Piedmont Realty Trust, Inc. annual report, FY2011

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Piedmont Office Realty Trust, Inc. — 2011 Form 10-K

Reporting period: Fiscal year ended December 31, 2011. The filing identifies the registrant as Piedmont Office Realty Trust, Inc. (NYSE: PDM); the request metadata uses “Piedmont Realty Trust, Inc.”

Business context

Piedmont is a self-managed REIT focused primarily on owning, operating, acquiring and leasing Class A U.S. office properties. At year-end it owned interests in 79 office properties, plus five properties through unconsolidated joint ventures and two industrial buildings. Its 79-office-property portfolio comprised 20.9 million square feet and was 86.5% leased, versus 89.2% in 2010. Chicago, Washington, D.C. and New York represented 22.4%, 21.6% and 15.7% of annualized lease revenue, respectively. About 70% of annualized lease revenue came from investment-grade companies or government agencies.

Financial performance and liquidity

  • Revenue: $541.6 million, up 1.6% from $533.0 million in 2010. Rental income rose $10.8 million, with acquisitions partly offset by lower rents and reduced occupancy at existing properties.
  • Operating results: Real estate operating income was $148.4 million, down from $172.5 million; the corresponding margin on revenue declined to about 27.4% from 32.4%. Income from continuing operations fell to $89.5 million from $112.1 million, and diluted continuing-operations EPS declined to $0.52 from $0.65.
  • Net income: $225.0 million, versus $120.4 million. The increase primarily reflected $122.7 million of gains on property sales reported in discontinued operations; it should not be read as comparable growth in ongoing operations.
  • Cash flow: Operating cash flow was $270.3 million versus $275.8 million. Investing activities provided $33.7 million, compared with $80.2 million used in 2010, primarily reflecting $291.8 million of net property sale proceeds. Financing activities used $221.1 million, including $220.4 million of dividends and distributions.
  • REIT operating measures: FFO was $271.3 million ($1.57 per diluted share), down from $281.3 million ($1.65). Core FFO was $271.6 million ($1.57), versus $281.9 million ($1.65). AFFO was $202.6 million ($1.17), versus $228.7 million ($1.34). These are non-GAAP measures.
  • Debt and balance sheet: Year-end debt was $1.473 billion, up from $1.403 billion; total assets were $4.448 billion and stockholders’ equity was $2.773 billion. Cash and cash equivalents were $139.7 million. The weighted-average debt rate was 4.29%, and the $300 million term loan was effectively fixed at 2.69% through November 2016, subject to the company maintaining its credit rating.
  • Dividends: Piedmont paid $1.26 per share in 2011. On February 28, 2012, the board declared a first-quarter 2012 dividend of $0.20 per share, equivalent to $0.80 annualized.

Material changes and unusual items

  • Operating expenses increased, including property operating costs of $208.7 million (up $11.8 million) and depreciation and amortization of $159.7 million (up from $135.3 million). Acquisitions and lease-related amortization contributed to the increases.
  • Piedmont acquired several properties in 2011, including 500 W. Monroe in Chicago through foreclosure, and sold Eastpointe Corporate Center, 5000 Corporate Court and 35 West Wacker Drive. The three 2011 sales generated $122.7 million in gains reported in discontinued operations.
  • At year-end, management reported no impairment charge on held-for-use wholly owned buildings in 2011; the company recorded $35.1 million of such impairment charges in 2009.
  • The board authorized a stock repurchase program of up to $300 million through November 2013. In the fourth quarter, Piedmont repurchased 199,400 shares under the program for an average $16.24 per share; separate open-market purchases supported the dividend reinvestment plan.

Outlook, risks and contingencies

  • Management expected lower rent on certain recently executed leases and downtime while re-leasing space to pressure 2012 cash flow. Competition for tenants remained intense, and several large leases had expired or were expected to expire over the following three years; leasing costs and tenant-improvement commitments may be significant.
  • The $500 million unsecured facility was extended to August 2012, and management said it expected to seek a comparable replacement. The filing reported $15 million drawn and about $460.8 million available at filing date, with approximately $24.2 million reserved for letters of credit. A $45 million mortgage secured by 4250 North Fairfax matured in June 2012. The $140 million 500 W. Monroe mortgage, included in year-end debt maturities, was repaid on January 9, 2012.
  • The company anticipated approximately $143.8 million of potential, unrecorded tenant-improvement obligations over existing lease terms, mostly over the next several years. Funding timing depends in part on tenant requests, and some obligations may expire with the leases.
  • A securities class action concerning the 2007 internalization remained unresolved. The plaintiff claimed approximately $159 million plus prejudgment interest; the company described the potential gross loss range as $0 to $159 million plus interest, before allocations or insurance, and said up to $15 million might be recoverable under insurance. A separate securities case remained pending; the company assessed its material-loss risk as remote at the time of the filing.
  • Other key risks include office-market weakness, tenant defaults or early terminations, geographic concentration, refinancing and interest-rate exposure, possible impairment, environmental and regulatory liabilities, litigation, and maintaining REIT qualification. Management stated that disclosure controls and internal control over financial reporting were effective; the independent auditor issued unqualified opinions on the financial statements and internal controls.

Important facts for investors to verify

  • Progress and terms of replacing or renewing the unsecured facility, and the status of the 4250 North Fairfax maturity.
  • Whether occupancy, lease renewals and new lease economics stabilize after the decline to 86.5% leased, particularly in Chicago, Washington, D.C. and New York.
  • Cash requirements for tenant improvements and leasing commissions, alongside operating cash flow and the reduced dividend.
  • How much of reported 2011 net income and cash generation reflects property-sale proceeds and gains rather than recurring property operations; review FFO and AFFO reconciliations as well.
  • Developments in the securities litigation, potential exposure beyond insurance, and any material changes in the company’s risk or liquidity disclosures.