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, 2015
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 November 6, 2015:
145,508,307 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 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 share repurchases; and discussions regarding the potential impact of economic conditions on our real estate and lease 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:

•
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;
•
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 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;
•
Lease terminations or lease defaults, particularly by one of our large lead tenants;
•
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;
•
The success of our real estate strategies and investment objectives, including our ability to identify and consummate suitable acquisitions and divestitures;
•
The illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our properties;
•
Acquisitions of properties may have unknown risks and other liabilities at the time of acquisition;
•
Development and construction delays and resultant increased costs and risks may negatively impact our operating results;
•
Our real estate development strategies may not be successful;
•
Future terrorist attacks in the major metropolitan areas in which we own properties could significantly impact the demand for, and value of, our properties;
•
Costs of complying with governmental laws and regulations;
•
Additional risks and costs associated with directly managing properties occupied by government tenants;
•
Future offerings of debt or equity securities may adversely affect the market price of our common stock;
•
Changes in market interest rates may have an effect on the value of our common stock;
•
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;
•
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
•
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.


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, 2014. Piedmont’s results of operations for the nine months ended September 30, 2015 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,
2015
 
December 31,
2014
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
671,832

 
$
674,554

Buildings and improvements, less accumulated depreciation of $933,717 and $889,997 as of September 30, 2015 and December 31, 2014, respectively
2,655,581

 
2,741,583

Intangible lease assets, less accumulated amortization of $87,633 and $79,860 as of September 30, 2015 and December 31, 2014, respectively
60,770

 
70,177

Construction in progress
75,083

 
61,891

Real estate assets held for sale, net
470,847

 
526,887

Total real estate assets
3,934,113

 
4,075,092

Investments in and amounts due from unconsolidated joint ventures
7,652

 
7,798

Cash and cash equivalents
7,702

 
12,306

Tenant receivables, net of allowance for doubtful accounts of $86 and $231 as of September 30, 2015 and December 31, 2014, respectively
26,748

 
27,711

Notes receivable
45,400

 
—

Straight-line rent receivables
149,060

 
146,836

Restricted cash and escrows
37,705

 
5,679

Prepaid expenses and other assets
31,764

 
25,656

Goodwill
180,097

 
180,097

Interest rate swaps
—

 
430

Deferred financing costs, less accumulated amortization of $6,971 and $6,067 as of September 30, 2015 and December 31, 2014, respectively
7,220

 
7,667

Deferred lease costs, less accumulated amortization of $143,676 and $129,601 as of September 30, 2015 and December 31, 2014, respectively
231,379

 
228,953

Other assets held for sale, net
81,034

 
77,276

Total assets
$
4,739,874

 
$
4,795,501

Liabilities:
 
 
 
Unsecured debt, net of discount of $7,137 and $5,424 as of September 30, 2015 and December 31, 2014, respectively
$
1,925,863

 
$
1,828,544

Secured debt, inclusive of premium of $2,209 and $3,258 as of September 30, 2015 and December 31, 2014, respectively
502,456

 
449,045

Accounts payable, accrued expenses, and accrued capital expenditures
132,741

 
133,988

Deferred income
26,087

 
22,215

Intangible lease liabilities, less accumulated amortization of $40,542 and $35,628 as of September 30, 2015 and December 31, 2014, respectively
38,896

 
42,560

Interest rate swaps
20,526

 
6,417

Other liabilities held for sale, net
567

 
717

Total liabilities
2,647,136

 
2,483,486

Commitments and Contingencies
—

 
—

Stockholders’ Equity:
 
 
 
Shares-in-trust, 150,000,000 shares authorized; none outstanding as of September 30, 2015 or December 31, 2014
—

 
—

Preferred stock, no par value, 100,000,000 shares authorized; none outstanding as of September 30, 2015 or December 31, 2014
—

 
—

Common stock, $.01 par value, 750,000,000 shares authorized; 145,633,869 and 154,324,089 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively
1,456

 
1,543

Additional paid-in capital
3,669,154

 
3,666,182

Cumulative distributions in excess of earnings
(1,570,377
)
 
(1,365,620
)
Other comprehensive income/(loss)
(8,524
)
 
8,301

Piedmont stockholders’ equity
2,091,709

 
2,310,406

Noncontrolling interest
1,029

 
1,609

Total stockholders’ equity
2,092,738

 
2,312,015

Total liabilities and stockholders’ equity
$
4,739,874

 
$
4,795,501

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,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Rental income
$
117,994

 
$
114,529

 
$
353,255

 
$
338,720

Tenant reimbursements
30,273

 
29,579

 
90,476

 
79,253

Property management fee revenue
548

 
533

 
1,577

 
1,568

 
148,815

 
144,641

 
445,308

 
419,541

Expenses:
 
 
 
 
 
 
 
Property operating costs
61,677

 
62,027

 
187,392

 
177,434

Depreciation
31,199

 
35,366

 
103,470

 
103,154

Amortization
14,021

 
14,235

 
43,646

 
42,407

Impairment loss on real estate assets
34,815

 
—

 
40,169

 
—

General and administrative
8,236

 
5,814

 
22,726

 
17,514

 
149,948

 
117,442

 
397,403

 
340,509

Real estate operating income/(loss)
(1,133
)
 
27,199

 
47,905

 
79,032

Other income (expense):
 
 
 
 
 
 
 
Interest expense
(18,832
)
 
(18,654
)
 
(56,020
)
 
(55,592
)
Other income
803

 
524

 
1,218

 
68

Net recoveries/(loss) from casualty events and litigation settlements
—

 
(8
)
 
—

 
4,514

Equity in income/(loss) of unconsolidated joint ventures
135

 
89

 
418

 
(510
)
 
(17,894
)
 
(18,049
)
 
(54,384
)
 
(51,520
)
Income/(loss) from continuing operations
(19,027
)
 
9,150

 
(6,479
)
 
27,512

Discontinued operations:
 
 
 
 
 
 
 
Operating income
16

 
16

 
13

 
996

Gain/(loss) on sale of real estate assets
(2
)
 
—

 
(2
)
 
1,198

Income from discontinued operations
14

 
16

 
11

 
2,194

Gain on sale of real estate assets
17,142

 
—

 
53,826

 
1,140

Net income/(loss)
(1,871
)
 
9,166

 
47,358

 
30,846

Less: Net income attributable to noncontrolling interest
(4
)
 
(4
)
 
(12
)
 
(12
)
Net income/(loss) attributable to Piedmont
$
(1,875
)
 
$
9,162

 
$
47,346

 
$
30,834

Per share information – basic and diluted:
 
 
 
 
 
 
 
Income/(loss) from continuing operations and gain on sale of real estate assets
$
(0.01
)
 
$
0.06

 
$
0.31

 
$
0.19

Income from discontinued operations
—

 
—

 
—

 
0.01

Net income/(loss) available to common stockholders
$
(0.01
)
 
$
0.06

 
$
0.31

 
$
0.20

Weighted-average common shares outstanding – basic
148,855,336

 
154,325,073

 
152,231,060

 
154,495,761

Weighted-average common shares outstanding – diluted
149,176,207

 
154,561,362

 
152,499,430

 
154,664,834

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,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income/(loss) attributable to Piedmont
 
 
$
(1,875
)
 
 
 
$
9,162

 
 
 
$
47,346

 
 
 
$
30,834

Other comprehensive income/(loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective portion of gain/(loss) on derivative instruments that are designated and qualify as cash flow hedges (See Note 5)
(22,263
)
 
 
 
1,360

 
 
 
(21,389
)
 
 
 
(12,143
)
 
 
Plus: Reclassification of previously recorded loss included in net income (See Note 5)
1,506

 
 
 
1,295

 
 
 
4,575

 


 
3,623

 


Unrealized loss on investment in available for sale securities
(9
)
 
 
 
—

 
 
 
(11
)
 
 
 
—

 
 
Other comprehensive income/(loss)
 
 
(20,766
)
 
 
 
2,655

 
 
 
(16,825
)
 
 
 
(8,520
)
Comprehensive income/ (loss) attributable to Piedmont
 
 
$
(22,641
)
 
 
 
$
11,817

 
 
 
$
30,521

 
 
 
$
22,314



See accompanying notes

7
Table of Contents

PIEDMONT OFFICE REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2014
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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 loss
—

 
—

 
—

 
—

 
(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
(8,849
)
 
(88
)
 
—

 
(156,387
)
 
—

 
—

 
(156,475
)
Offering costs
—

 
—

 
(326
)
 
—

 
—

 
—

 
(326
)
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 ($0.63 per share), dividends to shareholders of subsidiary, and dividends reinvested
—

 
—

 
(186
)
 
(95,716
)
 
—

 
(8
)
 
(95,910
)
Shares issued and amortized under the 2007 Omnibus Incentive Plan, net of tax
159

 
1

 
2,302

 
—

 
—

 
—

 
2,303

Net income attributable to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
12

 
12

Net income attributable to Piedmont
—

 
—

 
—

 
47,346

 
—

 
—

 
47,346

Other comprehensive loss
—

 
—

 
—

 
—

 
(16,825
)
 
—

 
(16,825
)
Balance, September 30, 2015
145,634

 
$
1,456

 
$
3,669,154

 
$
(1,570,377
)
 
$
(8,524
)
 
$
1,029

 
$
2,092,738


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,
 
2015
 
2014
Cash Flows from Operating Activities:
 
 
 
Net income
$
47,358

 
$
30,846

Operating distributions received from unconsolidated joint ventures
565

 
266

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
103,470

 
103,237

Amortization of deferred financing costs
1,281

 
1,299

Gain/(loss) on settlement of forward starting interest rate swaps
(1,284
)
 
14,960

Other amortization
44,091

 
42,007

Impairment loss on real estate assets
40,169

 
—

Stock compensation expense
5,027

 
3,046

Equity in (income)/loss of unconsolidated joint ventures
(418
)
 
510

Gain on sale of real estate assets
(53,824
)
 
(2,338
)
Retirement of shares returned from escrow
—

 
(1,479
)
Changes in assets and liabilities:
 
 
 
Increase in tenant and straight-line rent receivables, net
(22,996
)
 
(29,277
)
Increase in restricted cash and escrows
(20,333
)
 
(114
)
Increase in prepaid expenses and other assets
(5,845
)
 
(10,588
)
Increase/(decrease) in accounts payable and accrued expenses
(8,284
)
 
5,617

Increase/(decrease) in deferred income
3,619

 
(476
)
Net cash provided by operating activities
132,596

 
157,516

Cash Flows from Investing Activities:
 
 
 
Acquisition of real estate assets and related intangibles
(75,976
)
 
(109,930
)
Capitalized expenditures, net of accruals
(81,917
)
 
(122,804
)
Redemption of noncontrolling interest in unconsolidated variable interest entity
(4,000
)
 
—

Net sales proceeds from wholly-owned properties
151,564

 
46,240

Net sales proceeds from unconsolidated joint ventures
—

 
6,017

Investments in unconsolidated joint ventures
—

 
(42
)
Deferred lease costs paid
(23,889
)
 
(20,732
)
Net cash used in investing activities
(34,218
)
 
(201,251
)
Cash Flows from Financing Activities:
 
 
 
Deferred financing costs paid
(1,048
)
 
(1,112
)
Proceeds from debt
1,205,857

 
979,564

Repayments of debt
(1,055,902
)
 
(784,320
)
Discount paid due to loan modification
—

 
(1,135
)
Costs of issuance of common stock
(326
)
 
—

Repurchases of common stock as part of announced plan
(155,653
)
 
(54,685
)
Dividends paid and discount on dividend reinvestments
(95,910
)
 
(92,735
)
Net cash provided by/(used in) financing activities
(102,982
)
 
45,577

Net increase/(decrease) in cash and cash equivalents
(4,604
)
 
1,842

Cash and cash equivalents, beginning of period
12,306

 
6,973

Cash and cash equivalents, end of period
$
7,702

 
$
8,815

 
 
 
 
Supplemental Disclosures of Significant Noncash Investing and Financing Activities:
 
 
 
Change in accrued share repurchases as part of an announced plan
$
(822
)
 
$
(2,005
)
Accrued capital expenditures and deferred lease costs
$
24,588

 
$
17,573


See accompanying notes

9
Table of Contents

PIEDMONT OFFICE REALTY TRUST, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 September 30, 2015, Piedmont owned 68 office properties, one redevelopment asset and two development assets, and one building through an unconsolidated joint venture. Piedmont's 68 office properties comprise 20.7 million square feet of primarily Class A commercial office space, and were 90.6% leased as of September 30, 2015. As of September 30, 2015, approximately 80% of Piedmont's Annualized Lease Revenue was generated from select office sub-markets in the following cities: Atlanta, Boston, Chicago, Dallas, 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.


10
Table of Contents

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 2018 for Piedmont, and 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 modify 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 does not anticipate any material impact to its consolidated financial statements as a result 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.


3.
Acquisitions
During the nine months ended September 30, 2015, Piedmont acquired 100% ownership of the following properties and land parcel using proceeds from the $500 Million Unsecured Line of Credit, proceeds from the sales of other properties (see Note 9), and cash on hand, as noted below:


11
Table of Contents

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, Texas
 
January 16, 2015
 
177,844

 
88
%
 
$
46.6

80 Central Street
 
Boxborough, Massachusetts
 
July 24, 2015
 
149,661

 
93
%
 
$
13.5

 
 
 
 
 
 
 
 
 
 
 
Land Parcel
 
Metropolitan Statistical Area
 
Date of Acquisition
 
Acreage
 
Contractual Purchase Price
(in millions)
 
 
Two Pierce Land Parcel
 
Chicago, Illinois
 
June 2, 2015
 
4.73

 
$
3.7

 
 


4.Debt

During the nine months ended September 30, 2015, Piedmont replaced its existing $500 Million Unsecured Line of Credit with a new $500 million line of credit facility (the "$500 Million Unsecured 2015 Line of Credit"). The existing $500 Million Unsecured Line of Credit was scheduled to expire on August 19, 2016, and was terminated concurrently with the closing of the new facility. The term of the new $500 Million Unsecured 2015 Line of Credit is four years with a maturity date of June 18, 2019, and Piedmont may extend the term for up to one additional year (through two available six-month extensions) provided Piedmont is not then in default and upon payment of extension fees. As of September 30, 2015, the stated interest rate spread over LIBOR on the $500 Million Unsecured 2015 Line of Credit is 1.00%, down from 1.175% on the prior line of credit.

Additionally, during the nine months ended September 30, 2015, Piedmont entered into a $160 million note payable secured by a mortgage against its 1901 Market Street building located in Philadelphia, Pennsylvania (the "$160 Million Fixed-Rate Loan"). The $160 Million Fixed-Rate Loan replaced the $105 Million Fixed-Rate Loan secured by the US Bancorp Center building in Minneapolis, Minnesota, which was paid in full in April 2015, and the remaining proceeds were used to pay down outstanding borrowings on the $500 Million Unsecured 2015 Line of Credit. The $160 Million Fixed-Rate Loan bears interest at 3.48% per year and matures on July 5, 2022.

Finally, during the nine months ended September 30, 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. Piedmont may prepay the $170 Million Unsecured 2015 Term Loan, in whole or in part, at any time without premium or penalty. As of September 30, 2015, the stated interest rate spread on the $170 Million Unsecured 2015 Term Loan was 1.125%.

During the nine months ended September 30, 2015, Piedmont incurred additional working capital borrowings on its $500 Million Unsecured Line of Credit (which was subsequently replaced with the $500 Million Unsecured 2015 Line of Credit) of $408.0 million and, utilizing a portion of the proceeds of the $170 Million Unsecured 2015 Term Loan and the $160 Million Fixed-Rate Loan described above, as well as other cash on hand, made repayments totaling $429.0 million on its line of credit facility. As of September 30, 2015, Piedmont believes it was in compliance with all financial covenants associated with its debt instruments.
Additionally, see Note 7 for a description of Piedmont’s estimated fair value of debt as of September 30, 2015.

Piedmont also made interest payments on all debt facilities, including interest rate swap cash settlements, of approximately $20.1 million and $20.9 million for the three months ended September 30, 2015 and 2014, respectively, and approximately $58.8 million and $54.1 million for the nine months ended September 30, 2015 and 2014, respectively. Piedmont capitalized interest of approximately $1.0 million and $0.5 million for the three months ended September 30, 2015 and 2014, respectively, and approximately $2.7 million and $1.4 million for the nine months ended September 30, 2015 and 2014, respectively.


12
Table of Contents

The following table summarizes the terms of Piedmont’s indebtedness outstanding as of September 30, 2015 and December 31, 2014 (in thousands):
Facility
 
Collateral
 
Stated Rate(1)
 
Maturity
 
Amount Outstanding as of
 
September 30,
2015
 
December 31,
2014
Secured (Fixed)
 
 
 
 
 
 
 
 
 
 
$105 Million Fixed-Rate Loan
 
US Bancorp Center
 
5.29
%
 
5/11/2015
 
$
—

 
$
105,000

$125 Million Fixed-Rate Loan
 
Four Property Collateralized
Pool (2)
 
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
%
(3) 
9/1/2021
 
35,617

 
36,520

$160 Million Fixed-Rate Loan
 
1901 Market Street
 
3.48
%
(4) 
7/5/2022
 
159,314

 
—

Subtotal/Weighted Average (5)
 
 
 
4.95
%
 
 
 
502,456

 
449,045

Unsecured (Variable and Fixed)
 
 
 
 
 
 
 
 
 
 
$50 Million Unsecured Term Loan
 
 
 
LIBOR + 1.15%

 
4/1/2015
 
—

 
49,968

$500 Million Unsecured Line of Credit
 
 
 
LIBOR + 1.175%

 
8/19/2016
 
—

 
434,000

$170 Million Unsecured 2015 Term Loan
 
 
 
LIBOR + 1.125%

(6) 
5/15/2018
 
169,645

 
—

$300 Million Unsecured 2013 Term Loan
 
 
 
LIBOR + 1.20%

(7) 
1/31/2019
 
300,000

 
300,000

$500 Million Unsecured 2015 Line of Credit
 
 
 
LIBOR + 1.00%

(8) 
6/18/2019
(9) 
411,145

 
0

$300 Million Unsecured 2011 Term Loan
 
 
 
LIBOR +  1.15%

(10) 
1/15/2020
 
299,101

 
298,944

$350 Million Unsecured Senior Notes
 
 
 
3.40
%
(11) 
6/1/2023
 
348,893

 
348,800

$400 Million Unsecured Senior Notes
 
 
 
4.45
%
(12) 
3/15/2024
 
397,079

 
396,832

Subtotal/Weighted Average (5)
 
 
 
2.71
%
 
 
 
1,925,863

 
1,828,544

Total/ Weighted Average (5)
 
 
 
3.17
%
 
 
 
$
2,428,319

 
$
2,277,589


(1) 
Other than the $35 Million Fixed-Rate Loan, all of Piedmont’s outstanding debt as of September 30, 2015 and December 31, 2014 is interest-only.
(2) 
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.
(3) 
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%.
(4) 
The $160 Million Fixed-Rate Loan has a fixed coupon rate of 3.48%, however, after consideration of the impact of settled interest rate swap agreements, the effective interest rate on this debt is 3.58%.
(5) 
Weighted average is based on contractual balance of outstanding debt and interest rates in the table as of September 30, 2015.
(6) 
On a periodic basis, 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 September 30, 2015) over the selected rate based on Piedmont’s current credit rating. The principal balance as of September 30, 2015 consisted of the 30-day LIBOR rate of 0.20% (subject to the additional spread mentioned above).

13
Table of Contents

(7) 
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%.
(8) 
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 (1.00% as of September 30, 2015) over the selected rate based on Piedmont’s current credit rating. The outstanding balance as of September 30, 2015 consisted of 30-day LIBOR draws at an average rate of 0.21% (subject to the additional spread mentioned above).
(9) 
Piedmont may extend the term for up to one additional year (through two available six month extensions to a final extended maturity date of June 18, 2020) provided Piedmont is not then in default and upon payment of extension fees.
(10) 
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.
(11) 
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%.
(12) 
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%.

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 September 30, 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 Unsecured 2015 Line of Credit and the $170 Million Unsecured 2015 Term Loan. During the nine months ended September 30, 2015, Piedmont settled various forward starting swaps with a total notional value of $250 million in conjunction with the issuance of the $160 Million Fixed-Rate Loan (see Note 4) for a net loss totaling $1.3 million, of which approximately $0.1 million was expensed immediately upon termination. The remaining loss was recorded as accumulated other comprehensive income and is being amortized as an increase to interest expense over the seven-year term of the $160 Million Fixed-Rate Loan. Additionally, as of September 30, 2015, Piedmont held $250 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 2016. The maximum length of time over which Piedmont is hedging its exposure to the variability in future cash flows for forecasted transactions is 125 months.


14
Table of Contents

A detail of Piedmont’s interest rate derivatives outstanding as of September 30, 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

 
2/25/2016
 
2/25/2026
Total
 
 
 
 
 
$
1,150

 
 
 
 

Piedmont presents its interest rate derivatives on its consolidated balance sheets on a gross basis as interest rate swap assets and interest rate swap liabilities. A detail of Piedmont’s interest rate derivatives on a gross and net basis as of September 30, 2015 and December 31, 2014, respectively, is as follows (in thousands):

Interest rate swaps classified as:
September 30,
2015
 
December 31,
2014
Gross derivative assets
$
—

 
$
430

Gross derivative liabilities
(20,526
)
 
(6,417
)
Net derivative liability
$
(20,526
)
 
$
(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, as well as the issuance of the $160 Million Fixed-Rate Loan mentioned above, Piedmont settled various forward starting swap agreements for gains/losses 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/(loss) on settlement of forward swaps described above, and other gains/(losses) associated with the swap that were recorded in the accompanying consolidated statements of income for the three and nine months ended September 30, 2015 and 2014, respectively, were as follows (in thousands):

 
Three Months Ended
 
Nine Months Ended
Derivative in
Cash Flow Hedging
Relationships (Interest Rate Swaps) (in thousands)
September 30,
2015
 
September 30,
2014
 
September 30,
2015
 
September 30,
2014
Amount of gain/(loss) recognized in OCI on derivative
$
(22,263
)
 
$
1,360

 
$
(21,389
)
 
$
(12,143
)
Amount of previously recorded loss reclassified from accumulated OCI into interest expense
$
1,506

 
$
1,295

 
$
4,575

 
$
3,623


Piedmont estimates that approximately $5.0 million will be reclassified from accumulated other comprehensive loss to interest expense over the next twelve months. Piedmont recognized no loss related to hedge ineffectiveness for the three months ended

15
Table of Contents

September 30, 2015 and 2014, and approximately $0.1 million and $0 of loss related to hedge ineffectiveness and terminations of its cash flow hedges was recognized during the nine months ended September 30, 2015 or 2014, respectively.

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 $21.0 million as of September 30, 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
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 nine months ended September 30, 2015, Piedmont paid $4.0 million to settle the redemption option associated with an equity participation in Medici Atlanta, LLC, eliminating any ongoing third party interest.


16
Table of Contents

A summary of Piedmont’s interests in and consolidation treatment of its outstanding VIEs as of September 30, 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
September 30, 2015
 
Net Carrying
Amount as of
December 31,
2014
 
Primary Beneficiary
Considerations
1201 Eye Street NW Associates, LLC
 
49.5%
 
1201 Eye Street
 
Consolidated
 
$
(7.2
)
 
$
(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
 
$
2.2

 
$
(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
 
$
246.9

 
$
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
 
$
5.9

 
$
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.


17
Table of Contents

7.Fair Value Measurement of Financial Instruments
Piedmont considers its cash and cash equivalents, tenant receivables, notes 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, 2015 and December 31, 2014, respectively (in thousands):

 
September 30, 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)
$
7,702

 
$
7,702

 
Level 1
 
$
12,306

 
$
12,306

 
Level 1
Tenant receivables, net(1)
$
26,748

 
$
26,748

 
Level 1
 
$
27,711

 
$
27,711

 
Level 1
Notes receivable (1)
$
45,400

 
$
45,400

 
Level 1
 
$
—

 
$
—

 
Level 1
Restricted cash and escrows(1)
$
37,705

 
$
37,705

 
Level 1
 
$
5,679

 
$
5,679

 
Level 1
Interest rate swap asset
$
—

 
$
—

 
Level 2
 
$
430

 
$
430

 
Level 2
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses(1)
$
17,200

 
$
17,200

 
Level 1
 
$
14,395

 
$
14,395

 
Level 1
Interest rate swap liability
$
20,526

 
$
20,526

 
Level 2
 
$
6,417

 
$
6,417

 
Level 2
Debt
$
2,428,319

 
$
2,450,580

 
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 September 30, 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 September 30, 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 September 30, 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.


18
Table of Contents

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 September 30, 2015, commitments for funding potential non-incremental capital expenditures over the next five years for tenant improvements totaled approximately $52.3 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 September 30, 2015, commitments for incremental capital expenditures for tenant improvements associated with new and existing leases totaled approximately $55.9 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 no reductions in reimbursement revenues related to such tenant audits/disputes during the three months ended September 30, 2015 and 2014, and approximately $0.1 million and $0.6 million during the nine months ended September 30, 2015 and 2014, respectively.

Letters of Credit

As of September 30, 2015, Piedmont was subject to a letter of credit of approximately $0.4 million, which reduces the total available capacity under its $500 Million 2015 Unsecured Line of Credit. This letter of credit is scheduled to expire in December 2015.

9.Property Dispositions, Assets Held for Sale, and Discontinued Operations

Property Dispositions

Since April 1, 2014, we have sold nine properties which did not meet the criteria to be reported as discontinued operations. The operational results for these properties for periods prior to their sale date 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 unless otherwise indicated below. Details of such properties sold are presented below (in thousands):


19
Table of Contents

Buildings Sold
 
Location
 
Date of Sale
 
Gain/(Loss) on Sale
 
Net Sales Proceeds
 
2020 W. 89th Street
 
Leawood, Kansas
 
May 19, 2014
 
$
1,132

 
$
5,515

 
Two Park Center (1)
 
Hoffman Estates, Illinois
 
May 29, 2014
 
$
(169
)
 
$
6,017

 
3900 Dallas Parkway
 
Plano, Texas
 
January 30, 2015
 
$
10,073

 
$
25,801

 
5601 Headquarters Drive
 
Plano, Texas
 
April 28, 2015
 
$
7,959

 
$
33,326

 
River Corporate Center
 
Tempe, Arizona
 
April 29, 2015
 
$
5,303

 
$
24,228

 
Copper Ridge Center
 
Lyndhurst, New Jersey
 
May 1, 2015
 
$
13,753

 
$
4,972

(2) 
Eastpoint I & II
 
Mayfield Heights, Ohio
 
July 28, 2015
 
$
(177
)
 
$
17,342

 
3750 Brookside Parkway
 
Alpharetta, Georgia
 
August 10, 2015
 
$
1,406

 
$
13,624

 
Chandler Forum
 
Chandler, Arizona
 
September 1, 2015
 
$
15,509

 
$
32,271

 

(1) 
Property was owned as part of the unconsolidated joint venture, Fund XIII and REIT Joint Venture. As such, the loss on sale was presented as equity in income/(loss) of unconsolidated joint ventures.
(2) 
As part of the transaction, Piedmont accepted a secured promissory note from the buyer for the remaining $45.4 million owed on the sale. The note bears interest at a rate of 8.45% and a matures on December 31, 2015. The maturity date may be extended for two terms of six months each upon 30 days prior written notice and a 25 bps extension fee.


20
Table of Contents

Assets Held for Sale

During the three months ended September 30, 2015, Piedmont reclassified the Aon Center building located in Chicago, Illinois, from real estate assets held for use to real estate assets held for sale as a result of entering into a binding agreement to sell the property. The sale of the Aon Center building subsequently closed on October 29, 2015. During the three months ended September 30, 2015 and 2014, Piedmont recognized net income from Aon Center of approximately $8.3 million and $1.1 million, respectively. During the nine months ended September 30, 2015 and 2014, Piedmont recognized net income/(loss) from Aon Center of approximately $8.8 million and $(0.8) million, respectively.

Assets held for sale as of December 31, 2014 include the Aon Center building (mentioned above), the 3900 Dallas Parkway building (sold on January 30, 2015), the Eastpoint I and II buildings (sold on July 28, 2015), and the 3750 Brookside Parkway building (sold on August 10, 2015). Details of assets held for sale as of September 30, 2015 and December 31, 2014 are presented below (in thousands):

 
 
September 30, 2015
 
December 31, 2014
Real estate assets held for sale, net:
 
 
 
 
Land
 
$
23,966

 
$
29,763

Building and improvements, less accumulated depreciation of $198,150 and $208,408 as of September 30, 2015 and December 31, 2014, respectively
 
444,099

 
495,622

Construction in progress
 
2,782

 
1,502

Total real estate assets held for sale, net
 
$
470,847

 
$
526,887

 
 
 
 
 
Other assets held for sale, net:
 
 
 
 
Straight-line rent receivables
 
$
25,790

 
$
23,464

Prepaid expenses and other assets
 
1,870

 
2,164

Deferred lease costs, less accumulated amortization of $14,990 and $14,866 as of September 30, 2015 and December 31, 2014, respectively
 
53,374

 
51,648

Total other assets held for sale, net
 
$
81,034

 
$
77,276

 
 
 
 
 
Other liabilities held for sale, net:
 
 
 
 
Intangible lease liabilities, less accumulated amortization of $2,486 and $2,335 as of September 30, 2015 and December 31, 2014, respectively
 
$
567

 
$
717


In addition, Piedmont entered into a binding contract to sell the 2 Gatehall Drive building located in Parsippany, New Jersey on October 2, 2015. The contract did not meet the requirements for held for sale classification as of September 30, 2015; however, as the contracted sales price, less estimated selling costs, was less than the carrying value of the asset, Piedmont recognized a loss on impairment of approximately $34.8 million during the three months ended September 30, 2015. Further, during the nine months ended September 30, 2015, Piedmont recognized an impairment loss of approximately $5.4 million due to the reclassification of the Eastpoint I & II buildings upon meeting the held for sale criteria. The fair value measurements used in the evaluation of both of these non-financial assets are considered to be Level 1 valuations within the fair value hierarchy as defined by GAAP, as there are direct observations and transactions involving the assets by unrelated, potential third-party purchasers. Piedmont expects the 2 Gatehall Drive building to close during fourth quarter 2015, while the Eastpoint I & II buildings were sold in July 2015.

21
Table of Contents


Discontinued Operations

Asset disposals in previous periods that were previously classified as, and that continue to be reported as, discontinued operations for the three and nine months ended September 30, 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 and nine months ended ended September 30, 2015 and 2014 are presented below (in thousands):

 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
Revenues:
 
 
 
 
 
 
 
Rental income
$
19

 
$
—

 
$
19

 
$
1,365

Tenant reimbursements
—

 
12

 
(3
)
 
126

Property management fee revenue
—

 
—

 
—

 
1

 
19

 
12

 
16

 
1,492

Expenses:
 
 
 
 
 
 
 
Property operating costs
3

 
3

 
2

 
185

Depreciation
—

 
—

 
—

 
83

Amortization
—

 
—

 
—

 
223

General and administrative
—

 
(7
)
 
1

 
(1
)
 
3

 
(4
)
 
3

 
490

 
 
 
 
 
 
 
 
Other income/(expense)
—

 
—

 
—

 
(6
)
 
 
 
 
 
 
 
 
Operating income, excluding gain on sale
16

 
16

 
13

 
996

Gain/(loss) on sale of real estate assets
(2
)
 
—

 
(2
)
 
1,198

Income from discontinued operations
$
14

 
$
16

 
$
11

 
$
2,194



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 ("TSR") 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 nine months ended September 30, 2015 is as follows:


22
Table of Contents

 
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 Nine Months Ended September 30, 2015
299,360

 
$
17.59

Adjustment to Estimated Future Grants of Performance Share Awards During Nine Months Ended September 30, 2015
386,536

 
$
18.01

Deferred Stock Awards Vested During Nine Months Ended September 30, 2015
(228,734
)
 
$
17.96

Deferred Stock Awards Forfeited During Nine Months Ended September 30, 2015
(8,405
)
 
$
18.04

Unvested Deferred Stock Awards as of September 30, 2015
955,161

 
$
17.88


The following table provides additional information regarding stock award activity during the three and nine months ended September 30, 2015 and 2014, respectively (in thousands except for per share data):

 
Three Months Ended
 
Nine Months Ended
 
September 30,
2015
 
September 30,
2014
 
September 30,
2015
 
September 30,
2014
Weighted-Average Grant Date Fair Value of Shares Granted During the Period (per share)
$
18.31

 
$
—

 
$
17.59

 
$
17.78

Total Grant Date Fair Value of Shares Vested During the Period
$
32

 
$
28

 
$
4,109

 
$
3,223

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

 
$
—

 
$
—

 
$
—


(1) 
Amount reflects the issuance of performance share awards during the period, if any.

23
Table of Contents

A detail of Piedmont’s outstanding employee stock awards as of September 30, 2015 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, 2015
 
November 7, 2012
 
Deferred Stock Award
 
14,836

 
$
18.04

 
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.
 
4,989

 
April 2, 2013
 
Deferred Stock Award
 
118,174

 
$
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.
 
37,084

 
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.
 
53,287

(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
 
163,222

 
$
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.
 
96,032

 
May 9, 2014
 
Fiscal Year 2014-2016 Performance Share Program
 
—

 
$
22.00

 
Shares awarded, if any, will vest immediately upon determination of award in 2017.
 
159,271

(2) 
May 1, 2015
 
Deferred Stock Award
 
271,970

 
$
17.59

 
Of the shares granted, 25% vested on the date of grant, and 25% vested or will vest on May 1, 2016, 2017, and 2018, respectively.
 
219,403

 
May 1, 2015
 
Fiscal Year 2015-2017 Performance Share Program
 
—

 
$
18.42

 
Shares awarded, if any, will vest immediately upon determination of award in 2018.
 
302,422

(2) 
Total
 
 
 
 
 
 
 
 
 
955,161

 

(1) 
Amounts reflect the total grant to employees, net of shares surrendered upon vesting to satisfy required minimum tax withholding obligations through September 30, 2015.
(2) 
Estimated based on Piedmont's cumulative TSR for the respective performance period through September 30, 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 September 30, 2015 and 2014, Piedmont recognized approximately $2.6 million and $1.1 million of compensation expense related to stock awards, all of which related to the amortization of unvested shares, respectively. During the nine months ended September 30, 2015 and 2014, Piedmont recognized approximately $6.8 million and $4.3 million of compensation expense related to stock awards, of which $5.0 million and $2.9 million related to the amortization of unvested shares, respectively. During the nine months ended September 30, 2015, a net total of 159,047 shares were issued to employees, directors, and officers. As of September 30, 2015, approximately $4.3 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 two years.

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

24
Table of Contents

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 and nine months ended September 30, 2015 and 2014, respectively (in thousands):

 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
Weighted-average common shares – basic
148,855
 
154,325
 
152,231
 
154,496
Plus incremental weighted-average shares from time-vested conversions:
 
 
 
 
 
 
 
Deferred stock awards
321
 
236
 
268
 
169
Weighted-average common shares – diluted (1)
149,176
 
154,561
 
152,499
 
154,665

(1) 
Due to repurchases of common stock during the nine months ended September 30, 2015, Piedmont has 145,633,869 shares of common stock outstanding as of September 30, 2015.


25
Table of Contents

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 Issuer is a wholly-owned subsidiary of the Guarantor, and all guarantees by the Guarantor of securities issued by the Issuer are full and unconditional. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions, including transactions with the Non-Guarantor Subsidiaries.


26
Table of Contents

Condensed Consolidated Balance Sheets
As of September 30, 2015
(in thousands)
Issuer
 
Guarantor
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets:
 
 
 
 
 
 
 
 
 
Real estate assets, at cost:
 
 
 
 
 
 
 
 
 
Land
$
64,218

 
$
—

 
$
607,614

 
$
—

 
$
671,832

Buildings and improvements, less accumulated depreciation
340,658

 
—

 
2,315,223

 
(300
)
 
2,655,581

Intangible lease assets, less accumulated amortization
1,405

 
—

 
59,365

 
—

 
60,770

Construction in progress
37

 
—

 
75,046

 
—

 
75,083

Real estate assets held for sale, net
—

 
—

 
470,847

 
—

 
470,847

Total real estate assets
406,318

 
—

 
3,528,095

 
(300
)
 
3,934,113

Investments in and amounts due from unconsolidated joint ventures
7,652

 
—

 
—

 
—

 
7,652

Cash and cash equivalents
3,935

 
151

 
3,616

 
—

 
7,702

Tenant and straight-line rent receivables, net
27,561

 
—

 
148,247

 
—

 
175,808

Advances to affiliates
6,447,352

 
1,253,328

 
—

 
(7,700,680
)
 
—

Investment in subsidiary
—

 
3,783,080

 
189

 
(3,783,269
)
 
—

Notes receivable
134,750

 
—

 
23,890

 
(113,240
)
 
45,400

Prepaid expenses, restricted cash, escrows, and other assets
43,597

 
52

 
27,531

 
(1,711
)
 
69,469

Goodwill
180,097

 
—

 
—

 
—

 
180,097

Interest rate swaps
—

 
—

 
—

 
—

 
—

Deferred financing costs, net
6,467

 
—

 
753

 
—

 
7,220

Deferred lease costs, net
20,829

 
—

 
210,550

 
—

 
231,379

Other assets held for sale, net
—

 
—

 
81,034

 
—

 
81,034

Total assets
$
7,278,558

 
$
5,036,611

 
$
4,023,905

 
$
(11,599,200
)
 
$
4,739,874

Liabilities:
 
 
 
 
 
 
 
 
 
Debt, net
$
1,949,753

 
$
—

 
$
591,806

 
$
(113,240
)
 
$
2,428,319

Accounts payable, accrued expenses, and accrued capital expenditures
15,809

 
1,365

 
117,279

 
(1,712
)
 
132,741

Advances from affiliates
566,461

 
5,032,684

 
2,173,303

 
(7,772,448
)
 
—

Deferred income
4,065

 
—

 
22,022

 
—