Piedmont Office Realty Trust, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing. Amounts below are U.S. dollars.
Business context
Piedmont is a self-managed office REIT focused on acquiring, developing, leasing, and managing primarily Class A office properties. At year-end, it owned 65 in-service properties, one redevelopment asset, two development assets, and an interest in one property through an unconsolidated joint venture. About 87% of annualized lease revenue (ALR, a non-GAAP measure) came from select submarkets in eight major U.S. markets. The in-service portfolio was 94.2% leased, up from 91.5% in 2015, with an average remaining lease term of slightly under seven years.
Financial results and key metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Total revenue | $555.7 million | $584.8 million |
| Real estate operating income | $73.8 million | $76.8 million |
| Net income attributable to Piedmont | $107.9 million | $173.0 million |
| Diluted earnings per share | $0.74 | $1.15 |
| NAREIT FFO per diluted share | $1.67 | $1.59 |
| Core FFO per diluted share | $1.67 | $1.60 |
| Adjusted FFO | $189.4 million | $186.1 million |
| Cash flow from operations | $235.8 million | $219.0 million |
| Capital expenditures | $110.2 million | $118.7 million |
| Outstanding debt at year-end | $2.02 billion | $2.03 billion |
Revenue fell 5.0%; real estate operating income was about 13.3% of revenue, compared with 13.1% in 2015. Net income included $98.6 million of property-sale gains in 2016, versus $168.2 million in 2015. At year-end, total assets were $4.45 billion, stockholders’ equity was $2.18 billion, cash and cash equivalents were $7.0 million, and debt-to-gross-assets was 36.9%. The weighted-average debt rate was 3.43%. The company reported $309.0 million of unused line-of-credit capacity as of the filing date.
For the fourth quarter of 2016, revenue was $143.9 million, net income attributable to Piedmont was $30.2 million, and diluted EPS was $0.21. The quarter included $19.7 million of property-sale gains. The company declared dividends of $0.21 per share in each 2016 quarter, or $0.84 for the year.
Material changes versus the prior period
- Lower 2016 net income and EPS chiefly reflected lower property-sale gains than in 2015; reduced interest expense, down $9.1 million, partly offset the decline.
- Revenue declined primarily because of dispositions, including the 2015 sale of Aon Center. New lease commencements partly offset the resulting rental-income reduction.
- Same-store cash NOI, a non-GAAP measure, rose 4.8%, supported by occupancy gains and the expiration of rental abatements. Total portfolio cash NOI decreased amid net dispositions.
- Piedmont sold nine non-core properties and acquired three properties plus a 99% interest in a joint venture holding two Orlando properties during 2016. It also completed the 500 TownPark development and substantially completed Enclave Place and the 3100 Clarendon Boulevard redevelopment.
- Impairment charges were $30.9 million in 2016, compared with $40.2 million in 2015. 2016 charges related to Detroit and Rockville properties and reflected revised sale/holding assumptions.
Outlook, risks, and unusual items
The filing gives no numerical earnings or FFO guidance. Management’s stated strategy is to concentrate the portfolio in selected markets, raise occupancy and cash flow, pursue disciplined acquisitions and dispositions, and maintain conservative leverage. Approximately 700,000 square feet from recently completed development and redevelopment projects was expected to enter service in early 2017. Management said leasing efforts were focused on vacant space; 7.1% of ALR was scheduled to expire in 2017. About 2.5% of ALR had tenant-controlled termination rights exercisable during the following 12 months.
Near-term liquidity and funding needs include a $140.8 million debt maturity in 2017; management expected to repay the related $140 million fixed-rate mortgage using sale proceeds or revolver borrowings. Tenant-improvement commitments were approximately $35.3 million for non-incremental work and $29.8 million for incremental improvements under executed leases. Total 2016 capital expenditures were $110.2 million.
Subsequent to year-end, Piedmont agreed to sell Two Independence Square, a 600,000-square-foot, fully leased Washington, D.C. property, for $359.6 million; closing was expected in the first half of 2017. The board declared a first-quarter 2017 dividend of $0.21 per share. Interest-rate exposure remains, although most debt was fixed-rate or effectively fixed through swaps; a 1 percentage-point increase in rates on variable-rate debt outstanding was estimated to add about $3.5 million in annual interest expense.
Key risks include office-market and leasing competition, tenant credit/default and early termination, geographic concentration (Washington, D.C. 19.5% of ALR; New York 11.8%; Chicago 11.6%), leasing costs and downtime, real-estate valuation/impairment, refinancing and interest-rate risk, development execution, environmental and regulatory obligations, and maintaining REIT qualification. No material pending legal proceedings were reported. Management and the auditor reported effective internal controls; the auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether the Two Independence Square sale closed on the expected terms and how proceeds were applied.
- Repayment or refinancing of the 2017 debt maturity and actual availability of the reported revolver capacity.
- Leasing progress, rent changes, tenant concessions, and delivery/occupancy of recently completed projects, particularly against 2017 lease expirations.
- Actual tenant-improvement and leasing costs, cash conversion, and dividend coverage; FFO, Core FFO, AFFO, ALR, and cash NOI are non-GAAP measures and may not be comparable across REITs.
- Assumptions behind the 2016 impairments and any further valuation changes, as well as developments affecting concentrated markets and large tenants.