Piedmont Office Realty Trust, Inc. (NYSE: PDM) — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015, with fourth-quarter results also disclosed. Piedmont is a U.S. office REIT focused on owning, leasing, managing, acquiring and developing primarily Class A office properties.
Business and portfolio
- At year-end, Piedmont owned and operated 69 office properties, one redevelopment asset and two development assets, plus one office building through an unconsolidated joint venture. Its portfolio was 91.5% leased, compared with 87.7% a year earlier; average remaining lease term was approximately 6.7 years.
- Annualized lease revenue (ALR) was $550.3 million, down from $583.3 million, while ALR per leased square foot rose to $31.79 from $30.98. The reported portfolio and revenue base changed materially following asset sales.
- Approximately 70% of ALR came from investment-grade or nationally recognized companies or government agencies. Washington, D.C., New York and Chicago represented 19.7%, 12.1% and 11.3% of ALR, respectively.
Financial results and key metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue | $584.8 million | $566.3 million |
| Income from continuing operations | $4.7 million | $40.1 million |
| Net income attributable to Piedmont | $173.0 million | $43.3 million |
| NAREIT FFO | $239.9 million ($1.59/share) | $236.5 million ($1.53/share) |
| Core FFO | $241.1 million ($1.60/share) | $230.1 million ($1.49/share) |
| Adjusted FFO | $186.1 million ($1.23/share) | $118.2 million ($0.76/share) |
| Cash provided by operating activities | $217.3 million | $215.9 million |
| Same-store cash NOI | $271.2 million; up 9.1% | $248.7 million |
| Total assets / stockholders’ equity | $4.43 billion / $2.20 billion | $4.79 billion / $2.31 billion |
| Outstanding debt | $2.03 billion | $2.27 billion |
Revenue increased 3.3%. Net income included $168.2 million of gains on property sales; continuing-operations income fell as real estate operating income declined to $76.8 million from $107.8 million. Operating expenses included $40.2 million of impairment charges on properties subsequently sold. The filing reports real estate operating income, but does not provide a directly comparable operating margin measure.
Investing cash flow was $305.0 million, versus cash used of $266.9 million in 2014, primarily reflecting $848.2 million of net property-sale proceeds. Financing used $529.2 million, including debt repayments, dividends and share repurchases. Year-end cash and cash equivalents were $5.4 million; approximately $388.0 million remained available on the $500 million unsecured credit line as of the filing date. Debt-to-gross-assets was 37.5%. A 1-percentage-point increase in rates on variable-rate debt outstanding at year-end was estimated to raise annual interest expense by about $1.9 million.
Common dividends were $0.84 per share for 2015, versus $0.81 in 2014. The board declared a $0.21-per-share first-quarter 2016 dividend.
Material changes and unusual items
- Piedmont sold nine assets during 2015, including Chicago’s Aon Center, generating $848.2 million in net proceeds. Management said proceeds were used to reduce debt, repurchase approximately nine million shares and fund acquisitions. The company reported $168.2 million in sale gains.
- During the year, Piedmont acquired five properties and land parcels in its target markets. It completed the Enclave Place development in Houston and continued construction of 500 TownPark in Florida, an 80%-preleased project expected to be completed in early 2017, with $26–$28 million of anticipated additional project costs, including leasing costs.
- Fourth-quarter revenue was $139.5 million and net income attributable to Piedmont was $125.6 million, or $0.84 per share, with results substantially influenced by property-sale gains. Third-quarter continuing operations included a $19.0 million loss, including impairment charges.
- Property occupancy improved and same-store NOI rose as rental and operating-expense abatement periods on prior leasing activity expired. Management noted that lease commencements, downtime, concessions and tenant-improvement costs can delay or reduce cash-flow benefits from leasing.
Liquidity, outlook and risks
- Management cited property operating cash flow, the unsecured credit line and selective dispositions as primary liquidity sources. It was marketing properties that could generate more than $500 million in additional proceeds over the following 12 months, if sales were completed; this is an intention, not a committed forecast.
- A $125.0 million mortgage was repaid on January 4, 2016. Management anticipated repaying a $42.5 million mortgage maturing in July 2016 using the credit line. Apart from that maturity, the filing said no other debt was due until the fourth quarter of 2017.
- Committed tenant-improvement funding included approximately $40.4 million of non-incremental commitments over five years and $36.9 million of incremental commitments. Future leasing may require additional tenant allowances and commissions.
- Principal risks include office-market and tenant demand changes, lease renewal and re-leasing costs, exposure to Washington, D.C., New York and Chicago, tenant defaults or early terminations, interest-rate and refinancing risk, development execution, environmental and regulatory obligations, and maintaining REIT qualification. Approximately 4.5% of ALR had tenant-controlled termination options exercisable during the following 12 months.
- Management reported no material pending legal proceedings and stated that disclosure controls and internal control over financial reporting were effective. The independent auditor issued unqualified opinions on the financial statements and internal controls.
Investor verification priorities
- Separate recurring property earnings from the $168.2 million sale gain and $40.2 million impairment; assess FFO, Core FFO and AFFO alongside GAAP results and their non-GAAP adjustments.
- Review the execution, timing and pricing assumptions behind the prospective asset sales, and how proceeds are allocated among debt reduction, repurchases, acquisitions and capital spending.
- Track leasing progress, especially vacant and not-yet-commenced space, 2016 expirations, tenant concessions and improvement costs, and whether occupancy gains translate into sustained cash NOI.
- Verify debt maturities, credit-line availability, covenant headroom, variable-rate exposure and the status of the $45.4 million Copper Ridge secured note receivable, whose maturity had been extended to June 30, 2016.
- Assess development costs and leasing for 500 TownPark, future capital requirements, dividend coverage, geographic concentration and continued REIT compliance.