PDM 3.31.15 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________
FORM 10-Q
____________________________________________________
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 |
For the Quarterly Period Ended March 31, 2015
OR
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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)
____________________________________________________
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| | |
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.
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| 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 April 28, 2015:
154,391,509 shares
FORM 10-Q
PIEDMONT OFFICE REALTY TRUST, INC.
TABLE OF CONTENTS
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PART I. | Financial Statements | |
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| Item 1. | | |
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| Item 2. | | |
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| Item 3. | | |
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| Item 4. | | |
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PART II. | Other Information | |
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| Item 1. | | |
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| Item 1A. | | |
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| Item 2. | | |
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| Item 3. | | |
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| Item 4. | | |
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| Item 5. | | |
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| Item 6. | | |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q may constitute forward-looking statements within the meaning of the federal securities laws. In addition, Piedmont Office Realty Trust, Inc. ("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 other written or 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, financings, and operating objectives; discussions regarding future dividends; 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 information available at the time the statements are made. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding the demands for office space in the markets 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:
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• | Economic, regulatory, and/or socio-economic changes (including accounting standards) that impact the real estate market generally, or that could affect patterns of use of commercial office space, may cause our operating results to suffer and decrease the value of our real estate properties; |
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• | The impact of competition on our efforts to renew existing leases or re-let space on terms similar to existing leases; |
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• | Changes in the economies and other conditions affecting the office sector in general and the specific markets in which we operate, particularly in Chicago, Washington, D.C., and the New York metropolitan area, where we have high concentrations of office properties; |
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• | Lease terminations or lease defaults, particularly by one of our large lead tenants; |
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• | Adverse market and economic conditions may negatively affect us and could cause us to recognize impairment charges on both our long-lived assets or goodwill or otherwise impact our performance; |
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• | The success of our real estate strategies and investment objectives, including our ability to identify and consummate suitable acquisitions; |
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• | The illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our properties; |
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• | Acquisitions of properties may have unknown risks and other liabilities at the time of acquisition; |
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• | Development and construction delays and resultant increased costs and risks may negatively impact our operating results; |
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• | Our real estate development strategies may not be successful; |
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• | Future terrorist attacks in the major metropolitan areas in which we own properties could significantly impact the demand for, and value of, our properties; |
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• | Costs of complying with governmental laws and regulations; |
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• | Additional risks and costs associated with directly managing properties occupied by government tenants; |
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• | Future offerings of debt or equity securities may adversely affect the market price of our common stock; |
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• | Changes in market interest rates may have an effect on the value of our common stock; |
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• | Uncertainties associated with environmental and other regulatory matters; |
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• | Potential changes in political environment and reduction in federal and/or state funding of our governmental tenants; |
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• | We may be subject to litigation, which could have a material adverse effect on our financial condition; |
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• | Changes in tax laws impacting REITs and real estate in general, as well as Piedmont’s ability to continue to qualify as a REIT under the Internal Revenue Code (the “Code”); and |
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• | 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, 2014. |
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.
PART I. FINANCIAL STATEMENTS
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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, 2014. Piedmont’s results of operations for the three months ended March 31, 2015 are not necessarily indicative of the operating results expected for the full year.
PIEDMONT OFFICE REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share and per share amounts) |
| | | | | | | |
| (Unaudited) | | |
| March 31, 2015 | | December 31, 2014 |
Assets: | | | |
Real estate assets, at cost: | | | |
Land | $ | 707,340 |
| | $ | 702,800 |
|
Buildings and improvements, less accumulated depreciation of $1,118,327 and $1,088,062 as of March 31, 2015 and December 31, 2014, respectively | 3,234,495 |
| | 3,224,178 |
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Intangible lease assets, less accumulated amortization of $84,212 and $79,860 as of March 31, 2015 and December 31, 2014, respectively | 69,254 |
| | 70,177 |
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Construction in progress | 83,853 |
| | 63,393 |
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Real estate assets held for sale | — |
| | 14,544 |
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Total real estate assets | 4,094,942 |
| | 4,075,092 |
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Investments in and amounts due from unconsolidated joint ventures | 7,820 |
| | 7,798 |
|
Cash and cash equivalents | 7,479 |
| | 12,306 |
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Tenant receivables, net of allowance for doubtful accounts of $106 and $231 as of March 31, 2015 and December 31, 2014, respectively | 30,132 |
| | 27,711 |
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Straight-line rent receivables | 175,340 |
| | 169,532 |
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Restricted cash and escrows | 671 |
| | 5,679 |
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Prepaid expenses and other assets | 26,879 |
| | 27,820 |
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Goodwill | 180,097 |
| | 180,097 |
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Interest rate swaps | 520 |
| | 430 |
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Deferred financing costs, less accumulated amortization of $6,607 and $6,067 as of March 31, 2015 and December 31, 2014, respectively | 7,391 |
| | 7,667 |
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Deferred lease costs, less accumulated amortization of $152,161 and $142,915 as of March 31, 2015 and December 31, 2014, respectively | 288,591 |
| | 280,105 |
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Other assets held for sale | — |
| | 1,264 |
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Total assets | $ | 4,819,862 |
| | $ | 4,795,501 |
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Liabilities: | | | |
Unsecured debt, net of discount of $5,682 and $5,456 as of March 31, 2015 and December 31, 2014, respectively | $ | 1,877,318 |
| | $ | 1,828,544 |
|
Secured debt, inclusive of premium of $3,137 and $3,258 as of March 31, 2015 and December 31, 2014, respectively | 448,791 |
| | 449,045 |
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Accounts payable, accrued expenses, and accrued capital expenditures | 119,466 |
| | 133,988 |
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Deferred income | 25,970 |
| | 22,215 |
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Intangible lease liabilities, less accumulated amortization of $39,682 and $37,964 as of March 31, 2015 and December 31, 2014, respectively | 42,978 |
| | 43,277 |
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Interest rate swaps | 19,416 |
| | 6,417 |
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Total liabilities | 2,533,939 |
| | 2,483,486 |
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Commitments and Contingencies | — |
| | — |
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Stockholders’ Equity: | | | |
Shares-in-trust, 150,000,000 shares authorized; none outstanding as of March 31, 2015 or December 31, 2014 | — |
| | — |
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Preferred stock, no par value, 100,000,000 shares authorized; none outstanding as of March 31, 2015 or December 31, 2014 | — |
| | — |
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Common stock, $.01 par value, 750,000,000 shares authorized; 154,339,507 and 154,324,089 shares issued and outstanding as of March 31, 2015 and December 31, 2014, respectively | 1,543 |
| | 1,543 |
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Additional paid-in capital | 3,667,574 |
| | 3,666,182 |
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Cumulative distributions in excess of earnings | (1,378,786 | ) | | (1,365,620 | ) |
Other comprehensive income | (5,437 | ) | | 8,301 |
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Piedmont stockholders’ equity | 2,284,894 |
| | 2,310,406 |
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Noncontrolling interest | 1,029 |
| | 1,609 |
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Total stockholders’ equity | 2,285,923 |
| | 2,312,015 |
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Total liabilities and stockholders’ equity | $ | 4,819,862 |
| | $ | 4,795,501 |
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See accompanying notes
PIEDMONT OFFICE REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except for share and per share amounts)
|
| | | | | | | |
| (Unaudited) |
| Three Months Ended |
| March 31, |
| 2015 | | 2014 |
Revenues: | | | |
Rental income | $ | 117,807 |
| | $ | 110,904 |
|
Tenant reimbursements | 31,390 |
| | 24,929 |
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Property management fee revenue | 562 |
| | 487 |
|
| 149,759 |
| | 136,320 |
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Expenses: | | | |
Property operating costs | 64,236 |
| | 58,271 |
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Depreciation | 36,232 |
| | 33,644 |
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Amortization | 14,670 |
| | 14,573 |
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General and administrative | 6,407 |
| | 4,555 |
|
| 121,545 |
| | 111,043 |
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Real estate operating income | 28,214 |
| | 25,277 |
|
Other income (expense): | | | |
Interest expense | (19,016 | ) | | (18,926 | ) |
Other income/(expense) | (181 | ) | | (90 | ) |
Net recoveries from casualty events and litigation settlements | — |
| | 3,042 |
|
Equity in income/(loss) of unconsolidated joint ventures | 159 |
| | (266 | ) |
| (19,038 | ) | | (16,240 | ) |
Income from continuing operations | 9,176 |
| | 9,037 |
|
Discontinued operations: | | | |
Operating income | — |
| | 466 |
|
Loss on sale of real estate assets | — |
| | (106 | ) |
Income from discontinued operations | — |
| | 360 |
|
Gain on sale of real estate assets | 10,073 |
| | — |
|
Net income | 19,249 |
| | 9,397 |
|
Less: Net income attributable to noncontrolling interest | (4 | ) | | (4 | ) |
Net income attributable to Piedmont | $ | 19,245 |
| | $ | 9,393 |
|
Per share information – basic and diluted: | | | |
Income from continuing operations and gain on sale of real estate assets | $ | 0.12 |
| | $ | 0.06 |
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Income from discontinued operations | — |
| | — |
|
Net income available to common stockholders | $ | 0.12 |
| | $ | 0.06 |
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Weighted-average common shares outstanding – basic | 154,339,029 |
| | 154,849,378 |
|
Weighted-average common shares outstanding – diluted | 154,580,335 |
| | 155,024,545 |
|
See accompanying notes.
PIEDMONT OFFICE REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
|
| | | | | | | | | | | | | |
| (Unaudited) |
| Three Months Ended |
| March 31, |
| 2015 | | 2014 |
| | | | | | | |
Net income attributable to Piedmont | | | $ | 19,245 |
| | | | $ | 9,393 |
|
Other comprehensive income/(loss): | | | | | | | |
Effective portion of gain/(loss) on derivative instruments that are designated and qualify as cash flow hedges (See Note 5) | (15,205 | ) | | | | (9,886 | ) | | |
Reclassification of previously recorded loss included in net income (See Note 5) | 1,467 |
| |
|
| | 1,170 |
| |
|
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Other comprehensive income/(loss) | | | (13,738 | ) | | | | (8,716 | ) |
Comprehensive income attributable to Piedmont | | | $ | 5,507 |
| | | | $ | 677 |
|
See accompanying notes
PIEDMONT OFFICE REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2014
AND FOR THE THREE MONTHS ENDED MARCH 31, 2015 (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, 2013 | 157,461 |
| | $ | 1,575 |
| | $ | 3,668,906 |
| | $ | (1,231,209 | ) | | $ | 20,278 |
| | $ | 1,609 |
| | $ | 2,461,159 |
|
Share repurchases as part of an announced plan | (3,190 | ) | | (32 | ) | | — |
| | (52,764 | ) | | — |
| | — |
| | (52,796 | ) |
Retirement of shares returned from escrow | (85 | ) | | (1 | ) | | (1,478 | ) | | — |
| | — |
| | — |
| | (1,479 | ) |
Redemption of noncontrolling interest in consolidated variable interest entity | — |
| | — |
| | (4,054 | ) | | — |
| | — |
| | — |
| | (4,054 | ) |
Dividends to common stockholders ($0.81 per share), dividends to shareholders of subsidiary, and dividends reinvested | — |
| | — |
| | (188 | ) | | (124,995 | ) | | — |
| | (15 | ) | | (125,198 | ) |
Shares issued and amortized under the 2007 Omnibus Incentive Plan, net of tax | 138 |
| | 1 |
| | 2,996 |
| | — |
| | — |
| | — |
| | 2,997 |
|
Net income attributable to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | 15 |
| | 15 |
|
Net income attributable to Piedmont | — |
| | — |
| | — |
| | 43,348 |
| | — |
| | — |
| | 43,348 |
|
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | (11,977 | ) | | — |
| | (11,977 | ) |
Balance, December 31, 2014 | 154,324 |
| | 1,543 |
| | 3,666,182 |
| | (1,365,620 | ) | | 8,301 |
| | 1,609 |
| | 2,312,015 |
|
Share repurchases as part of an announced plan | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Offering costs | — |
| | — |
| | (285 | ) | | — |
| | — |
| | — |
| | (285 | ) |
Redemption of noncontrolling interest in consolidated variable interest entity | — |
| | — |
| | 54 |
| | — |
| | — |
| | — |
| | 54 |
|
Reallocation of noncontrolling interest of subsidiary | — |
| | — |
| | 1,128 |
| | — |
| | — |
| | (584 | ) | | 544 |
|
Dividends to common stockholders ($0.21 per share), dividends to shareholders of subsidiary, and dividends reinvested | — |
| | — |
| | (66 | ) | | (32,411 | ) | | — |
| | — |
| | (32,477 | ) |
Shares issued and amortized under the 2007 Omnibus Incentive Plan, net of tax | 16 |
| | — |
| | 561 |
| | — |
| | — |
| | — |
| | 561 |
|
Net income attributable to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | 4 |
| | 4 |
|
Net income attributable to Piedmont | — |
| | — |
| | — |
| | 19,245 |
| | — |
| | — |
| | 19,245 |
|
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (13,738 | ) | | — |
| | (13,738 | ) |
Balance, March 31, 2015 | 154,340 |
| | $ | 1,543 |
| | $ | 3,667,574 |
| | $ | (1,378,786 | ) | | $ | (5,437 | ) | | $ | 1,029 |
| | $ | 2,285,923 |
|
See accompanying notes
PIEDMONT OFFICE REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
| | | | | | | |
| (Unaudited) |
| Three Months Ended |
| March 31, |
| 2015 | | 2014 |
Cash Flows from Operating Activities: | | | |
Net income | $ | 19,249 |
| | $ | 9,397 |
|
Operating distributions received from unconsolidated joint ventures | 137 |
| | 266 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation | 36,232 |
| | 33,727 |
|
Amortization of deferred financing costs | 387 |
| | 774 |
|
Settlement of forward starting interest rate swaps | — |
| | 14,960 |
|
Other amortization | 14,806 |
| | 14,346 |
|
Stock compensation expense | 725 |
| | 636 |
|
Equity in loss/(income) of unconsolidated joint ventures | (159 | ) | | 266 |
|
(Gain)/loss on sale of real estate assets | (10,073 | ) | | 106 |
|
Changes in assets and liabilities: | | | |
Increase in tenant and straight-line rent receivables, net | (11,234 | ) | | (1,371 | ) |
(Increase)/decrease in restricted cash and escrows | (148 | ) | | 43 |
|
Decrease/(increase) in prepaid expenses and other assets | 1,037 |
| | (3,467 | ) |
Decrease in accounts payable and accrued expenses | (11,074 | ) | | (350 | ) |
Increase in deferred income | 3,745 |
| | 720 |
|
Net cash provided by operating activities | 43,630 |
| | 70,053 |
|
Cash Flows from Investing Activities: | | | |
Acquisition of real estate assets and related intangibles | (41,554 | ) | | (400 | ) |
Capitalized expenditures, net of accruals | (39,804 | ) | | (27,187 | ) |
Redemption of noncontrolling interest in unconsolidated variable interest entity | (4,000 | ) | | — |
|
Net sales proceeds from wholly-owned properties | 25,803 |
| | 22,322 |
|
Deferred lease costs paid | (4,414 | ) | | (4,180 | ) |
Net cash used in investing activities | (63,969 | ) | | (9,445 | ) |
Cash Flows from Financing Activities: | | | |
Deferred financing costs paid | (242 | ) | | (454 | ) |
Proceeds from debt | 257,575 |
| | 764,564 |
|
Repayments of debt | (209,254 | ) | | (737,000 | ) |
Costs of issuance of common stock | (90 | ) | | — |
|
Repurchases of common stock as part of announced plan | — |
| | (54,515 | ) |
Dividends paid and discount on dividend reinvestments | (32,477 | ) | | (30,905 | ) |
Net cash provided by/(used in) financing activities | 15,512 |
| | (58,310 | ) |
Net (decrease)/increase in cash and cash equivalents | (4,827 | ) | | 2,298 |
|
Cash and cash equivalents, beginning of period | 12,306 |
| | 6,973 |
|
Cash and cash equivalents, end of period | $ | 7,479 |
| | $ | 9,271 |
|
| | | |
Supplemental Disclosures of Significant Noncash Investing and Financing Activities: | | | |
Change in accrued share repurchases as part of an announced plan | $ | — |
| | $ | (1,836 | ) |
Accrued capital expenditures and deferred lease costs | $ | 12,946 |
| | $ | 13,721 |
|
See accompanying notes
PIEDMONT OFFICE REALTY TRUST, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2015
(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, development, management, 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 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 March 31, 2015, Piedmont owned 74 office properties, one redevelopment asset, and one office building through an unconsolidated joint venture. Piedmont's 74 consolidated office properties comprise 21.5 million square feet of primarily Class A commercial office space, and were 88.8% leased as of March 31, 2015. As of March 31, 2015, approximately 90% of Piedmont's Annualized Lease Revenue was generated from select office sub-markets in the following cities: Atlanta, Boston, Chicago, Dallas, Houston, Los Angeles, Minneapolis, New York, and Washington, D.C.
Piedmont internally evaluates all of its real estate assets as one operating segment, and accordingly, does not report segment information.
2.Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
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.
Piedmont’s consolidated financial statements include the accounts of Piedmont, Piedmont’s wholly-owned subsidiaries, any variable interest entity ("VIE") of which Piedmont or any of its wholly-owned subsidiaries is considered to have the power to direct the activities of the entity and the obligation to absorb losses/right to receive benefits, or any entity in which Piedmont or any of its wholly-owned subsidiaries owns a controlling interest. In determining whether Piedmont or Piedmont OP has a controlling interest, the following factors, among others, are considered: equity ownership, voting rights, protective rights of investors, and participatory rights of investors. 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, 2014.
All inter-company balances and transactions have been eliminated upon consolidation.
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.
Use of Estimates
The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements and notes. Actual results could differ from those estimates.
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.
Recent Accounting Pronouncements
The Financial Accounting Standards Board (the "FASB") has issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"). The amendments in ASU 2014-09 change the criteria for the recognition of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services using a five-step determination process. Steps 1 through 5 involve (i) identifying contracts with a customer, (ii) identifying the performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the performance obligations, and (v) recognizing revenue as an entity satisfies a performance obligation. Additionally, lease contracts are specifically excluded from ASU 2014-09. The amendments in ASU 2014-09 are effective in the first quarter of 2017 for Piedmont, and early adoption is not permitted. Piedmont is currently evaluating the potential impact, if any, of adoption.
The FASB has issued Accounting Standards Update No. 2015-02, Consolidation (Topic 810), Amendments to the Consolidation Analysis ("ASU 2015-02"). The amendments in ASU 2015-02 modifies the consolidation analysis of certain types of entities. Specifically, ASU 2015-02 changes the assessment criteria of whether limited partnerships are VIEs, eliminates the presumption that general partners should consolidate a limited partner, eliminates certain conditions from the evaluation of whether a fee paid to a decision maker constitutes a VIE, and changes the evaluation regarding the impact of related parties in the primary beneficiary determination of a VIE. The amendments in ASU 2015-02 are effective in the first quarter of 2016 for Piedmont, and Piedmont is currently evaluating the potential impact, if any, of adoption.
The FASB has issued Accounting Standards Update No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs ("ASU 2015-03"). The amendments in ASU 2015-03 require debt issuance costs to be presented in the balance sheet as a reduction to the underlying debt instrument, as opposed to a separate asset. The amendments do not change the method by which such costs are amortized against earnings, nor do they change their classification in the consolidated statements of income, as a component of interest expense. The amendments in ASU 2015-03 are effective in the first quarter of 2016 for Piedmont, and Piedmont is currently evaluating the potential impact of adoption.
During the three months ended March 31, 2015, Piedmont acquired 100% ownership of the following property using proceeds from the $500 Million Unsecured Line of Credit, proceeds from the sale of the 3900 Dallas Parkway building in Plano, Texas (see Note 9), and cash on hand, as noted below:
|
| | | | | | | | | | | | | | |
Property | | Metropolitan Statistical Area | | Date of Acquisition | | Rentable Square Feet | | Percentage Leased as of Acquisition | | Purchase Price (in millions) |
Park Place on Turtle Creek | | Dallas, TX | | January 16, 2015 | | 177,844 |
| | 88 | % | | $ | 46.6 |
|
4.Debt
During the three months ended March 31, 2015, Piedmont entered into a $170 million unsecured term loan facility (the “$170 Million Unsecured 2015 Term Loan”) with a consortium of lenders. The term of the $170 Million Unsecured 2015 Term Loan is approximately three years with a maturity date of May 15, 2018; however, Piedmont may prepay the $170 Million Unsecured 2015 Term Loan, in whole or in part, at any time without premium or penalty. The proceeds of the $170 Million Unsecured 2015 Term Loan were used to pay off the principal maturing on the $50 Million Unsecured Term Loan, and the remaining net proceeds were used to pay down the balance outstanding under the $500 Million Unsecured Line of Credit.
The $170 Million Unsecured 2015 Term Loan has the option to bear interest at varying levels based on (i) the London Interbank Offered Rate (“LIBOR”) or Base Rate, defined as the greater of the prime rate, the federal funds rate plus one-half of one percent, or LIBOR for a one-month period plus one percent, (ii) the credit rating levels issued for the Registrant, and (iii) for LIBOR loans, an interest period selected by Piedmont OP of one, two, three, or six months, or to the extent available from all lenders in each case, one year or periods of less than one month. The stated interest rate spread over LIBOR can vary from 0.9% to 1.75% based upon the then current credit rating of Piedmont. As of March 31, 2015, the stated interest rate spread on the $170 Million Unsecured 2015 Term Loan was 1.125%.
Under the $170 Million Unsecured 2015 Term Loan, Piedmont is subject to certain financial covenants that require, among other things, the maintenance of an unencumbered interest coverage ratio of at least 1.75, an unencumbered leverage ratio of at least 1.60, a fixed charge coverage ratio of at least 1.50, a leverage ratio of no more than 0.60, and a secured debt ratio of no more than 0.40. As of March 31, 2015, Piedmont believes it was in compliance with all financial covenants associated with its debt instruments.
Additionally, during the three months ended March 31, 2015, Piedmont incurred additional working capital borrowings of $88.0 million and, utilizing a portion of the proceeds of the $170 Million Unsecured 2015 Term Loan described above, as well as other cash on hand, made repayments totaling $159.0 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 $20.4 million and $16.5 million for the three months ended March 31, 2015 and 2014, respectively. Piedmont capitalized interest of $0.8 million and $0.4 million for the three months ended March 31, 2015 and 2014, respectively.
The following table summarizes the terms of Piedmont’s indebtedness outstanding as of March 31, 2015 and December 31, 2014 (in thousands):
|
| | | | | | | | | | | | | | | |
Facility | | Collateral | | Stated Rate(1) | | Maturity | | Amount Outstanding as of |
| March 31, 2015 | | December 31, 2014 |
Secured (Fixed) | | | | | | | | | | |
$105 Million Fixed-Rate Loan | | US Bancorp Center | | 5.29 | % | (2) | 5/11/2015 | | $ | 105,000 |
| | $ | 105,000 |
|
$125 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 Million WDC Fixed-Rate Loans | | 1201 & 1225 Eye Street | | 5.76 | % | | 11/1/2017 | | 140,000 |
| | 140,000 |
|
$35 Million Fixed-Rate Loan | | 5 Wall Street | | 5.55 | % | (4) | 9/1/2021 | | 36,266 |
| | 36,520 |
|
Subtotal/Weighted Average (5) | | | | 5.56 | % | | | | 448,791 |
| | 449,045 |
|
Unsecured (Variable and Fixed) | | | | | | | | | | |
$300 Million Unsecured 2011 Term Loan | | | | LIBOR + 1.15% |
| (6) | 1/15/2020 | | 298,996 |
| | 298,944 |
|
$500 Million Unsecured Line of Credit | | | | LIBOR + 1.175% |
| (7) | 8/19/2016 | (8) | 363,000 |
| | 434,000 |
|
$350 Million Unsecured Senior Notes | | | | 3.40 | % | (9) | 6/1/2023 | | 348,831 |
| | 348,800 |
|
$300 Million Unsecured 2013 Term Loan | | | | LIBOR + 1.20% |
| (10) | 1/31/2019 | | 300,000 |
| | 300,000 |
|
$400 Million Unsecured Senior Notes | | | | 4.45 | % | (11) | 3/15/2024 | | 396,914 |
| | 396,832 |
|
$50 Million Unsecured Term Loan | | | | LIBOR + 1.15% |
| | 4/1/2015 | | — |
| | 49,968 |
|
$170 Million Unsecured 2015 Term Loan | | | | LIBOR + 1.125% |
| (12) | 5/15/2018 | | 169,577 |
| | — |
|
Subtotal/Weighted Average (5) | | | | 2.78 | % | | | | 1,877,318 |
| | 1,828,544 |
|
Total/ Weighted Average (5) | | | | 3.31 | % | | | | $ | 2,326,109 |
| | $ | 2,277,589 |
|
| |
(1) | Other than the $35 Million Fixed-Rate Loan, all of Piedmont’s outstanding debt as of March 31, 2015 and December 31, 2014 is interest-only. |
| |
(2) | On April 10, 2015, Piedmont repaid in full the balance on the $105 Million Fixed-Rate Loan. |
| |
(3) | Property collateralized pool includes 1430 Enclave Parkway in Houston, Texas, Windy Point I and II in Schaumburg, Illinois, and 1055 East Colorado Boulevard in Pasadena, California. |
| |
(4) | The $35 Million Fixed-Rate Loan has a contractual fixed rate of 5.55% ; however, the amortization of the premium recorded in order to adjust the note to its estimated fair value, results in an effective interest rate of 3.75%. |
| |
(5) | Weighted average is based on contractual balance of outstanding debt and interest rates in the table as of March 31, 2015. |
| |
(6) | The $300 Million Unsecured 2011 Term Loan has a stated variable rate; however, Piedmont has entered into interest rate swap agreements which effectively fix, exclusive of changes to Piedmont's credit rating, the rate on this facility to 2.39% through the original maturity date of November 22, 2016 and 3.35% from November 22, 2016 to January 15, 2020. |
| |
(7) | 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 March 31, 2015) over the selected rate based on Piedmont’s current credit rating. The outstanding balance as of March 31, 2015 consisted of 30-day LIBOR draws at a rate of 0.18% (subject to the additional spread mentioned above). |
| |
(8) | Piedmont may extend the term for up to one additional year (through two available six month extensions to a final extended maturity date of August 21, 2017) provided Piedmont is not then in default and upon payment of extension fees. |
| |
(9) | 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%. After consideration of the impact of settled interest rate swap agreements, in addition to the issuance discount, the effective interest rate on this debt is 3.43%. |
| |
(10) | The $300 Million Unsecured 2013 Term Loan has a stated variable rate; however, Piedmont entered into interest rate swap agreements which effectively fix, absent any changes to Piedmont's credit rating, the rate on this facility to 2.78% . |
| |
(11) | The $400 Million Senior Notes have a fixed coupon rate of 4.45%, however, as a result of the issuance of the notes at a discount, Piedmont recognizes an effective interest rate on this debt issuance of 4.48%. After consideration of the impact of settled interest rate swap agreements, in addition to the issuance discount, the effective interest rate on this debt is 4.10%. |
| |
(12) | Piedmont may select from multiple interest rate options, including the prime rate and various-length LIBOR locks. All LIBOR selections are subject to an additional spread (1.125% as of March 31, 2015) over the selected rate based on Piedmont’s current credit rating. The outstanding balance as of March 31, 2015 consisted of a 30-day LIBOR draw at a rate of 0.18% (subject to the additional spread mentioned above). |
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 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. As of March 31, 2015, Piedmont was party to various forward starting interest rate swap agreements which fully hedge the variable cash flows associated with all of its outstanding unsecured, variable-rate debt, other than the $500 Million Line of Credit and the $170 Million Unsecured 2015 Term Loan. Additionally, as of March 31, 2015, Piedmont held $500 million of forward starting interest rate swaps to hedge its exposure to the variability in future cash flows associated with potential future debt issuances in 2015 and 2016. The maximum length of time over which Piedmont is hedging its exposure to the variability in future cash flows for forecasted transactions is 131 months.
The detail of Piedmont’s interest rate derivatives outstanding as of March 31, 2015 is as follows:
|
| | | | | | | | | | | | |
Interest Rate Derivatives: | | Number of Swap Agreements | | Associated Debt Instrument | | Total Notional Amount (in millions) | | Effective Date | | Maturity Date |
Interest rate swaps | | 4 | | $300 Million Unsecured 2011 Term Loan | | $ | 300 |
| | 11/22/2011 | | 11/22/2016 |
Interest rate swaps | | 4 | | $300 Million Unsecured 2013 Term Loan | | 200 |
| | 1/30/2014 | | 1/31/2019 |
Interest rate swaps | | 2 | | $300 Million Unsecured 2013 Term Loan | | 100 |
| | 8/29/2014 | | 1/31/2019 |
Forward starting interest rate swaps | | 3 | | $300 Million Unsecured 2011 Term Loan | | 300 |
| | 11/22/2016 | | 1/15/2020 |
Forward starting interest rate swaps | | 4 | | Potential Future Issuance | | 250 |
| | 2/27/2015 | | 2/27/2022 |
Forward starting interest rate swaps | | 4 | | Potential Future Issuance | | 250 |
| | 2/25/2016 | | 2/25/2026 |
Total | | | | | | $ | 1,400 |
| | | | |
Piedmont has elected to present its interest rate derivatives on its consolidated balance sheets on a gross basis as interest rate swap assets and interest rate swap liabilities. The detail of Piedmont’s interest rate derivatives on a gross and net basis as of March 31, 2015 and December 31, 2014, respectively, is as follows (in thousands):
|
| | | | | | | |
Interest rate swaps classified as: | March 31, 2015 | | December 31, 2014 |
Gross derivative assets | $ | 520 |
| | $ | 430 |
|
Gross derivative liabilities | (19,416 | ) | | (6,417 | ) |
Net derivative liability | $ | (18,896 | ) | | $ | (5,987 | ) |
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 estimated fair value of these derivatives 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. In addition, in conjunction with the issuance of various unsecured senior notes during the years ended December 31, 2014 and 2013, Piedmont settled several forward starting swap agreements for gains which were recorded as accumulated other comprehensive income during the respective period and are being amortized as an offset to interest expense over the term of the respective notes on a straight line basis (which approximates the effective interest method). Piedmont classifies cash flows from the settlement of hedging derivative instruments in the same category as the underlying exposure which is being hedged. As the settlements were the result of hedging Piedmont's exposure to interest rate changes and their effect on interest expense, they are classified as operating cash flows in the accompanying consolidated statements of cash flows.
The effective portion of Piedmont's interest rate derivatives, including the gain on settlement of forward swaps described above, that was recorded in the accompanying consolidated statements of income for the three months ended March 31, 2015 and 2014, respectively, was as follows:
|
| | | | | | | |
| Three Months Ended |
Derivative in Cash Flow Hedging Relationships (Interest Rate Swaps) (in thousands) | March 31, 2015 | | March 31, 2014 |
Amount of gain/(loss) recognized in OCI on derivative | $ | (15,205 | ) | | $ | (9,886 | ) |
Amount of previously recorded loss reclassified from accumulated OCI into interest expense | $ | 1,467 |
| | $ | 1,170 |
|
Piedmont estimates that approximately $5.7 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 months ended March 31, 2015 or 2014.
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 estimated fair values plus accrued interest, or approximately $20.3 million as of March 31, 2015. 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 and Equity Participation Rights
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 must consolidate the VIE.
During the three months ended March 31, 2015, Piedmont paid $4 million to settle the redemption option associated with an equity participation in Medici Atlanta, LLC, eliminating any ongoing third party interest.
A summary of Piedmont’s interests in and consolidation treatment of its outstanding VIEs as of March 31, 2015 and their related carrying values as of December 31, 2014 is as follows (net carrying amount in millions):
|
| | | | | | | | | | | | | | | | |
Entity | | Piedmont’s % Ownership of Entity | | Related Building | | Consolidated/ Unconsolidated | | Net Carrying Amount as of March 31, 2015 | | Net Carrying Amount as of December 31, 2014 | | Primary Beneficiary Considerations |
1201 Eye Street NW Associates, LLC | | 49.5% | | 1201 Eye Street | | Consolidated | | $ | (2.5 | ) | | $ | (2.8 | ) | | In accordance with the partnership’s governing documents, Piedmont is entitled to 100% of the cash flow of the entity until certain financial returns are achieved 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 | | $ | 0.6 |
| | $ | (1.1 | ) | | In accordance with the partnership’s governing documents, Piedmont is entitled to 100% of the cash flow of the entity until certain financial returns are achieved 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 | | $ | 245.7 |
| | $ | 245.3 |
| | 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. |
Piedmont TownPark Land, LLC | | 100% | | Land Parcel Adjacent to 400 TownPark building | | Consolidated | | $ | 7.9 |
| | $ | 7.9 |
| | The equity participation and service fee agreement includes equity participation rights for the third party manager if certain defined events occur and 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 events occur and returns are achieved. |
Each of the VIEs described above has the sole purpose of holding land and 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.
7.Fair Value Measurement of Financial Instruments
Piedmont considers its cash, tenant receivables, 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 March 31, 2015 and December 31, 2014, respectively (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| March 31, 2015 | | December 31, 2014 |
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) | $ | 7,479 |
| | $ | 7,479 |
| | Level 1 | | $ | 12,306 |
| | $ | 12,306 |
| | Level 1 |
Tenant receivables, net(1) | $ | 30,132 |
| | $ | 30,132 |
| | Level 1 | | $ | 27,711 |
| | $ | 27,711 |
| | Level 1 |
Restricted cash and escrows(1) | $ | 671 |
| | $ | 671 |
| | Level 1 | | $ | 5,679 |
| | $ | 5,679 |
| | Level 1 |
Interest rate swap asset | $ | 520 |
| | $ | 520 |
| | Level 2 | | $ | 430 |
| | $ | 430 |
| | Level 2 |
Liabilities: | | | | | | | | | | | |
Accounts payable and accrued expenses(1) | $ | 16,098 |
| | $ | 16,098 |
| | Level 1 | | $ | 14,395 |
| | $ | 14,395 |
| | Level 1 |
Interest rate swap liability | $ | 19,416 |
| | $ | 19,416 |
| | Level 2 | | $ | 6,417 |
| | $ | 6,417 |
| | Level 2 |
Debt | $ | 2,326,109 |
| | $ | 2,373,488 |
| | Level 2 | | $ | 2,277,589 |
| | $ | 2,314,020 |
| | 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 March 31, 2015 and December 31, 2014; 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 estimated 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 estimated fair value as of March 31, 2015 and December 31, 2014. 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 estimated 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 estimated 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 March 31, 2015 and December 31, 2014, 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 estimated 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 Lease 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 categories: (i) improvements which incrementally enhance the building's
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 March 31, 2015, commitments for funding potential non-incremental capital expenditures over the next five years for tenant improvements totaled approximately $46.1 million related to Piedmont's existing lease portfolio over the respective lease terms, the majority of which Piedmont estimates may be required to be funded over the next three years based on when the underlying leases commence. 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 March 31, 2015, commitments for incremental capital expenditures for tenant improvements associated with new and existing leases, primarily at value-add properties, totaled approximately $23.8 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 reductions in reimbursement revenues related to such tenant audits/disputes of approximately $0 and $0.3 million during the three months ended March 31, 2015 and 2014, respectively.
Letters of Credit
As of March 31, 2015, Piedmont was subject to a letter of credit of approximately $0.4 million, which reduces the total outstanding capacity under its $500 Million Unsecured Line of Credit. This letter of credit agreement is scheduled to expire in July 2015; however, it contains an automatic renewal feature, consisting of successive one-year renewal periods, subject to the satisfaction of the credit obligation and certain other limitations.
9.Assets Held for Sale and Discontinued Operations
Assets Held for Sale
Assets held for sale as of December 31, 2014 consisted solely of the 3900 Dallas Parkway building. Details are presented below (in thousands):
|
| | | | | | | | |
| | March 31, 2015 | | December 31, 2014 |
Real estate assets held for sale, net: | | | | |
Land | | $ | — |
| | $ | 1,517 |
|
Building and improvements, less accumulated depreciation of $10,342 as of December 31, 2014 | | — |
| | 13,027 |
|
Total real estate assets held for sale, net | | $ | — |
| | $ | 14,544 |
|
| | | | |
Other assets held for sale, net: | | | | |
Straight-line rent receivables | | $ | — |
| | $ | 768 |
|
Deferred lease costs, less accumulated amortization of $1,552 as of December 31, 2014 | | — |
| | 496 |
|
Total other assets held for sale, net | | $ | — |
| | $ | 1,264 |
|
The 3900 Dallas Parkway building was subsequently sold during the three months ended March 31, 2015, and no other assets were held for sale as of March 31, 2015. The property was sold for approximately $26.2 million, resulting in a gain of approximately $10.1 million and net sales proceeds of approximately $25.8 million. As the sale of the 3900 Dallas Parkway building did not meet the criteria to be reported as a discontinued operation, the operational results for the building for periods prior to the sale are presented as continuing operations in the accompanying consolidated statements of income, and the gain on sale is presented separately on the face of the income statement.
Discontinued Operations
Asset disposals in previous periods that were previously classified as, and that continue to be reported as, discontinued operations for the three months ended March 31, 2015 and 2014 were as follows (in thousands):
|
| | | | | | | | | | | | |
Buildings Sold | | Location | | Date of Sale | | Gain/(Loss) on Sale | | Net Sales Proceeds |
11107 and 11109 Sunset Hills Road | | Reston, Virginia | | March 19, 2014 | | $ | (102 | ) | | $ | 22,326 |
|
1441 West Long Lake Road | | Troy, Michigan | | April 30, 2014 | | $ | 562 |
| | $ | 7,202 |
|
4685 Investment Drive | | Troy, Michigan | | April 30, 2014 | | $ | 747 |
| | $ | 11,198 |
|
Details comprising income from discontinued operations for the three months ended March 31, 2015 and 2014 are presented below (in thousands):
|
| | | | | | | |
| Three Months Ended |
| March 31, 2015 | | March 31, 2014 |
Revenues: | | | |
Rental income | $ | — |
| | $ | 1,174 |
|
Tenant reimbursements | — |
| | 112 |
|
| — |
| | 1,286 |
|
Expenses: | | | |
Property operating costs | — |
| | 505 |
|
Depreciation | — |
| | 83 |
|
Amortization | — |
| | 223 |
|
General and administrative | — |
| | 3 |
|
| — |
| | 814 |
|
| | | |
Other income/(expense) | — |
| | (6 | ) |
| | | |
Operating income, excluding gain on sale | — |
| | 466 |
|
Gain on sale of real estate assets | — |
| | (106 | ) |
Income from discontinued operations | $ | — |
| | $ | 360 |
|
10.Stock Based Compensation
From time to time, Piedmont has granted equity awards to all of its employees. The deferred stock awards are determined by the Compensation Committee of the board of directors of Piedmont and typically vest on the award anniversary date ratably over a multi-year period. Piedmont also has a multi-year performance share program for certain of its employees whereby equity awards may be earned based on the relative performance of Piedmont's total stockholder return as compared with a predetermined peer group's total stockholder return over the same multi-year period. Shares are not awarded until after the end of the multi-year performance period and vest upon award.
A rollforward of Piedmont's equity based award activity for the three months ended March 31, 2015 is as follows:
|
| | | | | | |
| Shares | | Weighted-Average Grant Date Fair Value |
Unvested Deferred Stock Awards as of December 31, 2014 | 506,404 |
| | $ | 18.12 |
|
Deferred Stock Awards Granted During Three Months Ended March 31, 2015 | — |
| | $ | — |
|
Adjustment to Estimated Future Grants of Performance Share Awards During Three Months Ended March 31, 2015 | (15,413 | ) | | $ | 18.51 |
|
Deferred Stock Awards Vested During Three Months Ended March 31, 2015 | (20,976 | ) | | $ | 16.48 |
|
Deferred Stock Awards Forfeited During Three Months Ended March 31, 2015 | — |
| | $ | — |
|
Unvested Deferred Stock Awards as of March 31, 2015 | 470,015 |
| | $ | 18.18 |
|
The following table provides additional information regarding stock award activity during the three months ended March 31, 2015 and 2014, respectively (in thousands except for per share data):
|
| | | | | | | | |
| Three Months Ended | |
| March 31, 2015 | | March 31, 2014 | |
Weighted-Average Grant Date Fair Value of Shares Granted During the Period (per share) | $ | — |
| | $ | 16.45 |
| |
Total Grant Date Fair Value of Shares Vested During the Period | $ | 346 |
| | $ | 4 |
| |
Share-based Liability Awards Paid During the Period(1) | $ | — |
| | $ | — |
| |
| |
(1) | Amount reflects the issuance of performance share awards during the period. |
A detail of Piedmont’s outstanding employee stock awards as of March 31, 2015 is as follows:
|
| | | | | | | | | | | | | | | |
Date of grant | | Type of Award | | Net Shares Granted (1) | | Grant Date Fair Value | | Vesting Schedule | | Unvested Shares as of March 31, 2015 | |
April 4, 2012 | | Deferred Stock Award | | 169,128 |
| | $ | 17.53 |
| | Of the shares granted, 25% vested on the date of grant, and 25% vested or will vest on April 4, 2013, 2014, and 2015, respectively. | | 53,868 |
| |
April 2, 2013 | | Deferred Stock Award | | 132,826 |
| | $ | 19.47 |
| | Of the shares granted, 25% vested on the date of grant, and 25% vested or will vest on April 2, 2014, 2015, and 2016, respectively. | | 76,156 |
| |
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) |
January 3, 2014 | | Deferred Stock Award | | 95,476 |
| | $ | 16.45 |
| | Of the shares granted, 20% will vest on January 3, 2015, 2016, 2017, 2018, and 2019, respectively. | | 82,673 |
| |
May 9, 2014 | | Deferred Stock Award | | 179,897 |
| | $ | 18.47 |
| | Of the shares granted, 25% vested on the date of grant, and 25% vested or will vest on May 9, 2015, 2016, and 2017, respectively. | | 144,287 |
| |
May 9, 2014 | | Fiscal Year 2014-2016 Performance Share Program | | — |
| | $ | 18.51 |
| | Shares awarded, if any, will vest immediately upon determination of award in 2017. | | 113,031 |
| (3) |
Total | | | | | | | | | | 470,015 |
| |
| |
(1) | Amounts reflect the total grant to employees, net of shares surrendered upon vesting to satisfy required minimum tax withholding obligations through March 31, 2015. |
| |
(2) | Estimated based on Piedmont's cumulative total stockholder return ("TSR") for the respective performance period through March 31, 2015. As of March 31, 2015, Piedmont's TSR for the fiscal year 2013-2015 performance share program was below threshold. Share estimates are subject to change in future periods based on both Piedmont's and its peers' stock performance and dividends paid. |
| |
(3) | Estimated based on Piedmont's cumulative TSR for the respective performance period through March 31, 2015. Share 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 March 31, 2015 and 2014, Piedmont recognized approximately $0.9 million and $0.6 million of compensation expense related to stock awards, of which $0.8 million and $0.6 million related to the amortization of unvested shares, respectively. During the three months ended March 31, 2015, a net total of 15,418 shares were issued to employees, directors, and officers. As of March 31, 2015, approximately $2.3 million of unrecognized compensation cost related to unvested 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 unvested deferred stock awards. Diluted weighted average number of common shares reflects the potential dilution under the treasury stock method that would occur if the remaining unvested deferred stock awards vested and resulted in additional common shares outstanding. Certain unvested deferred stock awards are not included in the calculation because they would be anti-dilutive and have no effect for the periods presented.
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 months ended March 31, 2015 and 2014, respectively (in thousands):
|
| | | |
| Three Months Ended |
| March 31, 2015 | | March 31, 2014 |
Weighted-average common shares – basic | 154,339 | | 154,849 |
Plus incremental weighted-average shares from time-vested conversions: | | | |
Deferred stock awards | 241 | | 176 |
Weighted-average common shares – diluted | 154,580 | | 155,025 |
12.Guarantor and Non-Guarantor Financial Information
The following condensed consolidating financial information for Piedmont Operating Partnership, L.P. (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.
|
| | | | | | | | | | | | | | | | | | | |
Condensed Consolidated Balance Sheets |
As of March 31, 2015 |
(in thousands) | Issuer | | Guarantor | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
Assets: | | | | | | | | | |
Real estate assets, at cost: | | | | | | | | | |
Land | $ | 81,406 |
| | $ | — |
| | $ | 625,934 |
| | $ | — |
| | $ | 707,340 |
|
Buildings and improvements, less accumulated depreciation | 438,933 |
| | — |
| | 2,795,862 |
| | (300 | ) | | 3,234,495 |
|
Intangible lease assets, less accumulated amortization | 1,676 |
| | — |
| | 67,578 |
| | — |
| | 69,254 |
|
Construction in progress | 3,032 |
| | — |
| | 80,821 |
| | — |
| | 83,853 |
|
Total real estate assets | 525,047 |
| | — |
| | 3,570,195 |
| | (300 | ) | | 4,094,942 |
|
Investments in and amounts due from unconsolidated joint ventures | 7,820 |
| | — |
| | — |
| | — |
| | 7,820 |
|
Cash and cash equivalents | 3,879 |
| | 250 |
| | 3,350 |
| | — |
| | 7,479 |
|
Tenant and straight-line rent receivables, net | 37,756 |
| | — |
| | 167,716 |
| | — |
| | 205,472 |
|
Advances to affiliates | 6,142,933 |
| | 1,284,521 |
| | — |
| | (7,427,454 | ) | | — |
|
Investment in subsidiary | — |
| | 3,846,399 |
| | 191 |
| | (3,846,590 | ) | | — |
|
Notes receivable | 161,350 |
| | — |
| | 23,890 |
| | (185,240 | ) | | — |
|
Prepaid expenses, restricted cash, escrows, and other assets | 6,129 |
| | 116 |
| | 22,567 |
| | (1,262 | ) | | 27,550 |
|
Goodwill | 180,097 |
| | — |
| | — |
| | — |
| | 180,097 |
|
Interest rate swaps | 520 |
| | — |
| | — |
| | — |
| | 520 |
|
Deferred financing costs, net | 7,023 |
| | — |
| | 368 |
| | — |
| | 7,391 |
|
Deferred lease costs, net | 31,445 |
| | — |
| | 257,146 |
| | — |
| | 288,591 |
|
Total assets | $ | 7,103,999 |
| | $ | 5,131,286 |
| | $ | 4,045,423 |
| | $ | (11,460,846 | ) | | $ | 4,819,862 |
|
Liabilities: | | | | | | | | | |
Debt, net | $ | 1,901,208 |
| | $ | — |
| | $ | 610,141 |
| | $ | (185,240 | ) | | $ | 2,326,109 |
|
Accounts payable, accrued expenses, and accrued capital expenditures | 16,732 |
| | 674 |
| | 103,322 |
| | (1,262 | ) | | 119,466 |
|
Advances from affiliates | 392,696 |
| | 4,909,707 |
| | 2,185,841 |
| | (7,488,244 | ) | | — |
|
Deferred income | 5,150 |
| | — |
| | 20,820 |
| | — |
| | 25,970 |
|
Intangible lease liabilities, net | — |
| | — |
| | 42,978 |
| | — |
| | 42,978 |
|
Interest rate swaps | 19,416 |
| | — |
| | — |
| | — |
| | 19,416 |
|
Total liabilities | 2,335,202 |
| | 4,910,381 |
| | 2,963,102 |
| | (7,674,746 | ) | | 2,533,939 |
|
Stockholders’ Equity: | | | | | | | | | |
Common stock | — |
| | 1,543 |
| | — |
| | — |
| | 1,543 |
|
Additional paid-in capital | 3,842,399 |
| | 3,670,447 |
| | 1,318 |
| | (3,846,590 | ) | | 3,667,574 |
|
Retained/(cumulative distributions in excess of) earnings | 931,835 |
| | (3,451,085 | ) | | 1,079,974 |
| | 60,490 |
| | (1,378,786 | ) |
Other comprehensive loss | (5,437 | ) | | — |
| | — |
| | — |
| | (5,437 | ) |
Piedmont stockholders’ equity | 4,768,797 |
| | 220,905 |
| | 1,081,292 |
| | (3,786,100 | ) | | 2,284,894 |
|
Noncontrolling interest | — |
| | — |
| | 1,029 |
| | — |
| | 1,029 |
|
Total stockholders’ equity | 4,768,797 |
| | 220,905 |
| | 1,082,321 |
| | (3,786,100 | ) | | 2,285,923 |
|
Total liabilities and stockholders’ equity | $ | 7,103,999 |
| | $ | 5,131,286 |
| | $ | 4,045,423 |
| | $ | (11,460,846 | ) | | $ | 4,819,862 |
|
|
| | | | | | | | | | | | | | | | | | | |
Condensed Consolidated Balance Sheets |
As of December 31, 2014 |
(in thousands) | Issuer | | Guarantor | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
Assets: | | | | | | | | | |
Real estate assets, at cost: | | | | | | | | | |
Land | $ | 81,406 |
| | $ | — |
| | $ | 621,394 |
| | $ | — |
| | $ | 702,800 |
|
Buildings and improvements, less accumulated depreciation | 442,034 |
| | — |
| | 2,782,444 |
| | (300 | ) | | 3,224,178 |
|
Intangible lease assets, less accumulated amortization | 1,812 |
| | — |
| | 68,365 |
| | — |
| | 70,177 |
|
Construction in progress | 1,355 |
| | — |
| | 62,038 |
| | — |
| | 63,393 |
|
Real estate assets held for sale, net | 14,544 |
| | — |
| | — |
| | — |
| | 14,544 |
|
Total real estate assets | 541,151 |
| | — |
| | 3,534,241 |
| | (300 | ) | | 4,075,092 |
|
Investments in and amounts due from unconsolidated joint ventures | 7,798 |
| | — |
| | — |
| | — |
| | 7,798 |
|
Cash and cash equivalents | 8,143 |
| | 1,790 |
| | 2,373 |
| | — |
| | 12,306 |
|
Tenant and straight-line rent receivables, net | 37,238 |
| | — |
| | 160,005 |
| | — |
| | 197,243 |
|
Advances to affiliates | 6,084,243 |
| | 1,282,443 |
| | — |
| | (7,366,686 | ) | | — |
|
Investment in subsidiary | — |
| | 3,878,811 |
| | 192 |
| | (3,879,003 | ) |
| — |
|
Notes receivable | 161,350 |
| | — |
| | 23,890 |
| | (185,240 | ) | | — |
|
Prepaid expenses, restricted cash, escrows, and other assets | 10,912 |
| | — |
| | 23,541 |
| | (954 | ) | | 33,499 |
|
Goodwill | 180,097 |
| | — |
| | — |
| | — |
| | 180,097 |
|
Interest rate swaps | 430 |
| | — |
| | — |
| | — |
| | 430 |
|
Deferred financing costs, net | 7,242 |
| | — |
| | 425 |
| | — |
| | 7,667 |
|
Deferred lease costs, net | 31,340 |
| | — |
| | 248,765 |
| | — |
| | 280,105 |
|
Other assets held for sale, net | 1,264 |
| | — |
| | — |
| | — |
| | 1,264 |
|
Total assets | $ | 7,071,208 |
| | $ | 5,163,044 |
| | $ | 3,993,432 |
| | $ | (11,432,183 | ) | | $ | 4,795,501 |
|
Liabilities: | | | | | | | | | |
Debt, net | $ | 1,852,434 |
| | $ | — |
| | $ | 610,395 |
| | $ | (185,240 | ) | | $ | 2,277,589 |
|
Accounts payable, accrued expenses, and accrued capital expenditures | 19,403 |
| | 465 |
| | 115,074 |
| | (954 | ) | | 133,988 |
|
Advances from affiliates | 376,122 |
| | 4,909,362 |
| | 2,138,140 |
| | (7,423,624 | ) | | — |
|
Deferred income | 4,998 |
| | — |
| | 17,217 |
| | — |
| | 22,215 |
|
Intangible lease liabilities, net | — |
| | — |
| | 43,277 |
| | — |
| | 43,277 |
|
Interest rate swaps | 6,417 |
| | — |
| | — |
| | — |
| | 6,417 |
|
Total liabilities | 2,259,374 |
| | 4,909,827 |
| | 2,924,103 |
| | (7,609,818 | ) | | 2,483,486 |
|
Stockholders’ Equity: | | | | | | | | | |
Common stock | — |
| | 1,543 |
| | — |
| | — |
| | 1,543 |
|
Additional paid-in capital | 3,874,757 |
| | 3,670,236 |
| | 192 |
| | (3,879,003 | ) | | 3,666,182 |
|
Retained/(cumulative distributions in excess of) earnings | 928,776 |
| | (3,418,562 | ) | | 1,067,528 |
| | 56,638 |
| | (1,365,620 | ) |
Other comprehensive loss | 8,301 |
| | — |
| | — |
| | — |
| | 8,301 |
|
Piedmont stockholders’ equity | 4,811,834 |
| | 253,217 |
| | 1,067,720 |
| | (3,822,365 | ) | | 2,310,406 |
|
Noncontrolling interest | — |
| | — |
| | 1,609 |
| | — |
| | 1,609 |
|
Total stockholders’ equity | 4,811,834 |
| | 253,217 |
| | 1,069,329 |
| | (3,822,365 | ) | | 2,312,015 |
|
Total liabilities and stockholders’ equity | $ | 7,071,208 |
| | $ | 5,163,044 |
| | $ | 3,993,432 |
| | $ | (11,432,183 | ) | | $ | 4,795,501 |
|
|
| | | | | | | | | | | | | | | | | | | |
Condensed Consolidated Statements of Income |
For the three months ended March 31, 2015 |
(in thousands) | Issuer | | Guarantor | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
Revenues: | | | | | | | | | |
Rental income | $ | 18,937 |
| | $ | — |
| | $ | 99,577 |
| | $ | (707 | ) | | $ | 117,807 |
|
Tenant reimbursements | 4,246 |
| | — |
| | 27,272 |
| | (128 | ) | | 31,390 |
|
Property management fee revenue | — |
| | — |
| | 4,439 |
| | (3,877 | ) | | 562 |
|
| 23,183 |
| | — |
| | 131,288 |
| | (4,712 | ) | | 149,759 |
|
Expenses: | | | | | | | | | |
Property operating costs | 10,661 |
| | — |
| | 58,494 |
| | (4,919 | ) | | 64,236 |
|
Depreciation | 5,803 |
| | — |
| | 30,429 |
| | — |
| | 36,232 |
|
Amortization | 1,254 |
| | — |
| | 13,416 |
| | — |
| | 14,670 |
|
General and administrative | 6,200 |
| | 111 |
| | 7,724 |
| | (7,628 | ) | | 6,407 |
|
| 23,918 |
| | 111 |
| | 110,063 |
| | (12,547 | ) | | 121,545 |
|
Real estate operating income | |