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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________ 
FORM 10-Q
____________________________________________________  
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT of 1934
For the Quarterly Period Ended June 30, 2018
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT of 1934
For the Transition Period From                      To                     
Commission file number 001-34626
PIEDMONT OFFICE REALTY TRUST, INC.
(Exact name of registrant as specified in its charter)
 ____________________________________________________ 
Maryland
 
58-2328421
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)

5565 Glenridge Connector
Ste. 450
Atlanta, Georgia 30342
(Address of principal executive offices)
(Zip Code)
(770) 418-8800
(Registrant’s telephone number, including area code)
N/A
(Former name, former address, and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No   o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large Accelerated filer x
 
Accelerated filer o
 
Non-Accelerated filer o     (Do not check if a smaller reporting company)        
 
Smaller reporting company o
 
 
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o No   x
Number of shares outstanding of the Registrant’s
common stock, as of July 31, 2018:
128,370,913 shares
 


Table of Contents

FORM 10-Q
PIEDMONT OFFICE REALTY TRUST, INC.
TABLE OF CONTENTS
 
 
Page No.
PART I.
Financial Statements
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
PART II.
Other Information
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
Item 5.
 
 
 
 
 
Item 6.


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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q may constitute forward-looking statements within the meaning of the federal securities laws. In addition, Piedmont Office Realty Trust, Inc. ("Piedmont," "we," "our," or "us"), 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. 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;
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 specifically the eight markets in which we primarily operate where we have high concentrations of our Annualized Lease Revenue (see definition below);
Lease terminations, lease defaults, or changes in the financial condition of our tenants, particularly by one of our large lead tenants;
The effect on us of adverse market and economic conditions, including any resulting impairment charges on both our long-lived assets or goodwill;
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, including the resulting impediment on our ability to quickly respond to adverse changes in the performance of our properties;
The risks and uncertainties associated with our acquisition of properties, many of which risks and uncertainties may not be known at the time of acquisition;
Development and construction delays and resultant increased costs and risks;
Our real estate development strategies may not be successful;
Future acts of terrorism in any of the major metropolitan areas in which we own properties, or future cybersecurity attacks against us or any of our tenants;
Costs of complying with governmental laws and regulations;
Additional risks and costs associated with directly managing properties occupied by government tenants;
Significant price and volume fluctuations in the public markets, including on the exchange which we listed our common stock;
The effect of future offerings of debt or equity securities or changes in market interest rates 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;
The effect of any litigation to which we are, or may become, subject;
Changes in tax laws impacting REITs and real estate in general, as well as our ability to continue to qualify as a REIT under the Internal Revenue Code of 1986 (the “Code”) or otherwise adversely affect our stockholders;
The future effectiveness of our internal controls and procedures; and
Other factors, including the risk factors discussed under Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2017.
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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Information Regarding Disclosures Presented

Annualized Lease Revenue ("ALR"), a non-U.S. generally accepted accounting principles ("GAAP") measure, 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 revenues associated with re-development properties, if any. ALR should not be viewed as an alternative to rental revenues or net income calculated in accordance with GAAP or as a measurement of our operating performance. Piedmont believes that ALR is helpful to investors in assessing the relative magnitude of specific tenants, properties, or other components of our portfolio in relation to each other and to the portfolio as a whole.



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PART I. FINANCIAL STATEMENTS

ITEM 1.
CONSOLIDATED FINANCIAL STATEMENTS
The information presented in the accompanying consolidated balance sheets and related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows reflects all adjustments that are, in management’s opinion, necessary for a fair and consistent presentation of financial position, results of operations, and cash flows in accordance with GAAP.
The accompanying financial statements should be read in conjunction with the notes to Piedmont’s financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this report on Form 10-Q and with Piedmont’s Annual Report on Form 10-K for the year ended December 31, 2017. Piedmont’s results of operations for the six months ended June 30, 2018 are not necessarily indicative of the operating results expected for the full year.

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PIEDMONT OFFICE REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share and per share amounts)
 
(Unaudited)
 
 
 
June 30,
2018
 
December 31,
2017
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
547,602

 
$
544,794

Buildings and improvements, less accumulated depreciation of $831,692 and $785,206 as of June 30, 2018 and December 31, 2017, respectively
2,409,749

 
2,418,023

Intangible lease assets, less accumulated amortization of $79,934 and $99,145 as of June 30, 2018 and December 31, 2017, respectively
70,271

 
77,805

Construction in progress
17,831

 
11,710

Real estate assets held for sale, net

 
332,410

Total real estate assets
3,045,453

 
3,384,742

Amounts due from unconsolidated joint ventures

 
10

Cash and cash equivalents
8,944

 
7,382

Tenant receivables, net of allowance for doubtful accounts of $597 and $539 as of June 30, 2018 and December 31, 2017, respectively
9,323

 
12,139

Straight-line rent receivables
172,164

 
163,160

Note receivable
3,200

 

Restricted cash and escrows
1,415

 
1,373

Prepaid expenses and other assets
29,180

 
22,517

Goodwill
98,918

 
98,918

Interest rate swaps
2,679

 
688

Deferred lease costs, less accumulated amortization of $169,256 and $183,740 as of June 30, 2018 and December 31, 2017, respectively
252,714

 
261,907

Other assets held for sale, net

 
47,131

Total assets
$
3,623,990

 
$
3,999,967

Liabilities:
 
 
 
Unsecured debt, net of discount and unamortized debt issuance costs of $8,144 and $7,689 as of June 30, 2018 and December 31, 2017, respectively
$
1,529,856

 
$
1,535,311

Secured debt, net of premiums and unamortized debt issuance costs of $795 and $946 as of June 30, 2018 and December 31, 2017, respectively
190,990

 
191,616

Accounts payable, accrued expenses, dividends payable, and accrued capital expenditures
94,215

 
216,653

Deferred income
25,532

 
29,582

Intangible lease liabilities, less accumulated amortization of $54,540 and $55,847 as of June 30, 2018 and December 31, 2017, respectively
40,341

 
38,458

Interest rate swaps

 
1,478

Other liabilities held for sale, net

 
380

Total liabilities
1,880,934

 
2,013,478

Commitments and Contingencies

 

Stockholders’ Equity:
 
 
 
Shares-in-trust, 150,000,000 shares authorized; none outstanding as of June 30, 2018 or December 31, 2017

 

Preferred stock, no par value, 100,000,000 shares authorized; none outstanding as of June 30, 2018 or December 31, 2017

 

Common stock, $.01 par value, 750,000,000 shares authorized; 128,370,913 and 142,358,940 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively
1,284

 
1,424

Additional paid-in capital
3,681,127

 
3,677,360

Cumulative distributions in excess of earnings
(1,953,291
)
 
(1,702,281
)
Other comprehensive income
12,141

 
8,164

Piedmont stockholders’ equity
1,741,261

 
1,984,667

Noncontrolling interest
1,795

 
1,822

Total stockholders’ equity
1,743,056

 
1,986,489

Total liabilities and stockholders’ equity
$
3,623,990

 
$
3,999,967

See accompanying notes

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PIEDMONT OFFICE REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except for share and per share amounts)
 
 
(Unaudited)
 
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Rental income
$
101,478

 
$
118,492

 
$
202,932

 
$
236,531

Tenant reimbursements
22,047

 
24,285

 
45,041

 
49,122

Property management fee revenue
382

 
400

 
691

 
925

Other property related income
5,267

 
5,502

 
10,410

 
10,564

 
129,174

 
148,679

 
259,074

 
297,142

Expenses:
 
 
 
 
 
 
 
Property operating costs
52,637

 
56,287

 
104,496

 
112,117

Depreciation
27,115

 
30,059

 
54,260

 
60,827

Amortization
15,245

 
19,314

 
31,978

 
39,729

General and administrative
8,258

 
7,528

 
14,810

 
15,678

 
103,255

 
113,188

 
205,544

 
228,351

Real estate operating income
25,919

 
35,491

 
53,530

 
68,791

Other income (expense):
 
 
 
 
 
 
 
Interest expense
(15,687
)
 
(18,421
)
 
(29,445
)
 
(36,478
)
Other income/(expense)
731

 
38

 
1,177

 
(62
)
Equity in income of unconsolidated joint ventures

 
107

 

 
118

Loss on extinguishment of debt

 

 
(1,680
)
 

Gain/(loss) on sale of real estate assets, net
(23
)
 
6,492

 
45,186

 
6,439

Net income
10,940

 
23,707

 
68,768

 
38,808

Plus: Net loss applicable to noncontrolling interest
2

 
3

 
4

 
6

Net income applicable to Piedmont
$
10,942

 
$
23,710

 
$
68,772

 
$
38,814

Per share information – basic and diluted:
 
 
 
 
 
 
 
Net income applicable to common stockholders
$
0.09

 
$
0.16

 
$
0.52

 
$
0.27

Weighted-average common shares outstanding – basic
128,346,433

 
145,412,524

 
132,090,741

 
145,350,074

Weighted-average common shares outstanding – diluted
128,700,743

 
145,813,130

 
132,431,642

 
145,779,709

See accompanying notes

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PIEDMONT OFFICE REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
 
(Unaudited)
 
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income applicable to Piedmont
 
 
$
10,942

 
 
 
$
23,710

 
 
 
$
68,772

 
 
 
$
38,814

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective portion of gain/(loss) on derivative instruments that are designated and qualify as cash flow hedges (See Note 6)
1,747

 
 
 
(911
)
 
 
 
3,264

 
 
 
132

 
 
Plus: Reclassification of net (gain)/loss included in net income (See Note 6)
(245
)
 
 
 
977

 
 
 
807

 


 
2,283

 


Gain on investment in available for sale securities

 
 
 
15

 
 
 

 
 
 
28

 
 
Other comprehensive income
 
 
1,502

 
 
 
81

 
 
 
4,071

 
 
 
2,443

Comprehensive income applicable to Piedmont
 
 
$
12,444

 
 
 
$
23,791

 
 
 
$
72,843

 
 
 
$
41,257



See accompanying notes

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PIEDMONT OFFICE REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2017
AND FOR THE SIX MONTHS ENDED JUNE 30, 2018 (UNAUDITED)
(in thousands, except per share amounts)
 
 
Common  Stock
 
Additional
Paid-In
Capital
 
Cumulative
Distributions
in Excess of
Earnings
 
Other
Comprehensive
Income/(Loss)
 
Non-
controlling
Interest
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Balance, December 31, 2016
145,235

 
$
1,452

 
$
3,673,128

 
$
(1,580,863
)
 
$
2,104

 
$
1,882

 
$
2,097,703

Share repurchases as part of an announced plan
(3,133
)
 
(31
)
 

 
(61,719
)
 

 

 
(61,750
)
Offering costs

 

 
(182
)
 

 

 

 
(182
)
Dividends to common stockholders ($1.34 per share), stockholders of subsidiaries, and dividends reinvested

 

 
(233
)
 
(193,263
)
 

 
(45
)
 
(193,541
)
Shares issued and amortized under the 2007 Omnibus Incentive Plan, net of tax
257

 
3

 
4,647

 

 

 

 
4,650

Net loss applicable to noncontrolling interest

 

 

 

 

 
(15
)
 
(15
)
Net income applicable to Piedmont

 

 

 
133,564

 

 

 
133,564

Other comprehensive income

 

 

 

 
6,060

 

 
6,060

Balance, December 31, 2017
142,359

 
1,424

 
3,677,360

 
(1,702,281
)
 
8,164

 
1,822

 
1,986,489

Cumulative effect of accounting change (adoption of ASU 2016-01)

 

 

 
94

 
(94
)
 

 

Share repurchases as part of an announced plan
(14,343
)
 
(143
)
 

 
(264,642
)
 

 

 
(264,785
)
Dividends to common stockholders ($0.42 per share), stockholders of subsidiaries, and dividends reinvested

 

 
(51
)
 
(55,234
)
 

 
(23
)
 
(55,308
)
Shares issued and amortized under the 2007 Omnibus Incentive Plan, net of tax
355

 
3

 
3,818

 

 

 

 
3,821

Net loss applicable to noncontrolling interest

 

 

 

 

 
(4
)
 
(4
)
Net income applicable to Piedmont

 

 

 
68,772

 

 

 
68,772

Other comprehensive income

 

 

 

 
4,071

 

 
4,071

Balance, June 30, 2018
128,371

 
$
1,284

 
$
3,681,127

 
$
(1,953,291
)
 
$
12,141

 
$
1,795

 
$
1,743,056


See accompanying notes

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PIEDMONT OFFICE REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) 
 
(Unaudited)
 
Six Months Ended
 
June 30,
 
2018
 
2017
Cash Flows from Operating Activities:
 
 
 
Net income
$
68,768

 
$
38,808

Operating distributions received from unconsolidated joint ventures
10

 

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
54,260

 
60,827

Amortization of debt issuance costs and net settlement of interest rate swaps
(207
)
 
810

Other amortization
29,061

 
39,034

Loss on extinguishment of debt
1,665

 

Stock compensation expense
5,004

 
5,403

Equity in income of unconsolidated joint ventures

 
(118
)
Gain on sale of real estate assets, net
(45,186
)
 
(6,439
)
Changes in assets and liabilities:
 
 
 
Increase in tenant and straight-line rent receivables, net
(6,974
)
 
(13,078
)
Increase in prepaid expenses and other assets
(6,452
)
 
(6,908
)
Cash received upon settlement of interest rate swaps
807

 

Decrease in accounts payable and accrued expenses
(13,672
)
 
(5,471
)
Decrease in deferred income
(3,839
)
 
(1,128
)
Net cash provided by operating activities
83,245

 
111,740

Cash Flows from Investing Activities:
 
 
 
Acquisition of real estate assets, related intangibles, and cash held in escrow for acquisitions
(28,176
)
 

Capitalized expenditures, net of accruals
(26,476
)
 
(58,320
)
Net sales proceeds from wholly-owned properties
419,557

 
23,023

Investments in unconsolidated joint ventures

 
(284
)
Note receivable issuance
(3,200
)
 

Deferred lease costs paid
(10,219
)
 
(9,563
)
Net cash provided by/(used in) investing activities
351,486

 
(45,144
)
Cash Flows from Financing Activities:
 
 
 
Debt issuance costs paid
(248
)
 
(102
)
Proceeds from debt
773,225

 
147,000

Repayments of debt
(780,721
)
 
(115,694
)
Costs of issuance of common stock

 
(74
)
Shares withheld for payment of taxes related to employee stock compensation
(2,213
)
 
(3,380
)
Repurchases of common stock as part of announced plan
(266,062
)
 

Dividends paid and discount on dividend reinvestments
(157,108
)
 
(91,664
)
Net cash used in financing activities
(433,127
)
 
(63,914
)
Net increase in cash, cash equivalents, and restricted cash and escrows
1,604

 
2,682

Cash, cash equivalents, and restricted cash and escrows, beginning of period
8,755

 
8,204

Cash, cash equivalents, and restricted cash and escrows, end of period
$
10,359

 
$
10,886


See accompanying notes

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PIEDMONT OFFICE REALTY TRUST, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
(unaudited)

1.    Organization
Piedmont Office Realty Trust, Inc. (“Piedmont”) (NYSE: PDM) is a Maryland corporation that operates in a manner so as to qualify as a real estate investment trust (“REIT”) for federal income tax purposes and engages in the acquisition, development, management, and ownership of commercial real estate properties located primarily in the Eastern-half of 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 various joint ventures which we control. References to Piedmont herein shall include Piedmont and all of its subsidiaries, including Piedmont OP and its subsidiaries and joint ventures.

As of June 30, 2018, Piedmont owned 53 in-service office properties and one redevelopment asset. As of June 30, 2018, Piedmont's 53 in-service office properties comprise approximately 16.2 million square feet of primarily Class A commercial office space and were approximately 90.6% leased. As of June 30, 2018, approximately 91% of Piedmont's Annualized Lease Revenue (unaudited) was generated from select sub-markets located primarily within eight major office markets located in the Eastern-half of the United States: Atlanta, Boston, Chicago, Dallas, Minneapolis, New York, Orlando, and Washington, D.C.

Piedmont internally evaluates all of its real estate assets as one operating segment, and accordingly does not report segment information.

2.Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation

The consolidated financial statements of Piedmont have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”), including the instructions to Form 10-Q and Article 10 of Regulation S-X, and do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the statements for the unaudited interim periods presented include all adjustments, which are of a normal and recurring nature, necessary for a fair presentation of the results for such periods. Results for these interim periods are not necessarily indicative of a full year’s results.

Piedmont’s consolidated financial statements include the accounts of Piedmont, Piedmont’s wholly-owned subsidiaries, any variable interest entity ("VIE") for which Piedmont or any of its wholly-owned subsidiaries is considered to have the power to direct the activities of the entity and the obligation to absorb losses/right to receive benefits, or any entity in which Piedmont or any of its wholly-owned subsidiaries owns a controlling interest. In determining whether Piedmont or Piedmont OP has a controlling interest, the following factors, among others, are considered: equity ownership, voting rights, protective rights of investors, and participatory rights of investors. For further information, refer to the financial statements and footnotes included in Piedmont’s Annual Report on Form 10-K for the year ended December 31, 2017.

All intercompany balances and transactions have been eliminated upon consolidation.

Further, Piedmont has formed special purpose entities to acquire and hold real estate. Each special purpose entity is a separate legal entity. Consequently, the assets of these special purpose entities are not available to all creditors of Piedmont. The assets owned by these special purpose entities are being reported on a consolidated basis with Piedmont’s assets for financial reporting purposes only.


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Use of Estimates

The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements and notes. Actual results could differ from those estimates.

Income Taxes

Piedmont has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, and has operated as such, beginning with its taxable year ended December 31, 1998. To qualify as a REIT, Piedmont must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of its annual REIT taxable income. As a REIT, Piedmont is generally not subject to federal income taxes, subject to fulfilling, among other things, its taxable income distribution requirement. Piedmont is subject to certain taxes related to the operations of properties in certain locations, as well as operations conducted by its taxable REIT subsidiary, POH, which have been provided for in the financial statements.

Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act ("H.R. 1"), which generally took effect for taxable years that began on or after January 1, 2018 (subject to certain exceptions), made many significant changes to the U.S. federal income tax laws that will profoundly impact the taxation of individuals and corporations (including both regular C corporations and corporations that have elected to be taxed as REITs). For example, H.R. 1 limits the ability of corporations to utilize net operating loss carryforwards and limits the deductibility of business interest for all taxpayers, subject to an exception for taxpayers that are engaged in certain specified real property trades or business who make an irrevocable election not to apply the limitation to a particular real property trade or business and to depreciate their real property investments held in such trade or business using the less favorable alternative depreciation system. To date, the IRS has issued limited guidance with respect to certain of the provisions of H.R. 1, and there are numerous interpretive issues that will require guidance. In addition, changes made by H.R. 1 may require Piedmont to accrue certain income for U.S. federal income tax purposes no later than when such income is taken into account as revenue on its GAAP-based financial statements, unless the income is already subject to certain special methods of accounting under the Code. This could cause Piedmont to recognize taxable income prior to the receipt of the associated cash and accordingly, increase its distribution levels in order to maintain its status as a REIT. H.R. 1 also includes limitations on the deductibility of certain compensation paid to Piedmont's executives, certain interest payments, and certain net operating loss carryforwards, each of which could potentially increase Piedmont's taxable income and its required distributions. Piedmont recorded an approximate $0.2 million reduction to its tax liability related to its taxable REIT subsidiary as a result of the rate reduction included in H.R. 1 during the six months ended June 30, 2018. Although management is still evaluating the other effects of H.R. 1, Piedmont does not believe that H.R. 1 will significantly impact its financial statements.

Reclassifications

Certain prior period amounts presented in the accompanying consolidated statements of income have been reclassified to conform to the current period financial statement presentation. These amounts included: (i) the reclassification of approximately $5.5 million and $10.6 million for the three and six months ended June 30, 2017, respectively, 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 in conjunction with the adoption of the Revenue Recognition Amendments, as further defined and described below; and (ii) the reclassification of $0.5 million and $1.0 million for the three and six months ended June 30, 2017, respectively, of expense related to certain regional employees who are primarily engaged in the operation and management of properties that was previously included in general and administrative expense to property operating costs.

Accounting Pronouncements Adopted during the Six Months Ended June 30, 2018

Revenue Recognition

On January 1, 2018, Piedmont 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

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exchange for those goods or services using a five-step determination process.

Piedmont's revenues which are included in the scope of the Revenue Recognition Amendments include its property management fee revenue, the majority of its parking revenue, as well as certain license agreements which allow third-parties to place their antennas or fiber-optic cabling on or inside Piedmont's buildings. Lease contracts are specifically excluded from the Revenue Recognition Amendments and, Piedmont intends to utilize a leasing practical expedient, which has been tentatively approved by the FASB, 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 Piedmont's non-lease related revenue already followed the prescribed method of the Revenue Recognition Amendments, Piedmont was 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, Piedmont reclassified approximately $5.5 million and $10.6 million for the three and six months ended June 30, 2017, respectively, 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. Piedmont did not elect to adopt any practical expedients provided by the Revenue Recognition Amendments.

A detail of Piedmont's total revenues for the three months ended June 30, 2018 and 2017 (after reclassifications as a result of the adoption of the Revenue Recognition Amendments), including a detailed description of each line item is as follows:

 
 
 
(After Adoption of Revenue Recognition Amendments)
 
Three Months Ended
June 30, 2018
 
Three Months Ended
June 30, 2017
Rental income
$
101,478

 
$
118,492

Tenant reimbursements
22,047

 
24,285

Property management fee revenue
382

 
400

Other property related income
5,267

 
5,502

Total revenues
$
129,174

 
$
148,679


Rental income - consists of revenue from leases with Piedmont's tenants, which is not within the scope of the Revenue Recognition Amendments.

Tenant reimbursements - consists of revenue derived from reimbursements for services prescribed by leases with Piedmont's tenants separate from, but in conjunction with, the revenue generated from leasing office space. Such income is not within the scope of the Revenue Recognition Amendments.

Property management fee revenue - consists of revenue earned by Piedmont related to operating and managing office properties owned by other third-parties. Such income is within the scope of the Revenue Recognition Amendments; however, because the property management services represent a performance obligation that would be satisfied over the length of the contract, not at any specific point in time, and has the same measure of transfer (time elapsed), property management fee revenue will be recognized over time, consistent with the timing of Piedmont’s historic recognition. Any variable consideration transferred as part of these management agreements will continue to be recognized in the quarter that the underlying cash receipts are collected, consistent with the allocation objective of allocating the transaction price in an amount that depicts the amount of consideration to which Piedmont expects to be entitled in exchange for transferring the promised service to the customer.

Other property related income - consists of all other property related income from Piedmont's customers (tenants) that is not derived from a contract meeting the definition of a lease. Examples of such income include parking revenue and income from licenses with unrelated third-parties to place antennae and/or fiber optic cables in or on Piedmont's buildings. Since these services are substantially the same and have the same pattern of transfer, there is no timing difference between the recognition of other property related income and the recognition of the underlying expense/delivery of “service” under the new Revenue Recognition Amendments. Additionally, no modification to the timing of Piedmont’s previous revenue recognition is necessary, as these items have been recognized historically in accordance with this pattern of transfer.


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Gain/(loss) on Sale of Real Estate Assets

On January 1, 2018, Piedmont 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. Piedmont 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, Piedmont 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 Piedmont are the only securities affected by ASU 2016-01 and ASU 2018-03. As such, Piedmont has made a cumulative-effect adjustment to its 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 has recorded changes in fair value in net income for the three and six months ended June 30, 2018 related to these investment securities.

Interest Rate Derivatives

On January 1, 2018, Piedmont early adopted Accounting Standards Update No. 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12"). Piedmont 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 Piedmont's existing interest rate swaps as of December 31, 2017, and all other trades were perfectly effective. The amended presentation and disclosure guidance which is required to be presented prospectively is provided in Note 6.

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, Accounting Standards Update No. 2018-11, Leases (Topic 842) Targeted Improvements ("ASU 2018-11") issued by the FASB allows certain non-lease operating expense reimbursements to be accounted for as part of the lease provided certain criteria are met under an optional practical expedient. Further, the FASB has issued Accounting Standards Update No. 2018-01 Leases (Topic 842) Land Easement Practical Expedient for Transition to Topic 842 ("ASU 2018-01"). The amendments to ASU No. 2018-01 clarify 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, and 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. The amendments in ASU 2016-02, ASU 2018-01, and ASU 2018-11 are effective in the first quarter of 2019. Although management continues to evaluate the guidance and disclosures required by these amendments, Piedmont does not anticipate any material impact to its consolidated financial statements as a result of adoption related to lessor accounting. However, Piedmont does expect to record a right-to-use asset and related liability under lessee accounting, and Piedmont is still evaluating the potential impact of such lessee accounting.

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. Piedmont does not anticipate any material impact to its consolidated financial statements as a result of adoption.

The FASB has issued Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement

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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. Piedmont is currently evaluating the potential impact of adoption.


3.Acquisitions

During the six months ended June 30, 2018, Piedmont acquired one property using proceeds available as a result of dispositions (see Note 9) in January 2018 and cash on hand, as noted below:

Property
 
Metropolitan Statistical Area
 
Date of Acquisition
 
Ownership Percentage Acquired
 
Rentable Square Feet
 
Percentage Leased as of Acquisition
 
Net Contractual Purchase Price
 (in millions)
501 West Church Street
 
Orlando, Florida
 
February 23, 2018
 
100
%
 
182,461

 
100
%
 
$
28.0



4.Debt

During the six months ended June 30, 2018, Piedmont fully repaid the balances of the $300 Million Unsecured 2013 Term Loan and the $170 Million Unsecured 2015 Term Loan using proceeds from the 2017 Disposition Portfolio (see Note 9) and cash on hand, as well as drawing on its $500 Million Unsecured 2015 Line of Credit. Further, Piedmont had net borrowings during the six months ended June 30, 2018 on its $500 Million Unsecured 2015 Line of Credit of approximately $215.0 million, which brought the outstanding balance on the $500 Million Unsecured 2015 Line of Credit to $238 million as of June 30, 2018.

Additionally during the six months ended June 30, 2018, Piedmont entered into a $250 million unsecured term loan facility (the “$250 Million Unsecured 2018 Term Loan”) with a consortium of lenders. The term of the $250 Million Unsecured 2018 Term Loan is seven years with a maturity date of March 31, 2025; however, Piedmont may prepay the $250 Million Unsecured 2018 Term Loan, in whole or in part, at any time after March 29, 2020 without premium or penalty. The proceeds of the $250 Million Unsecured 2018 Term Loan were used to reduce the outstanding balance under the $500 Million Unsecured 2015 Line of Credit on the date the proceeds were received.

The $250 Million Unsecured 2018 Term Loan has the option to bear interest at varying levels based on either (i) the London Interbank Offered Rate (“LIBOR”) for an interest period selected by Piedmont of one, two, three, or six months, or to the extent available from all lenders in each case, one year or periods of less than one month, or (ii) Base Rate, defined as the greater of the prime rate, the federal funds rate plus 0.5%, or LIBOR for a one-month period plus 1%; plus a stated interest rate spread based on the higher credit rating level issued for either Piedmont or Piedmont OP. The stated interest rate spread over LIBOR can vary from 1.45% to 2.40% based upon the then current credit rating of Piedmont or Piedmont OP, whichever is higher. As of June 30, 2018, the stated interest rate spread on the $250 Million Unsecured 2018 Term Loan was 1.60%.

Under the $250 Million Unsecured 2018 Term Loan, Piedmont is subject to certain financial covenants that require, among other things, the maintenance of an unencumbered interest coverage ratio of at least 1.75, an unencumbered leverage ratio of at least 1.60, a fixed charge coverage ratio of at least 1.50, a leverage ratio of no more than 0.60, and a secured debt ratio of no more than 0.40. In addition, Piedmont entered into three interest rate swap agreements for a total notional amount of $150 million which effectively fixed $150 million of the $250 Million Unsecured 2018 Term Loan at an interest rate of approximately 4.11%.


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The following table summarizes the terms of Piedmont’s indebtedness outstanding as of June 30, 2018 and December 31, 2017 (in thousands):
Facility (1)
 
Stated Rate
 
Effective Rate (2)
 
Maturity
 
Amount Outstanding as of
 
June 30, 2018
 
December 31, 2017
Secured (Fixed)
 
 
 
 
 
 
 
 
 
 
$35 Million Fixed-Rate Loan (3)
 
5.55
%
 
3.75
%
 
9/1/2021
 
$
30,195

 
$
30,670

$160 Million Fixed-Rate Loan (4)
 
3.48
%
 
3.58
%
 
7/5/2022
 
160,000

 
160,000

Net premium and unamortized debt issuance costs
 
 
 
 
 
 
 
795

 
946

Subtotal/Weighted Average (5)
 
3.81
%
 
 
 
 
 
190,990

 
191,616

Unsecured (Variable and Fixed)
 
 
 
 
 
 
 
 
 
 
$170 Million Unsecured 2015 Term Loan
 
LIBOR + 1.125%

 
2.54
%
 
5/15/2018
 

 
170,000

$300 Million Unsecured 2013 Term Loan
 
LIBOR + 1.20%

 
2.78
%
(7) 
1/31/2019
 

 
300,000

$500 Million Unsecured 2015 Line of Credit (6)
 
LIBOR + 1.00%

 
3.08
%
 
6/18/2019
(8) 
238,000

 
23,000

$300 Million Unsecured 2011 Term Loan
 
LIBOR +  1.15%

 
3.35
%
(7) 
1/15/2020
 
300,000

 
300,000

$350 Million Senior Notes
 
3.40
%
 
3.43
%
 
6/01/2023
 
350,000

 
350,000

$400 Million Senior Notes
 
4.45
%
 
4.10
%
 
3/15/2024
 
400,000

 
400,000

$250 Million Unsecured 2018 Term Loan
 
LIBOR + 1.60%

 
3.95
%
(9) 
3/31/2025
 
250,000

 

Discounts and unamortized debt issuance costs
 
 
 
 
 
 
 
(8,144)

 
(7,689)

Subtotal/Weighted Average (5)
 
3.70
%
 
 
 
 
 
1,529,856

 
1,535,311

Total/Weighted Average (5)
 
3.71
%
 
 
 
 
 
$
1,720,846

 
$
1,726,927


(1) 
Other than the $35 Million Fixed-Rate Loan, all of Piedmont’s outstanding debt as of June 30, 2018 and December 31, 2017 is interest-only.
(2) 
Effective rate after consideration of settled or in-place interest rate swap agreements, issuance premiums/discounts, and/or fair market value adjustments upon assumption of debt.
(3) 
Collateralized by the 5 Wall Street building in Burlington, Massachusetts.
(4) 
Collateralized by the 1901 Market Street building in Philadelphia, Pennsylvania.
(5) 
Weighted average is based on contractual balance of outstanding debt and the stated or effectively fixed interest rates as of June 30, 2018.
(6) 
On a periodic basis, Piedmont may select from multiple interest rate options, including the prime rate and various-length LIBOR locks on all or a portion of the principal. All LIBOR selections are subject to an additional spread over the selected rate based on Piedmont’s current credit rating.
(7) 
The facility has a stated variable rate; however, Piedmont has entered into interest rate swap agreements which effectively fix, exclusive of changes in Piedmont's credit rating, the rate to that shown as the effective rate.
(8) 
Piedmont may extend the term for up to one additional year (through two available six month extensions to a final extended maturity date of June 18, 2020) provided Piedmont is not then in default and upon payment of extension fees.
(9) 
The facility has a stated variable rate; however, Piedmont has entered into interest rate swap agreements which effectively fix, exclusive of changes to Piedmont's credit rating, $150 million of the principal balance to 4.11% through March 29, 2020, and $100 million of the principal balance to 4.21% from March 30, 2020 through the maturity date of the loan. For the remaining variable portion of the loan, Piedmont may periodically select from multiple interest rate options, including the prime rate and various-length LIBOR locks on all or a portion of the principal. All LIBOR selections are subject to an additional spread over the selected rate based on Piedmont’s current credit rating. The rate presented is the weighted-average rate for the effectively fixed and variable portions of the debt outstanding as of June 30, 2018.

Piedmont made interest payments on all debt facilities, including interest rate swap cash settlements, of approximately $14.8 million and $16.7 million for the three months ended June 30, 2018 and 2017, respectively, and approximately $30.7 million and $36.0 million for the six months ended June 30, 2018 and 2017, respectively. Also, Piedmont capitalized interest of approximately $346,000 and $35,000 for the three months ended June 30, 2018 and 2017, respectively, and approximately $0.5 million and $0.1 million for the six months ended June 30, 2018 and 2017, respectively. As of June 30, 2018, Piedmont believes it was in compliance

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with all financial covenants associated with its debt instruments. See Note 7 for a description of Piedmont’s estimated fair value of debt as of June 30, 2018.

5.Variable Interest Entities
Variable interest holders who have the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and have the obligation to absorb the majority of losses of the entity or the right to receive significant benefits of the entity must consolidate the VIE. Each of the following VIEs has the sole purpose of holding land and office buildings and their resulting operations, and are classified in the accompanying consolidated balance sheets in the same manner as Piedmont’s wholly-owned properties.
A summary of Piedmont’s interests in its consolidated VIEs and their related carrying values as of June 30, 2018 and December 31, 2017 is as follows (net carrying amount in millions):

 
 
Piedmont's
%
 
 
 
Net Carrying
Amount as of
 
Net Carrying
Amount as of
 
 
Entity
 
Ownership
of Entity
 
Related
Building
 
June 30, 2018
 
December 31, 2017
 
Primary Beneficiary Considerations
1201 Eye Street N.W. Associates, LLC
 
98.6%
 
1201 Eye Street
 
$
87.5

 
$
81.1

 
In accordance with the partnership’s governing documents, Piedmont currently receives 100% of the cash flow of the entity and has sole discretion in directing the management and leasing activities of the building.

1225 Eye Street N.W. Associates, LLC
 
98.1%
 
1225 Eye Street
 
$
64.5

 
$
65.2

 
In accordance with the partnership’s governing documents, Piedmont currently receives 100% of the cash flow of the entity and has sole discretion in directing the management and leasing activities of the building.

Piedmont 500 W. Monroe Fee, LLC
 
100%
 
500 W. Monroe
 
$
256.5

 
$
263.2

 
The Omnibus Agreement with the previous owner includes equity participation rights upon sale of the property for the previous owner, if certain financial returns are achieved; however, Piedmont has sole decision making authority and is entitled to 100% of the economic benefits of the property until such returns are met.



6.Derivative Instruments
Risk Management Objective of Using Derivatives

In addition to operational risks which arise in the normal course of business, Piedmont is exposed to economic risks such as interest rate, liquidity, and credit risk. In certain situations, Piedmont has entered into derivative financial instruments such as interest rate swap agreements and other similar agreements to manage interest rate risk exposure arising from current or future variable rate debt transactions. Interest rate swap agreements involve the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Piedmont’s objective in using interest rate derivatives is to add stability to interest expense and to manage its exposure to interest rate movements.

Cash Flow Hedges of Interest Rate Risk

Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for Piedmont making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

As of June 30, 2018, Piedmont was party to interest rate swap agreements, all of which are designated as effective cash flow hedges and fully hedge the variable cash flows covering the entire outstanding balance of the $300 Million Unsecured 2011 Term Loan, and $150 million of the $250 Million Unsecured 2018 Term Loan. The maximum length of time over which Piedmont is hedging its exposure to the variability in future cash flows for forecasted transactions is 81 months.


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A detail of Piedmont’s interest rate derivatives outstanding as of June 30, 2018 is as follows:

Interest Rate Derivatives:
 
Number of Swap Agreements
 
Associated Debt Instrument
 
Total Notional Amount
(in millions)
 
Effective Date
 
Maturity Date
Interest rate swaps
 
3
 
$300 Million Unsecured 2011 Term Loan
 
$
300

 
11/22/2016
 
1/15/2020
Interest rate swaps
 
2
 
$250 Million Unsecured 2018 Term Loan
 
$
100

 
3/29/2018
 
3/31/2025
Interest rate swaps
 
1
 
$250 Million Unsecured 2018 Term Loan
 
$
50

 
3/29/2018
 
3/29/2020
Total
 
 
 
 
 
$
450

 
 
 
 

Piedmont presents its interest rate derivatives on its consolidated balance sheets on a gross basis as interest rate swap assets and interest rate swap liabilities. A detail of Piedmont’s interest rate derivatives on a gross and net basis as of June 30, 2018 and December 31, 2017, respectively, is as follows (in thousands):

Interest rate swaps classified as:
June 30,
2018
 
December 31,
2017
Gross derivative assets
$
2,679

 
$
688

Gross derivative liabilities

 
(1,478
)
Net derivative asset/(liability)
$
2,679

 
$
(790
)

The gain/(loss) on Piedmont's interest rate derivatives, including previously settled forward swaps, that was recorded in OCI and the accompanying consolidated statements of income as a component of interest expense for the three and six months ended June 30, 2018 and 2017, respectively, was as follows (in thousands):
 
Three Months Ended
 
Six Months Ended
Interest Rate Swaps in Cash Flow Hedging Relationships
June 30,
2018
 
June 30,
2017
 
June 30,
2018
 
June 30,
2017
Amount of gain/(loss) recognized in OCI
$
1,747

 
$
(911
)
 
$
3,264

 
$
132

Amount of previously recorded gain/(loss) reclassified from OCI into Interest Expense
$
245

 
$
(977
)
 
$
451

 
$
(2,283
)
Amount of gain/(loss) recognized on derivatives reclassified from OCI into Loss on Extinguishment of Debt
$

 
$

 
$
(1,258
)
 
$

 
 
 
 
 
 
 
 
Total amount of Interest Expense presented in the consolidated statements of income
$
15,687

 
$
18,421

 
$
29,445

 
$
36,478

Total amount of Loss on Extinguishment of Debt presented in the consolidated statements of income (1)
$

 
$

 
$
1,680

 
$


(1) 
Includes the write-off of approximately $0.4 million of discounts and unamortized debt issuance costs associated with the repayment of debt (see Note 4).

Piedmont estimates that approximately $2.8 million will be reclassified from OCI as a reduction of interest expense over the next twelve months. Piedmont recognized no hedge ineffectiveness on its cash flow hedges during the three and six months ended June 30, 2018 and 2017, respectively.

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

Credit-risk-related Contingent Features

Piedmont has agreements with its derivative counterparties that contain a provision whereby if Piedmont defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then Piedmont could

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also be declared in default on its derivative obligations. Because all of Piedmont's interest rate swaps are in an asset position, if Piedmont were to breach any of the contractual provisions of the derivative contracts, the settlement of its obligations under the agreements would not result in a penalty as of June 30, 2018. Additionally, Piedmont has rights of set-off under certain of its derivative agreements related to potential termination fees and amounts payable under the agreements, if a termination were to occur.

7.Fair Value Measurement of Financial Instruments
Piedmont considers its cash and cash equivalents, tenant receivables, notes receivable, restricted cash and escrows, accounts payable and accrued expenses, interest rate swap agreements, and debt to meet the definition of financial instruments. The following table sets forth the carrying and estimated fair value for each of Piedmont’s financial instruments, as well as its level within the GAAP fair value hierarchy, as of June 30, 2018 and December 31, 2017, respectively (in thousands):

 
June 30, 2018
 
December 31, 2017
Financial Instrument
Carrying Value
 
Estimated
Fair Value
 
Level Within Fair Value Hierarchy
 
Carrying Value
 
Estimated
Fair Value
 
Level Within Fair Value Hierarchy
Assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents(1)
$
8,944

 
$
8,944

 
Level 1
 
$
7,382

 
$
7,382

 
Level 1
Tenant receivables, net(1)
$
9,323

 
$
9,323

 
Level 1
 
$
12,139

 
$
12,139

 
Level 1
Notes receivable (1)
$
3,200

 
$
3,200

 
Level 1
 
$

 
$

 
Level 1
Restricted cash and escrows(1)
$
1,415

 
$
1,415

 
Level 1
 
$
1,373

 
$
1,373

 
Level 1
Interest rate swaps
$
2,679

 
$
2,679

 
Level 2
 
$
688

 
$
688

 
Level 2
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses(1)
$
11,000

 
$
11,000

 
Level 1
 
$
126,429

 
$
126,429

 
Level 1
Interest rate swaps
$

 
$

 
Level 2
 
$
1,478

 
$
1,478

 
Level 2
Debt, net
$
1,720,846

 
$
1,725,912

 
Level 2
 
$
1,726,927

 
$
1,759,905

 
Level 2

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

Piedmont's debt was carried at book value as of June 30, 2018 and December 31, 2017; however, Piedmont's estimate of its estimated fair value is disclosed in the table above. Piedmont uses widely accepted valuation techniques including discounted cash flow analysis based on the contractual terms of the debt facilities, including the period to maturity of each instrument, and uses observable market-based inputs for similar debt facilities which have transacted recently in the market. Therefore, the estimated fair values determined are considered to be based on significant other observable inputs (Level 2). Scaling adjustments are made to these inputs to make them applicable to the remaining life of Piedmont's outstanding debt. Piedmont has not changed its valuation technique for estimating the fair value of its debt.

Piedmont’s interest rate swap agreements presented above, and further discussed in Note 6, are classified as “Interest rate swap” assets and liabilities in the accompanying consolidated balance sheets and were carried at estimated fair value as of June 30, 2018 and December 31, 2017. The valuation of these derivative instruments was determined using widely accepted valuation techniques including discounted cash flow analysis based on the contractual terms of the derivatives, including the period to maturity of each instrument, and uses observable market-based inputs, including interest rate curves and implied volatilities. Therefore, the estimated fair values determined are considered to be based on significant other observable inputs (Level 2). In addition, Piedmont considered both its own and the respective counterparties’ risk of nonperformance in determining the estimated fair value of its derivative financial instruments by estimating the current and potential future exposure under the derivative financial instruments that both Piedmont and the counterparties were at risk for as of the valuation date. The credit risk of Piedmont and its counterparties were factored into the calculation of the estimated fair value of the interest rate swaps; however, as of June 30, 2018 and December 31, 2017, this credit valuation adjustment did not comprise a material portion of the estimated fair value. Therefore, Piedmont believes that any unobservable inputs used to determine the estimated fair values of its derivative financial instruments are not significant to the fair value measurements in their entirety, and does not consider any of its derivative financial instruments to be Level 3 assets or liabilities.


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8.Commitments and Contingencies

Commitments Under Existing Lease Agreements

Under its existing lease agreements, Piedmont may be required to fund significant tenant improvements, leasing commissions, and building improvements. In addition, certain agreements contain provisions that require Piedmont to issue corporate or property guarantees to provide funding for capital improvements or other financial obligations. Piedmont classifies its capital 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 June 30, 2018, commitments to fund potential non-incremental capital expenditures over the next five years for tenant improvements totaled approximately $40.0 million related to Piedmont's existing lease portfolio over the respective lease terms, the majority of which Piedmont estimates may be required to be funded over the next three years based on when the underlying leases commence. For most of Piedmont’s leases, the timing of the actual funding of these tenant improvements is largely dependent upon tenant requests for reimbursement. In some cases, these obligations may expire with the leases without further recourse to Piedmont. As of June 30, 2018, commitments for incremental capital expenditures for tenant improvements associated with executed leases totaled approximately $11.8 million.

Contingencies Related to Tenant Audits/Disputes

Certain lease agreements include provisions that grant tenants the right to engage independent auditors to audit their annual operating expense reconciliations. Such audits may result in the re-interpretation of language in the lease agreements which could result in the refund of previously recognized tenant reimbursement revenues, resulting in financial loss to Piedmont. Piedmont recorded $0 and $20,000 of such reductions in reimbursement revenues related to such tenant audits/disputes during the three months ended June 30, 2018 and 2017, respectively, and $0.4 million and $0.3 million of such reductions in reimbursement revenues related to such tenant audits/disputes during the six months ended June 30, 2018 and 2017, respectively.

9.Assets Held for Sale

As of June 30, 2018, no properties met the criteria for held for sale classification. However, during the six months ended June 30, 2018, Piedmont sold a portfolio of 14 properties (the "2017 Disposition Portfolio"). As of December 31, 2017, the 2017 Disposition Portfolio met the criteria for held for sale classification, and such properties are shown as held for sale as of December 31, 2017 in the consolidated balance sheet. Details of assets held for sale as of June 30, 2018 and December 31, 2017 are presented below (in thousands):
 
 
June 30, 2018
 
December 31, 2017
Real estate assets held for sale, net:
 
 
 
 
Land
 
$

 
$
74,498

Building and improvements, less accumulated depreciation of $0 and $169,116 as of June 30, 2018 and December 31, 2017, respectively
 

 
255,634

Construction in progress
 

 
2,278

Total real estate assets held for sale, net
 
$

 
$
332,410

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

 
$
25,975

Prepaid expenses and other assets
 

 
328

Deferred lease costs, less accumulated amortization of $0 and $16,549 as of June 30, 2018 and December 31, 2017, respectively
 

 
20,828

Total other assets held for sale, net
 
$

 
$
47,131

 
 
 
 
 
Other liabilities held for sale, net:
 
 
 
 
Intangible lease liabilities, less accumulated amortization of $0 and $935 as of June 30, 2018 and December 31, 2017, respectively
 
$

 
$
380




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10.Stock Based Compensation
The Compensation Committee of Piedmont's Board of Directors has periodically granted deferred stock awards to all of Piedmont's employees and independent directors. Employee awards typically vest ratably over a multi-year period and independent director awards vest over one year. Certain employees' long-term equity incentive program is split equally between the time-vested awards described above and a multi-year performance share program whereby the actual awards are contingent upon Piedmont's total stockholder return ("TSR") relative to a peer group's TSR. The peer group is predetermined by the Board of Directors. Any shares earned are awarded at the end of the multi-year performance period and vest upon award.

A rollforward of Piedmont's equity based award activity for the six months ended June 30, 2018 is as follows:

 
Shares
 
Weighted-Average Grant Date Fair Value
Unvested and Potential Stock Awards as of December 31, 2017
868,437

 
$
21.69

Deferred Stock Awards Granted
354,236

 
$
17.84

Increase in Estimated Potential Share Award
379,249

 
$
23.80

Performance Stock Awards Vested
(161,005
)
 
$
18.47

Deferred Stock Awards Vested
(331,195
)
 
$
19.21

Deferred Stock Awards Forfeited
(6,515
)
 
$
19.98

Unvested and Potential Stock Awards as of June 30, 2018
1,103,207

 
$
22.42


The following table provides additional information regarding stock award activity during the three and six months ended June 30, 2018 and 2017, respectively (in thousands, except per share amounts):

 
Three Months Ended
 
Six Months Ended
 
June 30,
2018
 
June 30,
2017
 
June 30,
2018
 
June 30,
2017
Weighted-Average Grant Date Fair Value of Deferred Stock Granted During the Period
$
17.84

 
$
21.38

 
$
17.84

 
$
21.38

Total Grant Date Fair Value of Deferred Stock Vested During the Period
$
5,639

 
$
5,551

 
$
6,363

 
$
5,841

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

 
$

 
$
2,947

 
$
2,877


(1) 
Amounts reflect the issuance of performance share awards related to the 2014-16 and 2015-17 Performance Share Plans during the six months ended June 30, 2018 and 2017, respectively.

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A detail of Piedmont’s outstanding stock awards as of June 30, 2018 is as follows:

Date of grant
 
Type of Award
 
Net Shares
Granted (1)
 
Grant
Date Fair
Value
 
Vesting Schedule
 
Unvested Shares
 
January 3, 2014
 
Deferred Stock Award
 
72,969

 
$
16.45

 
Of the shares granted, 20% vested or will vest on January 3, 2015, 2016, 2017, 2018, and 2019, respectively.
 
16,416

 
May 24, 2016
 
Deferred Stock Award
 
208,055

 
$
19.91

 
Of the shares granted, 25% vested on the date of grant, and 25% vested or will vest on May 24, 2017, 2018, and 2019, respectively.
 
60,975

 
May 24, 2016
 
Fiscal Year 2016-2018 Performance Share Program
 

 
$
23.02

 
Shares awarded, if any, will vest immediately upon determination of award in 2019.
 
119,371

(2) 
May 18, 2017
 
Deferred Stock Award
 
219,947

 
$
21.38

 
Of the shares granted, 25% vested on the date of grant, and 25% vested or will vest on May 18, 2018, 2019, and 2020, respectively.
 
124,281

 
May 18, 2017
 
Fiscal Year 2017-2019 Performance Share Program
 

 
$
30.45

 
Shares awarded, if any, will vest immediately upon determination of award in 2020.
 
143,335

(2) 
May 17, 2018
 
Deferred Stock Award-Board of Directors
 
31,388

 
$
17.84

 
Of the shares granted, 100% will vest by May 17, 2019.
 
31,388

 
May 17, 2018
 
Deferred Stock Award
 
302,865

 
$
17.84

 
Of the shares granted, 25% vested on the date of grant, and 25% vested or will vest on May 17, 2019, 2020, and 2021, respectively.
 
241,409

 
May 17, 2018
 
Fiscal Year 2018-2020 Performance Share Program
 

 
$
23.52

 
Shares awarded, if any, will vest immediately upon determination of award in 2021.
 
366,032

(2) 
Total
 
 
 
 
 
 
 
 
 
1,103,207

 

(1) 
Amounts reflect the total grant to employees and independent directors, net of shares surrendered upon vesting to satisfy required minimum tax withholding obligations through June 30, 2018.
(2) 
Estimated based on Piedmont's cumulative TSR for the respective performance period through June 30, 2018. Share estimates are subject to change in future periods based upon Piedmont's relative performance compared to its peers' total stockholder return.

During the three months ended June 30, 2018 and 2017, Piedmont recognized approximately $4.0 million and $2.6 million of compensation expense related to stock awards, of which $2.6 million and $1.1 million is related to the amortization of unvested shares, respectively. During the six months ended June 30, 2018 and 2017, Piedmont recognized approximately $5.0 million and $5.7 million of compensation expense related to stock awards, of which $3.9 million and $4.2 million is related to the amortization of unvested shares, respectively. During the six months ended June 30, 2018, a net total of 354,526 shares were issued to employees. As of June 30, 2018, approximately $6.3 million of unrecognized compensation cost related to unvested deferred stock awards remained, which Piedmont will record in its consolidated statements of income over a weighted-average vesting period of approximately two years.


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Table of Contents

11.Supplemental Disclosures for the Statement of Consolidated Cash Flows

Certain noncash investing and financing activities for the six months ended June 30, 2018 and 2017, (in thousands) are outlined below:

 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
Accrued capital expenditures and deferred lease costs
$
8,920

 
$
9,417

Change in accrued dividends and discount on dividend reinvestments
$
(101,800
)
 
$
(30,532
)
Change in accrued share repurchases as part of an announced plan
$
(1,277
)
 
$


The following table provides a reconciliation of cash, cash equivalents, and restricted cash and escrows as reported, or previously reported, within the consolidated balance sheet to the consolidated statement of cash flows as of the six months ended June 30, 2018 and 2017, respectively (in thousands).

 
 
Six Months Ended
 
 
June 30, 2018
 
June 30, 2017
Cash and cash equivalents, beginning of period
 
$
7,382

 
$
6,992

Restricted cash and escrows, beginning of period
 
1,373

 
1,212

Total cash, cash equivalents, and restricted cash and escrows shown in the consolidated statement of cash flows, beginning of period
 
$
8,755

 
$
8,204

 
 
 
 
 
Cash and cash equivalents, end of period
 
$
8,944

 
$
9,596

Restricted cash and escrows, end of period
 
1,415

 
1,290

Total cash, cash equivalents, and restricted cash and escrows shown in the consolidated statement of cash flows, end of period
 
$
10,359

 
$
10,886


Amounts in real estate tax and escrowed cash represent deposits which are required by Piedmont’s lenders under certain of its debt agreements to escrow amounts for the payment of real estate taxes, and other amounts escrowed, for instance, earnest money deposited for the purchase of a property. Security and utility deposit escrows represent the cash held for tenants and/or Piedmont for lease related deposits.


12.Earnings Per Share

There are no adjustments to “Net income applicable to Piedmont” for the diluted earnings per share computations.

Net income per share-basic is calculated as net income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Net income per share-diluted is calculated as net income available to common stockholders divided by the diluted weighted average number of common shares outstanding during the period, including unvested deferred stock awards. Diluted weighted average number of common shares reflects the potential dilution under the treasury stock method that would occur if the remaining unvested deferred stock awards vested and resulted in additional common shares outstanding. Unvested deferred stock awards which are determined to be anti-dilutive are not included in the calculation of diluted weighted average common shares.


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Table of Contents

The following table reconciles the denominator for the basic and diluted earnings per share computations shown on the consolidated statements of income for the three and six months ended June 30, 2018 and 2017, respectively (in thousands):

 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Weighted-average common shares – basic
128,346
 
145,413
 
132,091
 
145,350
Plus: Incremental weighted-average shares from time-vested deferred and performance stock awards
355
 
400
 
341
 
430
Weighted-average common shares – diluted
128,701
 
145,813
 
132,432
 
145,780
 
 
 
 
 
 
 
 
Common stock issued and outstanding as of period end
 
 
 
 
128,371
 
145,490


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Table of Contents


13.Guarantor and Non-Guarantor Financial Information

The following condensed consolidating financial information for Piedmont (the "Parent", "Guarantor", and/or "Consolidated"), Piedmont OP (the "Issuer"), and the other directly and indirectly owned subsidiaries of Piedmont as the Guarantor (the "Non-Guarantors") is provided pursuant to the requirements of Rule 3-10 of Regulation S-X regarding financial statements of guarantors and issuers of guaranteed registered securities. The Issuer is a wholly-owned subsidiary of the Guarantor, and all guarantees by the Guarantor of securities issued by the Issuer are full and unconditional. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions, including transactions with the Non-Guarantors.

Condensed Consolidating Balance Sheets
As of June 30, 2018
(in thousands)
Piedmont
(Parent)
(Guarantor)
 
Piedmont OP
(the Issuer)
 
Non-Guarantors
 
Eliminations
 
Piedmont
(Consolidated)
Assets:
 
 
 
 
 
 
 
 
 
Real estate assets, at cost:
 
 
 
 
 
 
 
 
 
Land
$

 
$
36,094

 
$
511,508

 
$

 
$
547,602

Buildings and improvements, less accumulated depreciation

 
176,704

 
2,233,345

 
(300
)
 
2,409,749

Intangible lease assets, less accumulated amortization

 

 
70,271

 

 
70,271

Construction in progress

 
408

 
17,423

 

 
17,831

Total real estate assets

 
213,206

 
2,832,547

 
(300
)
 
3,045,453

Cash and cash equivalents
150

 
5,311

 
3,483

 

 
8,944

Tenant and straight-line rent receivables, net

 
15,467

 
166,020

 

 
181,487

Investment in subsidiaries
1,743,439

 
2,803,136

 
169

 
(4,546,744
)
 

Notes receivable

 
810

 
147,700

 
(145,310
)
 
3,200

Prepaid expenses, restricted cash, escrows, interest rate swaps, and other assets
77

 
7,020

 
26,205

 
(28
)
 
33,274

Goodwill

 
98,918

 

 

 
98,918

Deferred lease costs, net

 
15,530

 
237,184

 

 
252,714

Total assets
$
1,743,666

 
$
3,159,398

 
$
3,413,308

 
$
(4,692,382
)
 
$
3,623,990

Liabilities:
 
 
 
 
 
 
 
 
 
Debt, net
$

 
$
1,529,792

 
$
336,364

 
$
(145,310
)
 
$
1,720,846

Accounts payable, accrued expenses, and accrued capital expenditures
610

 
15,012

 
78,621

 
(28
)
 
94,215

Deferred income

 
2,185

 
23,347

 

 
25,532

Intangible lease liabilities, net

 

 
40,341

 

 
40,341

Total liabilities
610

 
1,546,989

 
478,673

 
(145,338
)
 
1,880,934

Equity:
 
 
 
 
 
 
 
 
 
Total stockholders’ equity
1,743,056

 
1,612,409

 
2,934,635

 
(4,547,044
)
 
1,743,056

Total liabilities and stockholders’ equity
$
1,743,666

 
$
3,159,398

 
$
3,413,308

 
$
(4,692,382
)
 
$
3,623,990


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Table of Contents

Condensed Consolidating Balance Sheets
As of December 31, 2017
(in thousands)
Piedmont
(Parent)
(Guarantor)
 
Piedmont OP
(the Issuer)
 
Non-Guarantors
 
Eliminations
 
Piedmont
(Consolidated)
Assets:
 
 
 
 
 
 
 
 
 
Real estate assets, at cost:
 
 
 
 
 
 
 
 
 
Land
$

 
$
36,094

 
$
508,700

 
$

 
$
544,794

Buildings and improvements, less accumulated depreciation

 
180,886

 
2,237,437

 
(300
)
 
2,418,023

Intangible lease assets, less accumulated amortization

 
181

 
77,624

 

 
77,805

Construction in progress

 
85

 
11,625

 

 
11,710

Real estate assets held for sale, net

 
32,815

 
299,595

 

 
332,410

Total real estate assets

 
250,061

 
3,134,981

 
(300
)
 
3,384,742

Cash and cash equivalents
150

 
3,890

 
3,342

 

 
7,382

Tenant and straight-line rent receivables, net, and amounts due from unconsolidated joint ventures

 
16,891

 
158,418

 

 
175,309

Advances to affiliates
1,674,276

 
6,297,632

 

 
(7,971,908
)
 

Investment in subsidiary
3,437,299

 

 
172

 
(3,437,471
)


Notes receivable

 
88,810

 
144,500

 
(233,310
)
 

Prepaid expenses, restricted cash, escrows, interest rate swaps and other assets
2

 
5,094

 
20,222

 
(740
)
 
24,578

Goodwill

 
98,918

 

 

 
98,918

Deferred lease costs, net

 
16,611

 
245,296

 

 
261,907

Other assets held for sale, net

 
2,266

 
44,865

 

 
47,131

Total assets
$
5,111,727

 
$
6,780,173

 
$
3,751,796

 
$
(11,643,729
)
 
$
3,999,967

Liabilities:
 
 
 
 
 
 
 
 
 
Debt, net
$

 
$
1,535,239

 
$
424,998

 
$
(233,310
)
 
$
1,726,927

Accounts payable, accrued expenses, dividends payable, and accrued capital expenditures
104,028

 
20,279

 
93,086

 
(740
)
 
216,653

Advances from affiliates
5,277,957

 
941,494

 
1,850,712

 
(8,070,163
)
 

Deferred income

 
3,631

 
25,951

 

 
29,582

Intangible lease liabilities, net

 

 
38,458

 

 
38,458

Interest rate swaps

 
1,478

 

 

 
1,478

Liabilities held for sale, net

 

 
380

 

 
380

Total liabilities
5,381,985

 
2,502,121

 
2,433,585

 
(8,304,213
)
 
2,013,478

Equity:
 
 
 
 
 
 
 
 
 
Total stockholders’ equity
(270,258
)
 
4,278,052

 
1,318,211

 
(3,339,516
)
 
1,986,489

Total liabilities and stockholders’ equity
$
5,111,727

 
$
6,780,173

 
$
3,751,796

 
$
(11,643,729
)