Piedmont Office Realty Trust, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Piedmont owned interests in 75 office properties, five buildings through unconsolidated joint ventures, and two industrial buildings. Its 75 office properties totaled approximately 20.6 million square feet and were 84.4% leased at quarter-end.
Financial performance and position
- Revenue: $133.2 million, up 1.3% from $131.5 million. Rental income rose to $105.8 million from $100.3 million, principally reflecting acquired properties and new leases; other rental income fell to $0.1 million from $3.4 million.
- Operating results: Real estate operating income was $34.9 million versus $40.6 million. Its margin was approximately 26.2%, down from 30.9%. Income from continuing operations declined to $18.6 million from $30.6 million; diluted continuing-operations EPS was $0.11 versus $0.18.
- Net income: $37.2 million, up from $34.0 million, or diluted EPS of $0.22 versus $0.20. The 2012 result included an $17.8 million gain on the Portland Portfolio sale; discontinued operations contributed $18.6 million, compared with $3.4 million a year earlier.
- REIT operating measures: FFO was $60.0 million ($0.35 per diluted share) versus $71.3 million ($0.41); AFFO was $50.1 million ($0.29 per diluted share) versus $56.3 million ($0.33). These are non-GAAP measures.
- Cash flow: Operating cash flow was $37.9 million, down from $61.5 million. Investing activities provided $5.9 million, including $24.8 million of net proceeds from property sales; financing activities used $154.8 million, including $120.0 million net debt repayments and $34.6 million of dividends. Cash declined from $139.7 million to $28.7 million.
- Debt and liquidity: Debt totaled $1.353 billion at quarter-end, down from $1.473 billion; weighted-average stated debt rate was 4.55%. Total liabilities were $1.550 billion and stockholders’ equity $2.777 billion. The $500 million unsecured facility matures in August 2012. At filing, $56.0 million was outstanding and approximately $420.6 million was available, including capacity reserved for letters of credit. The filing reports no other pending debt maturities until 2014, apart from this facility.
- Dividends: The board declared a $0.20-per-share second-quarter dividend, payable June 22, 2012. The first-quarter dividend was also $0.20 per share.
Material changes and management commentary
- Continuing-operations income fell mainly because the prior-year quarter included lease termination/restructuring income, a gain on consolidation of a variable interest entity, and income related to the 500 W. Monroe property. Higher rental income from acquisitions partly offset these items.
- Property operating costs, depreciation, amortization, and interest expense increased year over year. Management attributed most operating cost and depreciation increases to acquired properties; interest expense reflected the newer $300 million term loan’s higher effective rate and balance.
- On March 19, Piedmont sold the Portland Portfolio for approximately $43.9 million, recognizing a $17.8 million gain. It accepted a $19.0 million unsecured buyer note bearing 8.73%, due October 31, 2012.
- Piedmont repaid the $140 million 500 W. Monroe mortgage in January and repaid the $45 million 4250 N. Fairfax loan on May 1, after quarter-end.
- Management expects pressure on 2012 cash flow from lower rents on certain new or renewed leases and downtime while re-tenanting space. It cited intense tenant competition and expects substantial tenant-improvement and leasing costs. No formal earnings forecast was provided.
Risks, contingencies, and other notable items
- Management anticipated approximately $137.3 million of potential tenant-improvement obligations over existing lease terms, mostly over the next several years; timing depends substantially on tenant reimbursement requests.
- A securities lawsuit concerning the 2007 management internalization remains active. Piedmont described a gross reasonably possible loss range of $0 to approximately $159 million plus prejudgment interest, before allocation among defendants or insurance recoveries; up to $13 million may be recoverable under insurance. A second securities lawsuit remained pending, with discovery stayed and the company assessing material-loss risk as remote in its disclosures.
- Management identified refinancing or replacing the August 2012 unsecured facility as a key liquidity risk. Other risks include lease expirations/defaults, weak office-market demand, tenant retention and rental-rate pressure, impairment risk, and REIT qualification.
- Interest-rate swaps effectively fixed the $300 million term loan at 2.69%; most debt was fixed or effectively fixed. The facility was the only variable-rate debt at quarter-end, with $20 million outstanding then. Management reported no real estate impairment as of March 31, 2012.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress and terms of renewing or replacing the $500 million facility before its August 2012 maturity, and the reconciliation between $20 million outstanding at quarter-end and $56 million outstanding at filing.
- Collection and repayment of the $19 million Portland sale note due October 31, 2012.
- Leasing, occupancy, rental rates, tenant retention, and the timing and cost of the disclosed tenant-improvement obligations.
- Subsequent developments in both securities lawsuits, including potential exposure, insurance, and allocation among defendants.
- Cash generation and recurring operating trends apart from property-sale gains; in particular, the declines in continuing income, FFO, AFFO, and operating cash flow.