PDM-6.30.12 10-Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________ 
FORM 10-Q
____________________________________________________  
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT of 1934
For the Quarterly Period Ended June 30, 2012
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT of 1934
For the Transition Period From                      To                     
Commission file number 001-34626
PIEDMONT OFFICE REALTY TRUST, INC.
(Exact name of registrant as specified in its charter)
 ____________________________________________________ 
Maryland
 
58-2328421
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)

11695 Johns Creek Parkway
Ste. 350
Johns Creek, Georgia 30097
(Address of principal executive offices)
(Zip Code)
(770) 418-8800
(Registrant’s telephone number, including area code)
N/A
(Former name, former address, and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No   o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated filer x
 
Accelerated filer o
 
Non-Accelerated filer o     (Do not check if a smaller reporting company)        
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o No   x
Number of shares outstanding of the Registrant’s
common stock, as of July 31, 2012:
168,899,427 shares
 

Table of Contents

FORM 10-Q
PIEDMONT OFFICE REALTY TRUST, INC.
TABLE OF CONTENTS
 
 
Page No.
PART I.
Financial Statements
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
PART II.
Other Information
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
Item 5.
 
 
 
 
 
Item 6.


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Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q and other written or oral statements made by or on behalf of Piedmont Office Realty Trust, Inc. (“Piedmont”) may constitute forward-looking statements within the meaning of the federal securities laws. In addition, Piedmont, or its executive officers on Piedmont’s behalf, may from time to time make forward-looking statements in reports and other documents Piedmont files with the Securities and Exchange Commission or in connection with oral statements made to the press, potential investors, or others. Statements regarding future events and developments and Piedmont’s future performance, as well as management’s expectations, beliefs, plans, estimates, or projections relating to the future, are forward-looking statements within the meaning of these laws. Forward-looking statements include statements preceded by, followed by, or that include the words “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. Examples of such statements in this report include descriptions of our real estate, financing, and operating objectives; discussions regarding future dividends and stock repurchases; and discussions regarding the potential impact of economic conditions on our portfolio.
These statements are based on beliefs and assumptions of Piedmont’s management, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding the demand for office space in the sectors in which Piedmont operates, competitive conditions, and general economic conditions. These assumptions could prove inaccurate. The forward-looking statements also involve risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. Many of these factors are beyond Piedmont’s ability to control or predict. Such factors include, but are not limited to, the following:
•
The success of our real estate strategies and investment objectives, including our ability to identify and consummate suitable acquisitions;
•
The demand for office space, rental rates and property values may continue to lag the general economic recovery causing our business, results of operations, cash flows, financial condition and access to capital to be adversely affected or otherwise impact performance, including the potential recognition of impairment charges;
•
Our $500 Million Unsecured Facility matures in August 2012 and a failure to fully renew or replace this facility could cause our business, results of operations, cash flows, financial condition and access to capital to be adversely affected;
•
Lease terminations or lease defaults, particularly by one of our large lead tenants;
•
The impact of competition on our efforts to renew existing leases or re-let space on terms similar to existing leases;
•
Changes in the economies and other conditions of the office market in general and of the specific markets in which we operate, particularly in Chicago, Washington, D.C., and the New York metropolitan area;
•
Economic and regulatory changes, including accounting standards, that impact the real estate market generally;
•
Additional risks and costs associated with directly managing properties occupied by government tenants;
•
Adverse market and economic conditions may continue to negatively affect us and could cause us to recognize impairment charges or otherwise impact our performance;
•
Availability of financing and our lending banks’ ability to honor existing line of credit commitments;
•
Costs of complying with governmental laws and regulations;
•
Uncertainties associated with environmental and other regulatory matters;
•
Potential changes in the political environment and reduction in federal and/or state funding of our government tenants;
•
We are and may continue to be subject to litigation, which could have a material adverse effect on our financial condition;
•
Piedmont’s ability to continue to qualify as a REIT under the Internal Revenue Code (the “Code”); and
•
Other factors, including the risk factors discussed under Item 1A. of Piedmont’s Annual Report on Form 10-K for the year ended December 31, 2011.
Management believes these forward-looking statements are reasonable; however, undue reliance should not be placed on any forward-looking statements, which are based on current expectations. Further, forward-looking statements speak only as of the date they are made, and management undertakes no obligation to update publicly any of them in light of new information or future events.

3
Table of Contents

PART I. FINANCIAL STATEMENTS

ITEM 1.
CONSOLIDATED FINANCIAL STATEMENTS
The information presented in the accompanying consolidated balance sheets and related consolidated statements of operations, stockholders’ equity, and cash flows reflects all adjustments that are, in management’s opinion, necessary for a fair and consistent presentation of financial position, results of operations, and cash flows in accordance with U.S. generally accepted accounting principles.
The accompanying financial statements should be read in conjunction with the notes to Piedmont’s financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this report on Form 10-Q and with Piedmont’s Annual Report on Form 10-K for the year ended December 31, 2011. Piedmont’s results of operations for the six months ended June 30, 2012 are not necessarily indicative of the operating results expected for the full year.

4
Table of Contents

PIEDMONT OFFICE REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share and per share amounts)
 
(Unaudited)
 
 
 
June 30,
2012
 
December 31,
2011
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
629,476

 
$
640,196

Buildings and improvements, less accumulated depreciation of $837,285 and $792,342 as of June 30, 2012 and December 31, 2011, respectively
2,917,669

 
2,967,254

Intangible lease assets, less accumulated amortization of $82,742 and $119,419 as of June 30, 2012 and December 31, 2011, respectively
66,802

 
79,248

Construction in progress
24,154

 
17,353

Total real estate assets
3,638,101

 
3,704,051

Investments in unconsolidated joint ventures
37,580

 
38,181

Cash and cash equivalents
26,869

 
139,690

Tenant and notes receivable, net of allowance for doubtful accounts of $209 and $631 as of June 30, 2012 and December 31, 2011, respectively
153,615

 
129,523

Due from unconsolidated joint ventures
569

 
788

Restricted cash and escrows
48,046

 
9,039

Prepaid expenses and other assets
7,385

 
9,911

Goodwill
180,097

 
180,097

Deferred financing costs, less accumulated amortization of $9,974 and $9,214 as of June 30, 2012 and December 31, 2011, respectively
4,597

 
5,977

Deferred lease costs, less accumulated amortization of $120,925 and $120,358 as of June 30, 2012 and December 31, 2011, respectively
231,449

 
230,577

Total assets
$
4,328,308

 
$
4,447,834

Liabilities:
 
 
 
Line of credit and notes payable
$
1,400,525

 
$
1,472,525

Accounts payable, accrued expenses, and accrued capital expenditures
126,207

 
122,986

Deferred income
23,668

 
27,321

Intangible lease liabilities, less accumulated amortization of $68,723 and $63,981 as of June 30, 2012 and December 31, 2011, respectively
44,246

 
49,037

Interest rate swaps
6,922

 
2,537

Total liabilities
1,601,568

 
1,674,406

Commitments and Contingencies
—

 
—

Stockholders’ Equity:
 
 
 
Shares-in-trust, 150,000,000 shares authorized; none outstanding as of June 30, 2012 or December 31, 2011
—

 
—

Preferred stock, no par value, 100,000,000 shares authorized; none outstanding as of June 30, 2012 or December 31, 2011
—

 
—

Common stock, $.01 par value, 750,000,000 shares authorized; 170,234,828 and 172,629,748 shares issued and outstanding as of June 30, 2012 and December 31, 2011, respectively
1,702

 
1,726

Additional paid-in capital
3,665,284

 
3,663,662

Cumulative distributions in excess of earnings
(934,933
)
 
(891,032
)
Other comprehensive loss
(6,922
)
 
(2,537
)
Piedmont stockholders’ equity
2,725,131

 
2,771,819

Noncontrolling interest
1,609

 
1,609

Total stockholders’ equity
2,726,740

 
2,773,428

Total liabilities and stockholders’ equity
$
4,328,308

 
$
4,447,834

See accompanying notes

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Table of Contents

PIEDMONT OFFICE REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except for share and per share amounts)
 
 
(Unaudited)
 
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
Revenues:
 
 
 
 
 
 
 
Rental income
$
105,992

 
$
103,205

 
$
211,275

 
$
203,035

Tenant reimbursements
27,010

 
30,640

 
53,728

 
57,520

Property management fee revenue
626

 
363

 
1,199

 
1,193

Other rental income
88

 
1,347

 
212

 
4,751

 
133,716

 
135,555

 
266,414

 
266,499

Expenses:
 
 
 
 
 
 
 
Property operating costs
53,699

 
52,950

 
106,442

 
101,743

Depreciation
27,798

 
25,702

 
55,167

 
50,663

Amortization
11,478

 
14,040

 
24,221

 
24,314

General and administrative
4,865

 
7,342

 
10,122

 
13,954

 
97,840

 
100,034

 
195,952

 
190,674

Real estate operating income
35,876

 
35,521

 
70,462

 
75,825

Other income (expense):
 
 
 
 
 
 
 
Interest expense
(15,943
)
 
(17,762
)
 
(32,480
)
 
(33,402
)
Interest and other income (expense)
285

 
(238
)
 
382

 
3,221

Equity in income of unconsolidated joint ventures
246

 
338

 
416

 
547

Gain (loss) on consolidation of variable interest entity
—

 
(388
)
 
—

 
1,532

 
(15,412
)
 
(18,050
)
 
(31,682
)
 
(28,102
)
Income from continuing operations
20,464

 
17,471

 
38,780

 
47,723

Discontinued operations:
 
 
 
 
 
 
 
Operating income
240

 
3,560

 
1,325

 
7,279

Gain on sale of real estate assets
10,008

 
—

 
27,838

 
—

Income from discontinued operations
10,248

 
3,560

 
29,163

 
7,279

Net income
30,712

 
21,031

 
67,943

 
55,002

Less: Net income attributable to noncontrolling interest
(4
)
 
(4
)
 
(8
)
 
(8
)
Net income attributable to Piedmont
$
30,708

 
$
21,027

 
$
67,935

 
$
54,994

Per share information – basic and diluted:
 
 
 
 
 
 
 
Income from continuing operations
$
0.12

 
$
0.10

 
$
0.22

 
$
0.28

Income from discontinued operations
0.06

 
0.02

 
0.17

 
0.04

Net income available to common stockholders
$
0.18

 
$
0.12

 
$
0.39

 
$
0.32

Weighted-average common shares outstanding – basic
172,077,405

 
172,780,207

 
172,353,576

 
172,719,684

Weighted-average common shares outstanding – diluted
172,209,331

 
172,985,847

 
172,519,834

 
172,908,135

See accompanying notes.

6
Table of Contents


PIEDMONT OFFICE REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
 
(Unaudited)
 
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to Piedmont
 
 
$
30,708

 
 
 
$
21,027

 
 
 
$
67,935

 
 
 
$
54,994

Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective portion of loss on derivative instruments that are designated and qualify as cash flow hedges (See Note 6)
(5,124
)
 
 
 
(23
)
 
 
 
(5,872
)
 
 
 
(204
)
 
 
Less: reclassification of previously recorded loss included in net income (See Note 6)
754

 
 
 
444

 
 
 
1,487

 


 
851

 


Other comprehensive gain/(loss)
 
 
(4,370
)
 
 
 
421

 
 
 
(4,385
)
 
 
 
647

Comprehensive income attributable to Piedmont
 
 
$
26,338

 
 
 
$
21,448

 
 
 
$
63,550

 
 
 
$
55,641
































See accompanying notes

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PIEDMONT OFFICE REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2011
AND FOR THE SIX MONTHS ENDED JUNE 30, 2012 (UNAUDITED)
(in thousands, except per share amounts)
 
 
Common  Stock
 
Additional
Paid-In
Capital
 
Cumulative
Distributions
in Excess of
Earnings
 
Other
Comprehensive
Loss
 
Non-
controlling
Interest
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Balance, December 31, 2010
172,658

 
$
1,727

 
$
3,661,308

 
$
(895,122
)
 
$
(691
)
 
$
6,232

 
$
2,773,454

Share repurchases as part of an announced program
(199
)
 
(2
)
 
—

 
(3,242
)
 
—

 
—

 
(3,244
)
Offering costs associated with the issuance of common stock
—

 
—

 
(479
)
 
—

 
—

 
—

 
(479
)
Attribution of asset sales proceeds to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
(2,684
)
 
(2,684
)
Dividends to common stockholders ($1.2600 per share), distributions to noncontrolling interest, and dividends reinvested
—

 
—

 
(249
)
 
(217,709
)
 
—

 
(2,407
)
 
(220,365
)
Shares issued under the 2007 Omnibus Incentive Plan, net of tax
171

 
1

 
3,082

 
—

 
—

 
—

 
3,083

Net income attributable to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
468

 
468

Net income attributable to Piedmont
—

 
—

 
—

 
225,041

 
—

 
—

 
225,041

Other comprehensive loss
—

 
—

 
—

 
—

 
(1,846
)
 
—

 
(1,846
)
Balance, December 31, 2011
172,630

 
1,726

 
3,663,662

 
(891,032
)
 
(2,537
)
 
1,609

 
2,773,428

Share repurchases as part of announced program
(2,572
)
 
(26
)
 
—

 
(42,892
)
 
—

 
—

 
(42,918
)
Dividends to common stockholders ($0.40 per share), distributions to noncontrolling interest, and dividends reinvested
—

 
—

 
(101
)
 
(68,944
)
 
—

 
(8
)
 
(69,053
)
Shares issued under the 2007 Omnibus Incentive Plan, net of tax
177

 
2

 
1,723

 
—

 
—

 
—

 
1,725

Net income attributable to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
8

 
8

Net income attributable to Piedmont
—

 
—

 
—

 
67,935

 
—

 
—

 
67,935

Other comprehensive loss
—

 
—

 
—

 
—

 
(4,385
)
 
—

 
(4,385
)
Balance, June 30, 2012
170,235

 
$
1,702

 
$
3,665,284

 
$
(934,933
)
 
$
(6,922
)
 
$
1,609

 
$
2,726,740



See accompanying notes

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Table of Contents

PIEDMONT OFFICE REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) 
 
(Unaudited)
 
Six Months Ended
 
June 30,
 
2012
 
2011
Cash Flows from Operating Activities:
 
 
 
Net income
$
67,943

 
$
55,002

Operating distributions received from unconsolidated joint ventures
1,236

 
1,753

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Income attributable to noncontrolling interest- discontinued operations
—

 
235

Depreciation
55,447

 
54,769

Amortization of deferred financing costs
1,393

 
2,687

Other amortization
23,578

 
27,349

Accretion of notes receivable discount
—

 
(482
)
Stock compensation expense
623

 
1,864

Equity in income of unconsolidated joint ventures
(416
)
 
(547
)
Gain on sale of real estate assets
(27,838
)
 
—

Gain on consolidation of variable interest entity
—

 
(1,532
)
Changes in assets and liabilities:
 
 
 
Increase in tenant receivables, net
(8,255
)
 
(3,667
)
Increase in restricted cash and escrows
(39,007
)
 
(3,354
)
Decrease (increase) in prepaid expenses and other assets
2,604

 
(5,381
)
Decrease in accounts payable and accrued expenses
(5,097
)
 
(5,866
)
Decrease in deferred income
(3,654
)
 
(7,603
)
Net cash provided by operating activities
68,557

 
115,227

Cash Flows from Investing Activities:
 
 
 
Investments in real estate assets and related intangibles
(35,215
)
 
(76,121
)
Cash assumed upon consolidation of variable interest entity
—

 
5,063

Net sales proceeds from wholly-owned properties
49,245

 
—

Net sales proceeds from unconsolidated joint ventures
—

 
321

Investments in unconsolidated joint ventures
—

 
(158
)
Deferred lease costs paid
(15,236
)
 
(20,149
)
Net cash used in investing activities
(1,206
)
 
(91,044
)
Cash Flows from Financing Activities:
 
 
 
Deferred financing costs paid
(12
)
 
(83
)
Proceeds from line of credit and notes payable
142,000

 
349,000

Repayments of line of credit and notes payable
(214,000
)
 
(299,000
)
Costs of issuance of common stock
(229
)
 
—

Share repurchases as part of an announced program
(38,878
)
 
—

Dividends paid and discount on dividend reinvestments
(69,053
)
 
(109,414
)
Net cash used in financing activities
(180,172
)
 
(59,497
)
Net decrease in cash and cash equivalents
(112,821
)
 
(35,314
)
Cash and cash equivalents, beginning of period
139,690

 
56,718

Cash and cash equivalents, end of period
$
26,869

 
$
21,404

Supplemental Disclosures of Significant Noncash Investing and Financing Activities:
 
 
 
Change in accrued offering costs related to issuance of common stock
$
—

 
$
479

Change in accrued share repurchases as part of an announced program
$
4,040

 
$
—

Accrued capital expenditures and deferred lease costs
$
12,493

 
$
2,111

Net assets assumed upon consolidation of variable interest entity, net of notes receivable previously recorded
$
—

 
$
188,283

Liabilities assumed upon consolidation of variable interest entity
$
—

 
$
191,814

See accompanying notes

9
Table of Contents

PIEDMONT OFFICE REALTY TRUST, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012
(unaudited)

1.Organization
Piedmont Office Realty Trust, Inc. (“Piedmont”) (NYSE: PDM) is a Maryland corporation that operates in a manner so as to qualify as a real estate investment trust (“REIT”) for federal income tax purposes and engages in the acquisition and ownership of commercial real estate properties throughout the United States, including properties that are under construction, are newly constructed, or have operating histories. Piedmont was incorporated in 1997 and commenced operations in June of 1998. Piedmont conducts business primarily through Piedmont Operating Partnership, L.P. (“Piedmont OP”), a Delaware limited partnership, as well as performing the management of its buildings through two wholly-owned subsidiaries, Piedmont Government Services, LLC and Piedmont Office Management, LLC. Piedmont is the sole general partner of Piedmont OP and possesses full legal control and authority over the operations of Piedmont OP. Piedmont OP owns properties directly, through wholly-owned subsidiaries, and through both consolidated and unconsolidated joint ventures. References to Piedmont herein shall include Piedmont and all of its subsidiaries, including Piedmont OP and its subsidiaries and joint ventures.

As of June 30, 2012, Piedmont owned interests in 74 consolidated office properties, plus five buildings owned through unconsolidated joint ventures and two industrial buildings. Our 74 office properties are located in 17 metropolitan areas across the United States. These consolidated office properties comprise approximately 20.5 million square feet of primarily Class A commercial office space, and were approximately 85.0% leased as of June 30, 2012.

2.Summary of Significant Accounting Policies
Basis of Presentation

The consolidated financial statements of Piedmont have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”), including the instructions to Form 10-Q and Article 10 of Regulation S-X, and do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of management, the statements for the unaudited interim periods presented include all adjustments, which are of a normal and recurring nature, necessary for a fair presentation of the results for such periods. Results for these interim periods are not necessarily indicative of a full year’s results and certain prior period amounts have been reclassified to conform to the current period financial statement presentation, specifically relating to the required presentation of income from discontinued operations for the Eastpointe Corporate Center in Issaquah, Washington (sold in July 2011), the 5000 Corporate Court building in Holtsville, New York (sold in August 2011), the 35 West Wacker Drive building in Chicago, IL (sold in December 2011), the Deschutes building, the Rhein building, the Rogue building, the Willamette building, and 18.19 acres of adjoining, undeveloped land in Beaverton, Oregon (collectively the "Portland Portfolio" sold in March 2012), and the 26200 Enterprise Way building in Lake Forest, California (sold in May 2012, see Note 10). Piedmont’s consolidated financial statements include the accounts of Piedmont, Piedmont’s wholly-owned subsidiaries, any variable interest entity of which Piedmont or any of its wholly-owned subsidiaries is considered the primary beneficiary, or any entity in which Piedmont or any of its wholly-owned subsidiaries owns a controlling interest. For further information, refer to the financial statements and footnotes included in Piedmont’s Annual Report on Form 10-K for the year ended December 31, 2011.

Further, Piedmont has formed special purpose entities to acquire and hold real estate. Each special purpose entity is a separate legal entity and consequently the assets of the special purpose entities are not available to all creditors of Piedmont. The assets owned by these special purpose entities are being reported on a consolidated basis with Piedmont’s assets for financial reporting purposes only.

Income Taxes

Piedmont has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), and has operated as such, beginning with its taxable year ended December 31, 1998. To qualify as a REIT, Piedmont must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of its annual REIT taxable income. As a REIT, Piedmont is generally not subject to federal income taxes. Piedmont is subject to certain taxes related to the operations of properties in certain locations, as well as operations conducted by its taxable REIT subsidiary, which have been provided for in the financial statements.


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Goodwill

Goodwill is the excess of cost of an acquired entity over the amounts specifically assigned to assets acquired and liabilities assumed in purchase accounting for business combinations. Piedmont tests the carrying value of its goodwill for impairment on an annual basis, or on an interim basis if an event occurs or circumstances change that would indicate the carrying amount may be impaired. Such interim circumstances may include, but are not limited to, significant adverse changes in legal factors or in the general business climate, adverse action or assessment by a regulator, unanticipated competition, the loss of key personnel, or persistent declines in an entity’s stock price below carrying value of the entity. In accordance with GAAP, Piedmont has the option, should it chose to do so, to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, Piedmont concludes that the estimated fair value is greater than the carrying amount, then performing a further two-step impairment test is unnecessary. However, if Piedmont chooses to forgo the availability of the qualitative analysis, the test prescribed by authoritative accounting guidance is a two-step test. The first step involves comparing the estimated fair value of the entity to its carrying value, including goodwill. Fair value is determined by adjusting the trading price of the stock for various factors including, but not limited to: (i) liquidity or transferability considerations, (ii) control premiums, and/or (iii) fully distributed premiums, if necessary, multiplied by the common shares outstanding. If such calculated fair value exceeds the carrying value, no further procedures or analysis is required. However, if the carrying value exceeds the calculated fair value, goodwill is potentially impaired and step two of the analysis would be required. Step two of the test involves calculating the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets of the entity from the entity’s fair value calculated in step one of the test. If the implied value of the goodwill (the remainder left after deducting the fair values of the entity from its calculated overall fair value in step one of the test) is less than the carrying value of goodwill, an impairment loss would be recognized.

3.Acquisitions
On June 28, 2012, Piedmont purchased undeveloped land parcels adjacent to the Medici building in Atlanta, Georgia for a purchase price of approximately $2.5 million. The land parcels consist of approximately 2.01 acres, are zoned for office and accessory use, and have a site plan approved for approximately 248,781 square feet.


4.
Tenant and Notes Receivable

Tenant and notes receivables as of June 30, 2012 and December 31, 2011, respectively, were comprised of the following (in thousands):

 
June 30,
2012
 
December 31,
2011
Tenant receivables, net of allowance for doubtful accounts of $209 and $631 as of June 30, 2012 and December 31, 2011, respectively
$
22,884

 
$
24,722

Cumulative rental revenue recognized on a straight-line basis in excess of cash received in accordance with lease terms
111,731

 
104,801

Notes receivable received in conjunction with real estate asset sale (See Note 10)
19,000

 
—

Tenant and notes receivable, net
$
153,615

 
$
129,523


5.Line of Credit and Notes Payable
During the six months ended June 30, 2012, Piedmont incurred net borrowings on the $500 Million Unsecured Facility of approximately $113.0 million. On January 9, 2012, Piedmont fully repaid the $140 Million 500 W. Monroe Mortgage Loan. Additionally, on May 1, 2012, Piedmont repaid in full the balance outstanding on the $45.0 Million Fixed-Rate Loan secured by the 4250 N. Fairfax building in Arlington, Virginia in advance of its June 1, 2012 scheduled maturity.

Piedmont made interest payments on all debt facilities, including interest rate swap cash settlements related to certain of its debt facilities, totaling approximately $15.6 million and $17.4 million for the three months ended June 30, 2012 and June 30, 2011, respectively, and approximately $31.4 million and $33.3 million for the six months ended June 30, 2012 and 2011, respectively.

See Note 8 for a description of Piedmont’s estimated fair value of debt as of June 30, 2012.

The following table summarizes the terms of Piedmont’s indebtedness outstanding as of June 30, 2012 and December 31, 2011 (in thousands):

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Facility
 
Collateral
 
Rate(1)
 
Maturity
 
Amount Outstanding as of
 
June 30,
2012
 
December 31,
2011
Secured (Fixed)
 
 
 
 
 
 
 
 
 
 
$45.0 Million Fixed-Rate Loan
 
4250 N. Fairfax
 
5.20
%
 
6/1/2012
 
$
—

 
$
45,000

$200.0 Million Mortgage Note
 
Aon Center
 
4.87
%
 
5/1/2014
 
200,000

  
200,000

$25.0 Million Mortgage Note
 
Aon Center
 
5.70
%
 
5/1/2014
 
25,000

  
25,000

$350.0 Million Secured Pooled Facility
 
Nine Property Collateralized
Pool (2)
 
4.84
%
 
6/7/2014
 
350,000

  
350,000

$105.0 Million Fixed-Rate Loan
 
US Bancorp Center
 
5.29
%
 
5/11/2015
 
105,000

  
105,000

$125.0 Million Fixed-Rate Loan
 
Four Property Collateralized
Pool (3)
 
5.50
%
 
4/1/2016
 
125,000

  
125,000

$42.5 Million Fixed-Rate Loan
 
Las Colinas Corporate
Center I & II
 
5.70
%
 
10/11/2016
 
42,525

  
42,525

$140.0 Million WDC Mortgage Notes
 
1201 & 1225 Eye Street
 
5.76
%
 
11/1/2017
 
140,000

  
140,000

$140.0 Million 500 W. Monroe Mortgage Loan
 
500 W. Monroe
 
LIBOR +  1.008%

 
8/9/2012
 
—

  
140,000

Subtotal/Weighted Average (4)
 
 
 
5.17
%
 
 
 
987,525

  
1,172,525

Unsecured (Variable)
 
 
 
 
 
 
 
 
 
 
$300 Million Unsecured Term Loan
 
 
 
LIBOR +  1.45%

(5) 
11/22/2016
 
300,000

  
300,000

$500 Million Unsecured Facility
 
 
 
0.73
%
(6) 
8/30/2012
 
113,000

 
—

Subtotal/Weighted Average (4)
 
 
 
2.15
%
 
 
 
413,000

  
300,000

Total/ Weighted Average (4)
 
 
 
4.28
%
 
 
 
$
1,400,525

  
$
1,472,525


(1) 
All of Piedmont’s outstanding debt as of June 30, 2012 and December 31, 2011 is interest-only debt.
(2) 
Nine property collateralized pool includes: 1200 Crown Colony Drive, Braker Pointe III, 2 Gatehall Drive, One and Two Independence Square, 2120 West End Avenue, 400 Bridgewater Crossing, 200 Bridgewater Crossing, and Fairway Center II.
(3) 
Four property collateralized pool includes 1430 Enclave Parkway, Windy Point I and II, and 1055 East Colorado Boulevard.
(4) 
Weighted average is based on contractual balance of outstanding debt and interest rates in the table as of June 30, 2012.
(5) 
The $300 Million Unsecured Term Loan has a stated variable rate; however, Piedmont entered into interest rate swap agreements which effectively fix, exclusive of changes to Piedmont's credit rating, the rate on this facility to 2.69%.
(6) 
Piedmont may select from multiple interest rate options with each draw, including the prime rate and various-length LIBOR locks. All LIBOR selections are subject to an additional spread (0.475% as of June 30, 2012) over the selected rate based on Piedmont’s current credit rating. The outstanding balance as of June 30, 2012 consisted of LIBOR draws at 0.25% (subject to the additional spread mentioned above).

6.Derivative Instruments
Risk Management Objective of Using Derivatives

In addition to operational risks which arise in the normal course of business, Piedmont is exposed to economic risks such as interest rate, liquidity, and credit risk. In certain situations, Piedmont has entered into derivative financial instruments such as interest rate swap agreements and interest rate cap agreements to manage interest rate risk exposure arising from variable rate debt transactions that result in the receipt or payment of future known and uncertain cash amounts, the value of which is determined by interest

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rates. Piedmont’s objective in using interest rate derivatives is to add stability to interest expense and to manage its exposure to interest rate movements.

Cash Flow Hedges of Interest Rate Risk

Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for Piedmont making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

During the six months ended June 30, 2012, Piedmont used interest rate swap agreements to hedge the variable cash flows associated with its $300 Million Unsecured Term Loan. Piedmont’s interest rate swap agreements outstanding as of June 30, 2012 were as follows:
 
Interest Rate Derivative
Notional Amount
(in millions)
 
Effective Date
 
Maturity Date
Interest rate swap
$
125

 
11/22/2011
 
11/22/2016
Interest rate swap
75

 
11/22/2011
 
11/22/2016
Interest rate swap
50

 
11/22/2011
 
11/22/2016
Interest rate swap
50

 
11/22/2011
 
11/22/2016
Total
$
300

 
 
 
 

All of Piedmont's interest rate swap agreements outstanding for the periods presented were designated as cash flow hedges of interest rate risk. The effective portion of changes in the fair value of derivatives designated as, and that qualify as, cash flow hedges is recorded in other comprehensive income ("OCI") and is reclassified into earnings as interest expense in the period that the hedged forecasted transaction affects earnings. The effective portion of Piedmont’s interest rate swaps that was recorded in the accompanying consolidated statements of income for the three and six months ended June 30, 2012 and 2011, respectively, was as follows:

 
Three Months Ended
 
Six Months Ended
Derivative in
Cash Flow Hedging
Relationships (Interest Rate Swaps) (in thousands)
June 30,
2012
 
June 30,
2011
 
June 30,
2012
 
June 30,
2011
Amount of loss recognized in OCI on derivative
$
5,124

 
$
23

 
$
5,872

 
$
204

Amount of previously recorded loss reclassified from accumulated OCI into interest expense
$
(754
)
 
$
(444
)
 
$
(1,487
)
 
$
(851
)

Piedmont estimates that approximately $2.8 million will be reclassified from accumulated other comprehensive loss to interest expense over the next twelve months; however Piedmont's total exposure to interest rate expense related to the swaps and the associated debt facility is limited to 2.69% (exclusive of changes to Piedmont's credit rating). No gain or loss was recognized related to hedge ineffectiveness or to amounts excluded from effectiveness testing on Piedmont’s cash flow hedges during the three and six months ended June 30, 2012 or 2011, respectively. Please see the accompanying statements of comprehensive income for a rollforward of Piedmont’s Other Comprehensive Loss account. Additionally, see Note 8 for fair value disclosures of Piedmont's interest rate swap derivatives.

Credit-risk-related Contingent Features

Piedmont has agreements with its derivative counterparties that contain a provision whereby if Piedmont defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then Piedmont could also be declared in default on its derivative obligation. If Piedmont breached any of the contractual provisions of the derivative contracts, it would be required to settle its obligations under the agreements at their termination value of the fair values plus accrued interest, or approximately $7.1 million.

7.Variable Interest Entities
Variable interest holders who have the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and have the obligation to absorb the majority of losses of the entity or the right to receive significant benefits of the

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entity are considered to be the primary beneficiary and must consolidate the VIE.
A summary of Piedmont’s interests in and consolidation treatment of its VIEs as of June 30, 2012 is as follows (net carrying amount in millions):

Entity
 
Piedmont’s
%
Ownership
of Entity
 
Related
Building
 
Consolidated/
Unconsolidated
 
Net Carrying
Amount as of
June 30,
2012
 
Net Carrying
Amount as of
December 31,
2011
 
Primary Beneficiary
Considerations
1201 Eye Street NW Associates, LLC
 
49.5%
 
1201 Eye Street
 
Consolidated
 
$
(4.9
)
 
$
(1.6
)
 
In accordance with the partnership’s governing documents, Piedmont is entitled to 100% of the cash flow of the entity and has sole discretion in directing the management and leasing activities of the building.
1225 Eye Street NW Associates, LLC
 
49.5%
 
1225 Eye Street
 
Consolidated
 
$
0.4

 
$
0.6

 
In accordance with the partnership’s governing documents, Piedmont is entitled to 100% of the cash flow of the entity and has sole discretion in directing the management and leasing activities of the building.
Wells REIT Multi-State Owner, LLC
 
100%
 
1200 Crown Colony Drive
 
Consolidated
 
$
31.9

 
$
28.0

 
In accordance with a tenant's lease, if Piedmont sells the property on or before March 2013, then the tenant would be entitled to an equity participation fee.
Piedmont 500 W. Monroe Fee, LLC
 
100%
 
500 W. Monroe
 
Consolidated
 
$
200.5

 
$
76.9

 
The Omnibus Agreement with the previous owner includes equity participation rights for the previous owner, if certain financial returns are achieved; however, Piedmont has sole decision making authority and is entitled to the economic benefits of the property until such returns are met.
Suwanee Gateway One, LLC
 
100%
 
Suwanee Gateway One
 
Consolidated
 
$
7.6

 
$
7.7

 
The fee agreement includes equity participation rights for the incentive manager, if certain returns on investment are achieved; however, Piedmont has sole decision making authority and is entitled to the economic benefits of the property until such returns are met.
Medici Atlanta, LLC
 
100%
 
The Medici
 
Consolidated
 
$
13.7

 
$
13.0

 
The fee agreement includes equity participation rights for the incentive manager, if certain returns on investment are achieved; however, Piedmont has sole decision making authority and is entitled to the economic benefits of the property until such returns are met.
400 TownPark, LLC
 
100%
 
400 TownPark
 
Consolidated
 
$
23.8

 
$
23.7

 
The fee agreement includes equity participation rights for the incentive manager, if certain returns on investment are achieved; however, Piedmont has sole decision making authority and is entitled to the economic benefits of the property until such returns are met.

Each of the VIEs described above has the sole purpose of holding office buildings and their resulting operations, and are classified in the accompanying consolidated balance sheets in the same manner as Piedmont’s wholly-owned properties.

8.Fair Value Measurement of Financial Instruments
Piedmont considers its cash, accounts receivable, notes receivable, restricted cash and escrows, accounts payable, interest rate swap agreements, and line of credit and notes payable to meet the definition of financial instruments. The following table sets forth the carrying and estimated fair value for each of Piedmont’s financial instruments as of June 30, 2012 and December 31, 2011 (in thousands):

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As of June 30, 2012
 
As of December 31, 2011
Financial Instrument
Carrying Value
 
Estimated Fair Value
 
Level Within Fair Value Hierarchy
 
Carrying Value
 
Estimated Fair Value
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents(1)
$
26,869

 
$
26,869

 
Level 1
 
$
139,690

 
$
139,690

Tenant and notes receivable, net(1)
$
153,615

 
$
153,615

 
Level 1
 
$
129,523

 
$
129,523

Restricted cash and escrows(1)
$
48,046

 
$
48,046

 
Level 1
 
$
9,039

 
$
9,039

Liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable(1)
$
18,147

 
$
18,147

 
Level 1
 
$
14,637

 
$
14,637

Interest rate swap agreements 
$
6,922

 
$
6,922

 
Level 2
 
$
2,537

 
$
2,537

Line of credit and notes payable 
$
1,400,525

 
$
1,458,680

 
Level 2
 
$
1,472,525

 
$
1,529,811


(1) 
For the periods presented, the carrying value approximates estimated fair value due to its short-term maturity.

Piedmont's line of credit and notes payable are carried at book value as of June 30, 2012; however, Piedmont's estimate of their fair value is disclosed in the table above. Piedmont uses widely accepted valuation techniques including discounted cash flow analysis based on the contractual terms of the debt facilities, including the period to maturity of each instrument, and uses observable market-based inputs for similar debt facilities which have transacted recently in the market. Therefore, the fair values determined are considered to be based on significant other observable inputs (Level 2). Scaling adjustments are made to these inputs to make them applicable to the remaining life of Piedmont's outstanding debt. Piedmont has not changed its valuation technique for estimating the fair value of its line of credit and notes payable.

Piedmont’s interest rate swap agreements discussed in Note 6 above were classified as “Interest rate swap” liabilities in the accompanying consolidated balance sheets and carried at fair value as of June 30, 2012, and December 31, 2011. The valuation of these derivative instruments was determined using widely accepted valuation techniques including discounted cash flow analysis based on the contractual terms of the derivatives, including the period to maturity of each instrument, and uses observable market-based inputs, including interest rate curves and implied volatilities. Therefore, the fair values determined are considered to be based on significant other observable inputs (Level 2). In addition, Piedmont considered both its own and the respective counterparties’ risk of nonperformance in determining the fair value of its derivative financial instruments by estimating the current and potential future exposure under the derivative financial instruments that both Piedmont and the counterparties were at risk for as of the valuation date. The credit risk of Piedmont and its counterparties was factored into the calculation of the estimated fair value of the interest rate swaps; however, as of June 30, 2012 and December 31, 2011, this credit valuation adjustment did not comprise a material portion of the estimated fair value. Therefore, Piedmont believes that any unobservable inputs used to determine the fair values of its derivative financial instruments are not significant to the fair value measurements in their entirety, and does not consider any of its derivative financial instruments to be Level 3 liabilities.

9.Commitments and Contingencies

Commitments Under Existing Agreements

Certain lease agreements include provisions that, at the option of the tenant, may obligate Piedmont to provide funding for capital improvements. Under its existing lease agreements, Piedmont may be required to fund significant tenant improvements, leasing commissions, and building improvements. In addition, certain agreements contain provisions that require Piedmont to issue corporate or property guarantees to provide funding for capital improvements or other financial obligations. As of June 30, 2012, Piedmont anticipates funding approximately $136.0 million in potential obligations for tenant improvements related to its existing lease portfolio over the respective lease terms, the majority of which Piedmont estimates may be required to be funded over the next several years. For most of Piedmont’s leases, the timing of the actual funding of these tenant improvements is largely dependent upon tenant requests for reimbursement. In some cases, these obligations may expire with the leases without further recourse to Piedmont.

Contingencies Related to Tenant Audits/Disputes

Certain lease agreements include provisions that grant tenants the right to engage independent auditors to audit their annual operating expense reconciliations. Such audits may result in the re-interpretation of language in the lease agreements which could result in the refund of previously recognized tenant reimbursement revenues, resulting in financial loss to Piedmont. Piedmont

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recorded additional reserves related to such tenant audits/disputes of approximately $0 and $0.1 million during the three months ended June 30, 2012 and June 30, 2011, respectively, and approximately $0 and $0.1 million during the six months ended June 30, 2012 and June 30, 2011, respectively.

Letters of Credit

As of June 30, 2012, Piedmont was subject to the following letters of credit, which reduce the total outstanding capacity under its $500 Million Unsecured Facility:

Amount
 
Expiration of Letter of Credit (1)
$
382,556

 
December 2012
$
13,971,344

 
February 2013
$
9,033,164

 
July 2013

(1) 
These letter of credit agreements automatically renew for consecutive, one-year periods each anniversary, subject to the satisfaction of the credit obligation and certain other limitations.
Assertion of Legal Action
Piedmont is currently party to two separate lawsuits, where one of the lead plaintiffs in each lawsuit is the same stockholder. The first suit was filed in March 2007, and, in general, alleges inadequate disclosures pursuant to the federal securities laws against Piedmont’s officers, directors, and advisors in connection with the transaction to internalize its management function and become a self-managed entity. The suit originally contained thirteen counts; however, twelve of those counts have subsequently been dismissed. The suit has been removed from the court's trial calendar pending a ruling on defendants' motion for summary judgment, and, if necessary, a request for interlocutory appellate review of rulings made by the court. Piedmont believes that plaintiff's remaining allegation is without merit and intends to continue to vigorously defend this action; however, due to the uncertainties inherent in any litigation, Piedmont has determined that the risk of material loss associated with this lawsuit is reasonably possible. The plaintiff has claimed damages of approximately $159 million plus pre-judgment interest, which defendants dispute. There are a number of defendants in this case and the allocation of damages, if any, between Piedmont and any other defendants (including any indemnification rights or obligations of Piedmont with respect to the other defendants) is indeterminable at this time. Additionally, up to $12.3 million of such potential damages may be recoverable by Piedmont under its insurance policies. Therefore, Piedmont estimates the range of gross reasonably possible loss (without regard to allocations or insurance recoveries) associated with this claim to be $0 to $159 million plus pre-judgment interest.
The second lawsuit was filed in October 2007 and originally alleged four counts, including inadequate disclosures pursuant to the federal securities laws. To date, the court has dismissed two of the four counts in their entirety and has dismissed portions of the remaining two counts. On April 11, 2011, the Eleventh Circuit Court of Appeals invalidated the district court’s order certifying a class and remanded the case to the district court for further proceedings. Piedmont believes that plaintiffs' allegations are without merit, and intends to continue to vigorously defend this action. Due to the uncertainties inherent in any litigation process, Piedmont's assessment of the merits of the case notwithstanding, the risk of material financial loss does exist; however, given that a class has not yet been established, Piedmont's current assessment of the risk of material financial loss associated with this case is that it is remote. Such assessment is subject to change in future periods as additional legal rulings are made by the court.
Please refer to Part II. Item 1 “Legal Proceedings” for a complete description of the chronology of the two lawsuits.

10.Discontinued Operations

Piedmont has classified the results of operations related to the following properties as discontinued operations (in thousands):

Building(s) Sold
 
Location
 
Date of Sale
 
Gain/(Loss) on Sale
 
Net Sales Proceeds
Eastpointe Corporate Center
 
Issaquah, Washington
 
July 1, 2011
 
$
12,152

 
$
31,704

5000 Corporate Court
 
Holtsville, New York
 
August 31, 2011
 
$
14,367

 
$
36,100

35 West Wacker Drive(1)
 
Chicago, Illinois
 
December 15, 2011
 
$
96,138

 
$
223,981

Portland Portfolio(2)
 
Beaverton, Oregon
 
March 19, 2012
 
$
17,823

 
$
24,831

26200 Enterprise Way
 
Lake Forest, California
 
May 31, 2012
 
$
10,015

 
$
24,413



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(1) 
Piedmont sold its approximate 96.5% ownership in the property. Transaction data above is presented at Piedmont's ownership percentage.
(2) 
The Portland Portfolio consists of four office properties known as the Deschutes building, the Rhein building, the Rogue building, and the Willamette building, as well as 18.19 acres of adjoining, undeveloped land, As part of the transaction, Piedmont accepted an unsecured promissory note from the buyer for the remaining $19.0 million owed on the sale at a rate of 8.73% and a maturity date of October 31, 2012.

Income from Discontinued Operations

The details comprising income from discontinued operations are presented below (in thousands):

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Revenues:
 
 
 
 
 
 
 
Rental income
$
313

 
$
10,002

 
$
1,586

 
$
20,001

Tenant reimbursements
64

 
5,516

 
318

 
11,126

 
377

 
15,518

 
1,904

 
31,127

Expenses:
 
 
 
 
 
 
 
Property operating costs
69

 
6,402

 
214

 
12,760

Depreciation
43

 
2,045

 
280

 
4,106

Amortization of deferred leasing costs
20

 
1,805

 
77

 
3,607

General and administrative expenses
5

 
23

 
8

 
40

 
137

 
10,275

 
579

 
20,513

Other income (expense):
 
 


 
 
 
 
Interest expense
—

 
(1,551
)
 
—

 
(3,085
)
Interest and other expense


 
(15
)
 
—

 
(15
)
Net income attributable to noncontrolling interest
—

 
(117
)
 
—

 
(235
)
 
—

 
(1,683
)
 
—

 
(3,335
)
Operating income, excluding gain on sale
240

 
3,560

 
1,325

 
7,279

Gain on sale of real estate assets
10,008

 
—

 
27,838

 
—

Income from discontinued operations
$
10,248

 
$
3,560

 
$
29,163

 
$
7,279


11.Stock Based Compensation
Deferred Stock Awards

Piedmont has granted deferred stock awards in the form of restricted stock to its employees. The awards are determined by the Compensation Committee of the board of directors of Piedmont on an annual basis and typically vest over a three-year period beginning on the grant date. In addition, Piedmont has adopted a multi-year performance share program for certain of its employees. Restricted shares are earned based on the relative performance of Piedmont's total stockholder return as compared with a predetermined peer group's total stockholder return over a three-year period. Typically, shares are not awarded until the end of the third year in the performance period and vest immediately upon award; however, the inaugural performance share program, which covers the fiscal 2010-2012 performance period, contains three interim performance periods whereby shares may be awarded.

A rollforward of Piedmont's deferred stock award activity for the six months ended June 30, 2012 is as follows:

 
Unvested Deferred Stock Awards as of January 1, 2012
 
Deferred Stock Awards Granted During Six Months Ended June 30, 2012
 
Adjustment to Estimated Future Grants of Performance Share Awards During Six Months Ended June 30, 2012
 
Deferred Stock Awards Vested During Six Months Ended June 30, 2012
 
Deferred Stock Awards Forfeited During Six Months Ended June 30, 2012
 
Unvested Deferred Stock Awards as of
June 30, 2012
Shares
511,203

 
202,629

 
(162,107
)
 
(248,633
)
 
(4,185
)
 
298,907

Weighted-Average Grant Date Fair Value (per share)
$
21.67

 
$
17.49

 
$
23.72

 
$
20.97

 
$
18.82

 
$
18.35


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A detail of Piedmont’s outstanding employee deferred stock awards as of June 30, 2012 is as follows:

Date of grant
 
Type of Award
 
Net Shares
Granted (1)
 
Grant
Date Fair
Value
 
Vesting Schedule
 
Unvested Shares as of
June 30, 2012
 
May 11, 2010
 
Fiscal Year 2010-2012 Performance Share Program
 
56,875

(2) 
$
28.44

 
Shares vest immediately upon determination of award in 2012 and 2013.
 
2,633

(3) 
May 24, 2010
 
Annual Deferred Stock Award
 
161,148

 
$
18.71

 
Of the shares granted, 25% vested on the date of grant, and 25% vested or will vest on May 24, 2011, 2012, and 2013, respectively.
 
53,125

 
May 24, 2010
 
One-Time Special Deferred Stock Award in Recognition of Piedmont's Initial Public Offering
 
40,085

 
$
18.71

 
Of the shares granted, 33.33% vested or will vest on May 24, 2011, 2012, and 2013, respectively.
 
17,457

 
April 5, 2011
 
Annual Deferred Stock Award
 
128,986

 
$
19.40

 
Of the shares granted, 25% vested on the date of grant, and 25% vested or will vest on April 5, 2012, 2013, and 2014, respectively.
 
75,102

 
April 5, 2011
 
Fiscal Year 2011-2013 Performance Share Program
 
—

 
$
18.27

 
Shares vest immediately upon determination of award in 2014.
 
—

(3) 
April 4, 2012
 
Annual Deferred Stock Award
 
185,782

 
$
17.49

 
Of the shares granted, 25% vested on the date of grant, and 25% will vest on April 4, 2013, 2014, and 2015, respectively.
 
150,590

 
April 4, 2012
 
Fiscal Year 2012-2014 Performance Share Program
 
—

 
$
17.42

 
Shares vest immediately upon determination of award in 2015.
 
—

(3) 
Total
 
 
 
 
 
 
 
 
 
298,907

 

(1) 
Amounts reflect the total grant, net of shares surrendered upon vesting to satisfy required minimum tax withholding obligations through June 30, 2012.
(2) 
Represents net shares granted at the end of the first and second interim performance periods ended December 31, 2010 and 2011, respectively.
(3) 
Estimated based on Piedmont's cumulative total stockholder return for the respective performance period through June 30, 2012. Such estimates are subject to change in future periods based on both Piedmont's and its peers' stock performance and dividends paid.

During the three months ended June 30, 2012 and 2011, respectively, Piedmont recognized approximately $1.9 million and $2.7 million of compensation expense related to stock awards, of which $0.6 million and $1.5 million related to the amortization of nonvested shares, respectively. During the six months ended June 30, 2012 and 2011, respectively, Piedmont recognized approximately $2.2 million and $3.7 million of compensation expense related to stock awards, of which $1.0 million and $2.5 million relates to the amortization of nonvested shares, respectively. During the six months ended June 30, 2012, a total of 177,285 shares were issued to employees, directors, and officers. As of June 30, 2012, approximately $3.3 million of unrecognized compensation cost related to nonvested, share-based compensation remained, which Piedmont will record in its consolidated statements of income over a weighted-average vesting period of approximately one year.

12.Earnings Per Share

There are no adjustments to “Net income attributable to Piedmont” or “Income from continuing operations” for the diluted earnings per share computations.

Net income per share-basic is calculated as net income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Net income per share-diluted is calculated as net income available to common stockholders divided by the diluted weighted average number of common shares outstanding during the period, including nonvested

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restricted stock. Diluted weighted average number of common shares is calculated to reflect the potential dilution under the treasury stock method that would occur as if the remaining unvested restricted stock awards has vested and resulted in additional common shares outstanding.

The following table reconciles the denominator for the basic and diluted earnings per share computations shown on the consolidated statements of income for the three and six months ended June 30, 2012 and 2011, respectively:

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Weighted-average common shares – basic
172,077
 
172,780
 
172,354
 
172,720
Plus incremental weighted-average shares from time-vested conversions:
 
 
 
 
 
 
 
Restricted stock awards
132
 
206
 
166
 
188
Weighted-average common shares – diluted
172,209
 
172,986
 
172,520
 
172,908

13.Subsequent Events

Third Quarter Dividend Declaration

On August 1, 2012, the board of directors of Piedmont declared dividends for the third quarter of 2012 in the amount of $0.20 per common share outstanding to stockholders of record as of the close of business on August 31, 2012. Such dividends are to be paid on September 21, 2012.



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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, 2011.

Liquidity and Capital Resources
We intend to use cash flows generated from the operation of our wholly-owned properties, distributions from our joint ventures, proceeds from selective property dispositions, and proceeds from our $500 Million Unsecured Facility as our primary sources of immediate liquidity. As of June 30, 2012 approximately $47.7 million of net sales proceeds related to the tax deferred exchange of certain real estate assets under Section 1031 of the Internal Revenue Code (“IRC”) was held in escrow pending the acquisition of replacement properties. If suitable replacement properties are not identified within the requisite time frame allowed under the IRC, these proceeds will be returned to the Company as unrestricted cash and become immediately available to fund expenditures. Our $500 Million Unsecured Facility is scheduled to expire on August 30, 2012, and we anticipate closing on a comparable replacement facility prior to August 30, 2012. Any amounts outstanding on the current facility will be transferred to the replacement facility at closing. Depending on the timing and volume of our property acquisition and disposition activities, we may also seek other financing opportunities (such as issuance of additional equity or debt securities or additional borrowings from third-party lenders) afforded to us based on our relatively low leverage and quality asset base as additional sources of capital; however, the availability and attractiveness of terms for these sources of capital is highly dependent on market conditions. As of the time of this filing, we had $153.0 million outstanding under our $500 Million Unsecured Facility. As a result, we had approximately $323.6 million under this facility available for future borrowing (approximately $23.4 million of capacity is reserved as security for outstanding letters of credit required by various third parties).
We estimate that our most immediate 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 any of our various properties and (ii) tenant improvement allowances and leasing commissions negotiated as part of executed leases with our tenants. Both the timing and magnitude of general repair and maintenance projects are subject to our discretion. We anticipate funding approximately $136.0 million in unrecorded contractual obligations for tenant improvements related to our existing lease portfolio over the respective lease term, the majority of which we estimate may be required to be funded over the next several years. For many of our leases, the timing of the actual funding of these tenant improvements is largely dependent upon tenant requests for reimbursement. In some cases, these obligations may expire with the respective lease, without further recourse to us. We also anticipate funding certain tenant improvements and leasing commissions related to anticipated re-leasing efforts for several of our large tenants as they approach their lease expiration dates in the next few years. Both the timing and magnitude of these amounts are subject to change as competitive market conditions at the time of lease negotiations dictate.
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. Further, given that the Company's board believes our common stock is trading at a discount to the estimated fair value of our net assets, our board of directors has authorized the use of up to $300 million for the repurchase of our common stock through November 2013. Through June 30, 2012 (including repurchases made in December 2011), we have expended approximately $46.2 million under the stock repurchase program (including transactions fees) and may continue to make additional purchases as market conditions warrant.
On a longer term basis, we expect to use funds to make scheduled debt service payments and/or debt repayments when such obligations become due. After the $500 Million Unsecured Facility is replaced in August 2012, we will have no other pending debt maturities until 2014.
Our primary focus is to achieve an attractive long-term, risk-adjusted return for our stockholders. Competition to attract and retain high-credit-quality tenants remains intense due to general economic conditions. At the same time, several large leases at our properties expired in the past year or are scheduled to expire over the next eighteen months. In some cases we have had to accept lower market driven rental rates and grant larger tenant improvement packages to renew leases or secure new tenants than a stronger economic climate might have produced. The sale of the 35 West Wacker Drive building in Chicago, Illinois during the fourth quarter of 2011, the commencement of certain recently executed leases with lower rental rates and the downtime we are experiencing while re-tenanting certain properties has put pressure on 2012 cash flow. As a result, our board of directors lowered our quarterly dividend beginning with the first quarter of 2012 to $0.20 per share, or $0.80 per share on an annualized basis.

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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 for the three months ended June 30, 2012 increased as compared to the prior period primarily due to a decrease in general and administrative expense driven by decreased legal expenses and the recognition of a tax benefit associated with the successful appeal of a prior period franchise tax during the current quarter. Although total revenues increased due to rental income associated with properties acquired or new leases commenced subsequent to July 1, 2011, such increases were partially offset by reductions in leased space at some of our existing properties, reimbursement income, and lease termination income during the current period. Additionally, we recognized lower interest expense in the current period due to the payoff of three secured notes totaling $230 million over the last eight months.

Comparison of the three months ended June 30, 2012 versus the three months ended June 30, 2011

The following table sets forth selected data from our consolidated statements of income for the three months ended June 30, 2012 and 2011, respectively, as well as each balance as a percentage of total revenues for the same periods presented (dollars in millions):

 
June 30,
2012
 
%
 
June 30,
2011
 
%
 
$
Increase
(Decrease)
Revenue:
 
 
 
 
 
 
 
 
 
Rental income
$
106.0

 
 
 
$
103.2

 
 
 
$
2.8

Tenant reimbursements
27.0

 
 
 
30.6

 
 
 
(3.6
)
Property management fee revenue
0.6

 
 
 
0.4

 
 
 
0.2

Other rental income
0.1

 
 
 
1.3

 
 
 
(1.2
)
Total revenues
133.7

 
100
 %
 
135.5

 
100
 %
 
(1.8
)
Expense:
 
 
 
 
 
 
 
 
 
Property operating costs
53.7

 
40
 %
 
53.0

 
39
 %
 
0.7

Depreciation
27.8

 
20
 %
 
25.7

 
19
 %
 
2.1

Amortization
11.5

 
9
 %
 
14.0

 
10
 %
 
(2.5
)
General and administrative expense
4.8

 
4
 %
 
7.3

 
6
 %
 
(2.5
)
Real estate operating income
35.9

 
27
 %
 
35.5

 
26
 %
 
0.4

Other income (expense):
 
 
 
 
 
 
 
 
 
Interest expense
(15.9
)
 
(12
)%
 
(17.7
)
 
(13
)%
 
1.8

Interest and other income
0.3

 
—
 %
 
(0.2
)
 
—
 %
 
0.5

Equity in income of unconsolidated joint ventures
0.2

 
—
 %
 
0.3

 
—
 %
 
(0.1
)
Gain on consolidation of variable interest entity
—

 
—
 %
 
(0.4
)
 
—
 %
 
0.4

Income from continuing operations
$
20.5

 
15
 %
 
$
17.5

 
13
 %
 
$
3.0

Income from discontinued operations
$
10.2

 
 
 
$
3.6

 
 
 
$
6.6


Continuing Operations

Revenue

Rental income increased from approximately $103.2 million for the three months ended June 30, 2011 to approximately $106.0 million for the three months ended June 30, 2012. Approximately $2.6 million of the increase is attributable to properties acquired

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subsequent to March 31, 2011. Additionally, new leases commenced at our Piedmont Pointe I and II buildings in Bethesda, Maryland in late 2011 and at our 1075 West Entrance Drive building in Auburn Hills, Michigan in July 2011.

Tenant reimbursements decreased from approximately $30.6 million for the three months ended June 30, 2011 to approximately $27.0 million for the three months ended June 30, 2012. Approximately $1.7 million of the decrease relates to lease expirations at our 200 Bridgewater Crossing building in Bridgewater, New Jersey and our Windy Point II building in Schaumburg, Illinois. Additionally, approximately $0.7 million relates to an expiration of a large tenant at our Aon Center building in Chicago, Illinois in December 2011, although a portion of this space has already been re-leased. The remainder of the decrease is primarily due to new leases commencing subsequent to March 2011 which provide for gross abated rents into 2012 (including short-term relief from both rental revenue and operating expense reimbursements).

Other rental income is comprised primarily of income recognized for lease terminations and restructurings. Unlike the majority of our rental income, which is recognized ratably over long-term contracts, lease termination fee income in other rental income is recognized once we have completed our obligation to provide space to the tenant. Lease termination fee income for the three months ended June 30, 2011 of approximately $1.3 million related primarily to lease contractions/terminations at the US Bancorp building in Minneapolis, Minnesota and the Crescent Ridge II building in Minnetonka, Minnesota. We do not expect such income to be comparable in future periods, as it will be dependent upon the exercise of lease terminations by tenants and/or the execution of restructuring agreements that may not be in our control or are deemed by management to be in the best interest of the portfolio over the long term.

Expense

Property operating costs increased approximately $0.7 million for the three months ended June 30, 2012 compared to the same period in the prior year primarily attributable to properties acquired subsequent to March 31, 2011.

Depreciation expense increased approximately $2.1 million for the three months ended June 30, 2012 compared to the same period in the prior year. The variance is largely attributable to depreciation on additional tenant improvements subsequent to June 30, 2011 which contributed approximately $1.4 million of the increase. The remainder of the increase is due to new properties acquired subsequent to March 31, 2011.

Amortization expense decreased approximately $2.5 million for the three months ended June 30, 2012 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 portfolio of properties subsequent to June 30, 2011.

General and administrative expenses decreased approximately $2.5 million for the three months ended June 30, 2012 compared to the same period in the prior year. The decrease is primarily attributable to recoveries in excess of current period billings from our insurance carriers related to our ongoing litigation defense, as well as lower costs associated with our deferred stock compensation plan in the current period. Additionally, we recognized a reduction in state and local tax expense in the current period of approximately $0.5 million related to the successful appeal of a prior year franchise tax.

Other Income (Expense)

Interest expense decreased approximately $1.8 million for the three months ended June 30, 2012 compared to the same period in the prior year. The decrease is mainly attributable to paying off the $45.0 Million 500 W. Monroe Mezzanine I Loan in November 2011, the $140.0 million 500 W. Monroe Mortgage Loan in January 2012 and to a lesser extent, the $45.0 million 4250 North Fairfax note in May 2012.

Interest and other income increased approximately $0.5 million for the three months ended June 30, 2012 compared to the same period in the prior year. The increase reflects higher interest income in the current period related to interest earned on a $19.0 million note receivable originated as part of the sale of the Deschutes building, the Rhein building, the Rogue building, the Willamette building, and 18.19 acres of adjoining, undeveloped land in Beaverton, Oregon (collectively the "Portland Portfolio") in March 2012.

Income from continuing operations per share on a fully diluted basis increased from $0.10 for the three months ended June 30, 2011 to $0.12 for the three months ended June 30, 2012, primarily due to higher rental income related to new acquisitions, lower general and administrative costs, and lower debt service costs. These favorable variances were offset in the current period by a decrease in tenant reimbursements.


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Discontinued Operations

In accordance with GAAP, the operations of the Eastpointe Corporate Center in Issaquah, Washington, the 5000 Corporate Court building in Holtsville, New York, the 35 West Wacker Drive building, the Portland Portfolio, and the 26200 Enterprise Way building in Lake Forest, California are classified as discontinued operations for all periods presented. Income from discontinued operations increased approximately $6.6 million for the three months ended June 30, 2012 compared to the same period in the prior year primarily due to the gain realized on the sale of the 26200 Enterprise Way building for approximately $10.0 million. We do not expect that income from discontinued operations will be comparable to future periods, as such income is subject to the timing and existence of future property dispositions.

Comparison of the six months ended June 30, 2012 versus the six months ended June 30, 2011

The following table sets forth selected data from our consolidated statements of income for the six months ended June 30, 2012 and 2011, respectively, as well as each balance as a percentage of total revenues for the same periods presented (dollars in millions):

 
June 30,
2012
 
%
 
June 30,
2011
 
%
 
$
Increase
(Decrease)
Revenue:
 
 
 
 
 
 
 
 
 
Rental income
$
211.3

 
 
 
$
203.0

 
 
 
$
8.3

Tenant reimbursements
53.7

 
 
 
57.5

 
 
 
(3.8
)
Property management fee revenue
1.2

 
 
 
1.2

 
 
 
—

Other rental income
0.2

 
 
 
4.8

 
 
 
(4.6
)
Total revenues
266.4

 
100
 %
 
266.5

 
100
 %
 
(0.1
)
Expense:
 
 
 
 
 
 
 
 
 
Property operating costs
106.4

 
40
 %
 
101.7

 
38
 %
 
4.7

Depreciation
55.2

 
20
 %
 
50.7

 
19
 %
 
4.5

Amortization
24.2

 
9
 %
 
24.3

 
9
 %
 
(0.1
)
General and administrative expense
10.1

 
4
 %
 
14.0

 
5
 %
 
(3.9
)
Real estate operating income
70.5

 
27
 %
 
75.8

 
29
 %
 
(5.3
)
Other income (expense):
 
 
 
 
 
 
 
 
 
Interest expense
(32.5
)
 
(12
)%
 
(33.4
)
 
(13
)%
 
0.9

Interest and other income
0.4

 
—
 %
 
3.2

 
1
 %
 
(2.8
)
Equity in income of unconsolidated joint ventures
0.4

 
—
 %
 
0.6

 
—
 %
 
(0.2
)
Gain on consolidation of variable interest entity
—

 
—
 %
 
1.5

 
1
 %
 
(1.5
)
Income from continuing operations
$
38.8

 
15
 %
 
$
47.7

 
18
 %
 
$
(8.9
)
Income from discontinued operations
$
29.2

 
 
 
$
7.3

 
 
 
$
21.9


Continuing Operations
Revenue
Rental income increased from approximately $203.0 million for the six months ended June 30, 2011 to approximately $211.3 million for the six months ended June 30, 2012. Approximately $11.7 million of the variance is due to properties acquired subsequent to January 1, 2011. Additionally, new leases commenced at our Piedmont Pointe I and II buildings in late 2011 and at our 1075 West Entrance Drive building in July 2011. However, these increases were partially offset by a reduction in leased space due to lease expirations at various properties (primarily at our 200 Bridgewater Crossing building and our Windy Point II building). During June 2012, we executed a new lease for approximately one-third of the 200 Bridgewater Crossing building which will commence in first quarter 2013.

Tenant reimbursements decreased from approximately $57.5 million for the six months ended June 30, 2011 to approximately $53.7 million for the six months ended June 30, 2012. Approximately $3.0 million of the decrease coincides with the lease expirations noted above at the 200 Bridgewater Crossing building, the Windy Point II building, and the Crescent Ridge II building subsequent to January 1, 2011. Additionally, approximately $1.0 million of the decrease is due to new leases commencing in late 2011 at our US Bancorp building which provide for gross abated rents into 2012 (including short-term relief from both rental revenue and operating expense reimbursements).

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Other rental income is comprised primarily of income recognized for lease terminations and restructurings. Unlike the majority of our rental income, which is recognized ratably over long-term contracts, other rental income is recognized once we have completed our obligation to provide space to the tenant. Lease termination fee income for the six months ended June 30, 2011 of approximately $4.8 million primarily relate to leases terminated or contracted at the 1201 and 1225 Eye Street buildings in Washington, D.C., the US Bancorp building, and the 1075 West Entrance building. We do not expect such income to be comparable in future periods, as it will be dependent upon the exercise of lease terminations by tenants and/or the execution of restructuring agreements that may not be in our control or are deemed by management to be in the best interest of the portfolio over the long term.
Expense
Property operating costs increased approximately $4.7 million for the six months ended June 30, 2012 compared to the same period in the prior year primarily due to properties acquired subsequent to January 1, 2011.
Depreciation expense increased approximately $4.5 million for the six months ended June 30, 2012 compared to the same period in the prior year. The variance is largely attributable to depreciation on additional tenant improvements subsequent to January 1, 2011, providing approximately $3.5 million of the increase. The remainder of the increase is due to properties acquired subsequent to January 1, 2011.
General and administrative expenses decreased approximately $3.9 million for the six months ended June 30, 2012 compared to the same period in the prior year. The decrease is primarily attributable to recoveries in excess of current period billings from our insurance carriers related to our ongoing litigation defense, as well as lower costs associated with our deferred stock compensation plan in the current period, totaling approximately $2.8 million. Additionally, we recognized a reduction in state and local tax expense in the current period related to the receipt of amounts owed from a prior year amended return.
Other Income (Expense)
Interest expense decreased approximately $0.9 million for the six months ended June 30, 2012 compared to the same period in the prior year primarily due to the repayment of the $45.0 Million 500 W. Monroe Mezzanine I Loan in November 2011 and the $140.0 million 500 W. Monroe Mortgage Loan in January 2012. However, in November 2011, we entered into a new $300 Million Unsecured Term Loan which had an effectively fixed interest rate, through interest rate swap agreements, of 2.69% compared to the previous $250 Million Unsecured Term Loan, which carried an effectively fixed rate of 2.36%, and matured in June 2011. The higher interest rate on the new debt, coupled with the higher outstanding balance, resulted in the recognition of increased interest expense in the current period, partially offsetting the effect of the loan pay-offs noted above.
Interest and other income decreased approximately $2.8 million for the six months ended June 30, 2012 compared to the same period in the prior year. The decrease reflects the recognition in the prior period of approximately $2.6 million of previously deferred property operating income upon consolidation of the 500 W. Monroe building.
The approximate $1.5 million gain on the consolidation of our VIE recognized during the six months ended June 30, 2011 is the net result of recording the estimated fair value of the net assets associated with taking ownership of the 500 W. Monroe building through foreclosure.
Income from continuing operations per share on a fully diluted basis decreased from $0.28 for the six months ended June 30, 2011 to $0.22 for the six months ended June 30, 2012 primarily due to the increase in property operating costs and depreciation expense associated with properties acquired subsequent to January 1, 2011. Although rental and reimbursement income increased due to properties acquired subsequent to January 1, 2011, such increases were partially offset by reductions in leased space or reimbursement abatements at some of our existing properties during the same period. The decrease in continuing operations per share is also due to the non-recurring, one time increases in other income in the prior year: the recognition of (a) a non-cash gain of approximately $1.5 million upon consolidation of the VIE containing the 500 W. Monroe building, (b) approximately $2.6 million of previously deferred property operating income upon consolidation of the 500 W. Monroe building, and (c) other rental income of approximately $4.8 million due to lease terminations and restructurings.
Discontinued Operations
In accordance with GAAP, the operations of the Eastpointe Corporate Center, the 5000 Corporate Court building, the 35 West Wacker Drive building, the Portland Portfolio, and the 26200 Enterprise Way building are classified as discontinued operations for all periods presented. Income from discontinued operations increased approximately $21.9 million for the six months ended June 30, 2012 compared to the same period in the prior year. We realized gains on the sales of our Portland Portfolio and our 26200 Enterprise Way building of approximately $27.8 million during the current period, which were offset by the lack of operational activity in the current period at the 35 West Wacker Drive building, Eastpointe Corporate Center or the 5000 Corporate Court building, as these properties were sold in 2011. We do not expect that income from discontinued operations will be comparable to future periods, as such income is subject to the timing and existence of future property dispositions.



24
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Funds From Operations (“FFO”), Core FFO, and Adjusted Funds from Operations (“AFFO”)

Net income calculated in accordance with GAAP is the starting point for calculating FFO, Core FFO, and AFFO. FFO, Core FFO, and AFFO are non-GAAP financial measures and should not be viewed as an alternative measurement of our operating performance to net income. Management believes that accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. As a result, we believe that the use of FFO, Core FFO, and AFFO, together with the required GAAP presentation, provides a more complete understanding of our performance relative to our competitors and a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities.

We calculate FFO in accordance with the current NAREIT definition as follows: Net income (computed in accordance with GAAP), excluding gains or losses from sales of property and impairment charges (including our proportionate share of any impairment charges and/or gains or losses from sales of property related to investments in unconsolidated joint ventures), plus depreciation and amortization on real estate assets (including our proportionate share of depreciation and amortization related to investments in unconsolidated joint ventures). Other REITs may not define FFO in accordance with the NAREIT definition, or may interpret the current NAREIT definition differently than we do; therefore, our computation of FFO may not be comparable to such other REITs.

We calculate Core FFO as FFO (calculated as set forth above) less acquisition costs and other significant, non-recurring items, such as a gain on early extinguishment of debt.

We calculate AFFO as Core FFO (calculated as set forth above) exclusive of the net effects of: (i) amortization associated with deferred financing costs; (ii) depreciation of non real estate assets; (iii) straight-line lease revenue/expense; (iv) amortization of above and below-market lease intangibles; (v) stock-based and other non-cash compensation expense; (vi) amortization of mezzanine discount income; (vii) acquisition costs, and (viii) non-incremental capital expenditures (as defined below). Our proportionate share of such adjustments related to investments in unconsolidated joint ventures are also included when calculating AFFO.

Reconciliations of net income to FFO, Core FFO, and AFFO are presented below (in thousands except per share amounts):

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Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
Per
Share (1)
 
2011
 
Per
Share(1)
 
2012
 
Per
Share(1)
 
2011
 
Per
Share(1)
Net income attributable to Piedmont
$
30,708

 
$
0.18

 
$
21,027

 
$
0.12

 
$
67,935

 
$
0.39

 
$
54,994

 
$
0.32

Depreciation of real assets (2)
28,033

 
0.16

 
27,879

 
0.17

 
55,842

 
0.33

 
55,033

 
0.32

Amortization of lease-related costs (2)
11,539

 
0.07

 
15,878

 
0.09

 
24,379

 
0.14

 
27,984

 
0.16

Gain on consolidation of VIE
—

 
—

 
388

 
—

 
—

 
—

 
(1,532
)
 
(0.01
)
Gain on sale- wholly-owned properties
(10,008
)
 
(0.06
)
 
—

 
—

 
(27,838
)
 
(0.16
)
 
—

 
—

Gain on sale- unconsolidated partnership
—

 
—

 
(45
)
 
—

 
—

 
—

 
(45
)
 
—

Funds From Operations
$
60,272

 
$
0.35

 
$
65,127

 
$
0.38

 
$
120,318

 
$
0.70

 
$
136,434

 
$
0.79

Adjustment: