|
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and notes thereto of Piedmont Office Realty Trust, Inc. (“Piedmont,” "we," "our," or "us"). See also “Cautionary Note Regarding Forward-Looking Statements” preceding Part I, as well as the consolidated financial statements and accompanying notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended
December 31, 2017
.
Liquidity and Capital Resources
We intend to use cash flows generated from the operation of our properties, proceeds from selective property dispositions, including approximately $160.0 million of anticipated net sales proceeds related to the disposition of 800 North Brand Boulevard, which we anticipate closing during the fourth quarter of 2018, and proceeds from our recently obtained $500 Million Unsecured 2018 Line of Credit as our primary sources of immediate liquidity. As of the filing date, we have
$202.0 million
of unused capacity under our line of credit. When necessary, we may seek secured or unsecured borrowings from third party lenders or issue securities as additional sources of capital. The availability and attractiveness of terms for these additional sources of capital will be highly dependent on market conditions at the time.
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
nine months ended
September 30, 2018
and
2017
we incurred the following types of capital expenditures (in thousands):
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
September 30, 2018
|
|
September 30, 2017
|
Capital expenditures for new development
|
$
|
32
|
|
|
$
|
4,794
|
|
Capital expenditures for redevelopment/renovations
|
7,546
|
|
|
1,006
|
|
Capital expenditures previously credited as part of property acquisition
|
—
|
|
|
9,254
|
|
Other capital expenditures, including building and tenant improvements
|
37,420
|
|
|
50,353
|
|
Total capital expenditures
(1)
|
$
|
44,998
|
|
|
$
|
65,407
|
|
|
|
(1)
|
Of the total amounts paid, approximately
$1.2 million
and
$0.2 million
relates to soft costs such as capitalized interest, payroll, and other general and administrative expenses for the
nine months ended
September 30, 2018
and
2017
, respectively.
|
"Capital expenditures for new development" relate to new office development projects. During the nine months ended September 30, 2017, such expenditures primarily related to the construction of 500 TownPark, our now complete, approximately 134,000 square foot, 100% leased, four-story office building located adjacent to our existing 400 TownPark building in Lake Mary, Florida.
"Capital expenditures for redevelopment/renovations" during the nine months ended September 30, 2018 primarily relate to the redevelopment project to upgrade common areas, as well as amenities and parking, at our Two Pierce Place building in Itasca, Illinois, while such expenditures during the nine months ended September 30, 2017 related to a now-complete redevelopment project that converted our 3100 Clarendon Boulevard building in Arlington, Virginia from governmental use into Class A private sector office space.
"Other capital expenditures" include all other capital expenditures during the period and are typically comprised of tenant and building improvements necessary to lease, maintain, or provide enhancements to our existing portfolio of office properties.
We classify our tenant and building improvements into two categories: (i) improvements which maintain the building's existing asset value and its revenue generating capacity (“non-incremental capital expenditures”) and (ii) improvements which incrementally enhance the building's asset value by expanding its revenue generating capacity (“incremental capital expenditures”). As of
September 30, 2018
, commitments for funding non-incremental capital expenditures for tenant improvements over the next five years related to our existing lease portfolio total approximately
$47.0 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 executed leases totaled approximately
$34.9 million
as of
September 30, 2018
.
For example, for leases executed during the
nine months ended
September 30, 2018
, we committed to spend approximately
$5.61
per square foot per year of lease term for tenant improvement allowances and lease commissions (net of expiring lease commitments), and for those executed during the
nine months ended
September 30, 2017
, we committed to spend approximately $4.74 per square foot per year of lease term for tenant improvement allowances and lease commissions (net of expiring lease commitments). 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. Given that our operating model frequently results in leases for large blocks of space to credit-worthy tenants, our leasing success can result in significant capital outlays. 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.
There are other uses of capital that may arise as part of our typical operations. 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, we may continue to use capital resources to repurchase additional shares of our common stock under our stock repurchase program. As of
September 30, 2018
, we had approximately
$123.5 million
of board-authorized capacity remaining for future stock repurchases. Finally, after replacing our $500 Million Unsecured 2015 Line of Credit with the $500 Million Unsecured 2018 Line of Credit, as well as extending our Amended and Restated $300 Million 2011 Term Loan, during the three months ended September 30, 2018, we have no scheduled debt maturities until 2021; however, on a longer term basis we expect to use capital to repay debt obligations when they 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. With the fluctuating nature of cash flows and expenditures, we may periodically borrow funds on a short-term basis to cover timing differences in cash receipts and cash disbursements.
Results of Operations
Overview
Net income applicable to common stockholders for the three months ended September 30, 2018 was
$16.1 million
, or
$0.13
per diluted share, as compared with net income applicable to common stockholders of
$126.1 million
, or
$0.87
per diluted share, for the three months ended September 30, 2017. Net income applicable to common stockholders for the three months ended September 30, 2017 included approximately $113.2 million, or $0.77 per diluted share, of gains on sales of both a wholly-owned property, as well as an equity interest in a joint venture, whereas the current quarter had no sales or related gains. The current quarter's results did reflect increased operating income as a result of higher overall occupancy in the portfolio in the current period, rental rate growth, and the operational results of properties acquired since September 2017.
Comparison of the
three months ended
September 30, 2018
versus the
three months ended
September 30, 2017
Income from Continuing Operations
The following table sets forth selected data from our consolidated statements of income for the
three months ended
September 30, 2018
and
2017
, respectively, as well as each balance as a percentage of total revenues for the same periods presented (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
% of Revenues
|
|
September 30,
2017
|
|
% of Revenues
|
|
Variance
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Rental income
|
$
|
101.3
|
|
|
|
|
$
|
108.9
|
|
|
|
|
$
|
(7.6
|
)
|
Tenant reimbursements
|
23.2
|
|
|
|
|
24.2
|
|
|
|
|
(1.0
|
)
|
Property management fee revenue
|
0.4
|
|
|
|
|
0.5
|
|
|
|
|
(0.1
|
)
|
Other property related income
|
4.8
|
|
|
|
|
4.0
|
|
|
|
|
0.8
|
|
Total revenues
|
129.7
|
|
|
100
|
%
|
|
137.6
|
|
|
100
|
%
|
|
(7.9
|
)
|
Expense:
|
|
|
|
|
|
|
|
|
|
Property operating costs
|
49.7
|
|
|
38
|
%
|
|
54.5
|
|
|
40
|
%
|
|
(4.8
|
)
|
Depreciation
|
26.9
|
|
|
21
|
%
|
|
30.0
|
|
|
22
|
%
|
|
(3.1
|
)
|
Amortization
|
14.8
|
|
|
12
|
%
|
|
18.1
|
|
|
13
|
%
|
|
(3.3
|
)
|
General and administrative
|
6.7
|
|
|
5
|
%
|
|
6.2
|
|
|
4
|
%
|
|
0.5
|
|
Real estate operating income
|
31.6
|
|
|
24
|
%
|
|
28.8
|
|
|
21
|
%
|
|
2.8
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
Interest expense
|
(15.8
|
)
|
|
12
|
%
|
|
(16.2
|
)
|
|
12
|
%
|
|
0.4
|
|
Other income
|
0.3
|
|
|
—
|
%
|
|
0.3
|
|
|
—
|
%
|
|
—
|
|
Equity in income of unconsolidated joint ventures
|
—
|
|
|
—
|
%
|
|
3.7
|
|
|
3
|
%
|
|
(3.7
|
)
|
Gain on sale of real estate assets, net
|
—
|
|
|
—
|
%
|
|
109.5
|
|
|
80
|
%
|
|
(109.5
|
)
|
Net income
|
$
|
16.1
|
|
|
12
|
%
|
|
$
|
126.1
|
|
|
92
|
%
|
|
$
|
(110.0
|
)
|
Revenue
Rental income
decreased
approximately
$7.6 million
for the
three months ended
September 30, 2018
, as compared to the same period in the prior year. Approximately $8.3 million of the decrease was attributable to net disposition activity subsequent to September 30, 2017; however, that decrease was partially offset by increases due to increased rental rates and occupancy in the portfolio.
Tenant reimbursements
decreased
approximately
$1.0 million
for the
three months ended
September 30, 2018
as compared to the same period in the prior year. Approximately $2.2 million of the decrease was due to net disposition activity subsequent to September 30, 2017; however, that decrease was partially offset by higher recoveries related to increased property taxes at certain of our existing properties as well as increased occupancy in the portfolio.
Expense
Property operating costs
decreased
approximately
$4.8 million
for the
three months ended
September 30, 2018
, as compared to the same period in the prior year. Approximately $4.0 million of the decrease was due to net disposition activity subsequent to September 30, 2017. Additionally, approximately $2.4 million of the decrease was attributable to a reduction in recoverable operating expenses, primarily property tax expense due to favorable tax appeals at certain of our properties during the current period. These decreases were partially offset by other operating expenses, particularly higher recoverable repairs and maintenance costs.
Depreciation expense
decreased
approximately
$3.1 million
for the
three months ended
September 30, 2018
as compared to the same period in the prior year. Approximately $3.6 million of the decrease was attributable to net disposition activity subsequent
to September 30, 2017; however, this decrease was partially offset by depreciation on additional building and tenant improvements placed in service subsequent to September 30, 2017 across our portfolio of properties.
Amortization expense
decreased
approximately
$3.3 million
for the
three months ended
September 30, 2018
as compared to the same period in the prior year. The decrease is primarily attributable to certain lease intangible assets at our existing properties becoming fully amortized subsequent to September 30, 2017, as well as the recognition of accelerated amortization for lease terminations/modifications in the prior year of approximately $0.5 million.
General and administrative expense
increased
approximately
$0.5 million
for the
three months ended
September 30, 2018
as compared to the same period in the prior year primarily due to increased accrual for potential performance-based compensation.
Other Income (Expense)
Interest expense
decreased
approximately
$0.4 million
for the
three months ended
September 30, 2018
as compared to the same period in the prior year. The decrease is primarily attributable to capitalizing interest expense in the current period as part of the redevelopment project to upgrade amenities and parking at our Two Pierce Place building.
Equity in income of unconsolidated joint ventures
decreased
approximately
$3.7 million
for the
three months ended
September 30, 2018
as compared to the same period in the prior year. The decrease is due to the sale of our last unconsolidated joint venture property, the 8560 Upland Drive building in Denver, Colorado in the prior period, and the recognition of our portion of the related gain on sale.
Gain on sale of real estate assets, net, during the
three months ended
September 30, 2017
represent the gain recognized on the sale of the Two Independence Square building located in Washington, D.C. There were no sales of real estate assets during the three months ended September 30, 2018.
Comparison of the accompanying consolidated statements of income for the
nine months ended
September 30, 2018
versus the
nine months ended
September 30, 2017
Income from Continuing Operations
The following table sets forth selected data from our consolidated statements of income for the
nine months ended
September 30, 2018
and
2017
, respectively, as well as each balance as a percentage of total revenues for the same period presented (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
% of Revenues
|
|
September 30,
2017
|
|
% of Revenues
|
|
Variance
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Rental income
|
$
|
304.3
|
|
|
|
|
$
|
345.4
|
|
|
|
|
$
|
(41.1
|
)
|
Tenant reimbursements
|
68.2
|
|
|
|
|
73.4
|
|
|
|
|
(5.2
|
)
|
Property management fee revenue
|
1.1
|
|
|
|
|
1.4
|
|
|
|
|
(0.3
|
)
|
Other rental income
|
15.2
|
|
|
|
|
14.5
|
|
|
|
|
0.7
|
|
Total revenues
|
388.8
|
|
|
100
|
%
|
|
434.7
|
|
|
100
|
%
|
|
(45.9
|
)
|
Expense:
|
|
|
|
|
|
|
|
|
|
Property operating costs
|
154.2
|
|
|
40
|
%
|
|
166.6
|
|
|
38
|
%
|
|
(12.4
|
)
|
Depreciation
|
81.1
|
|
|
21
|
%
|
|
90.8
|
|
|
22
|
%
|
|
(9.7
|
)
|
Amortization
|
46.8
|
|
|
12
|
%
|
|
57.9
|
|
|
13
|
%
|
|
(11.1
|
)
|
General and administrative
|
21.5
|
|
|
5
|
%
|
|
21.9
|
|
|
5
|
%
|
|
(0.4
|
)
|
Real estate operating income
|
85.2
|
|
|
22
|
%
|
|
97.5
|
|
|
22
|
%
|
|
(12.3
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
Interest expense
|
(45.3
|
)
|
|
12
|
%
|
|
(52.7
|
)
|
|
12
|
%
|
|
7.4
|
|
Other income
|
1.5
|
|
|
—
|
%
|
|
0.2
|
|
|
—
|
%
|
|
1.3
|
|
Equity in income of unconsolidated joint ventures
|
—
|
|
|
—
|
%
|
|
3.9
|
|
|
1
|
%
|
|
(3.9
|
)
|
Loss on extinguishment of debt
|
(1.7
|
)
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
(1.7
|
)
|
Gain on sale of real estate assets, net
|
45.2
|
|
|
12
|
%
|
|
116.0
|
|
|
27
|
%
|
|
(70.8
|
)
|
Net income
|
$
|
84.9
|
|
|
22
|
%
|
|
$
|
164.9
|
|
|
38
|
%
|
|
$
|
(80.0
|
)
|
Revenue
Rental income
decreased
approximately
$41.1 million
for the
nine months ended
September 30, 2018
as compared to the same period in the prior year. Substantially all of the decrease is attributable to net property disposition activity subsequent to January 1, 2017.
Tenant reimbursements
decreased
approximately
$5.2 million
for the
nine months ended
September 30, 2018
as compared to the same period in the prior year. Net disposition activity subsequent to January 1, 2017 contributed approximately $8.1 million to the decrease; however, this variance was partially offset due to the expiration of abatements and an increase in recoverable operating expenses at certain of our existing properties.
Expense
Property operating costs
decreased
approximately
$12.4 million
for the
nine months ended
September 30, 2018
as compared to the same period in the prior year. Approximately $17.4 million of the decrease was due to net disposition activity subsequent to January 1, 2017; however, this variance was partially offset by higher recoverable utility, administrative, and repairs and maintenance costs at certain of our existing properties.
Depreciation expense
decreased
approximately
$9.7 million
for the
nine months ended
September 30, 2018
as compared to the same period in the prior year. Approximately $12.1 million of the decrease was attributable to net disposition activity subsequent to January 1, 2017; however, this decrease was partially offset by depreciation on additional building and tenant improvements placed in service subsequent to January 1, 2017.
Amortization expense
decreased
approximately
$11.1 million
for the
nine months ended
September 30, 2018
as compared to the same period in the prior year. The decrease is attributable to net disposition activity and to certain lease intangible assets at our existing properties becoming fully amortized subsequent to January 1, 2017, as well as the recognition of accelerated amortization for lease terminations/modifications in the prior year.
General and administrative expenses
decreased
approximately
$0.4 million
for the
nine months ended
September 30, 2018
as compared to the same period in the prior year, primarily due to a decrease in state and local tax expense as a result of a reduction in property-related deferred tax liabilities. This decrease was partially offset by increased accruals for potential performance-based compensation.
Other Income (Expense)
Interest expense
decreased
approximately
$7.4 million
for the
nine months ended
September 30, 2018
as compared to the same period in the prior year. The decrease is primarily attributable to lower average debt outstanding in the current period, specifically due to the repayment of debt subsequent to January 1, 2017, including the $140 million of secured debt on our 1201 and 1225 Eye Street buildings in Washington, D.C. paid off in August 2017, and two of our unsecured term loans totaling $470 million paid off in January 2018, offset partially by a new $250 million seven-year term loan obtained in March 2018.
Other income
increased
approximately
$1.3 million
for the
nine months ended
September 30, 2018
as compared to the same period in the prior year due to the sale of solar renewable energy certificates to a third-party, as well as interest and fee income for the administration of certain debt instruments.
Equity in income of unconsolidated joint ventures
decreased
approximately
$3.9 million
for the
nine months ended
September 30, 2018
as compared to the same period in the prior year. The decrease is primarily due to the recognition of our portion of the gain on the sale of our last unconsolidated joint venture property, the 8560 Upland Drive building in the prior period.
The loss on extinguishment of debt is associated with the early repayment of our $170 Million Unsecured 2015 Term Loan and our $300 Million Unsecured 2013 Term Loan. The loss includes the write-off of unamortized debt issuance costs, discounts, and costs related to the termination of interest rate swap agreements associated with the debt.
Gain on sale of real estate assets, net, during the
nine months ended
September 30, 2018
represents the gain recognized on the sale of the 2017 Disposition Portfolio comprised of 14 properties in various markets that closed in January 2018. Gain on sale of real estate assets, net, during the
nine months ended
September 30, 2017
represent the gain recognized on the sales of the Sarasota Commerce Center II building located in Sarasota, Florida and the Two Independence Square building.
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 additive 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. NAREIT currently defines FFO as follows: Net income (computed in accordance with GAAP), excluding gains or losses from sales of property and impairment charges (including our proportionate share of any impairment charges and/or gains or losses from sales of property related to investments in unconsolidated joint ventures), plus depreciation and amortization on real estate assets (including our proportionate share of depreciation and amortization related to investments in unconsolidated joint ventures). Other REITs may not define FFO in accordance with the NAREIT definition, or may interpret the current NAREIT definition differently than we do; therefore, our computation of FFO may not be comparable to such other REITs.
We calculate Core FFO by starting with FFO, as defined by NAREIT, and adjusting for gains or losses on the extinguishment of swaps and/or debt, acquisition-related expenses, and any significant non-recurring or infrequent items. Core FFO is a non-GAAP financial measure and should not be viewed as an alternative to net income calculated in accordance with GAAP as a measurement of our operating performance. We believe that Core FFO is helpful to investors as a supplemental performance measure because it excludes the effects of certain items which can create significant earnings volatility, but which do not directly relate to our core recurring business operations. As a result, we believe that Core FFO can help facilitate comparisons of operating performance between periods and provides a more meaningful predictor of future earnings potential. Other REITs may not define Core FFO in the same manner as us; therefore, our computation of Core FFO may not be comparable to that of other REITs.
We calculate AFFO by starting with Core FFO and adjusting for non-incremental capital expenditures and acquisition-related costs and then adding back non-cash items including: non-real estate depreciation, straight-line rent adjustments and fair value lease adjustments, non-cash components of interest expense and compensation expense, and by making similar adjustments for unconsolidated partnerships and joint ventures. AFFO is a non-GAAP financial measure and should not be viewed as an alternative to net income calculated in accordance with GAAP as a measurement of our operating performance. We believe that AFFO is helpful to investors as a meaningful supplemental comparative performance measure of our ability to make incremental capital investments. Other REITs may not define AFFO in the same manner as us; therefore, our computation of AFFO may not be comparable to that of other REITs.
Reconciliations of net income to FFO, Core FFO, and AFFO are presented below (in thousands except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30, 2018
|
|
Per
Share
(1)
|
|
September 30, 2017
|
|
Per
Share
(1)
|
|
September 30, 2018
|
|
Per
Share
(1)
|
|
September 30, 2017
|
|
Per
Share
(1)
|
GAAP net income applicable to common stock
|
$
|
16,114
|
|
|
$
|
0.13
|
|
|
$
|
126,133
|
|
|
$
|
0.87
|
|
|
$
|
84,886
|
|
|
$
|
0.65
|
|
|
$
|
164,947
|
|
|
$
|
1.13
|
|
Depreciation of real estate assets
(2)
|
26,668
|
|
|
0.21
|
|
|
29,774
|
|
|
0.20
|
|
|
80,531
|
|
|
0.61
|
|
|
90,335
|
|
|
0.62
|
|
Amortization of lease-related costs
(2)
|
14,828
|
|
|
0.11
|
|
|
18,107
|
|
|
0.12
|
|
|
46,773
|
|
|
0.35
|
|
|
57,828
|
|
|
0.40
|
|
Gain on sale - wholly-owned properties
|
—
|
|
|
—
|
|
|
(109,512
|
)
|
|
(0.75
|
)
|
|
(45,186
|
)
|
|
(0.34
|
)
|
|
(115,951
|
)
|
|
(0.80
|
)
|
Gain on sale- unconsolidated partnership
|
—
|
|
|
—
|
|
|
(3,683
|
)
|
|
(0.02
|
)
|
|
—
|
|
|
—
|
|
|
(3,683
|
)
|
|
(0.02
|
)
|
NAREIT Funds From Operations applicable to common stock
|
$
|
57,610
|
|
|
$
|
0.45
|
|
|
$
|
60,819
|
|
|
$
|
0.42
|
|
|
$
|
167,004
|
|
|
$
|
1.27
|
|
|
$
|
193,476
|
|
|
$
|
1.33
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition costs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
—
|
|
Loss on extinguishment of debt
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,680
|
|
|
0.02
|
|
|
—
|
|
|
—
|
|
Core Funds From Operations applicable to common stock
|
$
|
57,610
|
|
|
$
|
0.45
|
|
|
$
|
60,819
|
|
|
$
|
0.42
|
|
|
$
|
168,684
|
|
|
$
|
1.29
|
|
|
$
|
193,482
|
|
|
$
|
1.33
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of debt issuance costs, fair market value adjustments on notes payable, and discount on debt
|
550
|
|
|
|
|
634
|
|
|
|
|
1,561
|
|
|
|
|
1,892
|
|
|
|
Depreciation of non real estate assets
|
176
|
|
|
|
|
218
|
|
|
|
|
558
|
|
|
|
|
597
|
|
|
|
Straight-line effects of lease revenue
(2)
|
(3,210
|
)
|
|
|
|
(3,602
|
)
|
|
|
|
(11,489
|
)
|
|
|
|
(15,939
|
)
|
|
|
Stock-based and other non-cash compensation
|
1,661
|
|
|
|
|
1,250
|
|
|
|
|
4,462
|
|
|
|
|
4,202
|
|
|
|
Net effect of amortization of above and below-market in-place lease intangibles
|
(2,006
|
)
|
|
|
|
(1,720
|
)
|
|
|
|
(5,636
|
)
|
|
|
|
(4,890
|
)
|
|
|
Acquisition costs
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
(6
|
)
|
|
|
Non-incremental capital expenditures
(3)
|
(9,276
|
)
|
|
|
|
(5,229
|
)
|
|
|
|
(27,407
|
)
|
|
|
|
(21,974
|
)
|
|
|
Adjusted Funds From Operations applicable to common stock
|
$
|
45,505
|
|
|
|
|
$
|
52,370
|
|
|
|
|
$
|
130,733
|
|
|
|
|
$
|
157,364
|
|
|
|
Weighted-average shares outstanding – diluted
|
128,819
|
|
|
|
|
145,719
|
|
|
|
|
131,187
|
|
|
|
|
145,680
|
|
|
|
Common stock issued and outstanding as of period end
|
128,371
|
|
|
|
|
145,295
|
|
|
|
|
128,371
|
|
|
|
|
145,295
|
|
|
|
|
|
(1)
|
Based on weighted average shares outstanding – diluted.
|
|
|
(2)
|
Includes amounts for wholly-owned properties, as well as such amounts for our proportionate ownership in unconsolidated joint ventures.
|
|
|
(3)
|
We define non-incremental capital expenditures as capital expenditures of a recurring nature related to tenant improvements, leasing commissions, and building capital that do not incrementally enhance the underlying assets' income generating capacity. Tenant improvements, leasing commissions, building capital and deferred lease incentives incurred to lease space that was vacant at acquisition, leasing costs for spaces vacant for greater than one year, leasing costs for spaces at newly acquired properties for which in-place leases expire shortly after acquisition, improvements associated with the expansion of a building, and renovations that either enhance the rental rates of a building or change the property's underlying classification, such as from a Class B to a Class A property, are excluded from this measure.
|
Property and Same Store Net Operating Income
Property Net Operating Income ("Property NOI") is a non-GAAP measure which we use to assess our operating results. We calculate Property NOI beginning with Net income (computed in accordance with GAAP) before interest, taxes, depreciation and amortization and incrementally removing any impairment losses, gains or losses from sales of any property and other significant infrequent items that create volatility within our earnings and make it difficult to determine the earnings generated by our core ongoing business. Furthermore, we adjust for general and administrative expense, income associated with property management performed by us for other organizations, and other income or expense items such as interest income from loan investments or costs from the pursuit of non-consummated transactions. For Property NOI (cash basis), the effects of straight-lined rents and fair value lease revenue are also eliminated; while such effects are not adjusted in calculating Property NOI (accrual basis). Property NOI is a non-GAAP financial measure and should not be viewed as an alternative to net income calculated in accordance with GAAP as a measurement of our operating performance. We believe that Property NOI, on either a cash or accrual basis, is helpful to investors as a supplemental comparative performance measure of income generated by our properties alone without our administrative overhead. Other REITs may not define Property NOI in the same manner as we do; therefore, our computation of Property NOI may not be comparable to that of other REITs.
We calculate Same Store Net Operating Income ("Same Store NOI") as Property NOI applicable to the properties owned or placed in service during the entire span of the current and prior year reporting periods. Same Store NOI also excludes amounts applicable to unconsolidated joint venture assets. Same Store NOI is a non-GAAP financial measure and should not be viewed as an alternative to net income calculated in accordance with GAAP as a measurement of our operating performance. We believe that Same Store NOI, on either a cash or accrual basis is helpful to investors as a supplemental comparative performance measure of the income generated from the same group of properties from one period to the next. Other REITs may not define Same Store NOI in the same manner as we do; therefore, our computation of Same Store NOI may not be comparable to that of other REITs.
The following table sets forth a reconciliation from net income calculated in accordance with GAAP to Property NOI, on both a cash and accrual basis, and Same Store NOI, on both a cash and accrual basis, for the
three months ended
September 30, 2018
and
2017
, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Basis
|
|
Accrual Basis
|
|
Three Months Ended
|
|
Three Months Ended
|
|
September 30,
2018
|
|
September 30,
2017
|
|
September 30,
2018
|
|
September 30,
2017
|
|
|
|
|
|
|
|
|
Net income applicable to Piedmont (GAAP basis)
|
$
|
16,114
|
|
|
$
|
126,133
|
|
|
$
|
16,114
|
|
|
$
|
126,133
|
|
|
|
|
|
|
|
|
|
Net loss applicable to noncontrolling interest
|
—
|
|
|
(4
|
)
|
|
—
|
|
|
(4
|
)
|
Interest expense
|
15,849
|
|
|
16,183
|
|
|
15,849
|
|
|
16,183
|
|
Depreciation
(1)
|
26,844
|
|
|
29,993
|
|
|
26,844
|
|
|
29,993
|
|
Amortization
(1)
|
14,828
|
|
|
18,107
|
|
|
14,828
|
|
|
18,107
|
|
Net loss from casualty events
|
—
|
|
|
25
|
|
|
—
|
|
|
25
|
|
Gain on sale of real estate assets
(1)
|
—
|
|
|
(113,195
|
)
|
|
—
|
|
|
(113,195
|
)
|
General & administrative expenses
(1)
|
6,677
|
|
|
6,202
|
|
|
6,677
|
|
|
6,202
|
|
Management fee revenue
(2)
|
(181
|
)
|
|
(253
|
)
|
|
(181
|
)
|
|
(253
|
)
|
Other income
(1)
|
(87
|
)
|
|
(171
|
)
|
|
(87
|
)
|
|
(171
|
)
|
Straight-line rent effects of lease revenue
(1)
|
(3,210
|
)
|
|
(3,602
|
)
|
|
|
|
|
Amortization of lease-related intangibles
(1)
|
(2,006
|
)
|
|
(1,720
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Property NOI
|
$
|
74,828
|
|
|
$
|
77,698
|
|
|
$
|
80,044
|
|
|
$
|
83,020
|
|
|
|
|
|
|
|
|
|
Net operating income from:
|
|
|
|
|
|
|
|
Acquisitions
(3)
|
(958
|
)
|
|
—
|
|
|
(1,292
|
)
|
|
—
|
|
Dispositions
(4)
|
(122
|
)
|
|
(8,001
|
)
|
|
(122
|
)
|
|
(7,675
|
)
|
Other investments
(5)
|
(659
|
)
|
|
(2,339
|
)
|
|
(827
|
)
|
|
(2,301
|
)
|
|
|
|
|
|
|
|
|
Same Store NOI
|
$
|
73,089
|
|
|
$
|
67,358
|
|
|
$
|
77,803
|
|
|
$
|
73,044
|
|
|
|
|
|
|
|
|
|
Change period over period in Same Store NOI
|
8.5
|
%
|
|
N/A
|
|
|
6.5
|
%
|
|
N/A
|
|
|
|
(1)
|
Includes amounts applicable to consolidated properties and our proportionate share of amounts applicable to unconsolidated joint ventures.
|
|
|
(2)
|
Presented net of related operating expenses incurred to earn the revenue.
|
|
|
(3)
|
Acquisitions consist of Norman Pointe I in Bloomington, Minnesota, purchased on December 28, 2017; and 501 West Church Street in Orlando, Florida, purchased on February 23, 2018.
|
|
|
(4)
|
Dispositions consist of Sarasota Commerce Center II in Sarasota, Florida, sold on June 16, 2017; Two Independence Square in Washington, D.C., sold on July 5, 2017; and the 14-property, 2017 Disposition Portfolio sale completed on January 4, 2018.
|
|
|
(5)
|
Other investments consist of our interests in unconsolidated joint ventures, active redevelopment and development projects, land, and recently completed redevelopment and development projects for which some portion of operating expenses were capitalized during the current and/or prior year reporting periods. The operating results from 500 TownPark in Lake Mary, Florida, and Two Pierce Place in Itasca, Illinois, are included in this line item.
|
The following table sets forth a reconciliation from net income calculated in accordance with GAAP to Property NOI, on both a cash and accrual basis, and Same Store NOI, on both a cash and accrual basis, for the
nine months ended
September 30, 2018
and
2017
, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Basis
|
|
Accrual Basis
|
|
Nine Months Ended
|
|
Nine Months Ended
|
|
September 30,
2018
|
|
September 30,
2017
|
|
September 30,
2018
|
|
September 30,
2017
|
|
|
|
|
|
|
|
|
Net income applicable to Piedmont (GAAP basis)
|
$
|
84,886
|
|
|
$
|
164,947
|
|
|
$
|
84,886
|
|
|
$
|
164,947
|
|
|
|
|
|
|
|
|
|
Net loss applicable to noncontrolling interest
|
(4
|
)
|
|
(10
|
)
|
|
(4
|
)
|
|
(10
|
)
|
Interest expense
|
45,294
|
|
|
52,661
|
|
|
45,294
|
|
|
52,661
|
|
Loss on extinguishment of debt
|
1,680
|
|
|
—
|
|
|
1,680
|
|
|
—
|
|
Depreciation
(1)
|
81,090
|
|
|
90,933
|
|
|
81,090
|
|
|
90,933
|
|
Amortization
(1)
|
46,773
|
|
|
57,828
|
|
|
46,773
|
|
|
57,828
|
|
Acquisition costs
|
—
|
|
|
6
|
|
|
—
|
|
|
6
|
|
Net loss from casualty events
|
—
|
|
|
57
|
|
|
—
|
|
|
57
|
|
Gain on sale of real estate assets
(1)
|
(45,186
|
)
|
|
(119,634
|
)
|
|
(45,186
|
)
|
|
(119,634
|
)
|
General & administrative expenses
(1)
|
21,487
|
|
|
21,907
|
|
|
21,487
|
|
|
21,907
|
|
Management fee revenue
(2)
|
(531
|
)
|
|
(762
|
)
|
|
(531
|
)
|
|
(762
|
)
|
Other income
(1)
|
(475
|
)
|
|
(146
|
)
|
|
(475
|
)
|
|
(146
|
)
|
Straight-line rent effects of lease revenue
(1)
|
(11,489
|
)
|
|
(15,939
|
)
|
|
|
|
|
Amortization of lease-related intangibles
(1)
|
(5,636
|
)
|
|
(4,890
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Property NOI
|
$
|
217,889
|
|
|
$
|
246,958
|
|
|
$
|
235,014
|
|
|
$
|
267,787
|
|
|
|
|
|
|
|
|
|
Net operating income from:
|
|
|
|
|
|
|
|
Acquisitions
(3)
|
(2,540
|
)
|
|
—
|
|
|
(3,424
|
)
|
|
—
|
|
Dispositions
(4)
|
(509
|
)
|
|
(39,077
|
)
|
|
(500
|
)
|
|
(36,331
|
)
|
Other investments
(5)
|
(3,096
|
)
|
|
(6,277
|
)
|
|
(3,309
|
)
|
|
(7,079
|
)
|
|
|
|
|
|
|
|
|
Same Store NOI
|
$
|
211,744
|
|
|
$
|
201,604
|
|
|
$
|
227,781
|
|
|
$
|
224,377
|
|
|
|
|
|
|
|
|
|
Change period over period in Same Store NOI
|
5.0
|
%
|
|
N/A
|
|
|
1.5
|
%
|
|
N/A
|
|
|
|
(1)
|
Includes amounts applicable to consolidated properties and our proportionate share of amounts applicable to unconsolidated joint ventures.
|
|
|
(2)
|
Presented net of related operating expenses incurred to earn the revenue.
|
|
|
(3)
|
Acquisitions consist of Norman Pointe I in Bloomington, Minnesota, purchased on December 28, 2017; and 501 West Church Street in Orlando, Florida, purchased on February 23, 2018.
|
|
|
(4)
|
Dispositions consist of Sarasota Commerce Center II in Sarasota, Florida, sold on June 16, 2017; Two Independence Square in Washington, D.C., sold on July 5, 2017; and the 14-property, 2017 Disposition Portfolio sale completed on January 4, 2018.
|
|
|
(5)
|
Other investments consist of our interests in unconsolidated joint ventures, active redevelopment and development projects, land, and recently completed redevelopment and development projects for which some portion of operating expenses were capitalized during the current and/or prior year reporting periods. The operating results from 500 TownPark in Lake Mary, Florida, and Two Pierce Place in Itasca, Illinois, are included in this line item.
|
Overview
Our portfolio is a diverse geographical portfolio primarily located in select sub-markets within eight major office markets located in the Eastern-half of the United States. We typically lease space to large, credit-worthy corporate or governmental tenants on a long-term basis. As of
September 30, 2018
, our average lease was almost 20,000 square feet with approximately
seven
years of lease term remaining. Consequently, leased percentage, as well as rent roll ups and roll downs, which we experience as a result of re-leasing, can fluctuate widely between buildings and between tenants, depending on when a particular lease is scheduled to commence or expire.
Leased Percentage
Our current in-service portfolio of
53
office properties was
93.2%
leased as of
September 30, 2018
, up from 89.2% leased as of September 30, 2017, and scheduled lease expirations for the portfolio as a whole for the remainder of 2018 and 2019 were 1.6% and 11.9% of our ALR, respectively. To the extent new leases for currently vacant space outweigh or fall short of scheduled expirations, such leases would increase or decrease our leased percentage, respectively. Our leased percentage may also fluctuate from the impact of occupancy levels associated with our net acquisition and disposition activity.
Impact of Downtime, Abatement Periods, and Rental Rate Changes
Commencement of new leases typically occurs 6-18 months after the lease execution date, after refurbishment of the space is completed. The downtime between a lease expiration and the new lease's commencement can negatively impact Property NOI and Same Store NOI comparisons (both accrual and cash basis). In addition, office leases, both new and lease renewals, often contain upfront rental and/or operating expense abatement periods which delay the cash flow benefits of the lease even after the new lease or renewal has commenced and will continue to negatively impact Property NOI and Same Store NOI on a cash basis until such abatements expire. As of
September 30, 2018
, we had approximately 547,000 square feet of executed leases related to currently vacant space that had not yet commenced (301,000 square feet of which relates to a new, full-building lease at our Enclave Place building in Houston, Texas) and approximately 759,000 square feet of commenced leases that were in some form of rental and/or operating expense abatement.
If we are unable to replace expiring leases with new or renewal leases at rental rates equal to or greater than the expiring rates, rental rate roll downs could occur and negatively impact Property NOI and Same Store NOI comparisons. As mentioned above, our geographically diverse portfolio and the magnitude of some of our tenant's leased space can result in rent roll ups and roll downs that can fluctuate widely on a building-by-building and a quarter-to-quarter basis.
Same Store NOI increased
8.5%
and
6.5%
on a cash and accrual basis, respectively for the three months ended September 30, 2018 as compared with the three months ended September 30, 2017. In addition to general increases in occupancy levels and improved rental rates, Same Store NOI (cash basis) was favorably impacted by the expiration of several large lease abatements at certain properties and Same Store NOI (accrual basis) was favorably impacted by the commencement of several large leases throughout the portfolio. Property NOI and Same Store NOI comparisons for any given period may still fluctuate as a result of the mix of net leasing activity in individual properties during the respective period.
Election as a REIT
We have elected to be taxed as a REIT under the Code and have operated as such beginning with our taxable year ended December 31, 1998. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our adjusted REIT taxable income, computed without regard to the dividends-paid deduction and by excluding net capital gains attributable to our stockholders, as defined by the Code. As a REIT, we generally will not be subject to federal income tax on income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we may be subject to federal income taxes on our taxable income for that year and for the four years following the year during which qualification is lost and/or penalties, unless the IRS grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders. However, we believe that we are organized and operate in such a manner as to qualify for treatment as a REIT and intend to continue to operate in the foreseeable future in such a manner that we will remain qualified as a REIT for federal income tax purposes. We have elected to treat POH, a wholly-owned subsidiary of Piedmont, as a taxable REIT subsidiary. POH performs non-customary services for tenants of buildings that we own, including solar power generation, real estate and non-real estate related-services; however, any earnings related to such services performed by our taxable REIT subsidiary are subject to federal and state income taxes. In addition, for us to continue to qualify as a REIT, our investments in taxable REIT subsidiaries cannot exceed 20% of the value of our total assets.
Inflation
We are exposed to inflation risk, as income from long-term leases is the primary source of our cash flows from operations. There are provisions in the majority of our tenant leases that are intended to protect us from, and mitigate the risk of, the impact of inflation. These provisions include rent steps, reimbursement billings for operating expense pass-through charges, real estate tax, and insurance reimbursements on a per square-foot basis, or in some cases, annual reimbursement of operating expenses above certain per square-foot allowances. However, due to the long-term nature of the leases, the leases may not readjust their reimbursement rates frequently enough to fully cover inflation.
Off-Balance Sheet Arrangements
We are not dependent on off-balance sheet financing arrangements for liquidity. As of
September 30, 2018
, we had no off-balance sheet arrangements. For further information regarding our commitments under our debt obligations, see the Contractual Obligations table below.
Application of Critical Accounting Policies
Our accounting policies have been established to conform with GAAP. The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied, thus, resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses. Refer to our Annual Report on Form 10-K for the year ended
December 31, 2017
for a discussion of our critical accounting policies. There have been no material changes to these policies during the
nine months ended
September 30, 2018
.
Accounting Pronouncements Adopted during the Nine Months Ended September 30, 2018
Revenue Recognition
On January 1, 2018, we adopted Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
("ASU 2014-09") and Accounting Standards Update No. 2016-08,
Revenue from Contracts with Customers (Topic 606) Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
("ASU 2016-08") issued by the Financial Accounting Standards Board (the "FASB"). The amendments in ASU 2014-09, which are further clarified in ASU 2016-08, as well as Accounting Standards Update 2016-10, Accounting Standards Update 2016-12, and Accounting Standards Update 2016-20 (collectively the "Revenue Recognition Amendments") change the criteria for the recognition of certain revenue streams to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services using a five-step determination process.
Our revenues which are included in the scope of the Revenue Recognition Amendments include our property management fee revenue, the majority of our parking revenue, as well as certain license agreements which allow third-parties to place their antennas or fiber-optic cabling on or inside our buildings. Lease contracts are specifically excluded from the Revenue Recognition Amendments and, we intend to utilize a leasing practical expedient to group certain non-lease components related to operating expense reimbursements with other leasing components, provided they meet certain criteria. Because the timing and pattern of transfer of our non-lease related revenue already followed the prescribed method of the Revenue Recognition Amendments, we were able to effectively adopt these amendments on a full retrospective basis, with no impact to the timing of recognition of the related revenue; however, such non-lease revenues are now being presented as "Other property related income" in the accompanying consolidated statements of income. Further, for comparative purposes, we reclassified approximately
$4.0 million
and
$14.6 million
of parking, antennae license, and fiber income that was previously included in rental income into other property related income, as well as certain other miscellaneous revenue into tenant reimbursements and/or property management fee revenue during the
three and nine months ended
September 30, 2017
, respectively. We did not elect to adopt any practical expedients provided by the Revenue Recognition Amendments. For further details, see
Note 2
to our accompanying consolidated financial statements.
Gain/(loss) on Sale of Real Estate Assets
On January 1, 2018, we adopted Accounting Standards Update No. 2017-05,
Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
("ASU 2017-05") concurrent with the Revenue Recognition Amendments mentioned
above. We elected to apply the amendments of ASU 2017-05 on a full retrospective basis; however, there were
no
adjustments to previously recorded gains/(losses) on sale of real estate as a result of the transition.
Equity Investments Held in Non-qualified Deferred Compensation Plan
On January 1, 2018, we adopted Accounting Standards Update No. 2016-01,
Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities
("ASU 2016-01"), as well as Accounting Standards Update No. 2018-03
Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10)
("ASU 2018-03"). These amendments require equity investments, except those accounted for under the equity method of accounting, to be measured at estimated fair value with changes in fair value recognized in net income. Investments in trading securities held in a "rabbi trust" by us are the only securities affected by ASU 2016-01 and ASU 2018-03. As such, we have made a cumulative-effect adjustment to our consolidated balance sheet and consolidated statements of stockholders' equity of approximately
$0.1 million
from other comprehensive income to cumulative distributions in excess of earnings, and have recorded changes in fair value in net income for the three and nine months ended September 30, 2018 related to these investment securities.
Interest Rate Derivatives
On January 1, 2018, we early adopted Accounting Standards Update No. 2017-12,
Derivatives and Hedging: Targeted Improvements to Accounting
for Hedging Activities
("ASU 2017-12").We adopted ASU 2017-12 using the modified retrospective transition method; however,
no
adjustment was necessary to account for the cumulative effect of the change on the opening balance of each affected component of equity in the consolidated balance sheet as of the date of adoption because there was no cumulative ineffectiveness that had been recorded on our existing interest rate swaps as of December 31, 2017, and all trades were highly effective. The amended presentation and disclosure guidance which is required to be presented prospectively is provided in
Note 6
to our accompanying consolidated financial statements.
Other Recent Accounting Pronouncements
The FASB has issued Accounting Standards Update No. 2016-02,
Leases (Topic 842)
("ASU 2016-02"), which fundamentally changes the definition of a lease, as well as the accounting for operating leases by requiring lessees to recognize assets and liabilities which arise from the lease, consisting of a liability to make lease payments (the lease liability) and a right-of-use asset, representing the right to use the leased asset over the term of the lease. Accounting for leases by lessors is substantially unchanged from prior practice as lessors will continue to recognize lease revenue on a straight-line basis.
Additionally, the FASB has subsequently issued a number of clarifying and technical corrections to ASU 2016-02 through several Accounting Standards Updates ("ASU") as follows:
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ASU
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Title
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Summary
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Anticipated Impact on Piedmont's Consolidated Financial Statements Based on Management’s Assessment to Date
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ASU 2018-01
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Leases (Topic 842) Land Easement Practical Expedient for Transition to Topic 842
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Clarifies that a land easement is required to be evaluated to determine whether it should be accounted for as a lease upon adoption of ASU 2016-02; also provides an optional practical transition expedient allowing entities not currently assessing land easements under existing leasing guidance prior to adoption of ASU 2016-02 to not apply the new guidance to land easements existing at the date of initial adoption of ASU 2016-02.
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Not applicable as we have no land easements.
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ASU 2018-10
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Codification Improvements to Topic 842, Leases
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Clarifications and technical corrections to ASU 2016-02.
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No material impact expected.
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ASU 2018-11
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Leases (Topic 842) Targeted Improvements
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Allows certain non-lease operating expense reimbursements which are included in the underlying stated lease rate to be accounted for as part of the lease provided certain criteria are met under an optional practical expedient.
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All of our operating expense reimbursements are expected to qualify to be accounted for as a part of the underlying lease.
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Although management continues to evaluate the guidance and disclosures required by all of the above ASUs, we do not anticipate any material impact to our consolidated financial statements as a result of adoption related to lessor accounting. However, we do anticipate recording an immaterial right-to-use asset and offsetting lease liability under lessee accounting on our balance sheet upon adoption of ASU 2016-02 on January 1, 2019.
The FASB has issued Accounting Standards Update No. 2018-07,
Stock Compensation (Topic 718),
Improvements to Nonemployee Share-Based Payment Accounting ("ASU 2018-07"). The provisions of ASU 2018-07 align accounting for stock based compensation for non-employees for goods and services with existing accounting for similar compensation for employees. The amendments supersede previous guidance on accounting for share-based payments to non-employees codified in the FASB's Accounting Standards Codification ("ASC") 505-50. ASU 2018-07 is effective in the first quarter of 2019, with early adoption permitted at any time provided that the entity has already adopted the provisions of ASC 606. We do
not anticipate any material impact to our consolidated financial statements as a result of adoption.
The FASB has issued Accounting Standards Update No. 2016-13,
Financial Instruments—Credit Losses (Topic 326),
Measurement of Credit Losses on Financial Instruments
("ASU 2016-13"). The provisions of ASU 2016-13 replace the "incurred loss" approach with an "expected loss" model for impairing trade and other receivables, held-to-maturity debt securities, net investment in leases, and off-balance-sheet credit exposures, which will generally result in earlier recognition of allowances for credit losses. Additionally, the provisions change the classification of credit losses related to available-for-sale securities to an allowance, rather than a direct reduction of the amortized cost of the securities. ASU 2016-13 is effective in the first quarter of 2020, with early adoption permitted as of January 1, 2019. We are currently evaluating the potential impact of adoption.
Related-Party Transactions and Agreements
There were no related-party transactions during the
three and nine months ended
September 30, 2018
.
Contractual Obligations
We have had significant changes to our debt structure during the
nine months ended
September 30, 2018
. As such, our contractual obligations related to long-term debt as of
September 30, 2018
were as follows (in thousands):
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Payments Due by Period
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Contractual Obligations
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Total
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Less than
1 year
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1-3 years
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3-5 years
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More than
5 years
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Long-term debt
(1)
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$
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1,725,033
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$
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1,000
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$
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29,033
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$
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1,045,000
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(2)(3)
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$
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650,000
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(4)
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(1)
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Amounts include principal payments only and balances outstanding as of
September 30, 2018
, not including unamortized issuance discounts, debt issuance costs paid to lenders, or estimated fair value adjustments. We made interest payments, including payments under our interest rate swaps, of approximately
$48.7 million
during the
nine months ended
September 30, 2018
, and expect to pay interest in future periods on outstanding debt obligations based on the rates and terms disclosed herein and in
Note 4
to our accompanying consolidated financial statements.
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(2)
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Includes the balance outstanding as of
September 30, 2018
of the new $500 Million Unsecured 2018 Line of Credit. However, we may extend the term for up to one additional year (through two available six month extensions to a final extended maturity date of September 29, 2023) provided we are not then in default and upon payment of extension fees.
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(3)
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Includes the Amended and Restated $300 Million Unsecured 2011 Term Loan which has a stated variable rate; however, we have entered into interest rate swap agreements which effectively fix, exclusive of changes to our credit rating, the rate on this facility to
3.20%
through January 15, 2020. As such, we estimate incurring, exclusive of changes to our credit rating, approximately $9.6 million per annum in total interest (comprised of combination of variable contractual rate and settlements under interest rate swap agreements) through January 2020.
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(4)
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Includes the $250 Million Unsecured 2018 Term Loan, which has a stated variable rate; however, we entered into
$100 million
in notional amount of seven-year interest rate swap agreements and
$50 million
in notional amount of two-year interest rate swap agreements, resulting in an effectively fixed interest rate on
$150 million
of the term loan at
4.11%
through March 29, 2020 and on
$100 million
of the term loan at
4.21%
from March 30, 2020 through the loan's maturity date of March 31, 2025, assuming no change in our credit rating. For the portion of the
$250 Million
Unsecured 2018 Term Loan that continues to have a variable interest rate, we may select from multiple interest rate options, including the prime rate and various length LIBOR locks. All LIBOR selections are subject to an additional spread (
1.60%
as of March 31, 2018) over the selected interest rate based on our then current credit rating.
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Commitments and Contingencies
We are subject to certain commitments and contingencies with regard to certain transactions. Refer to
Note 8
of our consolidated financial statements for further explanation. Examples of such commitments and contingencies include:
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•
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Commitments Under Existing Lease Agreements; and
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•
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Contingencies Related to Tenant Audits/Disputes.
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