Piedmont Office Realty Trust, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Piedmont owned interests in 77 consolidated office properties and two buildings through an unconsolidated joint venture, totaling approximately 21.1 million square feet; the consolidated portfolio was 86.7% leased.
Financial performance and position
- Q3 revenue: $145.1 million, up 9.4% year over year; rental income was $116.8 million. Real estate operating income was $35.8 million, or approximately 24.7% of revenue, versus $33.5 million, or 25.3%, a year earlier.
- Q3 earnings: Income from continuing operations was $19.0 million ($0.12 per diluted share), compared with $10.5 million ($0.06) in Q3 2012. Net income attributable to Piedmont was $19.1 million versus $10.8 million.
- Nine-month results: Revenue was $413.1 million versus $394.0 million. Continuing-operations income rose to $58.2 million from $48.3 million, while net income attributable to Piedmont declined to $69.1 million from $78.8 million; diluted EPS was $0.41 versus $0.46.
- Cash flow: Operating cash flow was $168.3 million for the nine months, up from $142.6 million. Investing activities used $356.7 million, including acquisitions and capital spending; financing activities provided $191.3 million. Cash ended the period at $16.0 million.
- Funds from operations: Nine-month FFO was $186.6 million ($1.12 per diluted share), versus $175.5 million ($1.03). Core FFO was $180.6 million ($1.08 per share), versus $183.1 million ($1.07); AFFO was $104.2 million ($0.63 per share), versus $106.7 million ($0.62). These are non-GAAP measures.
- Same-store operations: Cash-basis same-store NOI fell 5.8% in Q3 and 2.7% for the nine months. Cash-basis Property NOI was $231.6 million for the nine months, versus $229.6 million.
- Debt and liquidity: Debt totaled $1.823 billion, up from $1.417 billion at year-end 2012; total liabilities were $2.056 billion and stockholders’ equity $2.521 billion. Weighted-average debt interest rate was 4.04%. The company reported approximately $272.1 million of available capacity on its $500 million unsecured line at filing, including capacity reserved for letters of credit.
Material changes versus comparable periods
- Q3 rental income increased $11.8 million, largely from 2013 acquisitions and leases commencing, partly offset by the expiration of a 330,000-square-foot government lease at One Independence Square.
- Q3 property operating costs rose $8.3 million and interest expense rose $3.1 million. Higher property taxes, acquisitions, occupancy and debt balances contributed to the increases.
- Q3 results included $3.9 million of net casualty recoveries related to Hurricane Sandy; Q3 2012 included $7.5 million of litigation settlement expense. These items materially affect the year-over-year earnings comparison.
- Nine-month discontinued-operations income declined $19.5 million, primarily because 2012 included gains on property sales. 2013 included a $16.3 million gain on the sale of 1200 Enclave Parkway and a $6.4 million impairment charge on 1111 Durham Avenue.
- During 2013 Piedmont acquired Arlington Gateway and 5 & 15 Wayside Road, and bought out its partners’ remaining interests in three properties previously held in joint ventures. It issued $350 million of 3.40% senior notes due 2023.
- The company repurchased $111.6 million of common stock during the nine months. Shares outstanding at September 30 were approximately 161.3 million, down from 167.6 million at year-end 2012.
Outlook, risks and contingencies
- Management expected 2013 same-store NOI to decline approximately 1%–2% versus 2012 and said it could decline in 2014 absent near-term leasing success in Washington, D.C. or downtown Chicago; management expected positive growth from 2015 as rent abatements expire and leases commence.
- Approximately 1.5 million square feet of commenced leases were in rent abatement, and 0.5 million square feet of executed leases for vacant space had not yet commenced. Leasing concessions, large-space re-leasing and tenant turnover may pressure cash flows and occupancy.
- Management anticipated refinancing $575 million of secured debt maturing in the first half of 2014, subject to market conditions. The company had $187 million drawn on its variable-rate line; a 1 percentage-point increase in variable rates was estimated to add approximately $1.9 million of annual interest expense.
- Potential non-incremental tenant improvement commitments were approximately $93.7 million, with most potentially requested over the next several years; incremental tenant-improvement commitments were approximately $23.6 million. The timing depends partly on tenant requests and lease commencement.
- On October 30, 2013, the board declared a $0.20-per-share fourth-quarter dividend and authorized a new $150 million repurchase plan over two years. Repurchases and future dividends remain subject to market conditions, cash needs and other factors.
- Other disclosed risks include office-market and economic weakness, tenant defaults or lease losses, financing availability, significant indebtedness, property impairments, government funding exposure, environmental and regulatory matters, and maintaining REIT qualification. Management reported no material litigation then pending and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Progress on leasing the large vacant or expiring blocks in Washington, D.C. and Chicago, and the impact of rent abatements on occupancy and same-store NOI.
- Refinancing terms and execution for the $575 million of secured debt maturing in the first half of 2014, plus remaining line-of-credit capacity.
- Timing and cash requirements for tenant improvements, leasing commissions and other capital expenditures.
- Whether reported earnings growth is sustained after separating recurring operations from insurance recoveries, litigation items, property-sale gains and impairment charges.
- Execution and funding of the announced dividend and stock repurchase plan, alongside acquisition and debt-repayment priorities.