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PDM > SEC Filings for PDM > Form 10-Q on 31-Oct-2013All Recent SEC Filings

Show all filings for PIEDMONT OFFICE REALTY TRUST, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for PIEDMONT OFFICE REALTY TRUST, INC.


31-Oct-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and notes thereto of Piedmont Office Realty Trust, Inc. ("Piedmont"). See also "Cautionary Note Regarding Forward-Looking Statements" preceding Part I, as well as the notes to our consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2012, as well as the Current Report on Form 8-K containing Exhibit 99.1 filed on June 4, 2013, for the purpose of recasting certain sections of Piedmont's Annual Report on Form 10-K for the year ended December 31, 2012 for dispositions subsequent to December 31, 2012.

Liquidity and Capital Resources
We intend to use cash flows generated from the operation of our properties, proceeds from our $500 Million Unsecured Line of Credit, and proceeds from selective property dispositions, as our primary sources of immediate liquidity. As of the time of this filing, we had approximately $272.1 million in capacity under the line of credit facility available for future borrowing (approximately $13.9 million of capacity is reserved as security for outstanding letters of credit required by various third parties). Depending on the timing and volume of property acquisition and disposition activities and debt maturities, we may also issue additional equity or debt securities from time to time. In addition, we may also seek additional borrowings from third-party lenders as additional sources of capital. The availability and attractiveness of terms for these additional sources of capital is highly dependent on market conditions.

We estimate that our most consistent use of capital will be to fund capital expenditures for our existing portfolio of properties. These expenditures include two types of specifically identified building improvement projects: (i) general repair and maintenance projects that we as the owner may choose to perform at our discretion at any of our various properties and (ii) tenant improvement allowances and leasing commissions that we have committed to as part of executed leases with our tenants. Due to the high lease rollover that we have experienced over the last several years, the majority of our expected capital expenditures relate to leasing commissions and tenant improvement allowances as we complete tenant build-outs in preparation for the commencement of executed leases. During the year ended December 31, 2012 and the nine months ended September 30, 2013, we incurred obligations averaging approximately $5.39 and $3.47 per square foot per year of lease term, respectively, for such capital expenditures. As of September 30, 2013, unrecorded contractual obligations for non-incremental tenant improvements related to our existing lease portfolio totaled $93.7 million. The timing of the funding of these commitments is largely dependent upon tenant requests for reimbursement; however, we anticipate that the majority of this amount may be requested over the next 12 - 24 months as certain significant leases commence. In some instances, these obligations may expire with the respective lease, without further recourse to us. Additionally, commitments for incremental capital expenditures for tenant improvements associated with new leases, primarily at value-add properties, total approximately $23.6 million.

We also anticipate incurring market-based concession packages, typically consisting of the tenant allowances described above and/or rent abatement periods, and paying broker commissions in conjunction with the commencement of recently executed, or soon to be executed, leases. Further, we anticipate continuing to grant such concession packages as we negotiate future leases. Given our average lease size of between 30,000 and 35,000 square feet, some of the concession packages that we grant can result in significant capital outlays. In particular, there are currently five blocks of space in excess of 200,000 square feet in our Washington, D.C. and Chicago portfolio that are subject to re-leasing efforts, and we may grant significant concession packages to secure new, or renew existing, tenants for those spaces. Both the timing and magnitude of any such concessions have yet to be determined and are highly dependent on competitive market conditions at the time of lease negotiations.

Subject to the identification and availability of attractive investment opportunities and our ability to consummate additional acquisitions on satisfactory terms, acquiring new assets compatible with our investment strategy could also be a significant use of capital. In March 2013, we acquired two properties, Arlington Gateway in the Washington, D.C. market and 5 & 15 Wayside Road in the Boston, Massachusetts market. These purchases were initially funded using our $500 Million Unsecured Line of Credit and subsequently refinanced with long-term debt through our Senior Notes issuance in May 2013. Additionally, we purchased the remaining partnership interests in three properties previously held through joint ventures, using available capacity under our $500 Million Unsecured Line of Credit, in order to maximize stockholder value by gaining sole control of the leasing and exit strategy for these assets.

Additionally, during the nine months ended September 30, 2013, we have used $111.6 million to repurchase shares of our common stock on the open market pursuant to our publicly announced stock repurchase plan. We have used the plan to repurchase our common stock when we believe that shares are trading at a meaningful discount to our estimate of the fair value of our assets. The current plan was set to expire in November of 2013. On October 30, 2013, our board of directors amended and restated the plan


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to authorize $150 million in stock repurchases over the next two years. Consequently, dependent upon our prevailing stock price, we anticipate that stock repurchases may continue to be a use of capital over the next few years.

Finally, we expect to use capital to repay debt when obligations become due. We currently have no debt maturities scheduled for the remainder of 2013; however, we have $575 million of secured debt maturing in the first six months of 2014. Subject to our assessment of market conditions, we currently anticipate refinancing these amounts with unsecured debt. In anticipation of incurring replacement debt and considering the historically low interest rate environment, we have entered into several forward starting interest rate swaps with a total notional value of $280 million to partially protect us against rising interest rates by locking a portion of the interest rate on future unsecured debt with a 10-year maturity. Again, subject to our assessment of market conditions, we may enter into additional similar swaps in the future.

The amount and form of payment (cash or stock issuance) of future dividends to be paid to our stockholders will continue to be largely dependent upon (i) the amount of cash generated from our operating activities; (ii) our expectations of future cash flows; (iii) our determination of near-term cash needs for debt repayments and selective acquisitions of new properties; (iv) the timing of significant expenditures for tenant improvements and general property capital improvements; (v) long-term payout ratios for comparable companies; (vi) our ability to continue to access additional sources of capital, including potential sales of our properties; and (vii) the amount required to be distributed to maintain our status as a REIT. Given the fluctuating nature of cash flows and expenditures, we may periodically borrow funds on a short-term basis to cover timing differences in cash receipts and cash disbursements.

Results of Operations

Overview

Our income from continuing operations increased from $0.06 per share for the three months ended September 30, 2012 to $0.12 per share for the three months ended September 30, 2013. The current quarter includes $3.9 million, or approximately $0.02 per diluted share, in insurance reimbursements related to casualty losses incurred in prior periods, whereas the third quarter of the prior year included $7.5 million, or approximately $0.05 per diluted share, of litigation settlement expense. In addition, the current quarter reflects increased interest expense associated with higher outstanding debt balances during the current quarter primarily as a result of property acquisitions made by the Company earlier this year.


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Comparison of the three months ended September 30, 2013 versus the three months ended September 30, 2012

The following table sets forth selected data from our consolidated statements of income for the three months ended September 30, 2013 and 2012, respectively, as well as each balance as a percentage of total revenues for the same periods presented (dollars in millions):

                                                                                                      $
                                    September 30,                  September 30,                   Increase
                                        2013             %             2012             %         (Decrease)
Revenue:
Rental income                      $       116.8                  $       105.0                  $     11.8
Tenant reimbursements                       27.4                           27.1                         0.3
Property management fee revenue              0.9                            0.5                         0.4
Total revenues                             145.1         100  %           132.6         100  %         12.5
Expense:
Property operating costs                    58.8          40  %            50.5          38  %          8.3
Depreciation                                30.8          21  %            27.9          21  %          2.9
Amortization                                13.9          10  %            15.2          12  %         (1.3 )
General and administrative                   5.8           4  %             5.5           4  %          0.3
Real estate operating income                35.8          25  %            33.5          25  %          2.3
Other income (expense):
Interest expense                           (19.3 )       (13 )%           (16.2 )       (12 )%         (3.1 )
Interest and other income
(expense)                                   (0.6 )        (1 )%             0.4           -  %         (1.0 )
Litigation settlement expense                  -           -  %            (7.5 )        (5 )%          7.5
Net recoveries of casualty loss              3.9           3  %               -           -  %          3.9
Equity in income of unconsolidated
joint ventures                               0.1           -  %             0.3           -  %         (0.2 )
Loss on consolidation                       (0.9 )        (1 )%               -           -  %         (0.9 )
Income from continuing operations  $        19.0          13  %   $        10.5           8  %   $      8.5
Income from discontinued
operations                         $         0.1                  $         0.4                  $     (0.3 )

Continuing Operations

Revenue

Rental income increased from approximately $105.0 million for the three months ended September 30, 2012 to approximately $116.8 million for the three months ended September 30, 2013 primarily due to approximately $8.5 million of additional revenue attributable to properties acquired during the current year as well as the commencement of several significant leases over the last twelve months, partially offset by the expiration of a 330,000 square foot lease at our One Independence Square building in Washington, D. C. during March 2013.

Tenant reimbursements increased from approximately $27.1 million for the three months ended September 30, 2012 to approximately $27.4 million for the three months ended September 30, 2013. Although we recognized a $1.1 million reduction in tenant reimbursements as a result of operating expense and tax abatements granted on a large lease renewal at the 500 W. Monroe building in Chicago, Illinois, this reduction was offset by higher property tax expense recoveries and utility expense reimbursements at certain of our properties as well as approximately $0.5 million of additional tenant reimbursements associated with properties acquired during the current year.

Property management fee revenue increased approximately $0.4 million for the three months ended September 30, 2013 compared to the same period in the prior year primarily due to the buyer retaining our property management services subsequent to the sale of our 1200 Enclave Parkway building in Houston, Texas in May 2013.

Expense

Property operating costs increased approximately $8.3 million for the three months ended September 30, 2013 compared to the same period in the prior year primarily due to an increase in recoverable property tax expense of approximately $4.4 million, as well as


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additional expense attributable to properties acquired and increased occupancy at several buildings, during the current period.

Depreciation expense increased approximately $2.9 million for the three months ended September 30, 2013 compared to the same period in the prior year. The variance is largely attributable to depreciation on additional tenant and building improvements placed in service subsequent to the prior period which contributed approximately $1.9 million of the increase. The remainder of the increase is due to additional depreciation recognized on new properties acquired during the current year.

Amortization expense decreased approximately $1.3 million for the three months ended September 30, 2013 compared to the same period in the prior year. The variance is primarily attributable to the acceleration of amortization expense on certain lease intangible assets related to a lease termination due to a tenant bankruptcy at our 500 W. Monroe building in the prior period of approximately $3.8 million. This variance was largely offset by the acceleration of amortization related to lease modifications/terminations in the current period of approximately $2.4 million, primarily at our 5 & 15 Wayside Road building.

General and administrative expenses increased approximately $0.3 million for the three months ended September 30, 2013 compared to the same period in the prior year. The increase in expenses is primarily attributable to lower insurance reimbursements of legal expenses in the current period related to litigation settled in October 2012.

Other Income (Expense)

Interest expense increased approximately $3.1 million for the three months ended September 30, 2013 compared to the same period in the prior year. The increase is attributable to higher outstanding, long-term debt balances during the current quarter primarily as a result of property acquisitions during the first quarter of 2013.

Interest and other income/(expense) decreased approximately $1.0 million for the three months ended September 30, 2013 compared to the same period in the prior year. Of the variance, $0.4 million is attributable to the decrease in interest income associated with the repayment of a note receivable in October 2012. The remaining variance is attributable to higher costs related to unconsummated capital markets transactions in the current period.

During the prior period, we incurred $7.5 million of litigation settlement expense related to settlement agreements of two class action lawsuits.

The approximate $3.9 million net casualty gain recognized during the current period is attributable to insurance recoveries related to damages incurred during the fourth quarter of 2012 at certain of our assets in the New York/New Jersey markets as a result of Hurricane Sandy. We anticipate receiving additional insurance recoveries related to these damages in future periods.

During the three months ended September 30, 2013, we purchased all of the remaining interests in three office properties previously held through two unconsolidated joint ventures for $14.7 million in cash. The estimated fair value of the respective properties were derived by reference to a credible, unrelated third-party offer and verified using discounted cash flow analysis. Under the terms of the respective joint venture agreements, Piedmont exercised its dissenter's right to buy out each of its co-venturers' interests based upon the terms of the third-party offer. The $0.9 million difference between the fair value of the properties acquired and the sum of Piedmont's previously recorded book value in investment in unconsolidated joint ventures plus cash consideration paid for the interests was recorded as a loss on consolidation in Piedmont's consolidated statement of operations for the three months ended September 30, 2013. The acquisition also resulted in a decrease in equity in income of unconsolidated joint ventures as compared to the prior period, as the results of operations of these properties are now consolidated on the same basis as Piedmont's other wholly-owned properties.

Discontinued Operations

The operations of the Deschutes building, the Rhein building, the Rogue building, and the Willamette building, and 18.19 acres of adjoining, undeveloped land in Beaverton, Oregon (collectively the "Portland Portfolio"), the 26200 Enterprise Way building in Lake Forest, California, the 110 and 112 Hidden Lake Circle buildings in Duncan, South Carolina, the 1111 Durham Avenue building in South Plainfield, New Jersey, the 1200 Enclave Parkway building and the 350 Spectrum Loop building (currently held for sale) in Colorado Springs, Colorado are classified as discontinued operations for all periods presented. Income from discontinued operations decreased approximately $0.3 million for the three months ended September 30, 2013 compared to the same period in the prior year. We do not expect that income from discontinued operations will be comparable to future periods, as such income is subject to the occurrence and timing of future property dispositions.


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Comparison of the nine months ended September 30, 2013 versus the nine months ended September 30, 2012

The following table sets forth selected data from our consolidated statements of income for the nine months ended September 30, 2013 and 2012, respectively, as well as each balance as a percentage of total revenues for the same periods presented (dollars in millions):

                                                                                                        $
                                     September 30,                  September 30,                   Increase
                                         2013             %             2012             %         (Decrease)
Revenue:
Rental income                       $       333.9                  $       312.0                  $      21.9
Tenant reimbursements                        77.2                           80.3                         (3.1 )
Property management fee revenue               2.0                            1.7                          0.3
Total revenues                              413.1         100  %           394.0         100  %          19.1
Expense:
Property operating costs                    164.4          40  %           154.6          39  %           9.8
Depreciation                                 90.7          22  %            81.7          21  %           9.0
Amortization                                 34.3           8  %            39.1          10  %          (4.8 )
General and administrative                   16.7           4  %            15.6           4  %           1.1
Real estate operating income                107.0          26  %           103.0          26  %           4.0
Other income (expense):
Interest expense                            (53.9 )       (13 )%           (48.7 )       (12 )%          (5.2 )
Interest and other income/(expense)          (2.0 )         -  %             0.8           -  %          (2.8 )
Litigation settlement
recovery/(expense)                            1.3           -  %            (7.5 )        (2 )%           8.8
Net recoveries of casualty loss               6.1           1  %               -           -  %           6.1
Equity in income of unconsolidated
joint ventures                                0.6           -  %             0.7           -  %          (0.1 )
Loss on consolidation                        (0.9 )         -  %               -           -  %          (0.9 )
Income from continuing operations   $        58.2          14  %   $        48.3          12  %   $       9.9
Income from discontinued operations $        11.0                  $        30.5                  $     (19.5 )

Continuing Operations

Revenue

Rental income increased from approximately $312.0 million for the nine months ended September 30, 2012 to approximately $333.9 million for the nine months ended September 30, 2013 primarily due to approximately $15.4 million of additional revenue attributable to properties acquired during the current year, as well as the commencement of several significant leases over the last twelve months, offset by the expiration of a 330,000 square foot lease at our One Independence Square building during March 2013.

Tenant reimbursements decreased from approximately $80.3 million for the nine months ended September 30, 2012 to approximately $77.2 million for the nine months ended September 30, 2013. The variance is mainly attributable to an approximate $4.2 million reduction in tenant reimbursements as a result of operating expense and tax abatements granted on a large lease renewal at the 500 W. Monroe building and an approximate $1.7 million reduction in tenant reimbursements at the One Independence Square building due to the lease expiration discussed above. These decreases were partially offset by an increase in tenant reimbursements at our 60 Broad Street building and our US Bancorp Center building in Minneapolis, Minnesota primarily driven by higher recoverable property tax expense in the current period.

Property management fee revenue increased approximately $0.3 million for the nine months ended September 30, 2013 compared to the same period in the prior year primarily due to the buyer retaining our property management services subsequent to the sale of our 1200 Enclave Parkway building in May 2013.


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Expense

Property operating costs increased approximately $9.8 million for the nine months ended September 30, 2013 compared to the same period in the prior year. Properties acquired during the current period contributed approximately $4.7 million of additional operating costs and higher recoverable property tax expense at our existing properties contributed an additional $4.7 of operating costs.

Depreciation expense increased approximately $9.0 million for the nine months ended September 30, 2013 compared to the same period in the prior year. The variance is largely attributable to depreciation on additional tenant and building improvements placed in service subsequent to January 1, 2012 which contributed approximately $6.5 million of the increase. The remainder of the increase is due to new properties acquired during the current period.

Amortization expense decreased approximately $4.8 million for the nine months ended September 30, 2013 compared to the same period in the prior year. The variance is primarily attributable to reduced amortization expense as a result of lease intangible assets becoming fully amortized at certain of our existing properties subsequent to January 1, 2012, as well as higher accelerated amortization expense as a result of lease terminations during the prior period. However, these decreases were partially offset by approximately $7.0 million of additional amortization expense related to property acquisitions during the current year.

General and administrative expenses increased approximately $1.1 million for the nine months ended September 30, 2013 compared to the same period in the prior year primarily due to lower insurance reimbursements of legal expenses in the current period related to litigation settled in October 2012, as well as higher personnel and benefits costs in the current period.

Other Income (Expense)

Interest expense increased approximately $5.2 million for the nine months ended September 30, 2013 compared to the same period in the prior year. The increase is attributable to higher outstanding debt balances during the current period primarily as a result of property acquisitions during the first quarter of 2013.

Interest and other income/(expense) decreased approximately $2.8 million for the nine months ended September 30, 2013 compared to the same period in the prior year. The decrease reflects approximately $1.3 million of costs associated with the acquisitions of the Arlington Gateway building and the 5 & 15 Wayside Road building during the current period, as well as a decrease in interest income associated with the repayment of a note receivable in October 2012. The remaining variance is attributable to higher costs related to unconsummated capital markets transactions in the current period.

During the nine months ended September 30, 2013, we recognized approximately $1.3 million in insurance recoveries associated with the $7.5 million of litigation settlement expense we recorded in the prior period related to settlement agreements of two class action lawsuits. We expect to receive additional insurance recoveries related to the settlements in future periods.

The approximate $6.1 million net casualty gain we recognized during the current period is due to insurance recoveries received related to damages incurred at certain of our assets in the New York/New Jersey markets during the fourth quarter of 2012 as a result of Hurricane Sandy. We anticipate receiving additional insurance recoveries related to these damages in future periods.

During the nine months ended September 30, 2013, we purchased all of the remaining interests in three office properties previously held through two unconsolidated joint ventures for $14.7 million in cash. The estimated fair value of the respective properties were derived by reference to a credible, unrelated third-party offer and verified using discounted cash flow analysis. Under the terms of the respective joint venture agreements, Piedmont exercised its dissenter's right to buy out each of its co-venturers' interests based upon the terms of the third-party offer.The $0.9 million difference between the fair value of the properties acquired and the sum of Piedmont's previously recorded book value in investment in unconsolidated joint ventures plus cash consideration paid for the interests was recorded as a loss on consolidation in Piedmont's consolidated statement of operations for the three months ended September 30, 2013. The acquisition also resulted in a decrease in equity in income of unconsolidated joint ventures as compared to the prior period, as the results of operations of these properties are now consolidated on the same basis as Piedmont's other wholly-owned properties.

Discontinued Operations

The operations of the Portland Portfolio, the 26200 Enterprise Way building, the 110 and 112 Hidden Lake Circle buildings, the 1111 Durham Avenue building, the1200 Enclave Parkway building, and the 350 Spectrum Loop building are classified as discontinued operations for all periods presented. Income from discontinued operations decreased approximately $19.5 million for the nine . . .

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