Piedmont Office Realty Trust, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; the filing also reports unaudited fourth-quarter results. The company is a REIT focused on Class A office properties, principally in seven Eastern U.S. markets. Its 54 in-service properties comprised approximately 16.0 million square feet and were 91.2% leased at year-end.
Key financial results
| Metric | 2019 | 2018 | Change / context |
|---|---|---|---|
| Total revenue | $533.2 million | $526.0 million | Up 1.4% |
| Net income attributable to Piedmont | $229.3 million; $1.82 diluted EPS | $130.3 million; $1.00 diluted EPS | Increase largely reflected higher property-sale gains |
| Gain on real estate sales | $197.0 million | $75.7 million | 2019 included $157.7 million from 500 West Monroe and $33.2 million from One Independence Square |
| NAREIT FFO | $222.9 million; $1.77 per share | $225.0 million; $1.72 per share | Dollar amount declined slightly |
| Core FFO | $226.1 million; $1.79 per share | $226.6 million; $1.73 per share | Nearly flat in total |
| Adjusted FFO | $165.7 million | $171.5 million | Down about 3.3% |
| Operating cash flow | $208.5 million | $202.9 million | Up about 2.8% |
| Capital expenditures | $103.6 million | $72.1 million | Higher year over year |
| Debt at year-end | $1.481 billion carrying value; $1.489 billion principal | $1.685 billion carrying value | Debt-to-gross-assets ratio was 32.5%; weighted-average rate was 3.76% |
| Cash and cash equivalents | $13.5 million | $4.6 million | Additionally, no amount was drawn on the $500 million unsecured revolver at year-end |
Property operating costs were $211.4 million, about 39.6% of revenue. Accrual-basis Property NOI was $320.5 million; same-store NOI increased 2.5% on an accrual basis and 5.7% on a cash basis. These are non-GAAP measures. Quarterly revenue was $134.2 million in Q4 2019; net income was $162.5 million, or $1.29 per share, including a $157.6 million property-sale gain.
Changes versus the prior period
- Portfolio occupancy fell to 91.2% from 93.3%; ALR declined to $496.2 million from $520.0 million. Average remaining lease term was approximately seven years.
- Revenue rose modestly, reflecting higher rents from new leases and increased management fees, partly offset by lower parking income after property sales.
- GAAP earnings rose sharply, but the increase primarily reflected property-sale gains. FFO and Core FFO were broadly flat, while AFFO declined.
- Debt fell by approximately $204 million, while capital expenditures increased by approximately $31 million.
- 2019 included an $8.95 million real estate impairment: $7.0 million for 600 Corporate Drive and $1.95 million for The Dupree.
Outlook, liquidity, risks and notable items
- The filing does not provide formal earnings or FFO guidance. Management described capital needs for ongoing property improvements, leasing, tenant allowances, and debt repayment, with capital allocation dependent on operating cash flow, dispositions, and capital-market access.
- After year-end, Piedmont acquired the Dallas Galleria Office Towers on February 12, 2020 for approximately $396 million. The 1.4-million-square-foot acquisition was initially funded with cash and revolver borrowings. The company also arranged an unfunded $150 million term-loan commitment and said it expected to use proceeds from a planned sale of 1901 Market Street to repay the revolver.
- Debt principal maturities included $327.7 million in 2021 and $160 million in 2022; the filing stated there were no scheduled maturities until the third quarter of 2021. Most debt was fixed-rate or effectively fixed, but $550 million of debt and $150 million of swaps referenced LIBOR. Management noted the potential LIBOR transition after 2021.
- Lease rollover and leasing costs warrant attention: 8.8% of year-end ALR was scheduled to expire in 2020. A roughly 520,000-square-foot, 20-year State of New York renewal and expansion at 60 Broad Street included an unrecorded tenant-allowance commitment of approximately $57.4 million. Management was also negotiating renewal of a City of New York lease of approximately 320,000 square feet expiring in 2020.
- Key risks include office-market and regional concentration, tenant defaults or early terminations, occupancy and rent pressure, large tenant-improvement requirements, interest rates and refinancing, property impairments, environmental and climate exposure, and maintaining REIT qualification. The five largest tenants included U.S. Bancorp (5.3% of ALR) and the State of New York (5.1%).
- The board declared a $0.21-per-share first-quarter 2020 dividend. It extended authorization for up to $200 million of repurchases through February 2022; no open-market repurchases occurred in Q4 2019. The company-funded dividend reinvestment plan was suspended effective March 21, 2020.
- The company reported effective disclosure controls and internal control over financial reporting. Auditors issued unqualified opinions on the financial statements and internal controls. No material pending legal proceedings were reported.
Important facts for investors to verify
- How much of 2019 earnings and future cash generation is recurring, given the large property-sale gains and the divergence between GAAP net income and FFO/AFFO.
- Whether occupancy and ALR stabilize, and the leasing and capital costs associated with 2020 expirations and the New York tenant commitments.
- The final financing and disposition plan for the Dallas Galleria acquisition, including the expected sale of 1901 Market Street and resulting leverage.
- Debt maturity and interest-rate exposure, including replacement of LIBOR-based benchmarks and upcoming swap expirations.
- The impact of higher capital expenditures and tenant improvements on cash available for dividends, repurchases, and debt reduction.