Piedmont Office Realty Trust, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; financial statements are unaudited. The filing identifies the registrant as Piedmont Office Realty Trust, Inc.
Business context
Piedmont is a U.S. office-property REIT. At quarter-end it owned 74 consolidated office properties comprising 21.5 million square feet, plus a redevelopment asset and an office building held through an unconsolidated joint venture. The consolidated portfolio was 88.8% leased, up from 87.7% at December 31, 2014 and 86.7% a year earlier.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Total revenue | $149.8 million | $136.3 million; up 9.8% |
| Real estate operating income | $28.2 million | $25.3 million |
| Real estate operating margin | 18.8% | 18.5% |
| Income from continuing operations | $9.2 million | $9.0 million |
| Net income attributable to Piedmont | $19.2 million | $9.4 million |
| Diluted EPS | $0.12 | $0.06 |
| FFO / Core FFO per diluted share | $0.39 / $0.39 | $0.37 / $0.36 |
| AFFO per diluted share | $0.30 | $0.21 |
| Cash from operating activities | $43.6 million | $70.1 million |
| Cash and cash equivalents | $7.5 million | $12.3 million at Dec. 31, 2014 |
| Total debt, carrying amount | $2.326 billion | $2.278 billion at Dec. 31, 2014 |
Net income and EPS benefited from a $10.1 million gain on the sale of 3900 Dallas Parkway; that gain was not included in FFO. Property NOI on a cash basis rose 17.9% to $79.8 million and Same Store NOI rose 15.2% to $76.6 million. Calculated Property NOI as a share of reported revenue was approximately 53.3%, versus 49.6% in Q1 2014.
Operating cash flow fell year over year, in part because Q1 2014 included $15.0 million from settlement of forward-starting interest-rate swaps. Q1 2015 investing cash outflow was $64.0 million, including $41.6 million for acquisitions and $39.8 million of capital expenditures, partly offset by property-sale proceeds. Dividends paid were $32.5 million.
At March 31, total debt comprised $1.877 billion unsecured and $448.8 million secured. The weighted-average stated rate was 3.31%. Piedmont had $363.0 million drawn on its $500 million unsecured line of credit. A $170 million unsecured term loan was added, maturing May 2018; the maturing $50 million term loan was repaid. The company reported compliance with debt covenants. The $105 million mortgage due in May 2015 was repaid on April 10, after quarter-end.
Material changes and transactions
- Rental income increased $6.9 million, reflecting acquisitions and new leases; tenant reimbursements increased $6.5 million, partly from expiring expense-abatement periods, higher occupancy, and increased recoverable taxes and snow-removal costs.
- Property operating costs rose $5.9 million, including higher costs at acquired properties, property taxes, utilities, and severe-winter-related expenses. General and administrative costs rose $1.9 million, primarily due to compensation and professional fees.
- Piedmont acquired Park Place on Turtle Creek in Dallas for $46.6 million; it was 88% leased at acquisition. It sold 3900 Dallas Parkway for approximately $26.2 million, recognizing the $10.1 million gain.
- Subsequent to quarter-end, Piedmont sold 5601 Headquarters Drive and River Corporate Center, receiving approximately $57.5 million in combined net proceeds, and contracted to sell Copper Ridge Center, subject to customary closing conditions.
- Other comprehensive loss was $13.7 million, largely reflecting the change in fair value of cash-flow hedges; the net derivative liability increased to $18.9 million from $6.0 million at year-end.
Outlook, risks, and contingencies
No formal full-year earnings guidance is provided. Management expected Property NOI to continue improving in 2015 as leases on vacant space commence and rent-abatement periods expire. Approximately 500,000 square feet of executed leases had not yet commenced, and 1.7 million square feet of commenced leases remained subject to some form of abatement. Management noted that vacant large-block spaces may require substantial tenant-improvement spending.
Planned remaining development and redevelopment costs included $26–$28 million to complete a Houston office tower, plus an estimated $21–$24 million in later leasing commissions and tenant improvements; and $12–$13 million to complete work at 3100 Clarendon Boulevard, plus $21–$22 million in later leasing and tenant-improvement costs. Existing-lease commitments included $46.1 million of potential non-incremental tenant improvements over five years and $23.8 million of incremental tenant improvements.
Interest-rate risk is a principal market risk. Most debt was fixed-rate or effectively fixed through swaps, but the line of credit and new term loan were variable-rate. Piedmont estimated a 1 percentage-point increase in variable rates on quarter-end borrowings would add approximately $5.3 million in annual interest expense. Other risks include leasing and tenant-credit exposure, concentrated office-market exposure, property valuation and impairment, development costs, REIT qualification, and the timing of capital needs. The filing reported no material pending legal proceedings and no known material change to previously disclosed risk factors.
The board declared a second-quarter dividend of $0.21 per common share, payable June 19, 2015 to holders of record May 29, 2015. Piedmont also established an at-the-market equity program permitting up to $250 million of common-stock sales.
Investor verification priorities
- Separate the $10.1 million property-sale gain from recurring operating results; review FFO, Core FFO, AFFO, and cash NOI reconciliations and definitions.
- Reconcile the decline in operating cash flow, including the prior-year swap-settlement cash receipt, and assess cash available after capital expenditures and dividends.
- Confirm post-quarter debt repayments, property-sale proceeds, line-of-credit balance and availability, and the schedule of debt maturities.
- Track leasing, commencements, abatements, occupancy, and tenant-improvement/leasing-commission spending against management’s outlook.
- Monitor variable-rate exposure, derivative fair values and covenant compliance, as well as development completion costs and the planned property dispositions.