Piedmont Office Realty Trust, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2014; comparisons are to the corresponding 2013 periods unless noted. Financial amounts are in U.S. dollars. Piedmont is an office-property REIT. It owned 74 consolidated office properties totaling 21.5 million square feet, leased 87.5% at quarter-end, and generated approximately 90% of annualized lease revenue from nine major metropolitan markets.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $144.6 million | $143.4 million | $419.5 million | $408.1 million |
| Real estate operating income | $27.2 million | $35.4 million | $79.0 million | $105.7 million |
| Income from continuing operations | $9.2 million | $18.6 million | $27.5 million | $56.9 million |
| Net income attributable to Piedmont | $9.2 million | $19.1 million | $30.8 million | $69.1 million |
| Diluted net income per share | $0.06 | $0.12 | $0.20 | $0.41 |
| FFO per diluted share | $0.38 | $0.39 | $1.13 | $1.12 |
| AFFO per diluted share | $0.14 | $0.21 | $0.50 | $0.63 |
Operating margin, measured as real estate operating income divided by revenue, was approximately 18.8% in Q3 2014 versus 24.7% in Q3 2013, and 18.8% for the first nine months versus 25.9% in 2013. Cash-basis same-store NOI declined 2.5% in Q3 and 6.7% year to date. These are company-presented non-GAAP measures; Piedmont cautions that definitions may differ across REITs.
- Cash flow: Nine-month operating cash flow was $157.5 million versus $163.9 million. Investing used $201.3 million and financing provided $45.6 million. Cash and cash equivalents were $8.8 million at September 30, 2014.
- Debt and liquidity: Debt carrying value was $2.234 billion, up from $2.002 billion at year-end 2013; estimated fair value was $2.254 billion. The weighted-average stated rate was 3.39%. Secured debt totaled $449.4 million and unsecured debt $1.784 billion. The $500 million unsecured revolver had $440 million outstanding at quarter-end; Piedmont reported approximately $44.6 million of remaining capacity at filing time.
- Balance sheet: Total assets were $4.778 billion and total liabilities $2.439 billion; stockholders’ equity was $2.339 billion. Debt maturities included $105 million within one year, principally the US Bancorp Center loan due May 2015.
- Capital returns: Piedmont paid $0.60 per common share in dividends during the first nine months and repurchased $52.7 million of stock under its announced repurchase plan. After quarter-end, the board declared a fourth-quarter dividend of $0.21 per share.
Material changes versus the prior period
- Q3 revenue rose modestly, but operating income and continuing-operations income fell. Management cited higher depreciation—primarily on tenant and building improvements—and the absence of approximately $3.9 million of 2013 casualty and litigation recoveries. Higher property costs also reduced operating income.
- Nine-month revenue increased $11.4 million, mainly from acquired properties. Operating income fell $26.7 million as property operating costs, depreciation, and amortization rose. Continuing-operations income declined $29.4 million.
- Prior-year discontinued operations included a $16.3 million gain on sale and a $6.4 million impairment charge; therefore, the year-over-year decline in total net income also reflects unusual disposition items.
- Debt increased following new financing and acquisitions. Piedmont issued $400 million of 4.45% senior notes due 2024 and drew a $300 million unsecured term loan; proceeds helped repay $575 million of secured debt that matured during the period and reduce revolver borrowings. It also extended the $300 million 2011 term loan maturity to January 2020 and reduced its spread.
- Occupancy improved to 87.5% from 86.7% a year earlier, but same-store NOI remained lower, reflecting lease expirations, vacancy downtime, rent abatements, and rent changes.
Outlook, commentary, and risks
- Management expected sequential same-store NOI comparisons to improve as executed leases for vacant space commence and rent-abatement periods expire. At quarter-end, 0.6 million square feet of executed leases had not commenced, while 1.7 million square feet of commenced leases remained in some form of abatement. This is management’s expectation, not earnings guidance.
- Piedmont was under contract or marketing properties expected to generate $150 million–$175 million of sale proceeds over the following three to nine months, and was working to arrange $150 million–$200 million of additional debt financing. Both plans depended on market conditions and successful transactions.
- Remaining development and redevelopment spending was estimated at $43 million–$48 million for a Houston office tower and $26 million–$28 million for 3100 Clarendon Boulevard, before anticipated leasing costs. Potential tenant-improvement commitments included $63.4 million for existing leases and $22.9 million for incremental improvements associated with new leases.
- Interest-rate exposure was concentrated in the unsecured revolver: a 1 percentage-point increase in variable rates would add approximately $4.4 million of annual interest expense on quarter-end borrowings. The term loans were effectively fixed through swaps, subject to credit-rating conditions. Piedmont reported $600 million of swap notional outstanding and estimated $5.4 million of accumulated hedge loss would be reclassified to interest expense over the next 12 months.
- Principal business risks include office-market demand and rental rates, competition for tenants, lease expirations or defaults, financing availability and cost, property impairments, tenant concessions and capital needs, and REIT qualification. Management reported no material litigation and no known material changes to the 2013 Form 10-K risk factors.
- Piedmont reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It early adopted the revised discontinued-operations standard; the 2020 W. 89th Street sale was consequently presented differently from earlier disposals.
Most important facts for investors to verify
- Whether leasing commencements and expirations of rent abatements deliver the anticipated sequential improvement in same-store NOI and occupancy.
- Actual completion, pricing, and timing of the proposed $150 million–$175 million property sales and $150 million–$200 million debt financing, and the resulting revolver balance and liquidity.
- Near-term refinancing or repayment plans for the $105 million loan due in May 2015, and compliance with debt covenants and credit-rating conditions affecting hedges.
- Cash required for development, tenant improvements, leasing commissions, and recurring capital expenditures relative to operating cash flow, dividends, and repurchases.
- The sustainability of AFFO and dividends: nine-month AFFO was $0.50 per diluted share versus $0.60 of dividends per share paid, although REIT distribution requirements are based on taxable income rather than AFFO.
- Whether nonrecurring casualty recoveries, property-sale gains, lease-termination amortization, and acquisition-related costs distort comparisons; review GAAP results alongside Piedmont’s non-GAAP FFO, AFFO, and NOI reconciliations.