Piedmont Office Realty Trust, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Piedmont is a U.S. office-property REIT. It owned 75 consolidated office properties totaling 21.1 million square feet; the portfolio was 86.7% leased. Approximately 90% of annualized lease revenue came from its primary markets.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $136.3 million | $132.2 million | Up $4.1 million |
| Real estate operating income | $25.3 million | $37.6 million | Down $12.3 million |
| Real estate operating margin | 18.5% | 28.5% | Down 10.0 percentage points |
| Income from continuing operations | $9.0 million; $0.06 per diluted share | $20.2 million; $0.12 per diluted share | Lower |
| Net income attributable to Piedmont | $9.4 million | $14.7 million | Down $5.3 million |
| FFO per diluted share | $0.37 | $0.36 | Up $0.01 |
| Core FFO per diluted share | $0.36 | $0.37 | Down $0.01 |
| AFFO per diluted share | $0.21 | $0.22 | Down $0.01 |
| Same-store NOI, cash basis | $61.9 million | $72.6 million | Down 14.8% |
| Net cash from operating activities | $70.1 million | $42.0 million | Up $28.0 million |
Operating cash flow included approximately $15.0 million received on settlement of forward-starting interest rate swaps. Investing activities used $9.4 million, including $27.2 million of capital expenditures, partly offset by $22.3 million of property-sale proceeds. Financing activities used $58.3 million, including $54.5 million of share repurchases and $30.9 million of dividends. Cash increased to $9.3 million from $7.0 million at year-end.
Balance sheet, debt and liquidity
- Total assets were $4.61 billion and total stockholders’ equity was $2.38 billion at March 31, 2014.
- Total debt was $2.03 billion, versus $2.00 billion at December 31, 2013. The weighted-average stated rate was 3.50%; all debt was interest-only.
- During the quarter, Piedmont issued $400 million of 4.45% senior notes due 2024 and drew the full $300 million delayed-draw term loan. Proceeds and other cash were used to repay $575 million of secured debt due in 2014 and reduce the unsecured credit line. The filing reports $272 million drawn on the $500 million line and approximately $230.6 million of remaining capacity as of filing.
- Most debt was fixed-rate or effectively fixed through swaps. A 1 percentage-point increase in variable rates was estimated to add approximately $3.7 million to annual interest expense. Management stated that Piedmont was in compliance with debt covenants.
Material changes and management commentary
- Revenue rose mainly from 2013 property acquisitions and a higher-rent renewal at 1901 Market Street. These gains were partly offset by large lease expirations, including government tenants, and lower tenant reimbursements.
- Operating expenses increased, including higher property costs at acquired properties and weather-related utility and landscaping costs. Depreciation and amortization also rose, largely due to acquisitions and improvements placed in service.
- Management attributed the decline in continuing-operations earnings to lease expirations, rent roll-downs and downtime before replacement leases, as well as $2.5 million of additional interest expense. The quarter included $3.0 million of insurance recoveries tied to prior casualty losses and litigation settlements.
- Leasing indicators included 0.8 million square feet of executed leases not yet commenced and 2.2 million square feet of commenced leases in rental-abatement periods. Management expected same-store NOI comparisons to begin improving in the second half of 2014 as certain leases commenced and abatements expired; this was an expectation, not formal earnings guidance.
- Planned investment included approximately $60–$65 million over 15 months for a Houston office development, plus later leasing costs, and $25–$30 million to redevelop 3100 Clarendon Boulevard, plus anticipated re-leasing costs. The filing also identifies four vacant blocks larger than 200,000 square feet in the Washington, D.C. and Chicago portfolios, where significant leasing concessions may be needed.
- Existing lease commitments included approximately $72.0 million of potential non-incremental tenant improvements and $20.3 million of incremental tenant improvements for new leases. Timing depends substantially on tenant requests and lease activity.
- The board declared a $0.20-per-share second-quarter dividend, payable June 20, 2014. The Troy, Michigan properties classified as held for sale were sold after quarter-end on April 30, 2014.
Risks and contingencies
Key risks include office-market demand, rental rates and property values; lease renewals, defaults and downtime; tenant improvement and leasing costs; access to financing; interest-rate exposure; and potential impairment charges. Piedmont disclosed $43.2 million of remaining ground-lease obligations and a $0.4 million letter of credit. It reported no litigation expected by management to have a material adverse effect and no known material changes to previously disclosed risk factors. The filing cautions that quarterly results are not necessarily indicative of full-year results.
Investor facts to verify
- Whether occupancy and lease commencements improve, particularly for the large vacant spaces and leases in abatement.
- Whether same-store NOI stabilizes after its 14.8% year-over-year decline, and how much of operating cash flow reflects recurring operations versus the $15.0 million swap settlement.
- Debt maturities, credit-line availability, covenant compliance and the cost of floating-rate borrowings.
- Actual development, redevelopment, tenant-improvement and leasing costs compared with management’s estimates.
- The effects of share repurchases, dividends and property dispositions on liquidity and per-share results.