UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________
FORM 10-K
_________________________________________________________
(Mark One)
x | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 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 to |
Commission file number 001-34626
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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
_________________________________________________________
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class | Name of exchange on which registered |
COMMON STOCK | NEW YORK STOCK EXCHANGE |
Securities registered pursuant to Section 12 (g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No x
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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Act).
Large accelerated filer x Accelerated filer o Non-accelerated filer o 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
As of June 30, 2015, the aggregate market value of the common stock of Piedmont Office Realty Trust, Inc., held by non-affiliates was $2,654,544,041 based on the closing price as reported on the New York Stock Exchange. As of February 16, 2016, 145,063,043 shares of common stock were outstanding.
Documents Incorporated by Reference:
Registrant incorporates by reference portions of the Piedmont Office Realty Trust, Inc. Definitive Proxy Statement for the 2016 Annual Meeting of Stockholders (Items 10, 11, 12, 13, and 14 of Part III) to be filed no later than April 30, 2016.
FORM 10-K | ||||
PIEDMONT OFFICE REALTY TRUST, INC. | ||||
TABLE OF CONTENTS | ||||
PART I. | Page No. | |||
Item 1. | ||||
Item 1A. | ||||
Item 1B. | ||||
Item 2. | ||||
Item 3. | ||||
Item 4. | ||||
PART II. | ||||
Item 5. | ||||
Item 6. | ||||
Item 7. | ||||
Item 7A. | ||||
Item 8. | ||||
Item 9. | ||||
Item 9A. | ||||
Item 9B. | ||||
PART III. | ||||
Item 10. | ||||
Item 11. | ||||
Item 12. | ||||
Item 13. | ||||
Item 14. | ||||
PART IV. | ||||
Item 15. | ||||
Certain statements contained in this Form 10-K 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, financing, 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 demand 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 |
• | Other factors, including the risk factors discussed under Item 1A. of this Annual Report on Form 10-K. |
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.
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PART I
ITEM 1. BUSINESS
General
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.
Operating Objectives and Strategy
Based on our December 31, 2015 equity market capitalization of $2.7 billion, Piedmont is among the top ten largest office REITs in the United States based on comparison to the constituents of the Bloomberg U.S. Office REIT Index.
As of December 31, 2015, we owned and operated 69 office properties, one redevelopment asset, two development assets and one office building through an unconsolidated joint venture. Slightly under 80% of our Annualized Lease Revenue (see definition below) is generated from select office sub-markets in the following cities: Atlanta, Boston, Chicago, Dallas, Minneapolis, New York, and Washington, D.C.
Our portfolio of primarily Class A commercial office buildings was 91.5% and 87.7% leased as of December 31, 2015 and 2014, respectively. As we typically lease to larger, credit-worthy corporate users, our average lease size is approximately 23,000 square feet and as of December 31, 2015, we had an average lease term remaining of slightly under seven years. Our tenant base is primarily comprised of investment grade or nationally recognized corporations or governmental agencies, with 70% of our Annualized Lease Revenue derived from such tenants. No tenant other than the U.S. government accounts for more than 5% of our Annualized Lease Revenue.
Headquartered in metropolitan Atlanta, Georgia, with regional and/or local management offices in each of our major markets, Piedmont values operational excellence and ranks first among REITs based on the number of buildings owned and managed with Building Owners and Managers Association ("BOMA") 360 designations. BOMA 360 is a program that evaluates six major areas of building operations and management and benchmarks a building's performance against industry standards. The achievement of such a designation recognizes excellence in building operations and management. We also have focused on environmental sustainability initiatives at our properties, and approximately 62% of our office portfolio (based on Annualized Lease Revenue) maintains Energy Star labels (recognizing the top 25% of commercial buildings in energy consumption efficiency) as of December 31, 2015. In addition to operational excellence, we focus on fostering long-term relationships with our high-credit quality, diverse tenant base as evidenced by our 74% tenant retention rate over the past ten years.
Our primary objectives are to maximize the risk-adjusted return to our stockholders by increasing cash flow from operations, achieving sustainable growth in Funds from Operations, growing net asset value, and realizing long-term capital appreciation. We manage risk by owning almost exclusively Class A, geographically diverse office properties which are among the most desirable in their respective, select office submarkets. In addition to the creditworthiness of our tenants, we strive to ensure our tenants represent a broad spectrum of industry types with lease maturities that are laddered over many years. Operationally, we maintain a low leverage structure, utilizing primarily unsecured financing facilities, along with laddered maturities. We utilize a national buying platform of property management support services to ensure optimal pricing for landlord and tenant services, as well as for building best practices and sustainability standards. The strategies we intend to execute to achieve these objectives include:
Capitalizing on Acquisition/Investment Opportunities
Our overall acquisition/investment strategy focuses on properties in select submarkets within certain major U.S. office markets that are generally characterized by their diverse industry base, attractive supply and demand ratios, potential rent growth, and appeal to investors. We target the acquisition of high quality, Class A properties that are attractively priced below replacement
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value and that complement our existing portfolio from a risk management and diversification perspective with a concentration upon select submarkets where efficiencies can be gained and our market expertize can be maximized.
Proactive Asset Management, Leasing Capabilities and Property Management
Proactive asset and property management encompasses a number of operating initiatives designed to maximize occupancy and rental rates, including the following: devoting significant resources to building and cultivating our relationships with commercial real estate executives; maintaining local management offices in markets in which we have a significant presence; demonstrating our commitment to our tenants by maintaining the high quality of our properties; driving a significant volume of leasing transactions in a manner that provides optimal returns by using creative approaches, including early extension, lease wrap-arounds and restructurings. We manage portfolio risk by structuring lease expirations to avoid, among other things, having multiple leases expire in the same market in a relatively short period of time; applying our leasing and operational expertise in meeting the specialized requirements of federal, state and local government agencies to attract and retain these types of tenants; evaluating potential tenants based on third-party and internal assessments of creditworthiness; and using our purchasing power and market knowledge to reduce our operating costs and those of our tenants.
Recycling Capital Efficiently
We use our proven, disciplined capital recycling capabilities to maximize total return to our stockholders by selectively disposing of non-core assets and assets where returns appear to have been maximized, and redeploying the proceeds into new investment opportunities with higher overall return prospects.
Financing Strategy
We employ a conservative leverage strategy by maintaining a debt-to-gross assets ratio of between 30%-40%. To effectively manage our long-term leverage strategy, we continue to analyze various sources of debt capital to prudently ladder debt maturities and to determine which sources will be the most beneficial to our investment strategy at any particular point in time.
Use of Joint Ventures to Improve Returns and Mitigate Risk
We may enter into a few, select strategic joint ventures with third parties to acquire, develop, improve or dispose of properties, thereby reducing the amount of capital required by us to make investments, diversifying our sources of capital and allowing us to reduce the concentration of certain properties and/or markets without disrupting our operating performance or local operating capabilities.
Redevelopment and Repositioning of Properties
As circumstances warrant, we may redevelop or reposition properties within our portfolio including the creation of additional amenities for our tenants to increase both occupancy and rental rates and thereby improve returns on our invested capital.
Information Regarding Disclosures Presented
Annualized Lease Revenue ("ALR") is calculated by multiplying (i) rental payments (defined as base rent plus operating expense reimbursements, if payable by the tenant on a monthly basis under the terms of a lease that has been executed, but excluding (a) rental abatements and (b) rental payments related to executed but not commenced leases for space that was covered by an existing lease), by (ii) 12. In instances in which contractual rents or operating expense reimbursements are collected on an annual, semi-annual, or quarterly basis, such amounts are multiplied by a factor of 1, 2, or 4, respectively, to calculate the annualized figure. For leases that have been executed but not commenced relating to un-leased space, ALR is calculated by multiplying (i) the monthly base rental payment (excluding abatements) plus any operating expense reimbursements for the initial month of the lease term, by (ii) 12. Unless stated otherwise, this measure excludes our one redevelopment asset, two development assets, and our one property held in an unconsolidated joint venture.
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Employees
As of December 31, 2015, we had 143 full-time employees, with 52 of our employees working in our corporate office located in metropolitan Atlanta, Georgia. Our remaining employees work in regional and/or local management offices located in Atlanta, Georgia; Boston, Massachusetts; Minneapolis, Minnesota; Washington, D.C.; Orlando, Florida; Dallas, Texas; Houston, Texas; Chicago, Illinois; Detroit, Michigan; metropolitan New York, New York and Los Angeles, California. These employees are involved in acquiring and developing properties, as well as performing asset and property management services for our real estate properties and tenants.
Competition
We compete for tenants for our high-quality assets in major U.S. markets by fostering strong tenant relationships and by providing quality customer service including; leasing, asset management, property management, and construction management services. As the competition for high-credit-quality tenants is intense, we may be required to provide rent abatements, incur charges for tenant improvements and other concessions, or we may not be able to lease vacant space timely, all of which may impact our results of operations. We compete with other buyers who are interested in properties we elect to acquire, which may affect the amount that we are required to pay for such properties or may ultimately result in our decision not to acquire such properties. We also compete with sellers of similar properties when we sell properties, which may determine the amount of proceeds we receive from the disposal, or which may result in our inability to dispose of such properties due to the lack of an acceptable return.
Financial Information About Industry Segments
Our current business consists primarily of owning, managing, operating, leasing, acquiring, developing, investing in, and disposing of office real estate assets. We internally evaluate all of our real estate assets as one operating segment, and, accordingly, we do not report segment information.
Concentration of Credit Risk
We are dependent upon the ability of our current tenants to pay their contractual rent amounts as the rents become due. The inability of a tenant to pay future rental amounts would have a negative impact on our results of operations. As of December 31, 2015, no individual tenant represents 10% or more of our future revenues under non-cancelable leases. Additionally, no individual tenant represented 10% or more of our revenues for the year ended December 31, 2015.
Other Matters
Piedmont has contracts with various governmental agencies, exclusively in the form of operating leases in buildings we own. See Item 1A. “Risk Factors” for further discussion of the risks associated with these contracts.
Additionally, as the owner of real estate assets, we are subject to environmental risks. See Item 1A. “Risk Factors” for further discussion of the risks associated with environmental concerns.
Web Site Address
Access to copies of each of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and other filings with the Securities and Exchange Commission (the "SEC"), including any amendments to such filings, may be obtained free of charge from the following Web site, http://www.piedmontreit.com, or directly from the SEC’s Web site at http://www.sec.gov. These filings are available promptly after we file them with, or furnish them to, the SEC.
ITEM 1A. RISK FACTORS
Risks Related to Our Business and Operations
Economic, regulatory, and/or socio-economic changes 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 investment returns available from equity investments in real estate depend on the amount of income earned and capital appreciation generated by the properties, as well as the expenses incurred in connection with the properties. If our properties do not generate income sufficient to meet operating expenses, including debt service and capital expenditures, then our ability to make distributions to our stockholders could be adversely affected. In addition, there are significant expenditures associated with an investment in real estate (such as mortgage payments, real estate taxes, and maintenance costs) that generally do not decline when circumstances reduce the income from the property. The following factors, among others, may adversely affect the operating performance and long- or short-term value of our properties:
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• | changes in the national, regional, and local economic climate, particularly in markets in which we have a concentration of properties; |
• | local office market conditions such as employment rates and changes in the supply of, or demand for, space in properties similar to those that we own within a particular area; |
• | changes in the patterns of office use due to technological advances which may make telecommuting more prevalent; |
• | the attractiveness of our properties to potential tenants; |
• | changes in interest rates and availability of permanent mortgage funds that may render the sale of a property difficult or unattractive or otherwise reduce returns to stockholders; |
• | the financial stability of our tenants, including bankruptcies, financial difficulties, or lease defaults by our tenants; |
• | changes in operating costs and expenses, including costs for maintenance, insurance, and real estate taxes, and our ability to control rents in light of such changes; |
• | the need to periodically fund the costs to repair, renovate, and re-let space; |
• | earthquakes, tornadoes, hurricanes and other natural disasters, civil unrest, terrorist acts or acts of war, which may result in uninsured or under insured losses; |
• | changes in, or increased costs of compliance with, governmental regulations, including those governing usage, zoning, the environment, and taxes; and |
• | changes in accounting standards. |
In addition, periods of economic slowdown or recession, rising interest rates, or declining demand for real estate could result in a general decrease in rents or an increased occurrence of defaults under existing leases, which would adversely affect our financial condition and results of operations. Any of the above factors may prevent us from generating sufficient cash flow or maintaining the value of our real estate properties.
We face considerable competition in the leasing market and may be unable to renew existing leases or re-let space on terms similar to the existing leases, or we may expend significant capital in our efforts to re-let space, which may adversely affect our operating results.
Every year, we compete with a number of other developers, owners, and operators of office and office-oriented, mixed-use properties to renew leases with our existing tenants and to attract new tenants. To the extent that we are able to renew leases that are scheduled to expire in the short-term or re-let such space to new tenants, heightened competition resulting from adverse market conditions may require us to utilize rent concessions and tenant improvements to a greater extent than we historically have. In addition, competition for credit worthy tenants is intense and we may have difficulty competing with competitors, especially those who have purchased properties at discounted prices allowing them to offer space at reduced rental rates.
If our competitors offer office accommodations at rental rates below current market rates or below the rental rates we currently charge our tenants, we may lose potential tenants, and we may be pressured to reduce our rental rates below those we currently charge in order to retain tenants upon expiration of their existing leases. Even if our tenants renew their leases or we are able to re-let the space, the terms and other costs of renewal or re-letting, including the cost of required renovations, increased tenant improvement allowances, leasing commissions, declining rental rates, and other potential concessions, may be less favorable than the terms of our current leases and could require significant capital expenditures. If we are unable to renew leases or re-let space in a reasonable time, or if rental rates decline or tenant improvement, leasing commissions, or other costs increase, our financial condition, cash flows, cash available for distribution, value of our common stock, and ability to satisfy our debt service obligations could be adversely affected.
Our rental revenues will be significantly influenced by the economies and other conditions of the office market in general and of the specific markets in which we operate, particularly in Washington, D.C., the New York metropolitan area, and Chicago where we have high concentrations of office properties.
Because our portfolio consists of office properties, we are subject to risks inherent in investments in a single property type. This concentration exposes us to the risk of economic downturns in the office sector to a greater extent than if our portfolio also included other sectors of the real estate industry. Our properties located in Washington, D.C., New York and the Chicago metropolitan area account for approximately 19.7%, 12.1%, and 11.3% respectively, of our ALR. As a result, we are particularly susceptible to adverse market conditions in these particular areas, including the reduction in demand for office properties, industry slowdowns, governmental cut backs, relocation of businesses and changing demographics. Adverse economic or real estate developments in the markets in which we have a concentration of properties, or in any of the other markets in which we operate, or any decrease in demand for office space resulting from the local or national government and business climates, could adversely affect our rental revenues and operating results.
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We depend on tenants for our revenue, and accordingly, lease terminations and/or tenant defaults, particularly by one of our significant lead tenants, could adversely affect the income produced by our properties, which may harm our operating performance, thereby limiting our ability to make distributions to our stockholders.
The success of our investments materially depends on the financial stability of our tenants, any of whom may experience a change in their business at any time. As a result, our tenants may delay lease commencements, decline to extend or renew their leases upon expiration, fail to make rental payments when due, or declare bankruptcy. Any of these actions could result in the termination of the tenants’ leases, or expiration of existing leases without renewal, and the loss of rental income attributable to the terminated or expired leases. In the event of a tenant default or bankruptcy, we may experience delays in enforcing our rights as a landlord and may incur substantial costs in protecting our investment and re-letting our property. If significant leases are terminated or defaulted upon, we may be unable to lease the property for the rent previously received or sell the property without incurring a loss. In addition, significant expenditures, related to mortgage payments, real estate taxes, insurance, and maintenance costs, are generally fixed and do not decrease when revenues at the related property decrease.
The occurrence of any of the situations described above, particularly if it involves one of our significant lead tenants, could seriously harm our operating performance. As of December 31, 2015, our most substantial non-U.S. governmental lead tenants, based on ALR, were State of New York (approximately 4.5%), US Bancorp (approximately 4.0%), Independence Blue Cross (approximately 3.3%) and GE (approximately 3.1%). The revenues generated by the properties lead tenants occupy are substantially dependent upon the financial condition of these tenants and, accordingly, any event of bankruptcy, insolvency, or a general downturn in the business of any of these tenants may result in the failure or delay of such tenant’s rental payments, which may have a substantial adverse effect on our operating performance.
Some of our leases provide tenants with the right to terminate their leases early, which could have an adverse effect on our cash flow and results of operations.
Certain of our leases permit our tenants to terminate their leases of all or a portion of the leased premises prior to their stated lease expiration dates under certain circumstances, such as providing notice by a certain date and, in many cases, paying a termination fee. In certain cases, such early terminations can be effectuated by our tenants with little or no termination fee being paid to us. As of December 31, 2015, approximately 4.5% of our ALR was comprised of leases with tenant-controlled options to exercise early termination rights (including contractions and terminations of whole leases) that could be effected during the subsequent twelve month period. Leases comprising approximately 3.3% of our ALR would require the tenant to pay a termination fee, while 1.2% of our ALR would not require a termination fee upon execution. Substantially all of the leases which would not require a fee upon termination are government leases which can only be terminated due to non-appropriation of budgetary funding. To the extent that our tenants exercise early termination rights, our cash flow and earnings will be adversely affected, and we can provide no assurances that we will be able to generate an equivalent amount of net rental income by leasing the vacated space to new third party tenants.
We may face additional risks and costs associated with directly managing properties occupied by government tenants.
We currently own six properties in which some or all of the tenants in each property are federal government agencies. Lease agreements with these federal government agencies contain certain provisions required by federal law, which require, among other things, that the contractor (which is the lessor or the owner of the property) agree to comply with certain rules and regulations, including but not limited to, rules and regulations related to anti-kickback procedures, examination of records, audits and records, equal opportunity provisions, prohibitions against segregated facilities, certain executive orders, subcontractor costs or pricing data, and certain provisions intending to assist small businesses. Through one of our wholly-owned subsidiaries, we directly manage properties with federal government agency tenants and, therefore, we are subject to additional risks associated with compliance with all such federal rules and regulations. There are certain additional requirements relating to the potential application of the Employment Standards Administration’s Office of Federal Contract Compliance Programs and the related requirement to prepare written affirmative action plans applicable to government contractors and subcontractors. Some of the factors used to determine whether such requirements apply to a company that is affiliated with the actual government contractor (the legal entity that is the lessor under a lease with a federal government agency) include whether such company and the government contractor are under common ownership, have common management, and are under common control. One of our wholly-owned subsidiaries is considered a government contractor, increasing the risk that requirements of these equal opportunity provisions including the requirement to prepare affirmative action plans may be determined to be applicable to the entire operations of our company.
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Adverse market and economic conditions may negatively affect us and could cause us to recognize impairment charges on tangible real estate and related lease intangible assets or otherwise impact our performance.
We continually monitor events and changes in circumstances that could indicate that the carrying value of the real estate and related lease intangible assets in which we have an ownership interest, either directly or through investments in joint ventures, may not be recoverable. When indicators of potential impairment are present which indicate that the carrying value of real estate and related lease intangible assets may not be recoverable, we assess the recoverability of these assets by determining whether the carrying value will be recovered through the undiscounted future operating cash flows expected from the use of the asset and its eventual disposition. In the event that such expected undiscounted future cash flows do not exceed the carrying value, we adjust the real estate and related lease intangible assets to their estimated fair value and recognize an impairment loss.
Projections of expected future cash flows require management to make assumptions to estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, the number of months it takes to re-lease the property, and the number of years the property is held for investment, among other factors. The current uncertainty in the U.S. economy increases the subjectivity involved in projecting future cash flows, discount and capitalization rates and other factors involved in these calculations. The subjectivity of assumptions used in the future cash flow analysis, including discount rates, could result in an incorrect assessment of the property’s estimated fair value and, therefore, could result in the misstatement of the carrying value of our real estate and related lease intangible assets and our net income. In addition, adverse economic conditions could also cause us to recognize additional asset impairment charges in the future, which could materially and adversely affect our business, financial condition and results of operations.
Adverse market and economic conditions could cause us to recognize impairment charges on our goodwill, or otherwise impact our performance.
We review the value of our goodwill on an annual basis and when events or changes in circumstances indicate that the carrying value of goodwill may exceed the estimated fair value of such assets. Such interim events could be adverse changes in legal matters or in the business climate, adverse action or assessment by a regulator, the loss of key personnel, or persistent declines in our stock price below our carrying value. Volatility in the overall market could cause the price of our common stock to fluctuate and cause the carrying value of our company to exceed the estimated fair value. If that occurs, our goodwill potentially could be impaired. Impairment charges recognized in order to reduce our goodwill could materially and adversely affect our financial condition and results of operations.
Our earnings growth will partially depend upon future acquisitions of properties, and we may not be successful in identifying and consummating suitable acquisitions that meet our investment criteria, which may impede our growth and negatively affect our results of operations.
Our business strategy involves the acquisition of primarily high-quality office properties in selected markets. These activities require us to identify suitable acquisition candidates or investment opportunities that meet our criteria and are compatible with our growth strategy. We may not be successful in identifying suitable properties or other assets that meet our acquisition criteria or in consummating acquisitions on satisfactory terms, if at all. Failure to identify or consummate acquisitions could slow our growth.
Further, we face significant competition for attractive investment opportunities from an indeterminate number of other real estate investors, including investors with significant capital resources such as domestic and foreign corporations and financial institutions, publicly traded and privately held REITs, private institutional investment funds, investment banking firms, life insurance companies and pension funds. As a result of competition, we may be unable to acquire additional properties as we desire, the purchase price may be significantly elevated, or we may have to accept lease-up risk for a property with lower occupancy which could adversely affect our financial condition, results of operations, cash flows and the ability to pay dividends on, and the market price of our common stock.
The illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our properties.
Because real estate investments are relatively illiquid and large-scale office properties such as many of those in our portfolio are particularly illiquid, our ability to sell promptly one or more properties in our portfolio in response to changing economic, financial, and investment conditions is limited. The real estate market is affected by many forces, such as general economic conditions, availability of financing, interest rates, and other factors, including supply and demand, that are beyond our control. We cannot predict whether we will be able to sell any property for the price or on the terms set by us or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. We may be required to expend funds to correct defects or to make improvements
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before a property can be sold. We cannot provide any assurances that we will have funds available to correct such defects or to make such improvements. Our inability to dispose of assets at opportune times or on favorable terms could adversely affect our cash flows and results of operations, thereby limiting our ability to make distributions to stockholders.
Future acquisitions of properties may not yield anticipated returns, may result in disruptions to our business, and may strain management resources.
We intend to continue acquiring high-quality office properties, subject to the availability of attractive properties, to our ability to arrange financing, and to consummate acquisitions on satisfactory terms. In deciding whether to acquire a particular property, we make certain assumptions regarding the expected future performance of that property. However, newly acquired properties may fail to perform as expected. Costs necessary to bring acquired properties up to standards established for their intended market position may exceed our expectations, which may result in the properties’ failure to achieve projected returns.
In particular, to the extent that we engage in acquisition activities, they will pose the following risks for our ongoing operations:
• | we may acquire properties or other real estate-related investments that are not initially accretive to our results upon acquisition or accept lower cash flows in anticipation of longer term appreciation, and we may not successfully manage and lease those properties to meet our expectations; |
• | we may not achieve expected cost savings and operating efficiencies; |
• | we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into our existing operations; |
• | management attention may be diverted to the integration of acquired properties, which in some cases may turn out to be less compatible with our operating strategy than originally anticipated; |
• | we may not be able to support the acquired property through one of our existing property management offices and may not successfully open new satellite offices to serve additional markets; |
• | the acquired properties may not perform as well as we anticipate due to various factors, including changes in macro-economic conditions and the demand for office space; and |
• | we may acquire properties without any recourse, or with only limited recourse, for liabilities, whether known or unknown, such as clean-up of environmental contamination, unknown/undisclosed latent structural issues or maintenance problems, claims by tenants, vendors or other persons against the former owners of the properties, and claims for indemnification by general partners, directors, officers, and others indemnified by the former owners of the properties. |
Acquired properties may be located in new markets, where we may face risks associated with investing in an unfamiliar market.
We may acquire properties located in markets in which we do not have an established presence. We may face risks associated with a lack of market knowledge or understanding of the local economy, forging new business relationships in the area and unfamiliarity with local government and permitting procedures. As a result, the operating performance of properties acquired in new markets may be less than we anticipate, and we may have difficulty integrating such properties into our existing portfolio. In addition, the time and resources that may be required to obtain market knowledge and/or integrate such properties into our existing portfolio could divert our management’s attention from our existing business or other attractive opportunities in our concentration markets.
We may invest in mezzanine debt, which is subject to increased risk of loss relative to senior mortgage loans.
We may invest in mezzanine debt. These investments, which are subordinate to the mortgage loans secured by the real property underlying the loan, are generally secured by pledges of the equity interests of the entities owning the underlying real estate. As a result, these investments involve greater risk of loss than investments in senior mortgage loans that are secured by real property since they are subordinate to the mortgage loan secured by the building and may be subordinate to the interests of other mezzanine lenders. Therefore, if the property owner defaults on its debt service obligations payable to us or on debt senior to us, or declares bankruptcy, such mezzanine loans will be satisfied only after the senior debt and the other senior mezzanine loans are paid in full, resulting in the possibility that we may be unable to recover some or all of our investment. In addition, the value of the assets securing or supporting our mezzanine debt investments could deteriorate over time due to factors beyond our control, including acts or omissions by owners, changes in business, economic or market conditions, or foreclosure, any of which could result in the recognition of impairment losses. In addition, there may be significant delays and costs associated with the process of foreclosing on the collateral securing or supporting such investments.
Our operating results may suffer because of potential development and construction delays and resultant increased costs and risks.
We are currently engaged in development and re-development projects where we may be subject to uncertainties associated with re-zoning, environmental concerns of governmental entities and/or community groups, and our builders’ ability to build in
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conformity with plans, specifications, budgeted costs and timetables. A builder’s performance may also be affected or delayed by conditions beyond the builder’s control. Delays in completing construction could also give tenants the right to terminate preconstruction leases. We may incur additional risks when we make periodic progress payments or other advances to builders before they complete construction. Further, we may incur unanticipated additional costs related to disputes with existing tenants during redevelopment projects. These and other factors can result in increased costs of a project or loss of our investment. In addition, we will be subject to normal lease-up risks relating to newly constructed projects. Projects with long lead times may increase leasing risk due to changes in market conditions. We also must rely on rental income and expense projections and estimates of the fair market value of property upon completion of construction when agreeing upon a purchase price at the time we acquire the property. If our projections are inaccurate, we may pay too much for a property, and our return on our investment could suffer.
Our real estate development strategies may not be successful.
We are currently engaged in development and may continue to engage in additional development or redevelopment related activities to the extent attractive projects become available. When we engage in development activities, we are subject to risks associated with those activities that could adversely affect our financial condition, results of operations, cash flows and ability to pay distributions on, and the market price of, our common stock, including, but not limited to:
• | development projects in which we have invested may be abandoned and the related investment will be impaired; |
• | we may not be able to obtain, or may experience delays in obtaining, all necessary zoning, land-use, building, occupancy and other governmental permits and authorizations; |
• | we may not be able to obtain land on which to develop; |
• | we may not be able to obtain financing for development projects, or obtain financing on favorable terms; |
• | construction costs of a project may exceed the original estimates or construction may not be concluded on schedule, making the project less profitable than originally estimated or not profitable at all (including the possibility of errors or omissions in the project's design, contract default, contractor or subcontactor default, performance bond surety default, the effects of local weather conditions, the possibility of local or national strikes and the possibility of shortages in materials, building supplies or energy and fuel for equipment); |
• | tenants which pre-lease space or contract with us for a build-to-suit project may default prior to occupying the project; |
• | upon completion of construction, we may not be able to obtain, or obtain on advantageous terms, permanent financing for activities that we financed through construction loans; and |
• | we may not achieve sufficient occupancy levels and/or obtain sufficient rents to ensure the profitability of a completed project. |
Moreover, substantial renovation and development activities, regardless of their ultimate success, typically require a significant amount of management’s time and attention, diverting their attention from our other operations.
Future terrorist attacks in the major metropolitan areas in which we own properties could significantly impact the demand for, and value of, our properties.
Our portfolio maintains significant holdings in markets such as Washington, D.C., the New York metropolitan area, Chicago, Boston, and greater Los Angeles, each of which has been, and continues to be, a high risk geographical area for terrorism and threats of terrorism. Future terrorist attacks and other acts of terrorism or war would severely impact the demand for, and value of, our properties. Terrorist attacks in and around any of the major metropolitan areas in which we own properties also could directly impact the value of our properties through damage, destruction, loss, or increased security costs, and could thereafter materially impact the availability or cost of insurance to protect against such acts. A decrease in demand could make it difficult to renew or re-lease our properties at lease rates equal to or above historical rates. To the extent that any future terrorist attacks otherwise disrupt our tenants’ businesses, it may impair our tenants’ ability to make timely payments under their existing leases with us, which would harm our operating results.
We face risks related to the occurrence of cyber incidents, or a deficiency in our cybersecurity, which could negatively impact our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, all of which could negatively impact our financial results.
A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity, or availability of our information resources. More specifically, a cyber incident is an intentional attack or an unintentional event that can include gaining unauthorized access to systems to disrupt operations, corrupt data, or steal confidential information. The risk of a security breach or disruption, particularly through cyber attacks or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. As our reliance on technology has increased, so have the risks posed to our systems, both internal and those we have outsourced. Risks that could directly result from the occurrence of a cyber incident include physical harm to occupants or our
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buildings, physical damage to our buildings, operational interruption, damage to our relationship with our tenants, potential errors from misstated financial reports, violations of loan covenants, missed reporting deadlines, and private data exposure, among others. Any or all of the preceding risks could have a material adverse effect on our results of operations, financial condition and cash flows. Although we make efforts to maintain the security and integrity of these types of information technology networks and related systems, and we have implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging.
Uninsured losses or losses in excess of our insurance coverage could adversely affect our financial condition and our cash flow, and there can be no assurance as to future costs and the scope of coverage that may be available under insurance policies.
We carry comprehensive general liability, fire, extended coverage, business interruption rental loss coverage, environmental, and umbrella liability coverage on all of our properties and earthquake, wind, and flood coverage on properties in areas where such coverage is warranted. We believe the policy specifications and insured limits of these policies are adequate and appropriate given the relative risk of loss, the cost of the coverage, and industry practice. However, we may be subject to certain types of losses, those that are generally catastrophic in nature, such as losses due to wars, conventional or cyber terrorism, chemical, biological, nuclear and radiation (“CBNR”) acts of terrorism and, in some cases, earthquakes, hurricanes, and flooding, either because such coverage is not available or is not available at commercially reasonable rates. If we experience a loss that is uninsured or that exceeds policy limits, we could lose a significant portion of the capital we have invested in the damaged property, as well as the anticipated future revenue from the property. Inflation, changes in building codes and ordinances, environmental considerations, and other factors also might make it impractical or undesirable to use insurance proceeds to replace a property after it has been damaged or destroyed. In addition, if the damaged properties are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if these properties were irreparably damaged. Furthermore, we may not be able to obtain adequate insurance coverage at reasonable costs in the future, as the costs associated with property and casualty renewals may be higher than anticipated.
In addition, insurance risks associated with potential terrorism acts could sharply increase the premiums we pay for coverage against property and casualty claims. With the recent reauthorization of the Terrorism Risk Insurance Act ("TRIA") through 2020, United States insurers cannot exclude conventional (non-CBNR) terrorism losses. These insurers must make terrorism insurance available under their property and casualty insurance policies; however, this legislation does not regulate the pricing of such insurance. In some cases, mortgage lenders may insist that commercial property owners purchase coverage against terrorism as a condition of providing mortgage loans. Such insurance policies may not be available at a reasonable cost, which could inhibit our ability to finance or refinance our properties. In such instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. We may not have adequate coverage for such losses.
We have four properties located in the Los Angeles metropolitan area, an area that is especially susceptible to earthquakes. Collectively, these properties represent approximately 5.7% of our ALR. Because these properties are located in close proximity to one another, an earthquake in the greater Los Angeles area could materially damage, destroy or impair the use by tenants of all of these properties. If any of our properties incurs a loss that is not fully insured, the value of that asset will be reduced by such uninsured loss. Also, to the extent we must pay unexpectedly large amounts for insurance, we could suffer reduced earnings that would result in lower distributions to our stockholders.
Should one of our insurance carriers become insolvent, we would be adversely affected.
We carry several different lines of insurance, placed with several large insurance carriers. If any one of these large insurance carriers were to become insolvent, we would be forced to replace the existing insurance coverage with another suitable carrier, and any outstanding claims would be at risk for collection. In such an event, we cannot be certain that we would be able to replace the coverage at similar or otherwise favorable terms. Replacing insurance coverage at unfavorable rates and the potential of uncollectible claims due to carrier insolvency could adversely impact our results of operations and cash flows.
Our current and future joint venture investments could be adversely affected by a lack of sole decision-making authority and our reliance on joint venture partners’ financial condition.
As of December 31, 2015, we owned an interest in one property representing approximately 0.1 million rentable square feet through an unconsolidated joint venture. In the future we may enter into additional strategic joint ventures with institutional investors to acquire, develop, improve, or dispose of properties, thereby reducing the amount of capital required by us to make investments and diversifying our capital sources for growth. Such joint venture investments involve risks not otherwise present in a wholly-owned property, development, or redevelopment project, including the following:
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• | in these investments, we do not have exclusive control over the development, financing, leasing, management, and other aspects of the project, which may prevent us from taking actions that are opposed by our joint venture partners; |
• | joint venture agreements often restrict the transfer of a co-venturer’s interest or may otherwise restrict our ability to sell the interest when we desire or on advantageous terms; |
• | we would not be in a position to exercise sole decision-making authority regarding the property or joint venture, which could create the potential risk of creating impasses on decisions, such as acquisitions or sales; |
• | such co-venturer may, at any time, have economic or business interests or goals that are, or that may become, inconsistent with our business interests or goals; |
• | such co-venturer may be in a position to take action contrary to our instructions, requests, policies or objectives, including our current policy with respect to maintaining our qualification as a REIT; |
• | the possibility that our co-venturer in an investment might become bankrupt, which would mean that we and any other remaining co-venturers would generally remain liable for the joint venture’s liabilities; |
• | our relationships with our co-venturers are contractual in nature and may be terminated or dissolved under the terms of the applicable joint venture agreements and, in such event, we may not continue to own or operate the interests or assets underlying such relationship or may need to purchase such interests or assets at a premium to the market price to continue ownership; |
• | disputes between us and our co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and directors from focusing their time and efforts on our business and could result in subjecting the properties owned by the applicable joint venture to additional risk; or |
• | we may, in certain circumstances, be liable for the actions of our co-venturers, and the activities of a joint venture could adversely affect our ability to qualify as a REIT, even though we do not control the joint venture. |
Any of the above might subject a property to liabilities in excess of those contemplated and thus reduce the returns to our investors.
Costs of complying with governmental laws and regulations may reduce our net income and the cash available for distributions to our stockholders.
All real property and the operations conducted on real property are subject to federal, state, and local laws and regulations relating to environmental protection and human health and safety. Tenants’ ability to operate and to generate income to pay their lease obligations may be affected by permitting and compliance obligations arising under such laws and regulations. Some of these laws and regulations may impose joint and several liability on tenants, owners, or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. In addition, the presence of hazardous substances, or the failure to properly remediate these substances, may hinder our ability to sell, rent, or pledge such property as collateral for future borrowings.
Compliance with new laws or regulations or stricter interpretation of existing laws by agencies or the courts may require us to incur material expenditures. Future laws, ordinances, or regulations may impose material environmental liability. Additionally, our tenants’ operations, the existing condition of land when we buy it, operations in the vicinity of our properties such as the presence of underground storage tanks or activities of unrelated third parties may affect our properties. In addition, there are various local, state, and federal fire, health, life-safety, and similar regulations with which we may be required to comply, and which may subject us to liability in the form of fines or damages for noncompliance. Any material expenditures, fines, or damages we must pay will reduce our cash flows and ability to make distributions and may reduce the value of our stockholders’ investment.
As the present or former owner or operator of real property, we could become subject to liability for environmental contamination, regardless of whether we caused such contamination.
Under various federal, state, and local environmental laws, ordinances, and regulations, a current or former owner or operator of real property may be liable for the cost to remove or remediate hazardous or toxic substances, wastes, or petroleum products on, under, from, or in such property. These costs could be substantial and liability under these laws may attach whether or not the owner or operator knew of, or was responsible for, the presence of such contamination. Even if more than one person may have been responsible for the contamination, each liable party may be held entirely responsible for all of the clean-up costs incurred. In addition, third parties may sue the owner or operator of a property for damages based on personal injury, natural resources, or property damage and/or for other costs, including investigation and clean-up costs, resulting from the environmental contamination. The presence of contamination on one of our properties, or the failure to properly remediate a contaminated property, could give rise to a lien in favor of the government for costs it may incur to address the contamination, or otherwise adversely affect our ability to sell or lease the property or borrow using the property as collateral. In addition, if contamination is discovered on our properties, environmental laws may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures or prevent us from entering into leases with prospective tenants.
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Some of our properties are adjacent to or near other properties that have contained or currently contain underground storage tanks used to store petroleum products or other hazardous or toxic substances. In addition, certain of our properties are on, adjacent to, or near sites upon which others, including former owners or tenants of our properties, have engaged, or may in the future engage, in activities that have released or may have released petroleum products or other hazardous or toxic substances.
The cost of defending against claims of liability, of remediating any contaminated property, or of paying personal injury claims could reduce the amounts available for distribution to our stockholders.
As the owner of real property, we could become subject to liability for adverse environmental conditions in the buildings on our property.
Some of our properties contain asbestos-containing building materials. Environmental laws require that owners or operators of buildings containing asbestos properly manage and maintain the asbestos, adequately inform or train those who may come into contact with asbestos, and undertake special precautions, including removal or other abatement, in the event that asbestos is disturbed during building renovation or demolition. These laws may impose fines and penalties on building owners or operators who fail to comply with these requirements. In addition, environmental laws and the common law may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos.
The properties also may contain or develop harmful mold or suffer from other air quality issues. Any of these materials or conditions could result in liability for personal injury and costs of remediating adverse conditions, which could have an adverse effect on our cash flows and ability to make distributions to our stockholders.
As the owner of real property, we could become subject to liability for a tenant’s failure to comply with environmental requirements regarding the handling and disposal of regulated substances and wastes or for non-compliance with health and safety requirements, which requirements are subject to change.
Some of our tenants may handle regulated substances and wastes as part of their operations at our properties. Environmental laws regulate the handling, use, and disposal of these materials and subject our tenants, and potentially us, to liability resulting from non-compliance with these requirements. The properties in our portfolio also are subject to various federal, state, and local health and safety requirements, such as state and local fire requirements. If we or our tenants fail to comply with these various requirements, we might incur governmental fines or private damage awards. Moreover, we do not know whether or the extent to which existing requirements or their enforcement will change or whether future requirements will require us to make significant unanticipated expenditures that will materially adversely impact our financial condition, results of operations, cash flows, cash available for distribution to stockholders, the market price of our common stock, and our ability to satisfy our debt service obligations. If our tenants become subject to liability for noncompliance, it could affect their ability to make rental payments to us.
We depend on key personnel, each of whom would be difficult to replace.
Our continued success depends to a significant degree upon the continued contributions of certain key personnel including, but not limited to, Donald A. Miller, CFA, Robert E. Bowers, Joseph H. Pangburn, Thomas R. Prescott, Raymond L. Owens, Carroll A. Reddic, Robert K. Wiberg, Christopher B. Smith, and George M. Wells, each of whom would be difficult to replace. Our ability to retain our management team, or to attract suitable replacements should any member of the executive management team leave, is dependent on the competitive nature of the employment market. The loss of services of one or more of these key members of our management team could adversely affect our results of operations and slow our future growth. We have not obtained and do not expect to obtain “key person” life insurance on any of our key personnel.
We may be subject to litigation, which could have a material adverse effect on our financial condition.
From time to time, we may be subject to legal action arising in the ordinary course of our business or otherwise. Such action could result in additional expenses which, if uninsured, could adversely impact our earnings and cash flows, thereby impacting our ability to service debt and make quarterly distributions to our stockholders. There can be no assurance that our insurance policies will fully cover any payments or legal costs associated with any potential legal action. Further, the ultimate resolution of such action could impact the availability or cost of some of our insurance coverage, which could adversely impact our results of operations and cash flows, expose us to increased risks that would be uninsured, and/or adversely impact our ability to attract officers and directors.
If our disclosure controls or internal control over financial reporting is not effective, investors could lose confidence in our reported financial information, which could adversely affect the perception of our business and the trading price of our common stock.
The design and effectiveness of our disclosure controls and procedures and internal control over financial reporting may not prevent all errors, misstatements, or misrepresentations. Although management will continue to review the effectiveness of our disclosure
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controls and procedures and internal control over financial reporting, there can be no guarantee that our internal control over financial reporting will be effective in accomplishing all control objectives all of the time. Deficiencies, including any material weakness, in our internal control over financial reporting which may occur in the future could result in misstatements of our results of operations, restatements of our financial statements, a decline in the trading price of our common stock, or otherwise materially adversely affect our business, reputation, results of operations, financial condition, or liquidity.
Compliance or failure to comply with the Americans with Disabilities Act and other similar regulations could result in substantial costs.
Under the Americans with Disabilities Act, places of public accommodation must meet certain federal requirements related to access and use by disabled persons. Noncompliance could result in the imposition of fines by the federal government or the award of damages to private litigants. If we are required to make unanticipated expenditures to comply with the Americans with Disabilities Act, including removing access barriers, then our cash flows and the amounts available for distributions to our stockholders may be adversely affected. Although we believe that our properties are currently in material compliance with these regulatory requirements, we have not conducted an audit or investigation of all of our properties to determine our compliance, and we cannot predict the ultimate cost of compliance with the Americans with Disabilities Act or other legislation. If one or more of our properties is not in compliance with the Americans with Disabilities Act or other legislation, then we would be required to incur additional costs to achieve compliance. If we incur substantial costs to comply with the Americans with Disabilities Act or other legislation, our financial condition, results of operations, the market price of our common stock, cash flows, and our ability to satisfy our debt obligations and to make distributions to our stockholders could be adversely affected.
Risks Related to Our Organization and Structure
Our organizational documents contain provisions that may have an anti-takeover effect, which may discourage third parties from conducting a tender offer or seeking other change of control transactions that could involve a premium price for our common stock or otherwise benefit our stockholders.
Our charter and bylaws contain provisions that may have the effect of delaying, deferring, or preventing a change in control of our company (including an extraordinary transaction such as a merger, tender offer, or sale of all or substantially all of our assets) that might provide a premium price for our common stock or otherwise be in the best interest of our stockholders. These provisions include, among other things, restrictions on the ownership and transfer of our stock, advance notice requirements for stockholder nominations for directors and other business proposals, and our board of directors’ power to classify or reclassify unissued shares of common or preferred stock and issue additional shares of common or preferred stock.
In order to preserve our REIT status, our charter limits the number of shares a person may own, which may discourage a takeover that could result in a premium price for our common stock or otherwise benefit our stockholders.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT for federal income tax purposes. Unless exempted by our board of directors, no person may actually or constructively own more than 9.8% (by value or number of shares, whichever is more restrictive) of the outstanding shares of our common stock or the outstanding shares of any class or series of our preferred stock, which may inhibit large investors from desiring to purchase our stock. This restriction may have the effect of delaying, deferring, or preventing a change in control, including an extraordinary transaction (such as a merger, tender offer, or sale of all or substantially all of our assets) that might provide a premium price for our common stock or otherwise be in the best interest of our stockholders.
Our board of directors can take many actions without stockholder approval.
Our board of directors has overall authority to oversee our operations and determine our major corporate policies. This authority includes significant flexibility. For example, our board of directors can do the following:
• | within the limits provided in our charter, prevent the ownership, transfer, and/or accumulation of stock in order to protect our status as a REIT or for any other reason deemed to be in our best interest and the interest of our stockholders; |
• | issue additional shares of stock without obtaining stockholder approval, which could dilute the ownership of our then-current stockholders; |
• | amend our charter to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we have authority to issue, without obtaining stockholder approval; |
• | classify or reclassify any unissued shares of our common or preferred stock and set the preferences, rights and other terms of such classified or reclassified shares, without obtaining stockholder approval; |
• | employ and compensate affiliates; |
• | direct our resources toward investments, which ultimately may not appreciate over time; |
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• | change creditworthiness standards with respect to our tenants; |
• | change our investment or borrowing policies; |
• | determine that it is no longer in our best interest to attempt to qualify, or to continue to qualify, as a REIT; and |
• | suspend, modify or terminate the dividend reinvestment plan. |
Any of these actions could increase our operating expenses, impact our ability to make distributions, or reduce the value of our assets without giving our stockholders the right to vote.
Our charter permits our board of directors to issue stock with terms that may subordinate the rights of our common stockholders, which may discourage a third party from acquiring us in a manner that could result in a premium price for our common stock or otherwise benefit our stockholders.
Our board of directors may, without stockholder approval, issue authorized but unissued shares of our common or preferred stock and amend our charter to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we have authority to issue. In addition, our board of directors may, without stockholder approval, classify or reclassify any unissued shares of our common or preferred stock and set the preferences, rights and other terms of such classified or reclassified shares. Thus, our board of directors could authorize the issuance of preferred stock with terms and conditions that could have priority with respect to distributions and amounts payable upon liquidation over the rights of the holders of our common stock. Such preferred stock also could have the effect of delaying, deferring, or preventing a change in control, including an extraordinary transaction (such as a merger, tender offer, or sale of all or substantially all of our assets) that might provide a premium price for our common stock, or otherwise be in the best interest of our stockholders.
Our board of directors could elect for us to be subject to certain Maryland law limitations on changes in control that could have the effect of preventing transactions in the best interest of our stockholders.
Certain provisions of Maryland law may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change of control under certain circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize a premium over the then-prevailing market price of such shares, including:
• | “business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our outstanding voting stock or any affiliate or associate of ours who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of our then outstanding stock) or an affiliate thereof for five years after the most recent date on which the stockholder becomes an interested stockholder and thereafter impose supermajority voting requirements on these combinations; and |
• | “control share” provisions that provide that “control shares” of our company (defined as shares which, when aggregated with other shares controlled by the stockholder, except solely by virtue of a revocable proxy, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares. |
Our bylaws contain a provision exempting any acquisition by any person of shares of our stock from the control share acquisition statute, and our board of directors has adopted a resolution exempting any business combination with any person from the business combination statute. As a result, these provisions currently will not apply to a business combination or control share acquisition involving our company. However, our board of directors may opt into the business combination provisions and the control share provisions of Maryland law in the future.
Additionally, Maryland law permits our board of directors, without stockholder approval and regardless of what is currently provided in our charter or our bylaws, to implement takeover defenses, some of which (for example, a classified board) we do not currently employ. These provisions may have the effect of inhibiting a third party from making an acquisition proposal for our company or of delaying, deferring, or preventing a change in control of our company under circumstances that otherwise could provide the holders of our common stock with the opportunity to realize a premium over the then-current market price.
Our charter, our bylaws, the limited partnership agreement of our operating partnership, and Maryland law also contain other provisions that may delay, defer, or prevent a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders. In addition, the employment agreements with our named executive officers contain, and grants under our incentive plan also may contain, change-in-control provisions that might similarly have an anti-takeover effect, inhibit a change of our management, or inhibit in certain circumstances tender offers for our common stock or proxy contests to change our board.
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Our rights and the rights of our stockholders to recover claims against our directors and officers are limited, which could reduce our recovery and our stockholders’ recovery against them if they negligently cause us to incur losses.
Maryland law provides that a director or officer has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interest and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Our charter eliminates our directors’ and officers’ liability to us and our stockholders for money damages except for liability resulting from actual receipt of an improper benefit or profit in money, property, or services or active and deliberate dishonesty established by a final judgment and which is material to the cause of action. Our charter and bylaws require us to indemnify our directors and officers to the maximum extent permitted by Maryland law for any claim or liability to which they may become subject or which they may incur by reason of their service as directors or officers, except to the extent that the act or omission of the director or officer was material to the matter giving rise to the proceeding and was committed in bad faith or was the result of active and deliberate dishonesty, the director or officer actually received an improper personal benefit in money, property, or services, or, in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist under common law, which could reduce our and our stockholders’ recovery from these persons if they act in a negligent manner. In addition, we may be obligated to fund the defense costs incurred by our directors and officers (as well as by our employees and agents) in some cases.
Risks Related to Our Common Stock
Any change in our dividend policy could have a material adverse effect on the market price of our common stock.
Distributions are authorized and determined by our board of directors in its sole discretion and depend upon a number of factors, including:
• | cash available for distribution; |
• | our results of operations and anticipated future results of operations; |
• | our financial condition, especially in relation to our anticipated future capital needs of our properties; |
• | the level of reserves we establish for future capital expenditures; |
• | the distribution requirements for REITs under the Code; |
• | the level of distributions paid by comparable listed REITs; |
• | our operating expenses; and |
• | other factors our board of directors deems relevant. |
We expect to continue to pay quarterly distributions to our stockholders; however, we bear all expenses incurred by our operations, and our funds generated by operations, after deducting these expenses, may not be sufficient to cover desired levels of distributions to our stockholders. Any change in our distribution policy could have a material adverse effect on the market price of our common stock.
There are significant price and volume fluctuations in the public markets, including on the exchange which we listed our common stock.
The U.S. stock markets, including the NYSE on which our common stock is listed, have historically experienced significant price and volume fluctuations. The market price of our common stock may be highly volatile and could be subject to wide fluctuations and investors in our common stock may experience a decrease in the value of their shares, including decreases unrelated to our operating performance or prospects. If the market price of our common stock declines significantly, stockholders may be unable to resell their shares at or above their purchase price. We cannot assure stockholders that the market price of our common stock will not fluctuate or decline significantly in the future. Some of the factors that could negatively affect our stock price or result in fluctuations in the price or trading volume of our common stock include, but are not limited to, the following:
• | actual or anticipated variations in our quarterly operating results; |
• | changes in our earnings estimates or publication of research reports about us or the real estate industry, although no assurance can be given that any research reports about us will be published or the accuracy of such reports; |
• | changes in our dividend policy; |
• | future sales of substantial amounts of our common stock by our existing or future stockholders; |
• | increases in market interest rates, which may lead purchasers of our stock to demand a higher yield; |
• | changes in market valuations of similar companies; |
• | adverse market reaction to any increased indebtedness we incur in the future; |
• | additions or departures of key personnel; |
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• | actions by institutional stockholders; |
• | material, adverse litigation judgments; |
• | speculation in the press or investment community; and |
• | general market and economic conditions. |
Future offerings of debt securities, which would be senior to our common stock upon liquidation, or equity securities, which would dilute our existing stockholders and may be senior to our common stock for the purposes of distributions, may adversely affect the market price of our common stock.
We may attempt to increase our capital resources by making additional offerings of debt or equity securities, including medium term notes, senior or subordinated notes and classes of preferred or common stock. Upon liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock or both. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future offerings reducing the market price of our common stock and diluting their proportionate ownership.
Market interest rates may have an effect on the value of our common stock.
One of the factors that investors may consider in deciding whether to buy or sell our common stock is our distribution rate as a percentage of our share price, relative to market interest rates. If market interest rates increase, prospective investors may desire a higher yield on our common stock or seek securities paying higher dividends or yields. It is likely that the public valuation of our common stock will be based primarily on our earnings and cash flows and not from the underlying appraised value of the properties themselves. As a result, interest rate fluctuations and capital market conditions can affect the market value of our common stock. For instance, if interest rates rise, it is possible that the market price of our common stock will decrease, because potential investors may require a higher dividend yield on our common stock as market rates on interest-bearing securities, such as bonds, rise.
If securities analysts do not publish research or reports about our business or if they downgrade our common stock or our sector, the price of our common stock could decline.
The trading market for our common stock relies in part on the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts. Furthermore, if one or more of the analysts who do cover us downgrades our shares or our industry, or the stock of any of our competitors, the price of our shares could decline. If one or more of these analysts ceases coverage of our company, we could lose attention in the market, which in turn could cause the price of our common stock to decline.
Federal Income Tax Risks
Our failure to qualify as a REIT could adversely affect our operations and our ability to make distributions.
We are owned and operated in a manner intended to qualify us as a REIT for U.S. federal income tax purposes; however, we do not have a ruling from the IRS as to our REIT status. In addition, we own all of the common stock of a subsidiary that has elected to be treated as a REIT, and if our subsidiary REIT were to fail to qualify as a REIT, it is possible that we also would fail to qualify as a REIT unless we (or the subsidiary REIT) could qualify for certain relief provisions. Our qualification and the qualification of our subsidiary REIT as a REIT will depend on satisfaction, on an annual or quarterly basis, of numerous requirements set forth in highly technical and complex provisions of the Code for which there are only limited judicial or administrative interpretations. A determination as to whether such requirements are satisfied involves various factual matters and circumstances not entirely within our control. The fact that we hold substantially all of our assets through our operating partnership and its subsidiaries further complicates the application of the REIT requirements for us. No assurance can be given that we, or our subsidiary REIT, will qualify as a REIT for any particular year.
If we, or our subsidiary REIT, were to fail to qualify as a REIT in any taxable year for which a REIT election has been made, the non-qualifying REIT would not be allowed a deduction for dividends paid to its stockholders in computing our taxable income and would be subject to U.S. federal income tax (including any applicable alternative minimum tax) on its taxable income at corporate rates. Moreover, unless the non-qualifying REIT were to obtain relief under certain statutory provisions, the non-qualifying REIT also would be disqualified from treatment as a REIT for the four taxable years following the year during which qualification is lost. This treatment would reduce our net earnings available for investment or distribution to our stockholders
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because of the additional tax liability to us for the years involved. As a result of such additional tax liability, we might need to borrow funds or liquidate certain investments on terms that may be disadvantageous to us in order to pay the applicable tax.
Changes in tax laws may eliminate the benefits of REIT status or prevent us from maintaining our qualification as a REIT.
New legislation, regulations, administrative interpretations or court decisions could change the tax laws or interpretations of the tax laws regarding qualification as a REIT, or the federal income tax consequences of that qualification, in a manner that is materially adverse to our stockholders. Accordingly, there is no assurance that we can continue to operate with the current benefits of our REIT status. If there is a change in the tax laws that prevents us from qualifying as a REIT, that eliminates REIT status generally, or that requires REITs generally to pay corporate level income taxes, our results of operations may be adversely affected and we may not be able to make the same level of distributions to our stockholders.
Even if we qualify as a REIT, we may incur certain tax liabilities that would reduce our cash flow and impair our ability to make distributions.
Even if we maintain our status as a REIT, we may be subject to U.S. federal income taxes or state taxes, which would reduce our cash available for distribution to our stockholders. For example, we will be subject to federal income tax on any undistributed taxable income. Further, if we fail to distribute during each calendar year at least the sum of (a) 85% of our ordinary income for such year, (b) 95% of our net capital gain income for such year, and (c) any undistributed taxable income from prior periods, we will be subject to a 4% excise tax on the excess of the required distribution over the sum of (i) the amounts actually distributed by us, plus (ii) retained amounts on which we pay income tax at the corporate level. If we realize net income from foreclosure properties that we hold primarily for sale to customers in the ordinary course of business, we must pay tax thereon at the highest corporate income tax rate, and if we sell a property, other than foreclosure property, that we are determined to have held for sale to customers in the ordinary course of business, any gain realized would be subject to a 100% “prohibited transaction” tax. The determination as to whether or not a particular sale is a prohibited transaction depends on the facts and circumstances related to that sale. We cannot guarantee that sales of our properties would not be prohibited transactions unless we comply with certain safe-harbor provisions. The need to avoid prohibited transactions could cause us to forego or defer sales of properties that might otherwise be in our best interest to sell. In addition, we own interests in certain taxable REIT subsidiaries that are subject to federal income taxation and we and our subsidiaries may be subject to state and local taxes on our income or property.
Differences between the recognition of taxable income and the actual receipt of cash could require us to sell assets or borrow funds on a short-term or long-term basis to meet the distribution requirements of the Code.
We intend to make distributions to our stockholders to comply with the requirements of the Code for REITs and to minimize or eliminate our corporate tax obligations; however, differences between the recognition of taxable income and the actual receipt of cash could require us to sell assets or borrow funds on a short-term or long-term basis to meet the distribution requirements of the Code. Certain types of assets generate substantial disparity between taxable income and available cash, such as real estate that has been financed through financing structures which require some or all of available cash flows to be used to service borrowings. As a result, the requirement to distribute a substantial portion of our taxable income could cause us to: (1) sell assets in adverse market conditions, (2) borrow on unfavorable terms, or (3) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures, or repayment of debt, in order to comply with REIT requirements. Any such actions could increase our costs and reduce the value of our common stock. Further, we may be required to make distributions to our stockholders when it would be more advantageous to reinvest cash in our business or when we do not have funds readily available for distribution. Compliance with REIT qualification requirements may, therefore, hinder our ability to operate solely on the basis of maximizing profits.
We face possible adverse changes in tax laws including changes to state tax laws regarding the treatment of REITs and their stockholders, which may result in an increase in our tax liability.
From time to time, changes in state and local tax laws or regulations are enacted, including changes to a state’s treatment of REITs and their stockholders, which may result in an increase in our tax liability. Any shortfall in tax revenues for states and municipalities may lead to an increase in the frequency and size of such changes. If such changes occur, we may be required to pay additional taxes on our assets or income. These increased tax costs could adversely affect our financial condition and results of operations and the amount of cash available for payment of dividends.
Distributions made by REITs do not qualify for the reduced tax rates that apply to certain other corporate distributions.
The maximum tax rate for distributions made by corporations to individuals, trusts and estates is generally 20%. Distributions made by REITs; however, generally are taxed at the normal rate applicable to the individual recipient rather than the 20% preferential rate. The more favorable rates applicable to regular corporate distributions could cause investors who are individuals to perceive investments in REITs to be relatively less attractive than investments in non-REIT corporations that make distributions.
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A recharacterization of transactions undertaken by our operating partnership may result in lost tax benefits or prohibited transactions, which would diminish cash distributions to our stockholders, or even cause us to lose REIT status.
The IRS could recharacterize transactions consummated by our operating partnership, which could result in the income realized on certain transactions being treated as gain realized from the sale of property that is held as inventory or otherwise held primarily for the sale to customers in the ordinary course of business. In such event, the gain would constitute income from a prohibited transaction and would be subject to a 100% tax. If this were to occur, our ability to make cash distributions to our stockholders would be adversely affected. Moreover, our operating partnership may purchase properties and lease them back to the sellers of such properties. While we will use our best efforts to structure any such sale-leaseback transaction such that the lease will be characterized as a “true lease,” thereby allowing us to be treated as the owner of the property for federal income tax purposes, we can give stockholders no assurance that the IRS will not attempt to challenge such characterization. In the event that any such sale-leaseback transaction is challenged and recharacterized as a financing transaction or loan for U.S. federal income tax purposes, deductions for depreciation and cost recovery relating to such property would be disallowed. If a sale-leaseback transaction were so recharacterized, the amount of our adjusted REIT taxable income could be recalculated, which might cause us to fail to meet the distribution requirement for a taxable year. We also might fail to satisfy the REIT qualification asset tests or income tests and, consequently, lose our REIT status. Even if we maintain our status as a REIT, an increase in our adjusted REIT taxable income could cause us to be subject to additional federal and state income and excise taxes. Any federal or state taxes we pay will reduce our cash available for distribution to our stockholders.
Legislative or regulatory action could adversely affect our stockholders.
Numerous legislative, judicial and administrative changes have been made to the federal income tax laws applicable to investments in REITs and similar entities. Additional changes to tax laws are likely to continue to occur in the future, and we cannot assure stockholders that any such changes will not adversely affect the taxation of a stockholder. Any such changes could have an adverse effect on an investment in our common stock. Stockholders are urged to consult with their tax advisor with respect to the status of legislative, regulatory, or administrative developments and proposals and their potential effect on an investment in common stock.
Risks Associated with Debt Financing
We have incurred and are likely to continue to incur mortgage and other indebtedness, which may increase our business risks.
As of December 31, 2015, we had total outstanding indebtedness of approximately $2.0 billion and a total debt to gross assets ratio of 37.5%. Although the instruments governing our unsecured and secured indebtedness limit our ability to incur additional indebtedness, these restrictions are subject to a number of qualifications and exceptions and, under certain circumstances, debt incurred in compliance with these restrictions could be substantial.We may incur additional indebtedness to acquire properties or other real estate-related investments, to fund property improvements, and other capital expenditures or for other corporate purposes, such as to repurchase shares of our common stock through repurchase programs that our board of directors have authorized or to fund future distributions to our stockholders.
Significant borrowings by us increase the risks of an investment in us. Our ability to make payments on and to refinance our indebtedness and to fund our operations, working capital and capital expenditures, depends on our ability to generate cash in the future. Our cash flow is subject to general economic, industry, financial, competitive, operating, legislative, regulatory and other factors, many of which are beyond our control. If there is a shortfall between the cash flow from properties and the cash flow needed to service our indebtedness, then the amount available for distributions to stockholders may be reduced.
Our failure to pay amounts due in respect of any of our indebtedness when due may constitute an event of default under the instrument governing that indebtedness, which could permit the holders of that indebtedness to require the immediate repayment of that indebtedness in full and, in the case of secured indebtedness, could allow them to sell the collateral securing that indebtedness and use the proceeds to repay that indebtedness. For example, defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. Although we believe no such instances exist as of December 31, 2015, in those cases, we could lose the property securing the loan that is in default. For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but we would not receive any cash proceeds.
Moreover, any acceleration of or default in respect of any of our indebtedness could, in turn, constitute an event of default under other debt instruments or agreements, thereby resulting in the acceleration and required repayment of that other indebtedness. In addition, while we do not currently anticipate doing so, we may give full or partial guarantees to lenders of mortgage debt on
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behalf of the entities that own our properties if circumstances warrant that action. If we were to give a guaranty on behalf of an entity that owns one of our properties, we would be responsible to the lender for satisfaction of the debt if it were not paid by such entity. If any mortgages or other indebtedness contain cross-collateralization or cross-default provisions, a default on a single loan could affect multiple properties. If any of our properties are foreclosed on due to a default, our ability to pay cash distributions to our stockholders will be limited.
We cannot give any assurance that our business will generate sufficient cash flow from operations or that future sources of cash will be available to us in an amount sufficient to enable us to pay amounts due on our indebtedness or to fund our other liquidity needs.
We may need to refinance all or a portion of our indebtedness on or before maturity. Our ability to refinance our indebtedness or obtain additional financing will depend on, among other things our financial condition, results of operations and market conditions at the time; and restrictions in the agreements governing our indebtedness.
As a result, we may not be able to refinance our indebtedness on commercially reasonable terms, or at all. If we do not generate sufficient cash flow from operations, and additional borrowings or refinancings or proceeds of assets sales or other sources of cash are not available to us, we may not have sufficient cash to enable us to meet all of our obligations. Accordingly, if we cannot service our indebtedness, we may have to take actions such as seeking additional equity financing, delaying capital expenditures or strategic acquisitions and alliances. Any of these events or circumstances could have a material adverse effect on our financial condition, results of operations, cash flows, the trading price of our securities and our ability to satisfy our debt service obligations.
High mortgage rates may make it difficult for us to finance or refinance properties, which could reduce the number of properties we can acquire, our net income, and the amount of cash distributions we can make.
If mortgage debt is unavailable at reasonable rates, we may not be able to finance the purchase of properties. If we place mortgage debt on properties, we run the risk of being unable to refinance the properties when the loans become due, or of being unable to refinance on favorable terms. If interest rates are higher when we refinance our properties, our income could be reduced. We may be unable to refinance properties. If any of these events occur, our cash flow could be reduced. This, in turn, could reduce cash available for distribution to our stockholders and may hinder our ability to raise more capital by issuing more stock or by borrowing more money.
Agreements governing our existing indebtedness contain, and future financing arrangements will likely contain, restrictive covenants relating to our operations, which could limit our ability to make distributions to our stockholders.
We are subject to certain restrictions pursuant to the restrictive covenants of our outstanding indebtedness, which may affect our distribution and operating policies and our ability to incur additional debt. Loan documents evidencing our existing indebtedness contain, and loan documents entered into in the future will likely contain, certain operating covenants that limit our ability to further mortgage the property or discontinue insurance coverage. In addition, the agreements governing our existing indebtedness contain financial covenants, including certain coverage ratios and limitations on our ability to incur secured and unsecured debt, make dividend payments, sell all or substantially all of our assets, and engage in mergers and consolidations and certain acquisitions. Covenants under our existing indebtedness do, and under any future indebtedness likely will, restrict our ability to pursue certain business initiatives or certain acquisition transactions. In addition, failure to meet any of these covenants, including the financial coverage ratios, could cause an event of default under and/or accelerate some or all of our indebtedness, which would have a material adverse effect on us.
Increases in interest rates would increase the amount of our variable-rate debt payments and could limit our ability to pay dividends to our stockholders.
Currently, our $170 Million Unsecured 2015 Term Loan and outstanding draws on our $500 Million Unsecured 2015 Line of Credit are our only debt instruments that bear interest at a floating rate. All of our other debt is either fixed rate or has been effectively fixed through interest rate swap agreements. In addition, under the terms of the $170 Million Unsecured 2015 Term Loan and the $500 Million Unsecured 2015 Line of Credit, the balances are subject to various length LIBOR locks. Increases in interest rates will increase our interest costs associated with this variable rate debt. Such increases would reduce our cash flows and could impact our ability to pay dividends to our stockholders. In addition, if we are required to repay existing debt during periods of higher interest rates, we may need to sell one or more of our investments in order to repay the debt, which might not permit realization of the maximum return on such investments.
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Changes in interest rates could have adverse affects on our cash flows as a result of our interest rate derivative contracts.
We have entered into various interest rate derivative agreements to effectively fix our exposure to interest rates under certain of our existing and anticipated debt facilities. To the extent interest rates are higher than the fixed rate in the respective contract, we would realize cash savings as compared to other market participants. However, to the extent interest rates are below the fixed rate in the respective contract, we would make higher cash payments than other similar market participants, which would have an adverse affect on our cash flows as compared to other market participants.
Additionally, there is counterparty risk associated with entering into interest rate derivative contracts. Should market conditions lead to insolvency or make a merger necessary for one or more of our counterparties, or potential future counterparties, it is possible that the terms of our interest rate derivative contracts will not be honored in their current form with a replacement counterparty. The potential termination or renegotiation of the terms of the interest rate derivative contracts as a result of changing counterparties through insolvency or merger could result in an adverse impact on our results of operations and cash flows.
A downgrade in our credit rating could materially adversely affect our business and financial condition.
The credit ratings assigned to our debt securities could change based upon, among other things, our results of operations and financial condition. If any of the credit rating agencies that have rated our debt securities downgrades or lowers its credit rating, or if any credit rating agency indicates that it has placed any such rating on a so-called “watch list” for a possible downgrading or lowering or otherwise indicates that its outlook for that rating is negative, it could have a material adverse effect on our costs and availability of capital, which could in turn have a material adverse effect on our financial condition, results of operations, cash flows and our ability to satisfy our debt service obligations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
There were no unresolved SEC staff comments as of December 31, 2015.
ITEM 2. PROPERTIES
Overview
As of December 31, 2015, we owned interests in 69 office properties, one redevelopment asset, two development assets, and one building through an unconsolidated joint venture. Slightly under 80% of our annualized lease revenue ("ALR") (unaudited) was generated from select office sub-markets in the following cities: Atlanta, Boston, Chicago, Dallas, Minneapolis, New York, and Washington, D.C. As of December 31, 2015 and 2014, the portfolio was 91.5% and 87.7% leased, respectively, with an average lease term remaining as of each period end of approximately seven years.
ALR (see "Information Regarding Disclosures Presented" above) related to our portfolio of properties was $550.3 million, or $31.79 per leased square foot, as of December 31, 2015 as compared with $583.3 million, or $30.98 per leased square foot, as of December 31, 2014.
Property Statistics
The tables below include statistics for our properties that we own directly and through our consolidated joint ventures, but do not include our respective ownership interests in properties that we own through our unconsolidated joint ventures. Annualized Lease Revenue is defined in Item 1 of this Annual Report on Form 10-K.
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The following table shows lease expirations of our office portfolio as of December 31, 2015, during each of the next twelve years and thereafter, assuming no exercise of renewal options or termination rights.
Year of Lease Expiration | Annualized Lease Revenue (in thousands) | Rentable Square Feet Expiring (in thousands) | Percentage of Annualized Lease Revenue (%) | |||||||
Vacant | $ | — | 1,611 | — | ||||||
2016 (1) | 29,724 | 925 | 5.4 | |||||||
2017 | 47,522 | 1,147 | 8.6 | |||||||
2018 | 46,822 | 1,527 | 8.5 | |||||||
2019 | 70,848 | 2,307 | 12.9 | |||||||
2020 | 49,248 | 1,761 | 9.0 | |||||||
2021 | 36,784 | 1,225 | 6.7 | |||||||
2022 | 37,100 | 1,215 | 6.7 | |||||||
2023 | 33,758 | 1,206 | 6.1 | |||||||
2024 | 39,885 | 1,349 | 7.2 | |||||||
2025 | 27,380 | 830 | 5.0 | |||||||
2026 | 20,462 | 713 | 3.7 | |||||||
2027 | 32,843 | 1,017 | 6.0 | |||||||
Thereafter | 77,900 | 2,101 | 14.2 | |||||||
$ | 550,276 | 18,934 | 100.0 | |||||||
(1) | Includes leases with an expiration date of December 31, 2015 aggregating approximately 17,000 square feet and ALR of $1.1 million. |
The following table shows the geographic diversification of our portfolio as of December 31, 2015.
Location | Annualized Lease Revenue (in thousands) | Rentable Square Feet (in thousands) | Percentage of Annualized Lease Revenue (%) | |||||||
Washington, D.C. | $ | 108,319 | 3,039 | 19.7 | ||||||
New York | 66,603 | 1,766 | 12.1 | |||||||
Chicago | 62,120 | 2,094 | 11.3 | |||||||
Atlanta | 48,332 | 2,065 | 8.8 | |||||||
Minneapolis | 45,913 | 1,618 | 8.3 | |||||||
Dallas | 45,472 | 1,798 | 8.3 | |||||||
Boston | 45,231 | 1,626 | 8.2 | |||||||
Los Angeles | 31,159 | 1,010 | 5.7 | |||||||
Central & South Florida | 29,462 | 1,128 | 5.4 | |||||||
Philadelphia | 18,016 | 801 | 3.3 | |||||||
Detroit | 17,663 | 819 | 3.2 | |||||||
Houston | 11,231 | 313 | 2.0 | |||||||
Nashville | 10,547 | 513 | 1.9 | |||||||
Austin | 6,659 | 195 | 1.2 | |||||||
Phoenix | 3,549 | 149 | 0.6 | |||||||
$ | 550,276 | 18,934 | 100.0 | |||||||
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The following table shows the tenant industry diversification of our portfolio as of December 31, 2015.
Industry | Annualized Lease Revenue (in thousands) | Leased Square Footage (in thousands) | Percentage of Annualized Lease Revenue (%) | |||||||
Governmental Entity | $ | 83,536 | 1,702 | 15.2 | ||||||
Business Services | 47,934 | 1,836 | 8.7 | |||||||
Depository Institutions | 38,227 | 1,328 | 6.9 | |||||||
Engineering, Accounting, Research, Management & Related Services | 37,048 | 993 | 6.7 | |||||||
Nondepository Credit Institutions | 34,983 | 1,149 | 6.4 | |||||||
Insurance Carriers | 30,743 | 1,236 | 5.6 | |||||||
Insurance Agents, Brokers & Services | 27,836 | 975 | 5.1 | |||||||
Security & Commodity Brokers, Dealers, Exchanges & Services | 22,565 | 762 | 4.1 | |||||||
Communications | 19,834 | 631 | 3.6 | |||||||
Electronic & Other Electrical Equipment & Components, Except Computer | 19,091 | 611 | 3.5 | |||||||
Legal Services | 18,345 | 619 | 3.3 | |||||||
Educational Services | 15,095 | 395 | 2.7 | |||||||
Real Estate | 14,654 | 490 | 2.7 | |||||||
Food & Kindred Products | 12,515 | 408 | 2.3 | |||||||
Automotive Repair, Services & Parking | 12,111 | 4 | 2.2 | |||||||
Other | (1) | 115,759 | 4,184 | 21.0 | ||||||
$ | 550,276 | 17,323 | 100.0 | |||||||
(1) | Not more than 2% is attributable to any individual industry. |
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The following table shows the tenant diversification of our portfolio as of December 31, 2015.
Tenant | Number of Properties | Expiration Date(s) (1) | Annualized Lease Revenues (in thousands) (2) | Percentage of Annualized Lease Revenues (%) | ||||||||
U.S. Government | 6 | Various | (3) | $ | 46,309 | 8.4 | ||||||
State of New York | 1 | 2019 | 24,689 | 4.5 | ||||||||
US Bancorp | 3 | 2023 / 2024 | 21,775 | 4.0 | ||||||||
Independence Blue Cross | 1 | 2033 | 18,016 | 3.3 | ||||||||
GE | 2 | 2027 | 16,951 | 3.1 | ||||||||
Nestle | 1 | 2021 | 12,281 | 2.2 | ||||||||
City of New York | 1 | 2020 | 10,723 | 2.0 | ||||||||
Gallagher | 2 | 2018 | 9,146 | 1.7 | ||||||||
Catamaran | 1 | 2025 | 8,252 | 1.5 | ||||||||
Caterpillar Financial | 1 | 2022 | 7,968 | 1.4 | ||||||||
Harvard University | 2 | 2017 / 2018 | 7,267 | 1.3 | ||||||||
Raytheon | 2 | 2019 | 6,870 | 1.2 | ||||||||
Harcourt | 1 | 2016 | 6,654 | 1.2 | ||||||||
Technip | 1 | 2018 | 6,591 | 1.2 | ||||||||
Epsilon Data Management | 2 | 2026 | 6,232 | 1.1 | ||||||||
First Data Corporation | 1 | 2027 | 6,132 | 1.1 | ||||||||
Goldman Sachs | 2 | 2018 | 5,996 | 1.1 | ||||||||
Towers Watson | 1 | 2017 | 5,856 | 1.1 | ||||||||
Henry M Jackson | 2 | 2022 | 5,819 | 1.1 | ||||||||
District of Columbia | 2 | 2028 | 5,683 | 1.0 | ||||||||
Motorola | 1 | 2028 | 5,680 | 1.0 | ||||||||
Lockheed Martin | 2 | 2016 / 2020 | 5,264 | 1.0 | ||||||||
Other | Various | (4) | 300,122 | 54.5 | ||||||||
$ | 550,276 | 100.0 | ||||||||||
(1) | Represents the expiration year of the majority of the square footage leased by the tenant. |
(2) | Approximately 70% of our ALR is derived from investment grade or nationally recognized companies or government agencies. |
(3) | Various expirations ranging from 2016 to 2030. |
(4) | Not more than 1% of ALR is attributable to any individual tenant. |
Certain Restrictions Related to our Properties
Control of one of our properties is limited to a certain extent because the property is owned through a joint venture that we do not exclusively control. In addition, certain of our properties are held as collateral for debt, and another property is subject to a ground lease. Refer to Schedule III listed in the index of Item 15(a) of this report, which details ten properties held as collateral for debt facilities and one property subject to a ground lease as of December 31, 2015.
ITEM 3. LEGAL PROCEEDINGS
Piedmont is not subject to any material pending legal proceedings. However, we are subject to routine litigation arising in the ordinary course of owning and operating real estate assets. Our management expects that these ordinary routine legal proceedings will be covered by insurance and does not expect these legal proceedings to have a material adverse effect on our financial condition, results of operations, or liquidity. Additionally, management is not aware of any legal proceedings contemplated by governmental authorities.
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ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information and Holders
Our common stock is listed on the New York Stock Exchange under the symbol “PDM.” As of February 16, 2016, there were 12,497 common stockholders of record of our common stock.
The high and low sales prices for Piedmont’s common stock and the dividend distributions paid on all outstanding classes of common stock to stockholders during 2015 and 2014 were as follows:
2015 Quarters | |||||||||||||||
First | Second | Third | Fourth | ||||||||||||
High | $ | 20.15 | $ | 19.04 | $ | 18.95 | $ | 19.85 | |||||||
Low | $ | 17.61 | $ | 16.83 | $ | 16.54 | $ | 17.77 | |||||||
Dividend per common share | $ | 0.21 | $ | 0.21 | $ | 0.21 | $ | 0.21 | |||||||
2014 Quarters | |||||||||||||||
First | Second | Third | Fourth | ||||||||||||
High | $ | 17.42 | $ | 19.80 | $ | 19.97 | $ | 20.05 | |||||||
Low | $ | 15.83 | $ | 16.82 | $ | 17.64 | $ | 17.44 | |||||||
Dividend per common share | $ | 0.20 | $ | 0.20 | $ | 0.20 | $ | 0.21 | |||||||
Performance Graph
The following graph compares the cumulative total return of Piedmont’s common stock with the S&P 500 Index, the FTSE NAREIT Equity REITs Index, and the FTSE NAREIT Equity Office Index for the period beginning on December 31, 2010 through December 31, 2015. The graph assumes a $100 investment in each of Piedmont and the three indices, and the reinvestment of any dividends.
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Comparison of Cumulative Total Return of One or More Companies, Peer Groups, Industry Indices, and/or Broad Markets
As of the year ended December 31, | ||||||||||||||||||
12/31/2010 | 12/31/2011 | 12/31/2012 | 12/31/2013 | 12/31/2014 | 12/31/2015 | |||||||||||||
Piedmont Office Realty Trust, Inc. | $ | 100.00 | $ | 90.53 | $ | 100.47 | $ | 96.08 | $ | 114.47 | $ | 120.17 | ||||||
FTSE NAREIT Equity Office | $ | 100.00 | $ | 102.11 | $ | 118.45 | $ | 156.82 | $ | 178.29 | $ | 180.75 | ||||||
FTSE NAREIT Equity REITs | $ | 100.00 | $ | 108.29 | $ | 127.85 | $ | 131.01 | $ | 170.49 | $ | 175.94 | ||||||
S&P 500 | $ | 100.00 | $ | 99.24 | $ | 113.29 | $ | 119.60 | $ | 150.52 | $ | 150.96 | ||||||
The performance graph above is being furnished as part of this Annual Report solely in accordance with the requirement under Rule 14a-3(b)(9) to furnish Piedmont’s stockholders with such information and, therefore, is not deemed to be filed, or incorporated by reference in any filing, by Piedmont under the Securities Act of 1933 or the Securities Exchange Act of 1934.
Purchases of Equity Securities By the Issuer and Affiliated Purchasers
During the quarter ended December 31, 2015, Piedmont repurchased shares of its common stock in the open market, in order to reissue such shares under its dividend reinvestment plan (the “DRP”), as well as repurchasing and retiring shares as part of our announced stock repurchase plan.
Of the 283,161 shares repurchased during the fourth quarter of 2015, 131,000 shares (at an average price of $18.19 per share) related to repurchase of our common stock pursuant to our announced stock repurchase plan, and 152,161 shares (at an average price of $18.06 per share) related to shares purchased and conveyed to participants in the DRP. The aggregate stock repurchases for the quarter ended December 31, 2015 are as follows:
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Period | Total Number of Shares Purchased (in 000’s) (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Program (in 000’s) (1) | Maximum Approximate Dollar Value of Shares Available That May Yet Be Purchased Under the Program (in 000’s) | ||||||||||
October 1, 2015 to October 31, 2015 | 131 | $ | 18.19 | 131 | $ | 78,181 | ||||||||
November 1, 2015 to November 30, 2015 | — | $ | — | — | $ | 78,181 | ||||||||
December 1, 2015 to December 31, 2015 | 152 | $ | 18.06 | — | $ | 78,181 | (2) | |||||||
Total | 283 | $ | 18.12 | 131 | ||||||||||
(1) | Under our amended and restated DRP, as set forth in a Current Report on Form 8-K filed February 24, 2011, we have the option to either issue shares that we purchase in the open market or issue shares directly from Piedmont from authorized but unissued shares. Such election will take place at the settlement of each quarterly dividend in which there are participants in our DRP, and may change from quarter to quarter based on our judgment of the best use of proceeds for Piedmont. |
(2) | Amounts available for purchase relate only to our stock repurchase plan, which was announced on June 24, 2015. Our board of directors authorized the repurchase of up to $200 million of additional shares of our common stock pursuant to the stock repurchase plan prior to the second quarter ended June 20, 2017. The share repurchase plan is separate from shares purchased for DRP issuance. |
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ITEM 6. SELECTED FINANCIAL DATA
The following sets forth a summary of our selected financial data as of and for the years ended December 31, 2015, 2014, 2013, 2012, and 2011 (in thousands except for per-share data). Our selected financial data is prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), except as noted below.
2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||
Statement of Income Data (1): | |||||||||||||||||||
Total revenues | $ | 584,769 | $ | 566,252 | $ | 549,610 | $ | 520,704 | $ | 520,647 | |||||||||
Property operating costs | $ | 242,000 | $ | 239,436 | $ | 220,779 | $ | 206,189 | $ | 200,159 | |||||||||
Depreciation and amortization | $ | 195,389 | $ | 195,175 | $ | 166,070 | $ | 158,277 | $ | 153,017 | |||||||||
Impairment loss on real estate assets | $ | 40,169 | $ | — | $ | — | $ | — | $ | — | |||||||||
General and administrative expenses | $ | 30,368 | $ | 23,820 | $ | 21,881 | $ | 20,767 | $ | 25,070 | |||||||||
Other income/(expense) | $ | (72,158 | ) | $ | (67,742 | ) | $ | (68,682 | ) | $ | (75,937 | ) | $ | (58,761 | ) | ||||
Income from continuing operations (1) | $ | 4,685 | $ | 40,079 | $ | 72,198 | $ | 59,534 | $ | 83,640 | |||||||||
Income and gain on sale of real estate assets from discontinued operations (1) | $ | 83 | $ | 2,152 | $ | 26,545 | $ | 33,685 | $ | 141,416 | |||||||||
Gain on sale of real estate assets not classified as discontinued operations | $ | 168,237 | $ | 1,132 | $ | — | $ | — | $ | — | |||||||||
Net income attributable to noncontrolling interest | $ | (15 | ) | $ | (15 | ) | $ | (15 | ) | $ | (15 | ) | $ | (15 | ) | ||||
Net income attributable to Piedmont | $ | 172,990 | $ | 43,348 | $ | 98,728 | $ | 93,204 | $ | 225,041 | |||||||||
Per-Share Data (1): | |||||||||||||||||||
Per weighted-average common share data: | |||||||||||||||||||
Income from continuing operations per share—basic and diluted | $ | 1.15 | $ | 0.27 | $ | 0.44 | $ | 0.35 | $ | 0.48 | |||||||||
Income from discontinued operations per share—basic and diluted | $ | — | $ | 0.01 | $ | 0.16 | $ | 0.20 | $ | 0.82 | |||||||||
Net income attributable to Piedmont per share—basic and diluted | $ | 1.15 | $ | 0.28 | $ | 0.60 | $ | 0.55 | $ | 1.30 | |||||||||
Dividends declared and paid to common stockholders | $ | 0.84 | $ | 0.81 | $ | 0.80 | $ | 0.80 | $ | 1.26 | |||||||||
Weighted-average shares outstanding—basic (in thousands) | 150,538 | 154,452 | 165,013 | 170,312 | 172,765 | ||||||||||||||
Weighted-average shares outstanding—diluted (in thousands) | 150,880 | 154,585 | 165,137 | 170,441 | 172,981 | ||||||||||||||
Balance Sheet Data (at period end): | |||||||||||||||||||
Total assets | $ | 4,434,535 | $ | 4,787,834 | $ | 4,657,329 | $ | 4,248,421 | $ | 4,441,857 | |||||||||
Total stockholders’ equity | $ | 2,196,444 | $ | 2,312,015 | $ | 2,461,159 | $ | 2,640,495 | $ | 2,773,428 | |||||||||
Outstanding debt | $ | 2,029,510 | $ | 2,269,922 | $ | 1,993,446 | $ | 1,410,071 | $ | 1,466,548 | |||||||||
Ratio of Earnings to Fixed Charges | 3.2 | 1.5 | 2.1 | 1.9 | 2.2 | ||||||||||||||
NAREIT Funds from Operations Data (2): | |||||||||||||||||||
GAAP net income applicable to common stock | $ | 172,990 | $ | 43,348 | $ | 98,728 | $ | 93,204 | $ | 225,041 | |||||||||
Depreciation and amortization | 194,943 | 195,345 | 170,158 | 164,750 | 170,553 | ||||||||||||||
Loss/(gain) on consolidation | — | — | 898 | — | (1,532 | ) | |||||||||||||
Impairment loss | 40,169 | — | 12,046 | — | — | ||||||||||||||
Gain on sale- wholly-owned properties and unconsolidated partnerships | (168,236 | ) | (2,161 | ) | (31,292 | ) | (27,577 | ) | (122,773 | ) | |||||||||
NAREIT Funds From Operations applicable to common stock (2) | $ | 239,866 | $ | 236,532 | $ | 250,538 | $ | 230,377 | $ | 271,289 | |||||||||
Acquisition costs | 919 | 560 | 1,763 | 141 | 1,347 | ||||||||||||||
Loss/(gain) on settlement of swaps and extinguishment of debt | 38 | — | — | — | (1,039 | ) | |||||||||||||
Net loss/(recoveries) of casualty loss and litigation settlements | 278 | (6,992 | ) | (11,828 | ) | 12,670 | — | ||||||||||||
Core Funds From Operations applicable to common stock (2) | $ | 241,101 | $ | 230,100 | $ | 240,473 | $ | 243,188 | $ | 271,597 | |||||||||
Amortization of debt issuance costs, fair market adjustments on notes payable, and discount on Senior Notes | 2,547 | 2,632 | 2,664 | 2,648 | 4,608 | ||||||||||||||
Depreciation of non real estate assets | 755 | 508 | 406 | 502 | 499 | ||||||||||||||
Straight-line effects of lease revenue and net effect of amortization of below-market in-place lease intangibles | (20,305 | ) | (33,848 | ) | (23,375 | ) | (22,831 | ) | (16,572 | ) | |||||||||
Stock-based and other non-cash compensation | 7,090 | 3,975 | 1,590 | 2,246 | 4,705 | ||||||||||||||
Acquisition costs | (919 | ) | (560 | ) | (1,763 | ) | (141 | ) | (1,347 | ) | |||||||||
Income from amortization of discount on purchase of mezzanine loans | — | — | — | — | (484 | ) | |||||||||||||
Non-incremental capital expenditures | (44,136 | ) | (84,630 | ) | (102,977 | ) | (87,657 | ) | (60,401 | ) | |||||||||
Adjusted Funds From Operations applicable to common stock (2) | $ | 186,133 | $ | 118,177 | $ | 117,018 | $ | 137,955 | $ | 202,605 | |||||||||
(1) | Prior period amounts have been adjusted to conform with the current period presentation. |
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(2) | Net income calculated in accordance with GAAP is the starting point for calculating Funds from Operations, Core Funds From Operations, and Adjusted Funds From Operations. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Funds from Operations, Core Funds from Operations, and Adjusted Funds From Operations" below for a description and reconciliation of the calculations as presented. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the audited consolidated financial statements and notes thereto as of December 31, 2015 and 2014, and for the years ended December 31, 2015, 2014, and 2013 included elsewhere in this Annual Report on Form 10-K. See also “Cautionary Note Regarding Forward-Looking Statements” preceding Part I of this report and “Risk Factors” set forth in Item 1A. of this report.
Overview
We are a fully integrated, self-managed real estate investment trust specializing in the acquisition, development, management, and ownership of primarily high-quality Class A office buildings located in certain specific major U.S. office markets and leased primarily to high-credit-quality tenants. We operate as a real estate investment trust for federal income tax purposes.
As of December 31, 2015, we owned and operated 69 office properties, one redevelopment asset, two development assets and one office building through an unconsolidated joint venture. Slightly under 80% of our Annualized Lease Revenue is generated from select office sub-markets in the following cities: Atlanta, Boston, Chicago, Dallas, Minneapolis, New York, and Washington, D.C.
Our portfolio of primarily Class A commercial office buildings was 91.5% and 87.7% leased as of December 31, 2015 and 2014, respectively. As we typically lease to large corporate users, our average lease size is approximately 23,000 square feet and as of December 31, 2015, we had an average lease term remaining of slightly under seven years. Our tenant base is primarily comprised of investment grade or nationally recognized corporations or governmental agencies, with 70% of our Annualized Lease Revenue derived from such tenants. No tenant other than the U.S. government accounts for more than 5% of our Annualized Lease Revenue.
Liquidity and Capital Resources
We intend to use cash flows generated from the operation of our properties, proceeds from our $500 Million Unsecured 2015 Line of Credit, and proceeds from selective property dispositions as our primary sources of immediate liquidity. In accordance with our ongoing portfolio refinement strategy, during the year ended December 31, 2015, we took advantage of a strong sellers' market by disposing of nine assets, including our largest asset, Aon Center, located in Chicago, Illinois. The nine sales generated approximately $848.2 million in net sales proceeds which was used to reduce our total debt outstanding, to repurchase approximately nine million shares of our common stock, and to acquire five assets located in our strategic markets. As of the date of this filing we had approximately $388.0 million of our $500 Million Unsecured 2015 Line of Credit available for future borrowing. We are also continuing to market certain properties for sale which, if consummated, would generate over $500 million of additional proceeds over the next twelve months. Although we have no immediate plans to issue additional debt or equity securities, on a longer term basis we may seek additional secured or unsecured borrowings from third-party lenders or issue securities through our "at the market" offering program as additional sources of capital. The availability and attractiveness of terms for these additional sources of capital is highly dependent on market conditions.
Our most consistent use of capital has historically been, and we believe will continue to be, to fund capital expenditures for our existing portfolio of properties. During the years ended December 31, 2015 and 2014, we incurred the following types of capital expenditures (in thousands):
December 31, 2015 | December 31, 2014 | ||||||
Capital expenditures for new development | $ | 34,466 | $ | 25,256 | |||
Capital expenditures for redevelopment/ renovations | 17,283 | 14,151 | |||||
Other capital expenditures, including tenant improvements | 66,922 | 129,484 | |||||
Total capital expenditures (1) | $ | 118,671 | $ | 168,891 | |||
(1) | Of the total amounts paid, approximately $6.0 million and $3.5 million related to soft costs such as capitalized interest, payroll, and other general and administrative expenses for the year ended December 31, 2015 and 2014, respectively. |
"Capital expenditures for new development" relate to two development projects: Enclave Place, our recently completed 300,000 square foot, 11-story office tower in Houston, Texas, and 500 TownPark, a new 135,000 square foot, 80% pre-leased, four-story office building which is being constructed adjacent to our existing 400 TownPark asset in Lake Mary, Florida. The 500 TownPark
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project is currently under construction and total additional project costs are anticipated to be between $26-$28 million, inclusive of leasing costs. The project is expected to be completed early in 2017.
"Capital expenditures for redevelopment/renovations" relate to a recently completed repositioning project to convert our 3100 Clarendon Boulevard building in Arlington, Virginia from governmental use to private sector use.
"Other capital expenditures" include all other capital expenditures during the period and are typically comprised of tenant and building improvements and leasing commissions necessary to lease or maintain our existing portfolio of office properties.
Piedmont classifies its 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”). Commitments for funding non-incremental capital expenditures for tenant improvements over the next five years related to Piedmont's existing lease portfolio total approximately $40.4 million. The timing of the funding of these commitments is largely dependent upon tenant requests for reimbursement; however, we anticipate that a significant portion of these improvement allowances may be requested over the next three years based on when the underlying leases commence. In some instances, these obligations may expire with the respective lease, without further recourse to us. Additionally, commitments for incremental capital expenditures for tenant improvements associated with new and existing leases totaled approximately $36.9 million as of December 31, 2015.
In addition to the amounts described above that we have already committed to as a part of executed leases, we anticipate continuing to incur similar market-based tenant improvement allowances and leasing commissions in conjunction with procuring future leases for our existing portfolio of properties as well as our recently completed development and redevelopment projects. Given that our operating model frequently requires us to lease large blocks of space to credit-worthy tenants, our leasing success can result in significant capital outlays. For example, for leases executed during the year ended December 31, 2015, we committed to spend approximately $4.79 and $1.75 per square foot per year of lease term for tenant improvement allowances and leasing commissions, respectively, and for those executed during the the twelve months ended December 31, 2014, we committed to spend approximately $3.48 and $1.53 per square foot per year of lease term for tenant improvement allowances and leasing commissions, respectively. A substantial portion of the increase during 2015 was related to our leasing of space to new tenants in high capital cost markets, such as Chicago and Washington, D.C.; however, a portion of these obligations was transferred upon the sale of the Aon Center building located in Chicago, Illinois. Both the timing and magnitude of expenditures related to future leasing activity are highly dependent on the competitive market conditions at the time of lease negotiations of the particular office market within which a given lease is signed.
Subject to the identification and availability of attractive investment opportunities and our ability to consummate such acquisitions on satisfactory terms, acquiring new assets compatible with our investment strategy could also be a significant use of capital. Further, our Board of Directors has authorized a $200 million stock repurchase program pursuant to which we may use capital resources to purchase our common stock when we believe the stock is trading at a meaningful discount to what we believe the estimated fair value of our net assets to be. As of December 31, 2015, there was $78.2 million of authorized capacity remaining under the plan which may be spent prior to the plan's expiration in second quarter 2017. Finally, we expect to use capital to repay debt when obligations become due. On January 4, 2016, the earliest date for prepayment without penalty, we repaid a $125.0 million mortgage that was scheduled to mature in April 2016 and we currently anticipate repaying a $42.5 million maturing mortgage in July of 2016 by drawing on our $500 Million Unsecured 2015 Line of Credit. Other than the $42.5 million maturity, we currently have no other debt maturing until the fourth quarter of 2017; however, on a longer term basis, we expect to use capital to repay debt when obligations become due.
The amount and form of payment (cash or stock issuance) of future dividends to be paid to our stockholders will continue to be largely dependent upon (i) the amount of cash generated from our operating activities; (ii) our expectations of future cash flows; (iii) our determination of near-term cash needs for debt repayments, development projects, and selective acquisitions of new properties; (iv) the timing of significant expenditures for tenant improvements, building redevelopment projects, and general property capital improvements; (v) long-term payout ratios for comparable companies; (vi) our ability to continue to access additional sources of capital, including potential sales of our properties; and (vii) the amount required to be distributed to maintain our status as a REIT. Given the fluctuating nature of cash flows and expenditures, we may periodically borrow funds on a short-term basis to cover timing differences in cash receipts and cash disbursements.
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Results of Operations (2015 vs. 2014)
Overview
Income from continuing operations and gain on sale of real estate assets per share on a fully diluted basis increased from $0.27 for the year ended December 31, 2014 to $1.15 for the year ended December 31, 2015 primarily due to gains recognized on the sale of several of our properties during 2015 of $168.2 million, including our largest asset, the Aon Center building. The increase was partially offset by the recognition of $40.2 million of impairment charges to adjust our 2 Gatehall Drive building in Parsippany, New Jersey, and our Eastpoint I & II buildings in Mayfield Heights, Ohio to their contracted sales price less estimated selling costs upon entering into binding purchase and sale agreements. All of these assets were sold during the year ended December 31, 2015.
Comparison of the accompanying consolidated statements of income for the year ended December 31, 2015 vs. the year ended December 31, 2014
The following table sets forth selected data from our consolidated statements of income for the years ended December 31, 2015 and 2014, respectively, as well as each balance as a percentage of total revenues for the years presented (dollars in millions):
December 31, 2015 | % | December 31, 2014 | % | Variance | |||||||||||||
Revenue: | |||||||||||||||||
Rental income | $ | 468.9 | $ | 454.6 | $ | 14.3 | |||||||||||
Tenant reimbursements | 113.9 | 109.6 | 4.3 | ||||||||||||||
Property management fee revenue | 2.0 | 2.1 | (0.1 | ) | |||||||||||||
Total revenues | 584.8 | 100 | % | 566.3 | 100 | % | 18.5 | ||||||||||
Expense: | |||||||||||||||||
Property operating costs | 242.0 | 41 | % | 239.5 | 42 | % | 2.5 | ||||||||||
Depreciation | 134.5 | 23 | % | 138.6 | 25 | % | (4.1 | ) | |||||||||
Amortization | 60.9 | 11 | % | 56.6 | 10 | % | 4.3 | ||||||||||
Impairment losses on real estate assets | 40.2 | 7 | % | — | — | % | 40.2 | ||||||||||
General and administrative | 30.4 | 5 | % | 23.8 | 4 | % | 6.6 | ||||||||||
Real estate operating income | 76.8 | 13 | % | 107.8 | 19 | % | (31.0 | ) | |||||||||
Other income (expense): | |||||||||||||||||
Interest expense | (74.0 | ) | 12 | % | (74.4 | ) | 13 | % | 0.4 | ||||||||
Other income/(expense) | 1.6 | — | % | 0.1 | — | % | 1.5 | ||||||||||
Net recoveries/(loss) from casualty events and litigation settlements | (0.3 | ) | — | % | 7.0 | 1 | % | (7.3 | ) | ||||||||
Equity in income/(loss) of unconsolidated joint ventures | 0.6 | — | % | (0.4 | ) | — | % | 1.0 | |||||||||
Income from continuing operations | $ | 4.7 | 1 | % | $ | 40.1 | 7 | % | $ | (35.4 | ) | ||||||
Income from discontinued operations | $ | 0.1 | $ | 2.2 | $ | (2.1 | ) | ||||||||||
Gain on sale of real estate assets | $ | 168.2 | $ | 1.1 | $ | 167.1 | |||||||||||
Revenue
Rental income increased approximately $14.3 million for the year ended December 31, 2015 as compared to the same period in the prior year primarily due to an increase in leased space at several of our existing properties. Although we recognized approximately $17.6 million of rental revenue attributable to properties acquired during 2014 and 2015, the increase was offset by the sale of nine assets during the same period, including our largest asset, the Aon Center building, which was sold in late October 2015.
Tenant reimbursements increased approximately $4.3 million for the year ended December 31, 2015 as compared to the same period in the prior year primarily due to the expiration of operating expense abatement periods associated with several significant leases during late 2014 or 2015. This increase was partially offset by decreased tenant reimbursement income in 2015 as a result of the sale of Aon Center during the fourth quarter.
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Expense
Property operating costs increased approximately $2.5 million for the year ended December 31, 2015 as compared to the same period in the prior year due to increased occupancy at certain of our assets, as well as increased property tax expense at certain of our properties as a result of higher valuations, partially offset by net disposition activity during the year.
Depreciation expense decreased approximately $4.1 million for the year ended December 31, 2015 compared to the same period in the prior year. The variance is primarily due to the net impact of acquisition and disposition activity during the year, partially offset by depreciation on additional tenant and building improvements placed in service subsequent to January 1, 2014.
Amortization expense increased approximately $4.3 million for the year ended December 31, 2015 compared to the same period in the prior year. Approximately $7.5 million of the increase is due to additional amortization of intangible lease assets recognized as part of acquiring new properties during 2014 and 2015, offset by the reduction in amortization expense from dispositions over the same period. Additionally, the increase between periods is net of approximately $2.7 million related to the acceleration of amortization expense in the prior period related to two lease terminations.
During the year ended December 31, 2015, we recognized approximately $40.2 million in impairment charges related to the sale our Eastpoint I & II buildings, and the sale of our 2 Gatehall Drive building as a result of adjusting the assets to the net contracted sales price less estimated selling costs.
General and administrative expenses increased approximately $6.6 million for the year ended December 31, 2015 compared to the prior year primarily due to the accrual of potential incentive and performance-based compensation costs driven by improved operating results during the year, including $1.5 million of expense as a result of increasing accruals related to previous years under our respective three-year stock performance plans.
Other Income (Expense)
Interest expense decreased approximately $0.4 million for the year ended December 31, 2015 as compared to the prior year as a result of refinancing our line of credit on more favorable terms and lower average outstanding debt balances during the year ended December 31, 2015 as compared to the year ended December 31, 2014.
Other income/(expense) increased approximately $1.5 million for the year ended December 31, 2015 as compared to the prior year. The variance is primarily attributable to $2.6 million of interest income associated with a secured note receivable from the purchaser of our Copper Ridge Center building located in Lyndhurst, New Jersey, offset by a decrease in non-recurring income associated with the sale of density rights during the prior year.
We recognized a decrease in net recoveries from casualty loss and litigation settlement expense for the year ended December 31, 2015 compared to the prior year of approximately $7.3 million. Such recoveries are non-recurring in nature and are largely associated with the receipt of insurance proceeds related to casualty losses resulting from Hurricane Sandy in 2012.
Equity in income of unconsolidated joint ventures for the year ended December 31, 2014 included the operations of two properties; Two Park Center located in Hoffman Estates, Illinois, and 8560 Upland Drive located in Parker, Colorado. The Two Park Center building was sold in May 2014, resulting in a loss. The results of operations from unconsolidated joint ventures in the current year consist solely of the remaining 8560 Upland Drive property.
Income from Discontinued Operations
The operations of all assets sold prior to April 1, 2014 are classified as discontinued operations (see Note 2 and Note 14 to our accompanying consolidated financial statements for a complete listing) in the accompanying consolidated statements of income for all periods presented. The presentation of discontinued operations in the future is subject to the occurrence and timing of future property dispositions that meet the amended criteria to be classified as discontinued operations.
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Results of Operations (2014 vs. 2013)
Overview
Income from continuing operations per share on a fully diluted basis decreased from $0.44 for the year ended December 31, 2013 to $0.27 for the year ended December 31, 2014 primarily due to higher depreciation expense mostly associated with new tenant and building improvements put into service after January 1, 2013 and higher amortization expense due mainly to additional amortization of intangible lease assets recognized as part of acquiring new properties during 2013 and 2014.
Comparison of the accompanying consolidated statements of income for the year ended December 31, 2014 vs. the year ended December 31, 2013
The following table sets forth selected data from our consolidated statements of income for the years ended December 31, 2014 and 2013, respectively, as well as each balance as a percentage of total revenues for the years presented (dollars in millions):
December 31, 2014 | % | December 31, 2013 | % | Variance | |||||||||||||
Revenue: | |||||||||||||||||
Rental income | $ | 454.6 | $ | 443.1 | $ | 11.5 | |||||||||||
Tenant reimbursements | 109.6 | 104.3 | 5.3 | ||||||||||||||
Property management fee revenue | 2.1 | 2.2 | (0.1 | ) | |||||||||||||
Total revenues | 566.3 | 100 | % | 549.6 | 100 | % | 16.7 | ||||||||||
Expense: | |||||||||||||||||
Property operating costs | 239.5 | 42 | % | 220.7 | 40 | % | 18.8 | ||||||||||
Depreciation | 138.6 | 25 | % | 121.0 | 22 | % | 17.6 | ||||||||||
Amortization | 56.6 | 10 | % | 45.1 | 8 | % | 11.5 | ||||||||||
General and administrative expense | 23.8 | 4 | % | 21.9 | 4 | % | 1.9 | ||||||||||
Real estate operating income | 107.8 | 19 | % | 140.9 | 26 | % | (33.1 | ) | |||||||||
Other income (expense): | |||||||||||||||||
Interest expense | (74.4 | ) | 13 | % | (73.6 | ) | 13 | % | (0.8 | ) | |||||||
Other income/(expense) | 0.1 | — | % | (2.3 | ) | 1 | % | 2.4 | |||||||||
Net recoveries from casualty events and litigation settlements | 7.0 | 1 | % | 11.8 | 2 | % | (4.8 | ) | |||||||||
Equity in loss of unconsolidated joint ventures | (0.4 | ) | — | % | (3.7 | ) | 1 | % | 3.3 | ||||||||
Loss on consolidation | — | — | % | (0.9 | ) | — | % | 0.9 | |||||||||
Income from continuing operations | $ | 40.1 | 7 | % | $ | 72.2 | 13 | % | $ | (32.1 | ) | ||||||
Income from discontinued operations | $ | 2.2 | $ | 26.5 | $ | (24.3 | ) | ||||||||||
Gain on sale of real estate assets | $ | 1.1 | $ | — | $ | 1.1 | |||||||||||
Revenue
Rental income for the year ended December 31, 2014 increased approximately $11.5 million, as compared to the same period in the prior year. Although we recognized approximately $21.6 million of additional revenue attributable to properties acquired during 2013 and 2014, the increase was primarily offset by the expiration of a large governmental lease at our 3100 Clarendon Boulevard building in December 2013.
Tenant reimbursements increased approximately $5.3 million for the year ended December 31, 2014 compared to the same period in the prior year primarily due to additional tenant reimbursements associated with properties acquired during 2013 and 2014, and partial reimbursements of higher property operating expenses discussed below; specifically property taxes, maintenance costs, utility costs, and snow removal.
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Expense
Property operating costs increased approximately $18.8 million for the year ended December 31, 2014 compared to the same period in the prior year. The increase is primarily due to approximately $10.6 million of additional operating expenses attributable to properties acquired during 2013 and 2014. Additionally, we incurred higher property tax expense of $3.7 million and repair and maintenance costs of $1.7 million at certain of our existing properties. We also incurred higher utility and snow removal costs of $1.7 million and $0.5 million, respectively, due to the harsh weather in some of the markets in which we own and operate properties.
Depreciation expense increased approximately $17.6 million for the year ended December 31, 2014 compared to the same period in the prior year. The variance is largely attributable to depreciation on additional tenant and building improvements placed in service subsequent to January 1, 2013, which contributed approximately $11.3 million to the increase. An additional $4.2 million of the increase is attributable to properties acquired during 2013 and 2014, as well as a $1.6 million increase associated with higher accelerated depreciation expense as a result of lease modifications or terminations as compared to the prior year.
Amortization expense increased approximately $11.5 million for the year ended December 31, 2014 compared to the same period in the prior year. Approximately $8.6 million of the increase is due to additional amortization of intangible lease assets recognized as part of acquiring new properties during 2013 and 2014. The acceleration of amortization expense related to the early termination of a lease at our 400 Bridgewater Crossing building in Bridgewater, New Jersey and a structured partial lease termination at our 1430 Enclave Parkway building in Houston, Texas also contributed approximately $2.7 million to the increase.
General and administrative expenses increased approximately $1.9 million for the year ended December 31, 2014 compared to the prior year primarily due to higher non-cash stock compensation costs as a result of stronger stock performance in 2014.
Other Income (Expense)
Interest expense increased approximately $0.8 million for the year ended December 31, 2014 as compared to the prior year as a result of higher outstanding debt balances during 2014, partially offset by lower average interest rates due to refinancing activity during the first and third quarters of 2014.
Other income/(expense) increased approximately $2.4 million for the year ended December 31, 2014 as compared to the prior year. The variance is primarily due to a decrease in costs associated with the acquisition of new properties of approximately $1.7 million compared to the prior period, as well as the sale of density rights related to our Sarasota Commerce Center II building in Sarasota, Florida to a third-party for approximately $0.7 million during 2014.
We recognized a decrease in net recoveries of casualty loss and litigation settlement expense for the year ended December 31, 2014 compared to the prior year of approximately $4.8 million. These recoveries are non-recurring in nature and are largely associated with the receipt of insurance proceeds related to litigation settlement expense previously incurred, as well as insurance proceeds associated with damage to certain of our assets in the New York/New Jersey markets as a result of Hurricane Sandy. The timing of such reimbursements is dependent upon outside parties.
Equity in income of unconsolidated joint ventures increased approximately $3.3 million during the year ended December 31, 2014, as compared to the same period in the prior year primarily as a result of recognizing a $4.4 million, other-than-temporary impairment loss related to our equity interest in an unconsolidated joint venture in the prior year. This increase was partially offset by lower operating income in 2014 compared to the prior year due to the purchase and consolidation of the remaining interests in three office properties held through two unconsolidated joint ventures in 2013 (see discussion in paragraph below) and the sale of the Two Park Center building, held through our sole remaining unconsolidated joint venture, in May 2014.
During the year ended December 31, 2013, we exercised our dissenter's right to buy out each of our co-venturers' interests in three office properties previously held through two unconsolidated joint ventures. The $0.9 million difference between the fair value of the properties acquired and the sum of our previously recorded book value in investment in unconsolidated joint ventures plus cash consideration paid for the interests was recorded as a loss on consolidation in our consolidated statements of income for the year ended December 31, 2013.
Income from Discontinued Operations
The operations of all assets sold prior to April 1, 2014 are classified as discontinued operations (see Note 2 and Note 14 to our accompanying consolidated financial statements for a complete listing) in the accompanying consolidated statements of income for all periods presented. As such, the entire $31.3 million gain on sale from properties sold during 2013 are classified as discontinued operations.
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Funds From Operations ("FFO"), Core Funds From Operations ("Core FFO"), and Adjusted Funds From Operations (“AFFO”)
Net income calculated in accordance with GAAP is the starting point for calculating FFO, Core FFO, and AFFO. These metrics are non-GAAP financial measures and should not be viewed as an alternative measurement of our operating performance to net income. Management believes that accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. As a result, we believe that the use of FFO, Core FFO, and AFFO, together with the required GAAP presentation, provides a more complete understanding of our performance relative to our competitors and a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities.
We calculate FFO in accordance with the current National Association of Real Estate Investment Trusts ("NAREIT") definition as follows: Net income (computed in accordance with GAAP), excluding gains or losses from sales of property and impairment charges (including our proportionate share of any impairment charges and/or gains or losses from sales of property related to investments in unconsolidated joint ventures), plus depreciation and amortization on real estate assets (including our proportionate share of depreciation and amortization related to investments in unconsolidated joint ventures). Other REITs may not define FFO in accordance with the NAREIT definition, or may interpret the current NAREIT definition differently than we do; therefore, our computation of FFO may not be comparable to such other REITs. Further, other REITs may not compute Core FFO or AFFO in a manner comparable to ours, if computed at all.
We calculate Core FFO as FFO (calculated as set forth above) less acquisition costs and other significant, non-recurring items, such as the infrequent and non-recurring gains or losses from the early extinguishment of debt, swaps and other financial instruments, and litigation settlements expense and casualty losses, and their subsequent recoveries, such as insurance reimbursements and other settlements.
We calculate AFFO as Core FFO (calculated as set forth above) exclusive of the net effects of: (i) amortization associated with debt issuance costs; (ii) depreciation of non real estate assets; (iii) straight-line lease revenue/expense; (iv) amortization of above and below-market lease intangibles; (v) stock-based and other non-cash compensation expense; (vi) amortization of mezzanine discount income; and (vii) acquisition costs, less non-incremental capital expenditures (as defined below). Our proportionate share of such adjustments related to investments in unconsolidated joint ventures are also included when calculating AFFO.
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Reconciliations of net income to FFO, Core FFO, and AFFO are presented below (in thousands except per share amounts):
2015 | Per Share (1) | 2014 | Per Share(1) | 2013 | Per Share(1) | ||||||||||||||||||
GAAP net income applicable to common stock | $ | 172,990 | $ | 1.15 | $ | 43,348 | $ | 0.28 | $ | 98,728 | $ | 0.60 | |||||||||||
Depreciation of real assets (2) | 133,992 | 0.89 | 138,497 | 0.90 | 124,138 | 0.75 | |||||||||||||||||
Amortization of lease-related costs (2) | 60,951 | 0.40 | 56,848 | 0.37 | 46,020 | 0.28 | |||||||||||||||||
Impairment loss (2) | 40,169 | 0.27 | — | — | 12,046 | 0.07 | |||||||||||||||||
Loss on consolidation | — | — | — | — | 898 | 0.01 | |||||||||||||||||
Gain on sale- wholly-owned properties | (168,236 | ) | (1.12 | ) | (2,330 | ) | (0.02 | ) | (31,292 | ) | (0.19 | ) | |||||||||||
Loss on sale- unconsolidated partnerships | — | — | 169 | — | — | — | |||||||||||||||||
NAREIT Funds From Operations applicable to common stock | $ | 239,866 | $ | 1.59 | $ | 236,532 | $ | 1.53 | $ | 250,538 | $ | 1.52 | |||||||||||
Adjustments: | |||||||||||||||||||||||
Acquisition costs | 919 | 0.01 | 560 | — | 1,763 | 0.01 | |||||||||||||||||
Loss on settlement of swaps | 38 | — | — | — | — | — | |||||||||||||||||
Net loss/(recoveries) from casualty events and litigation settlements | 278 | — | (6,992 | ) | (0.04 | ) | (11,828 | ) | (0.07 | ) | |||||||||||||
Core Funds From Operations applicable to common stock | $ | 241,101 | $ | 1.60 | $ | 230,100 | $ | 1.49 | $ | 240,473 | $ | 1.46 | |||||||||||
Adjustments: | |||||||||||||||||||||||
Debt issuance cost amortization | 2,837 | 0.02 | 2,703 | 0.02 | 2,587 | 0.01 | |||||||||||||||||
Amortization of estimated fair market adjustments on notes payable | (484 | ) | — | (246 | ) | — | — | — | |||||||||||||||
Amortization of discount on Senior Notes | 194 | — | 175 | — | 77 | — | |||||||||||||||||
Depreciation of non real estate assets | 755 | 0.01 | 508 | — | 406 | — | |||||||||||||||||
Straight-line effects of lease revenue (2) | (15,734 | ) | (0.11 | ) | (29,121 | ) | (0.19 | ) | (18,097 | ) | (0.11 | ) | |||||||||||
Stock-based and other non-cash compensation | 7,090 | 0.04 | 3,975 | 0.02 | 1,590 | 0.01 | |||||||||||||||||
Net effect of amortization of below-market in-place lease intangibles | (4,571 | ) | (0.03 | ) | (4,727 | ) | (0.03 | ) | (5,278 | ) | (0.03 | ) | |||||||||||
Acquisition costs | (919 | ) | (0.01 | ) | (560 | ) | — | (1,763 | ) | (0.01 | ) | ||||||||||||
Non-incremental capital expenditures (3) | (44,136 | ) | (0.29 | ) | |||||||||||||||||||