Piedmont Office Realty Trust, Inc. — Q1 2019 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2019; comparative results are for Q1 2018. Piedmont owns, operates, and manages office properties as a REIT. At quarter-end, its 53 in-service properties totaled approximately 15.9 million square feet and were 93.3% leased, plus one 487,000-square-foot redevelopment asset. The filing cautions that quarterly results are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / prior period |
|---|---|---|
| Total revenue | $132.9 million | $129.9 million; up 2.3% |
| Net income attributable to Piedmont | $50.2 million | $57.8 million |
| Diluted EPS | $0.40 | $0.42 (GAAP statement: $0.42; MD&A cites $0.42) |
| NAREIT FFO per diluted share | $0.45 | $0.41 |
| Core FFO per diluted share | $0.45 | $0.43 |
| Adjusted FFO | $51.8 million | $45.8 million |
| Operating cash flow | $40.2 million | $33.3 million |
| Cash, cash equivalents and restricted cash | $6.1 million | $6.0 million at December 31, 2018 |
| Total debt, net | $1.566 billion | $1.685 billion at December 31, 2018 |
| Total assets | $3.433 billion | $3.592 billion at December 31, 2018 |
- Rental and tenant reimbursement revenue rose to $126.2 million from $124.4 million. Property management fees increased to $2.0 million from $0.3 million, largely reflecting construction management fees.
- GAAP net income included a $37.9 million property-sale gain, versus $45.2 million in Q1 2018. Excluding real estate sale gains, FFO was broadly level in total, while per-share FFO increased amid a lower share count.
- GAAP net income margin was approximately 37.8% of revenue, compared with 44.5% in Q1 2018; the change chiefly reflects lower property-sale gains. Property NOI was $79.5 million on an accrual basis; same-store NOI increased 3.1% accrual and 3.7% cash basis.
- Investing cash flow was $151.5 million, including $168.3 million in property sale proceeds; financing used $191.7 million, including $235.3 million of debt repayments, $53.4 million of dividends, and $16.9 million of share repurchases.
- Debt carried a weighted-average effective rate of 3.79%. The company reported $85 million drawn on its $500 million revolving line and $422 million of unused capacity at the filing date. Management reported compliance with debt covenants and no scheduled debt maturities until Q3 2021.
Material changes and notable items
- Net income attributable to Piedmont declined 13.2% year over year, primarily because the gain on property sales was lower. Diluted EPS was $0.40 versus $0.42.
- Higher occupancy and leasing activity supported operating results. The company attributed revenue growth partly to new leases and $1.2 million more accelerated lease revenue from terminations. Same-store NOI growth also benefited from lease-abatement expirations and increased termination-fee income.
- Interest expense increased $1.7 million, attributed mainly to higher average debt balances and variable interest rates. General and administrative expense rose $2.8 million, largely due to higher potential performance-based compensation accruals.
- Piedmont sold One Independence Square in Washington, D.C., on February 28, 2019, for approximately $163.6 million in net proceeds and recognized an approximately $33.2 million gain. No assets remained classified as held for sale at quarter-end.
- The company repurchased 727,821 shares under its board-authorized plan during the quarter; approximately $74.1 million of authorization remained. The board declared a Q2 dividend of $0.21 per share, payable June 21, 2019.
Outlook, risks, and contingencies
- No quantified full-year earnings or operating guidance is provided. Management cited cash from property operations, selective dispositions, and its revolving credit facility as primary liquidity sources; future dividends and investment decisions depend on cash flows, capital needs, market conditions, and REIT distribution requirements.
- The State of New York, the largest tenant, had a 480,000-square-foot lease representing nearly half of scheduled 2019 lease expirations. Renewal discussions were underway. Management anticipated significant tenant-improvement and leasing-commission spending over the next three to four years if the long-term renewal proceeds.
- Existing lease commitments included approximately $48.9 million of potential non-incremental tenant improvements over five years and $32.6 million for incremental improvements tied to executed leases. Timing depends partly on tenant reimbursement requests and lease commencements.
- Interest-rate exposure includes the revolving line and $100 million of the 2018 term loan that was not effectively fixed. Management estimated a 1 percentage-point rise in rates on then-outstanding variable borrowings would increase annual interest expense by approximately $1.9 million. LIBOR transition uncertainty is also noted.
- Other stated risks include office-market and economic conditions, competition for leasing and renewals, tenant defaults or financial deterioration, property illiquidity, development costs, inflation not fully offset by lease provisions, and REIT qualification. Management reported no material pending legal proceedings and no material change in previously disclosed risk factors.
- On April 25, 2019, Piedmont entered a binding contract to acquire Galleria 100, an approximately 414,000-square-foot Atlanta office building; the filing does not state a purchase price. Management reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Progress and economics of the State of New York lease renewal, including expected improvement and commission costs and the effect of any vacancy or rent changes.
- Whether reported same-store NOI and FFO growth are sustainable after accounting for termination fees, lease commencements, abatements, and non-GAAP adjustments.
- Use of disposition proceeds, acquisition terms and financing for Galleria 100, and remaining share-repurchase capacity.
- Debt costs, covenant headroom, variable-rate exposure, and the timing and amount of future leasing and property-capital expenditures.
- The filing reports a $0.40 diluted EPS in its financial statements; the MD&A overview gives $0.40 for Q1 2019 and $0.42 for Q1 2018, while the FFO reconciliation presents GAAP net income per diluted share as $0.40 and $0.42, respectively.