PDM-9.30.13 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 September 30, 2013
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 October 30, 2013:
161,112,966 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.


2
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:
•
Market and economic conditions remain challenging and 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;
•
The success of our real estate strategies and investment objectives, including our ability to identify and consummate suitable acquisitions;
•
Acquisitions of properties may have unknown risks and other liabilities at the time of acquisition;
•
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 adversely 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;
•
We have significant indebtedness and may not be able to meet our debt service obligations;
•
Costs of complying with governmental laws and regulations;
•
Uncertainties associated with environmental and other regulatory matters;
•
Potential changes in political environment and reduction in federal and/or state funding of our governmental tenants;
•
We may 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, 2012, and the Risk Factors contained in Piedmont's Registration Statement on Form S-4 filed on June 4, 2013.
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, comprehensive income, 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, 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. Piedmont’s results of operations for the nine months ended September 30, 2013 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)
 
 
 
September 30,
2013
 
December 31,
2012
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
675,281

 
$
627,351

Buildings and improvements, less accumulated depreciation of $955,480 and $877,644 as of September 30, 2013 and December 31, 2012, respectively
3,049,905

 
2,891,323

Intangible lease assets, less accumulated amortization of $70,744 and $67,940 as of September 30, 2013 and December 31, 2012, respectively
66,870

 
54,744

Construction in progress
61,162

 
20,373

Real estate assets held for sale, net
19,734

 
18,941

Total real estate assets
3,872,952

 
3,612,732

Investments in unconsolidated joint ventures
18,668

 
37,226

Cash and cash equivalents
15,972

 
12,957

Tenant receivables, net of allowance for doubtful accounts of $306 and $346 as of September 30, 2013 and December 31, 2012, respectively
31,006

 
25,038

Straight-line rent receivables
135,487

 
121,506

Due from unconsolidated joint ventures
—

 
463

Restricted cash and escrows
385

 
334

Prepaid expenses and other assets
17,610

 
13,022

Goodwill
180,097

 
180,097

Interest rate swaps
19,192

 
1,075

Deferred financing costs, less accumulated amortization of $12,365 and $10,479 as of September 30, 2013 and December 31, 2012, respectively
7,990

 
6,454

Deferred lease costs, less accumulated amortization of $129,998 and $112,496 as of September 30, 2013 and December 31, 2012, respectively
275,234

 
243,178

Other assets held for sale, net
1,960

 
793

Total assets
$
4,576,553

 
$
4,254,875

Liabilities:
 
 
 
Unsecured debt
$
835,650

 
$
429,000

Secured debt
987,525

 
987,525

Accounts payable, accrued expenses, and accrued capital expenditures
159,675

 
127,263

Deferred income
26,575

 
21,552

Intangible lease liabilities, less accumulated amortization of $43,322 and $40,931 as of September 30, 2013 and December 31, 2012, respectively
41,435

 
40,805

Interest rate swaps
5,010

 
8,235

Total liabilities
2,055,870

 
1,614,380

Commitments and Contingencies
—

 
—

Stockholders’ Equity:
 
 
 
Shares-in-trust, 150,000,000 shares authorized; none outstanding as of September 30, 2013 or December 31, 2012
—

 
—

Preferred stock, no par value, 100,000,000 shares authorized; none outstanding as of September 30, 2013 or December 31, 2012
—

 
—

Common stock, $.01 par value, 750,000,000 shares authorized; 161,270,766 and 167,556,001 shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively
1,613

 
1,676

Additional paid-in capital
3,668,424

 
3,667,051

Cumulative distributions in excess of earnings
(1,165,794
)
 
(1,022,681
)
Other comprehensive income/(loss)
14,827

 
(7,160
)
Piedmont stockholders’ equity
2,519,070

 
2,638,886

Noncontrolling interest
1,613

 
1,609

Total stockholders’ equity
2,520,683

 
2,640,495

Total liabilities and stockholders’ equity
$
4,576,553

 
$
4,254,875

See accompanying notes

5
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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Revenues:
 
 
 
 
 
 
 
Rental income
$
116,810

 
$
104,948

 
$
333,855

 
$
312,007

Tenant reimbursements
27,418

 
27,132

 
77,168

 
80,290

Property management fee revenue
890

 
520

 
2,034

 
1,720

 
145,118

 
132,600

 
413,057

 
394,017

Expenses:
 
 
 
 
 
 
 
Property operating costs
58,767

 
50,483

 
164,420

 
154,568

Depreciation
30,785

 
27,921

 
90,688

 
81,721

Amortization
13,878

 
15,165

 
34,244

 
39,095

General and administrative
5,841

 
5,508

 
16,678

 
15,629

 
109,271

 
99,077

 
306,030

 
291,013

Real estate operating income
35,847

 
33,523

 
107,027

 
103,004

Other income (expense):
 
 
 
 
 
 
 
Interest expense
(19,331
)
 
(16,247
)
 
(53,932
)
 
(48,727
)
Interest and other income/(expense)
(611
)
 
383

 
(1,960
)
 
765

Litigation settlement recovery/(expense)
—

 
(7,500
)
 
1,250

 
(7,500
)
Net recoveries of casualty loss
3,919

 
—

 
6,061

 
—

Equity in income of unconsolidated joint ventures
46

 
323

 
604

 
739

Loss on consolidation
(898
)
 
—

 
(898
)
 
—

 
(16,875
)

(23,041
)
 
(48,875
)
 
(54,723
)
Income from continuing operations
18,972

 
10,482

 
58,152

 
48,281

Discontinued operations:
 
 
 
 
 
 
 
Operating income
128

 
607

 
1,109

 
2,914

Impairment loss
—

 
—

 
(6,402
)
 
—

Gain/(loss) on sale of real estate assets
—

 
(254
)
 
16,258

 
27,583

Income from discontinued operations
128

 
353

 
10,965

 
30,497

Net income
19,100

 
10,835

 
69,117

 
78,778

Less: Net income attributable to noncontrolling interest
(4
)
 
(4
)
 
(12
)
 
(12
)
Net income attributable to Piedmont
$
19,096

 
$
10,831

 
$
69,105

 
$
78,766

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

 
$
0.06

 
$
0.35

 
$
0.28

Income from discontinued operations
—

 
—

 
0.06

 
0.18

Net income available to common stockholders
$
0.12

 
$
0.06

 
$
0.41

 
$
0.46

Weighted-average common shares outstanding – basic
164,683,173

 
168,805,589

 
166,597,577

 
171,162,281

Weighted-average common shares outstanding – diluted
164,796,275

 
168,929,039

 
166,734,464

 
171,295,098

See accompanying notes.

6
Table of Contents


PIEDMONT OFFICE REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
 
(Unaudited)
 
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to Piedmont
 
 
$
19,096

 
 
 
$
10,831

 
 
 
$
69,105

 
 
 
$
78,766

Other comprehensive income/(loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective portion of gain/(loss) on derivative instruments that are designated and qualify as cash flow hedges (See Note 5)
(2,201
)
 
 
 
(2,756
)
 
 
 
19,659

 
 
 
(8,628
)
 
 
Plus: Reclassification of previously recorded loss included in net income (See Note 5)
783

 
 
 
762

 
 
 
2,328

 


 
2,249

 


Other comprehensive income/(loss)
 
 
(1,418
)
 
 
 
(1,994
)
 
 
 
21,987

 
 
 
(6,379
)
Comprehensive income attributable to Piedmont
 
 
$
17,678

 
 
 
$
8,837

 
 
 
$
91,092

 
 
 
$
72,387



See accompanying notes

7
Table of Contents

PIEDMONT OFFICE REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2012
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 (UNAUDITED)
(in thousands, except per share amounts)
 
 
Common  Stock
 
Additional
Paid-In
Capital
 
Cumulative
Distributions
in Excess of
Earnings
 
Other
Comprehensive
Income/(Loss)
 
Non-
controlling
Interest
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
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 an announced plan
(5,255
)
 
(52
)
 
—

 
(88,685
)
 
—

 
—

 
(88,737
)
Offering costs associated with the issuance of common stock
—

 
—

 
567

 
—

 
—

 
—

 
567

Dividends to common stockholders ($0.80 per share), distributions to noncontrolling interest, and dividends reinvested
—

 
—

 
(195
)
 
(136,168
)
 
—

 
(15
)
 
(136,378
)
Shares issued and amortized under the 2007 Omnibus Incentive Plan, net of tax
181

 
2

 
3,017

 
—

 
—

 
—

 
3,019

Net income attributable to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
15

 
15

Net income attributable to Piedmont
—

 
—

 
—

 
93,204

 
—

 
—

 
93,204

Other comprehensive loss
—

 
—

 
—

 
—

 
(4,623
)
 
—

 
(4,623
)
Balance, December 31, 2012
167,556

 
1,676

 
3,667,051

 
(1,022,681
)
 
(7,160
)
 
1,609

 
2,640,495

Share repurchases as part of an announced plan
(6,433
)
 
(64
)
 
—

 
(112,287
)
 
—

 
—

 
(112,351
)
Offering costs associated with the issuance of common stock
—

 
—

 
(91
)
 
—

 
—

 
—

 
(91
)
Dividends to common stockholders ($0.60 per share), distributions to noncontrolling interest, and dividends reinvested
—

 
—

 
(163
)
 
(99,931
)
 
—

 
(8
)
 
(100,102
)
Shares issued and amortized under the 2007 Omnibus Incentive Plan, net of tax
148

 
1

 
1,627

 
—

 
—

 
—

 
1,628

Net income attributable to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
12

 
12

Net income attributable to Piedmont
—

 
—

 
—

 
69,105

 
—

 
—

 
69,105

Other comprehensive income
—

 
—

 
—

 
—

 
21,987

 
—

 
21,987

Balance, September 30, 2013
161,271

 
$
1,613

 
$
3,668,424

 
$
(1,165,794
)
 
$
14,827

 
$
1,613

 
$
2,520,683



See accompanying notes

8
Table of Contents

PIEDMONT OFFICE REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) 
 
(Unaudited)
 
Nine Months Ended
 
September 30,
 
2013
 
2012
Cash Flows from Operating Activities:
 
 
 
Net income
$
69,117

 
$
78,778

Operating distributions received from unconsolidated joint ventures
1,475

 
1,805

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
91,376

 
84,100

Amortization of deferred financing costs
1,931

 
2,056

Settlement of forward starting interest rate swaps
672

 
—

Other amortization
34,384

 
38,895

Impairment loss on real estate assets
6,402

 
—

Stock compensation expense
1,489

 
1,492

Equity in income of unconsolidated joint ventures
(604
)
 
(740
)
Gain on sale of real estate assets, net
(16,258
)
 
(27,583
)
Loss on consolidation
898

 
—

Changes in assets and liabilities:
 
 
 
Increase in tenant receivables, net
(24,257
)
 
(15,358
)
Increase in restricted cash and escrows
(51
)
 
(13,813
)
Increase in prepaid expenses and other assets
(4,539
)
 
(3,335
)
Increase/(decrease) in accounts payable and accrued expenses
1,291

 
(483
)
Increase/(decrease) in deferred income
5,022

 
(3,211
)
Net cash provided by operating activities
168,348

 
142,603

Cash Flows from Investing Activities:
 
 
 
Acquisition of real estate assets and related intangibles
(250,127
)
 
(2,500
)
Capitalized expenditures, net of accruals
(112,486
)
 
(71,936
)
Acquisition of unconsolidated joint ventures, net of cash assumed
(14,242
)
 
—

Net sales proceeds from wholly-owned properties
49,326

 
74,845

Investments in unconsolidated joint ventures
(793
)
 
—

Deferred lease costs paid
(28,349
)
 
(39,319
)
Net cash used in investing activities
(356,671
)
 
(38,910
)
Cash Flows from Financing Activities:
 
 
 
Deferred financing costs paid
(3,447
)
 
(2,991
)
Proceeds from debt
832,603

 
365,000

Repayments of debt
(426,000
)
 
(401,500
)
Costs of issuance of common stock
(91
)
 
(229
)
Repurchases of common stock as part of announced plan
(111,625
)
 
(80,130
)
Dividends paid and discount on dividend reinvestments
(100,102
)
 
(102,770
)
Net cash provided by/(used in) financing activities
191,338

 
(222,620
)
Net increase/(decrease) in cash and cash equivalents
3,015

 
(118,927
)
Cash and cash equivalents, beginning of period
12,957

 
139,690

Cash and cash equivalents, end of period
$
15,972

 
$
20,763

 
 
 
 
Supplemental Disclosures of Significant Noncash Investing and Financing Activities:
 
 
 
Change in accrued share repurchases as part of an announced plan
$
726

 
$
—

Accrued capital expenditures and deferred lease costs
$
38,837

 
$
11,177

Accrued deferred financing costs
$
—

 
$
110


See accompanying notes

9
Table of Contents

PIEDMONT OFFICE REALTY TRUST, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
(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 owns 99.9% of, and is the sole general partner of, Piedmont OP and as such, possesses full legal control and authority over the operations of Piedmont OP. The remaining 0.1% ownership interest of Piedmont OP is held indirectly by Piedmont through its wholly-owned subsidiary, Piedmont Office Holdings, Inc ("POH"), the sole limited partner 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 September 30, 2013, Piedmont owned interests in 77 consolidated office properties, plus two buildings owned through an unconsolidated joint venture. Our 77 consolidated office properties are located in 18 metropolitan areas across the United States. These office properties comprise approximately 21.1 million square feet of primarily Class A commercial office space, and were approximately 86.7% leased as of September 30, 2013.

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. The reclassifications relate to the required presentation of income from discontinued operations for properties sold during the nine months ended September 30, 2013 and during the year ended December 31, 2012 (see Note 9), as well as reclassifying other rental income as rental income to be consistent with current period presentation, as further described in "Revenue Recognition" below. None of these reclassifications affect net income attributable to Piedmont as presented in previous periods.

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, 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.

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.

Deferred Lease Costs

Deferred lease costs are comprised of costs and incentives incurred to acquire operating leases, including intangible lease origination costs and direct payroll costs incurred related to negotiating and executing specific leases, and are capitalized and amortized on a straight-line basis over the terms of the related underlying leases. The amortization of deferred lease costs and intangibles is

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recorded as amortization expense in the accompanying consolidated statements of income. Upon receipt of a lease termination notice, Piedmont adjusts any unamortized deferred lease costs to their net realizable value ratably over the revised remaining term of the lease after giving effect to the termination notice. If there is no remaining lease term and no other obligation to provide the tenant space in the property, then any unamortized tenant-specific costs are recognized immediately upon termination.

Revenue Recognition

All leases of real estate assets held by Piedmont are classified as operating leases, and the related base rental income is recognized on a straight-line basis over the terms of the respective leases. Tenant reimbursements are recognized as revenue in the period that the related operating cost is incurred. Rents and tenant reimbursements collected in advance are recorded as deferred income in the accompanying consolidated balance sheets. Lease termination revenues are recognized ratably as rental revenue over the revised remaining lease term after giving effect to the termination notice. Contingent rental income recognition is deferred until the specific lease-related targets are achieved.

Gains on the sale of real estate assets are recognized upon completing the sale and, among other things, determining the sale price and transferring all of the risks and rewards of ownership without significant continuing involvement with the purchaser. Recognition of all or a portion of the gain would be deferred until both of these conditions are met. Losses are recognized through impairment charges when identified.

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, POH, which have been provided for in the financial statements.

3.Acquisitions
During the nine months ended September 30, 2013, Piedmont acquired the following properties:

Property
 
Metropolitan Statistical Area
 
Date of Acquisition
 
Rentable Square Feet
 
Percentage Leased as of Acquisition
 
Contractual Purchase Price (in millions)
 
Arlington Gateway
 
Washington, D.C.
 
March 4, 2013
 
333,948

 
99
%
 
$
175.6

 
5 & 15 Wayside Road
 
Boston, MA
 
March 22, 2013
 
271,434

 
95
%
 
$
69.3

 
2020 W. 89th Street
(1) 
Kansas City, KS
 
August 12, 2013
 
68,376

 
89
%
 
$
4.3

(2) 
5301 Maryland Way
(1) 
Nashville, TN
 
August 12, 2013
 
201,237

 
100
%
 
$
18.5

(2) 
4685 Investment Drive
(1) 
Detroit, MI
 
August 12, 2013
 
77,045

 
100
%
 
$
10.0

(2) 
 
 
 
 
 
 
 
 
 
 
 
 
Land Parcel
 
Metropolitan Statistical Area
 
Date of Acquisition
 
Acreage
 
Purchase Price (in millions)
 
 
 
Royal Lane
 
Dallas, TX
 
August 1, 2013
 
10.59

 
$
2.6

 
 
 

(1) On August 12, 2013, Piedmont purchased all of the remaining interests in three office properties previously held through two unconsolidated joint ventures for approximately $14.7 million in cash.

(2) Purchase price represents the estimated fair value of the respective property which was 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.


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4.Debt
On May 9, 2013, Piedmont, through its 100% owned operating partnership, Piedmont OP, issued $350 million in aggregate principal amount of 3.40% Senior Notes which mature on June 1, 2023 (the “Senior Notes”). The Senior Notes were originally offered in a private offering and subsequently exchanged for notes registered under the Securities Act of 1933, as amended. The Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by Piedmont.

Upon issuance of the Senior Notes, Piedmont OP received proceeds of approximately $348.6 million, reflecting a discount of approximately $1.4 million which is being amortized as interest expense under the effective interest method over the ten-year term of the Senior Notes. In addition, in conjunction with the issuance, Piedmont settled two forward starting rate swaps, consisting of notional amounts of $220 million and $30 million, respectively. The settlement of the swaps resulted in a gain of approximately $0.7 million that is being amortized as an offset to interest expense over the ten-year term of the Senior Notes. See Note 5 for further detail.

During the nine months ended September 30, 2013, Piedmont incurred additional working capital borrowings of $484.0 million and, utilizing the proceeds of the Senior Notes issuance described above as well as other cash on hand, made repayments totaling $426.0 million on its $500 Million Unsecured Line of Credit. Piedmont also made interest payments on all debt facilities, including interest rate swap cash settlements, of approximately $15.5 million and $15.7 million for the three months ended September 30, 2013 and 2012, respectively, and $47.3 million and $47.1 million for the nine months ended September 30, 2013 and 2012, respectively. For the nine months ended September 30, 2013 Piedmont had no capitalized interest.

See Note 7 for a description of Piedmont’s estimated fair value of debt as of September 30, 2013.


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The following table summarizes the terms of Piedmont’s indebtedness outstanding as of September 30, 2013 and December 31, 2012 (in thousands):
Facility
 
Collateral
 
Rate(1)
 
Maturity
 
Amount Outstanding as of
 
September 30,
2013
 
December 31,
2012
Secured (Fixed)
 
 
 
 
 
 
 
 
 
 
$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

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

 
987,525

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

(5) 
11/22/2016
 
300,000

 
300,000

$500 Million Unsecured Line of Credit
 
 
 
1.36
%
(6) 
8/19/2016
 
187,000

 
129,000

$350 Million Senior Notes
 
 
 
3.40
%
(7) 
6/1/2023
 
348,650

 
—

Subtotal/Weighted Average (4)
 
 
 
2.71
%
 
 
 
835,650

 
429,000

Total/ Weighted Average (4)
 
 
 
4.04
%
 
 
 
$
1,823,175

 
$
1,416,525


(1) 
All of Piedmont’s outstanding debt as of September 30, 2013 and December 31, 2012 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 September 30, 2013, except for the $350 Million Senior Notes, which were issued at a discount (see footnote 7 below).
(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 (1.175% as of September 30, 2013) over the selected rate based on Piedmont’s current credit rating. The outstanding balance as of September 30, 2013 consisted of 30-day LIBOR draws ranging from 0.18% to 0.19% (subject to the additional spread mentioned above).
(7) 
The $350 Million Senior Notes have a fixed coupon rate of 3.40%, however, as a result of the issuance of the notes at a discount, Piedmont recognizes an effective interest rate on this debt issuance of 3.45%.


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5.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 other similar agreements to manage interest rate risk exposure arising from current or future variable rate debt transactions. Interest rate swap agreements involve the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest 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 changing the underlying notional amount. During the nine months ended September 30, 2013, Piedmont used four interest rate swap agreements with a total notional value of $300 million to hedge the variable cash flows associated with its $300 Million Unsecured Term Loan.

Additionally, over the course of the twelve months ended September 30, 2013, Piedmont entered into six forward starting interest rate swap agreements with a total notional value of $530 million to hedge the risk of changes in the interest-related cash flows associated with various potential issuances of long-term debt. In conjunction with the issuance of the Senior Notes (see Note 4), Piedmont settled two of the forward starting swap agreements with a total notional value of $250 million for a gain of approximately $0.7 million. The gain was recorded as accumulated other comprehensive income and is being amortized as an offset to interest expense over the ten-year term of the Senior Notes. Piedmont continues to hold the remaining $280 million of forward starting interest rate swaps to hedge its exposure to the variability in future cash flows for additional potential future debt issuances over a maximum period of 126 months.

A detail of Piedmont’s interest rate derivatives outstanding as of September 30, 2013 is 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
Forward starting interest rate swap
70

 
3/3/2014
 
3/3/2024
Forward starting interest rate swap
70

 
3/3/2014
 
3/3/2024
Forward starting interest rate swap
70

 
3/3/2014
 
3/3/2024
Forward starting interest rate swap
70

 
3/3/2014
 
3/3/2024
Total
$
580

 
 
 
 

Piedmont has elected to present its interest rate derivatives on its consolidated balance sheets on a gross basis as interest rate swap asset and interest rate swap liabilities. A detail of Piedmont’s interest rate derivatives on a gross and net basis as of September 30, 2013 and December 31, 2012, respectively, is as follows (in thousands):

Interest rate swaps classified as:
September 30,
2013
 
December 31,
2012
Gross derivative assets
$
19,192

 
$
1,075

Gross derivative liabilities
(5,010
)
 
(8,235
)
Net derivative asset/(liability)
$
14,182

 
$
(7,160
)

All of Piedmont's interest rate derivative agreements outstanding for the periods presented were designated as cash flow hedges of interest rate risk. As such, the effective portion of changes in the fair value of these 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 derivatives that

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was recorded in the accompanying consolidated statements of income for the three and nine months ended September 30, 2013 and 2012, respectively, is as follows:

 
Three Months Ended
 
Nine Months Ended
Derivative in
Cash Flow Hedging
Relationships (Interest Rate Swaps) (in thousands)
September 30,
2013
 
September 30,
2012
 
September 30,
2013
 
September 30,
2012
Amount of gain/(loss) recognized in OCI on derivative
$
(2,201
)
 
$
(2,756
)
 
$
19,659

 
$
(8,628
)
Amount of previously recorded loss reclassified from accumulated OCI into interest expense
$
783

 
$
762

 
$
2,328

 
$
2,249


Piedmont estimates that approximately $5.9 million will be reclassified from accumulated other comprehensive loss to interest expense over the next twelve months. 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 nine months ended September 30, 2013 or 2012.

Additionally, see Note 7 for fair value disclosures of Piedmont's derivative instruments.

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 obligations. If Piedmont were to breach 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 $5.1 million. Additionally, Piedmont has rights of set-off under certain of its derivative agreements related to potential termination fees and amounts payable under the agreements, if a termination were to occur.

6.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 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 September 30, 2013 is as follows (net carrying amount in millions):


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Entity
 
Piedmont’s
%
Ownership
of Entity
 
Related
Building
 
Consolidated/
Unconsolidated
 
Net Carrying
Amount as of
September 30, 2013
 
Net Carrying
Amount as of
December 31,
2012
 
Primary Beneficiary
Considerations
1201 Eye Street NW Associates, LLC
 
49.5%
 
1201 Eye Street
 
Consolidated
 
$
(4.5
)
 
$
(5.7
)
 
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
)
 
$
(0.1
)
 
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.
Piedmont 500 W. Monroe Fee, LLC
 
100%
 
500 W. Monroe
 
Consolidated
 
$
228.0

 
$
194.0

 
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
 
$
7.4

 
$
7.6

 
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
 
$
14.5

 
$
13.7

 
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.
400 TownPark, LLC
 
100%
 
400 TownPark
 
Consolidated
 
$
22.1

 
$
23.5

 
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.


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7.Fair Value Measurement of Financial Instruments
Piedmont considers its cash, accounts receivable, restricted cash and escrows, accounts payable and accrued expenses, interest rate swap agreements, and debt 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 well as its level within the GAAP fair value hierarchy, as of September 30, 2013 and December 31, 2012, respectively (in thousands):

 
September 30, 2013
 
December 31, 2012
Financial Instrument
Carrying Value
 
Estimated Fair Value
 
Level Within Fair Value Hierarchy
 
Carrying Value
 
Estimated Fair Value
Level Within Fair Value Hierarchy
Assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents(1)
$
15,972

 
$
15,972

 
Level 1
 
$
12,957

 
$
12,957

Level 1
Tenant receivables, net(1)
$
31,006

 
$
31,006

 
Level 1
 
$
25,038

 
$
25,038

Level 1
Restricted cash and escrows(1)
$
385

 
$
385

 
Level 1
 
$
334

 
$
334

Level 1
Interest rate swap asset
$
19,192

 
$
19,192

 
Level 2
 
$
1,075

 
$
1,075

Level 2
Liabilities:
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses(1)
$
22,229

 
$
22,229

 
Level 1
 
$
23,113

 
$
23,113

Level 1
Interest rate swap liability
$
5,010

 
$
5,010

 
Level 2
 
$
8,235

 
$
8,235

Level 2
Debt
$
1,823,175

 
$
1,836,413

 
Level 2
 
$
1,416,525

 
$
1,470,002

Level 2

(1) 
For the periods presented, the carrying value of these financial instruments approximates estimated fair value due to their short-term maturity.

Piedmont's debt was carried at book value as of September 30, 2013 and December 31, 2012; however, Piedmont's estimate of its 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 debt.

Piedmont’s interest rate swap and forward starting interest rate swap agreements presented above, and further discussed in Note 5, are classified as “Interest rate swap” assets and liabilities in the accompanying consolidated balance sheets and were carried at fair value as of September 30, 2013 and December 31, 2012. 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 September 30, 2013 and December 31, 2012, 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 assets or liabilities.


8.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. Further, Piedmont classifies such tenant and building improvements into two classes: (i) improvements which incrementally enhance the building's

17
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asset value by expanding its revenue generating capacity (“incremental capital expenditures”) and (ii) improvements which maintain the building's existing asset value and its revenue generating capacity (“non-incremental capital expenditures”). As of September 30, 2013, Piedmont anticipates funding potential non-incremental capital expenditures for tenant improvements of approximately $93.7 million 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.

Additionally, as of September 30, 2013, commitments for incremental capital expenditures for tenant improvements associated with new leases, primarily at value-add properties, totaled approximately $23.6 million.

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 recorded additional expense related to such tenant audits/disputes of approximately $0.5 million and $0.2 million during the three months ended September 30, 2013 and September 30, 2012, respectively, and approximately $0.6 million and $0.2 million for the nine months ended September 30, 2013 and September 30, 2012, respectively.

Letters of Credit

As of September 30, 2013, Piedmont was subject to the following letters of credit, which reduce the total outstanding capacity under its $500 Million Unsecured Line of Credit:

Amount

 
Expiration of Letter of Credit (1)
$
7,696,548

 
July 2014
$
9,033,164

 
July 2014
$
382,556

 
July 2014

(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.
9.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
Portland Portfolio(1)
 
Beaverton, Oregon
 
March 19, 2012
 
$
17,823

 
$
43,832

26200 Enterprise Way
 
Lake Forest, California
 
May 31, 2012
 
$
10,013

 
$
24,412

110 & 112 Hidden Lake Circle Buildings
 
Duncan, South Carolina
 
September 21, 2012
 
$
(259
)
 
$
25,595

1111 Durham Avenue
 
South Plainfield, New Jersey
 
March 28, 2013
 
$
(9
)
 
$
3,752

1200 Enclave Parkway
 
Houston, Texas
 
May 1, 2013
 
$
16,267

 
$
45,574

350 Spectrum Loop(2)
 
Colorado Springs, Colorado
 
Held for Sale(2)
 
N/A

 
N/A


(1) 
The Portland Portfolio consisted 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.
(2) 
On September 30, 2013, Piedmont entered into a binding agreement to sell the 350 Spectrum Loop building with an expected close in November 2013, and in accordance with GAAP, Piedmont reclassified the building from real estate assets held-for-use to real estate assets held-for-sale on its consolidated balance sheet as of September 30, 2013. As such, Piedmont reclassified the operational results of the property as income from discontinued operations for prior periods to conform with current period presentation.


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Sale of 1111 Durham Avenue building

In accordance with GAAP during the quarter ended March 31, 2013, Piedmont re-classified the 1111 Durham Avenue building from real estate assets held-for-use (at cost) to real estate assets held for sale (at estimated fair value) and recorded an impairment charge of $6.4 million, which represents the difference in carrying value of the asset at the time the asset met the held for sale criteria. The fair value measurement used in the evaluation of this non-financial asset is considered to be a Level 1 valuation within the fair value hierarchy as defined by GAAP, as there are direct observations and transactions involving the asset. After assessing the age of the building (constructed in 1975) and leasing prospects, Piedmont determined that the sales price should appropriately represent the land value of the asset. As a result, Piedmont disposed of the 1111 Durham Avenue building for a gross sale price of approximately $4.0 million, exclusive of closing costs. The transaction closed on March 28, 2013.

Assets Held for Sale

The details comprising assets held for sale, consisting solely of the 350 Spectrum Loop building, are presented below (in thousands):

 
 
September 30, 2013
 
December 31, 2012
Real estate assets held for sale, net:
 
 
 
 
Land
 
$
2,185

 
$
2,186

Building and improvements, less accumulated depreciation of $6,737 and $6,313 as of September 30, 2013 and December 31, 2012, respectively
 
16,332

 
16,755

Construction in progress
 
1,217

 
—

Total real estate assets held for sale, net
 
$
19,734

 
$
18,941

 
 
 
 
 
Other assets held for sale:
 
 
 
 
Straight-line rent
 
$
1,018

 
$
793

Deferred lease costs, less accumulated amortization of $78 and $0 as of September 30, 2013 and December 31, 2012, respectively
 
942

 
—

Total other assets held for sale, net
 
$
1,960

 
$
793



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Table of Contents

Income from Discontinued Operations

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

 
Three Months Ended
 
Nine Months Ended
 
September 30, 2013
 
September 30, 2012
 
September 30, 2013
 
September 30, 2012
Revenues:
 
 
 
 
 
 
 
Rental income
$
516

 
$
2,388

 
$
2,693

 
$
8,403

Tenant reimbursements
91

 
410

 
650

 
1,298

 
607

 
2,798

 
3,343

 
9,701

Expenses:
 
 
 
 
 
 
 
Property operating costs
316

 
1,262

 
1,448

 
3,834

Depreciation
141

 
732

 
687

 
2,379

Amortization
21

 
159

 
138

 
527

General and administrative
—

 
38

 
2

 
47

 
478

 
2,191

 
2,275

 
6,787

Other income (expense):
 
 
 
 
 
 
 
Interest and other income/(expense)
(1
)
 
—

 
24

 
—

Net recoveries of casualty loss
—

 
—

 
17

 
—

 
(1
)
 
—

 
41

 
—

 
 
 
 
 
 
 
 
Operating income, excluding gain/(loss) on sale
128

 
607

 
1,109

 
2,914

Impairment loss
—

 
—

 
(6,402
)
 
—

Gain/(loss) on sale of real estate assets
—

 
(254
)
 
16,258

 
27,583

Income from discontinued operations
$
128

 
$
353

 
$
10,965

 
$
30,497


10.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. Shares are not awarded until after the end of the third year in the performance period and vest immediately upon award.

A rollforward of Piedmont's deferred stock award activity for the nine months ended September 30, 2013 is as follows:

 
Shares
 
Weighted-Average Grant Date Fair Value
Unvested Deferred Stock Awards as of December 31, 2012
318,893

 
$
18.41

Deferred Stock Awards Granted During Nine Months Ended September 30, 2013
161,257

 
$
19.47

Deferred Stock Awards Vested During Nine Months Ended September 30, 2013
(204,295
)
 
$
18.93

Deferred Stock Awards Forfeited During Nine Months Ended September 30, 2013
(2,862
)
 
$
18.55

Unvested Deferred Stock Awards as of September 30, 2013
272,993

 
$
18.64



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The following table provides additional information regarding stock award activity during the three and nine months ended September 30, 2013 and 2012, respectively (in thousands except for per share data):

 
Three Months Ended
 
Nine Months Ended
 
September 30,
2013
 
September 30,
2012
 
September 30,
2013
 
September 30,
2012
Weighted-Average Grant Date Fair Value of Shares Granted During the Period
$
—

 
$
17.10

 
$
19.47

 
$
17.48

Total Grant Date Fair Value of Shares Vested During the Period
$
28

 
$
28

 
$
3,867

 
$
5,241

Share-based Liability Awards Paid During the Period(1)
$
—

 
$
—

 
$
103

 
$
798


(1) 
Amounts reflect the issuance of performance share awards during the period.

A detail of Piedmont’s outstanding employee deferred stock awards as of September 30, 2013 is as follows:

Date of grant
 
Type of Award
 
Net Shares
Granted (1)
 
Grant
Date Fair
Value
 
Vesting Schedule
 
Unvested Shares as of
September 30, 2013
 
April 5, 2011
 
Annual Deferred Stock Award
 
116,116

 
$
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.
 
37,196

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

 
$
18.27

 
Shares awarded, if any, will vest immediately upon determination of award in 2014.
 
—

(2) 
April 4, 2012
 
Annual Deferred Stock Award
 
191,786

 
$
17.53

 
Of the shares granted, 25% vested on the date of grant, and 25% will vest on April 4, 2013, 2014, and 2015, respectively.
 
116,289

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

 
$
17.42

 
Shares awarded, if any, will vest immediately upon determination of award in 2015.
 
—

(2) 
April 2, 2013
 
Annual Deferred Stock Award
 
146,679

 
$
19.47

 
Of the shares granted, 25% vested on the date of grant, and 25% will vest on April 2, 2014, 2015, and 2016, respectively.
 
119,508

 
April 2, 2013
 
Fiscal Year 2013-2015 Performance Share Program
 
—

 
$
18.91

 
Shares awarded, if any, will vest immediately upon determination of award in 2016.
 
—

(2) 
Total
 
 
 
 
 
 
 
 
 
272,993

 

(1) 
Amounts reflect the total grant, net of shares surrendered upon vesting to satisfy required minimum tax withholding obligations through September 30, 2013.
(2) 
Estimated based on Piedmont's cumulative total stockholder return ("TSR") for the respective performance period through September 30, 2013. As of September 30, 2013, Piedmont's TSR for each of these respective plans was below threshold. 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 September 30, 2013 and 2012, respectively, Piedmont recognized approximately $0.7 million and $0.9 million of compensation expense related to stock awards, all of which related to the amortization of nonvested shares. During the nine months ended September 30, 2013 and 2012, respectively, Piedmont recognized approximately $3.0 million and $3.1 million of compensation expense related to stock awards, of which approximately $1.8 million and $1.8 million relates to the amortization of nonvested shares, respectively. During the nine months ended September 30, 2013, a total of 147,515 shares were issued to employees, directors, and officers. As of September 30, 2013, approximately $2.5 million of unrecognized compensation

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cost related to nonvested, annual deferred stock awards remained, which Piedmont will record in its consolidated statements of income over a weighted-average vesting period of approximately one year.

11.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 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 nine months ended September 30, 2013 and 2012, respectively (in thousands):

 
Three Months Ended
 
Nine Months Ended
 
September 30, 2013
 
September 30, 2012
 
September 30, 2013
 
September 30, 2012
Weighted-average common shares – basic
164,683
 
168,806
 
166,598
 
171,162
Plus incremental weighted-average shares from time-vested conversions:
 
 
 
 
 
 
 
Restricted stock awards
113
 
123
 
136
 
133
Weighted-average common shares – diluted
164,796
 
168,929
 
166,734
 
171,295


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12.Guarantor and Non-Guarantor Financial Information

The following condensed consolidating financial information for Piedmont Operating Partnership, LP (the "Issuer"), Piedmont Office Realty Trust, Inc. (the "Guarantor"), and the other directly and indirectly owned subsidiaries of the Guarantor (the "Non-Guarantor Subsidiaries") is provided pursuant to the requirements of Rule 3-10 of Regulation S-X regarding financial statements of guarantors and issuers of guaranteed registered securities. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions, including transactions with the Non-Guarantor Subsidiaries. Additionally, certain reclassifications have been made to the statements presented below to reflect investments in subsidiaries, which had previously been presented on a net basis, on a gross basis. As all investments in subsidiaries are eliminated in consolidation, none of these reclassifications affect the total financial position or net income attributable to Piedmont as presented in previous periods.


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Table of Contents

Condensed Consolidated Balance Sheets
As of September 30, 2013
(in thousands)
Issuer
 
Guarantor
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets:
 
 
 
 
 
 
 
 
 
Real estate assets, at cost:
 
 
 
 
 
 
 
 
 
Land
$
88,054

 
$
—

 
$
587,227

 
$
—

 
$
675,281

Buildings and improvements, less accumulated depreciation
492,098

 
—

 
2,558,107

 
(300
)
 
3,049,905

Intangible lease assets, less accumulated amortization
2,547

 
—

 
64,323

 
—

 
66,870

Construction in progress
2,546

 
—

 
58,616

 
—

 
61,162

Real estate assets held for sale, net
19,734

 
—

 
—

 
—

 
19,734

Total real estate assets
604,979

 
—

 
3,268,273

 
(300
)
 
3,872,952

Investments in and amounts due from unconsolidated joint ventures
18,668

 
—

 
—

 
—

 
18,668

Cash and cash equivalents
12,096

 
146

 
3,730

 
—

 
15,972

Tenant and straight-line rent receivables, net
35,914

 
—

 
130,579

 
—

 
166,493

Advances to affiliates
5,110,420

 
1,293,461

 
(1,086,177
)
 
(5,317,704
)
 
—

Investment in subsidiary
—

 
4,035,964

 
199

 
(4,036,163
)
 
—

Notes receivable
160,000

 
2,000

 
23,890

 
(185,890
)
 
—

Prepaid expenses, restricted cash, escrows, and other assets
5,671

 
47

 
13,218

 
(941
)
 
17,995

Goodwill
180,097

 
—

 
—

 
—

 
180,097

Interest rate swaps
19,192

 
—

 
—

 
—

 
19,192

Deferred financing costs, net
6,703

 
—

 
1,287

 
—

 
7,990

Deferred lease costs, net
36,293

 
—

 
238,941

 
—

 
275,234

Other assets held for sale, net
1,960

 
—

 
—

 
—

 
1,960

Total assets
$
6,191,993

 
$
5,331,618

 
$
2,593,940

 
$
(9,540,998
)
 
$
4,576,553

Liabilities:
 
 
 
 
 
 
 
 
 
Secured and unsecured debt
$
859,540

 
$
—

 
$
1,149,525

 
$
(185,890
)
 
$
1,823,175

Accounts payable, accrued expenses, and accrued capital expenditures
20,937

 
1,360

 
138,319

 
(941
)
 
159,675

Advances from affiliates
306,636

 
4,807,113

 
244,499

 
(5,358,248
)
 
—

Deferred income
8,533

 
—

 
18,042

 
—

 
26,575

Intangible lease liabilities, net
6

 
—

 
41,429

 
—

 
41,435

Interest rate swaps
5,010

 
—

 
—

 
—

 
5,010

Total liabilities
1,200,662

 
4,808,473

 
1,591,814

 
(5,545,079
)
 
2,055,870

Stockholders’ Equity:
 
 
 
 
 
 
 
 
 
Common stock
—

 
1,613

 
—

 
—

 
1,613

Additional paid-in capital
4,035,964

 
3,668,424

 
199

 
(4,036,163
)
 
3,668,424

Retained/(cumulative distributions in excess of) earnings
940,540

 
(3,146,892
)
 
1,000,314

 
40,244

 
(1,165,794
)
Other comprehensive loss
14,827

 
—

 
—

 
—

 
14,827

Piedmont stockholders’ equity
4,991,331

 
523,145

 
1,000,513

 
(3,995,919
)
 
2,519,070

Noncontrolling interest
—

 
—

 
1,613

 
—

 
1,613

Total stockholders’ equity
4,991,331

 
523,145

 
1,002,126

 
(3,995,919
)
 
2,520,683

Total liabilities and stockholders’ equity
$
6,191,993

 
$
5,331,618

 
$
2,593,940

 
$
(9,540,998
)
 
$
4,576,553


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Table of Contents

Condensed Consolidated Balance Sheets
As of December 31, 2012
(in thousands)
Issuer
 
Guarantor
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets:
 
 
 
 
 
 
 
 
 
Real estate assets, at cost:
 
 
 
 
 
 
 
 
 
Land
$
91,782

 
$
—

 
$
535,569

 
$
—

 
$
627,351

Buildings and improvements, less accumulated depreciation
511,793

 
—

 
2,379,530

 
—

 
2,891,323

Intangible lease assets, less accumulated amortization
3,265

 
—

 
51,479

 
—

 
54,744

Construction in progress
1,056

 
—

 
19,317

 
—

 
20,373

Real estate assets held for sale, net
18,941

 
—