. Cash and cash equivalents were $7.7 million; restricted cash and escrows were $37.7 million.
- Debt and liquidity: Debt totaled $2.428 billion, versus $2.278 billion at year-end 2014; its weighted-average stated rate was 3.17%. The $500 million unsecured line had $411.1 million outstanding in the debt table at quarter-end. Management said it was in compliance with debt covenants. A 1 percentage-point increase in rates on quarter-end variable-rate borrowings would add approximately $5.8 million of annual interest expense.
Material changes versus the prior comparable period
- Q3 revenue increased 2.9%, but continuing operations shifted to a $19.0 million loss, principally because of a $34.8 million impairment charge on 2 Gatehall Drive. The quarter also included $17.1 million of gains on property sales.
- Nine-month revenue increased $25.8 million, supported by new leases, occupancy and acquisitions. Property operating costs rose $10.0 million, general and administrative expense rose $5.2 million, and impairment expense was $40.2 million versus none in 2014.
- Nine-month net income increased to $47.3 million, primarily reflecting $53.8 million of property-sale gains. Continuing operations were a $6.5 million loss, compared with $27.5 million of income in 2014; the prior period included $4.5 million of casualty and litigation recoveries.
- Nine-month operating cash flow declined by $24.9 million. The company repurchased 8.85 million shares under its announced plan for approximately $156.5 million during the period; shares outstanding fell to 145.6 million from 154.3 million at year-end 2014.
Outlook, management commentary, and risks
- Management expected continued positive same-store NOI growth in 2015, citing leases commencing and rental abatements expiring. This is an operating outlook, not formal earnings guidance.
- After quarter-end, Piedmont sold Aon Center for $712 million gross and $646.1 million net proceeds. Management said proceeds and cash were used to repay the full outstanding balance on its unsecured line of credit and fund part of a $259.1 million acquisition of two office properties, completed November 4.
- The company expected to sell 2 Gatehall Drive in Q4 2015 for $51 million; the sale agreement led to the Q3 impairment. Aon Center’s sale closed October 29, 2015.
- Development and redevelopment spending remained a use of capital: management estimated $33–$38 million of remaining Enclave Place lease-up costs, $27–$29 million of additional 500 TownPark costs, and $25–$27 million to complete 3100 Clarendon Boulevard construction and lease-up.
- After adjusting for Aon Center commitments assumed by its buyer, tenant-improvement commitments were approximately $35.5 million for non-incremental expenditures and $34.3 million for incremental expenditures. Timing depends in part on tenant requests and leasing activity.
- Key disclosed risks include office-market and economic conditions, competition for tenants, lease defaults or expirations, property impairments, interest-rate exposure, development costs and delays, and maintaining REIT qualification. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile quarter-end debt disclosures and confirm the timing and use of Aon Center proceeds, including repayment of the unsecured line and funding of post-quarter acquisitions.
- Track the closing and final proceeds for 2 Gatehall Drive and the realized effect of the $34.8 million impairment.
- Assess whether occupancy, lease commencements, and expirations of rent abatements deliver the expected NOI growth, including the effects of leasing costs and concessions.
- Monitor cash generation against dividends, debt maturities, repurchases, development spending, and tenant-improvement commitments.
- Evaluate FFO, Core FFO, AFFO, and NOI alongside GAAP results; these non-GAAP measures may not be comparable with similarly named measures at other REITs.