UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________
FORM 10-Q
_______________________________________________________________________________________
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 | |||||
For the Quarterly Period Ended September 30, 2020
OR
| 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
(Exact name of registrant as specified in its charter)
____________________________________________________
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |||||||
(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)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of exchange on which registered | ||||||||||||
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 ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 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.
| x | Accelerated filer | ☐ | ||||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||||||||
| Emerging growth company | ||||||||||||||||||||
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 ☐ No x
Number of shares outstanding of the Registrant’s
common stock, as of October 28, 2020:
FORM 10-Q
PIEDMONT OFFICE REALTY TRUST, INC.
TABLE OF CONTENTS
| Page No. | |||||||||||
| PART I | Financial Information | ||||||||||
| Item 1. | |||||||||||
| Item 2. | |||||||||||
| Item 3. | |||||||||||
| Item 4. | |||||||||||
| PART II. | Other Information | ||||||||||
| Item 1. | |||||||||||
| Item 1A. | |||||||||||
| Item 2. | |||||||||||
| Item 3. | |||||||||||
| Item 4. | |||||||||||
| Item 5. | |||||||||||
| Item 6. | |||||||||||
2
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, financings, and operating objectives; discussions regarding future dividends and share repurchases; and discussions regarding the potential impact of economic conditions on our real estate and lease portfolio.
These statements are based on beliefs and assumptions of Piedmont’s management, which in turn are based on information available at the time the statements are made. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding the 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:
•Actual or threatened public health epidemics or outbreaks, such as the novel coronavirus ("COVID-19") pandemic that the world is currently experiencing, and governmental and private measures taken to combat such health crises, which may affect our personnel, tenants, tenants' operations and ability to pay lease obligations, demand for office space, and the costs of operating our assets;
•The adequacy of our general reserve related to tenant receivables established as a result of the COVID-19 pandemic, as well as the impact of any increase in this reserve or the establishment of any other reserve in the future;
•Economic, regulatory, socio-economic changes, and/or technology 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 seven 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;
•Adverse market and economic conditions, including any resulting impairment charges on both our long-lived assets or goodwill resulting therefrom;
•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 regulatory restrictions to which real estate investment trusts ("REITs") are subject and 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 and disposition of properties, many of which risks and uncertainties may not be known at the time of acquisition or disposition;
•Development and construction delays and resultant increased costs and risks;
•Our real estate development strategies may not be successful;
•Future acts of terrorism, civil unrest, or armed hostilities 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, including an increased risk of default by government tenants during periods in which state or federal governments are shut down or on furlough;
•Significant price and volume fluctuations in the public markets, including on the exchange which we listed our common stock;
•Changes in the method pursuant to which the LIBOR rates are determined and the phasing out of LIBOR after 2021;
•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;
3
•Changes in the financial condition of our tenants directly or indirectly resulting from geopolitical developments that could negatively affect international trade, including the uncertainty surrounding the United Kingdom's withdrawal from the European Union, the termination or threatened termination of existing international trade agreements, or the implementation of tariffs or retaliatory tariffs on imported or exported goods;
•The effect of any litigation to which we are, or may become, subject;
•Additional risks and costs associated with owning properties occupied by tenants in particular industries, such as oil and gas, co-working, etc., including risks of default during start-up and during economic downturns;
•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 factor described in Item 1A. of this Quarterly Report on Form 10-Q, as well as the risk factors discussed under Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2019.
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.
Information Regarding Disclosures Presented
Annualized Lease Revenue ("ALR"), a non-GAAP measure, is calculated by multiplying (i) current 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 unleased 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 development properties and properties taken out of service for redevelopment, if any.
4
PART I. FINANCIAL INFORMATION
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, 2019. Piedmont’s results of operations for the nine months ended September 30, 2020 are not necessarily indicative of the operating results expected for the full year.
5
PIEDMONT OFFICE REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except for share and per share amounts)
| September 30, 2020 | December 31, 2019 | ||||||||||
| Assets: | |||||||||||
| Real estate assets, at cost: | |||||||||||
Land | $ | $ | |||||||||
Buildings and improvements, less accumulated depreciation of $ | |||||||||||
Intangible lease assets, less accumulated amortization of $ | |||||||||||
Construction in progress | |||||||||||
| Real estate assets held for sale, net | |||||||||||
| Total real estate assets | |||||||||||
| Cash and cash equivalents | |||||||||||
Tenant receivables, net of allowance for doubtful accounts of $ | |||||||||||
| Straight-line rent receivables | |||||||||||
| Restricted cash and escrows | |||||||||||
| Prepaid expenses and other assets | |||||||||||
| Goodwill | |||||||||||
Deferred lease costs, less accumulated amortization of $ | |||||||||||
| Other assets held for sale, net | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities: | |||||||||||
Unsecured debt, net of discount and unamortized debt issuance costs of $ | $ | $ | |||||||||
Secured debt, net of premiums and unamortized debt issuance costs of $ | |||||||||||
| Accounts payable, accrued expenses and accrued capital expenditures | |||||||||||
| Dividends payable | |||||||||||
| Deferred income | |||||||||||
Intangible lease liabilities, less accumulated amortization of $ | |||||||||||
| Interest rate swaps | |||||||||||
| Other liabilities held for sale | |||||||||||
| Total liabilities | |||||||||||
| Stockholders’ Equity: | |||||||||||
Shares-in-trust, | |||||||||||
Preferred stock, | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Cumulative distributions in excess of earnings | ( | ( | |||||||||
| Other comprehensive income/(loss) | ( | ||||||||||
| Piedmont stockholders’ equity | |||||||||||
| Noncontrolling interest | |||||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
See accompanying notes
6
PIEDMONT OFFICE REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except for share and per share amounts)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Rental and tenant reimbursement revenue | $ | $ | $ | $ | |||||||||||||||||||
| Property management fee revenue | |||||||||||||||||||||||
| Other property related income | |||||||||||||||||||||||
| Expenses: | |||||||||||||||||||||||
| Property operating costs | |||||||||||||||||||||||
| Depreciation | |||||||||||||||||||||||
| Amortization | |||||||||||||||||||||||
| Impairment loss on real estate assets | |||||||||||||||||||||||
General and administrative | |||||||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Other income | |||||||||||||||||||||||
| Loss on early extinguishment of debt | ( | ||||||||||||||||||||||
| Gain/(loss) on sale of real estate assets | ( | ||||||||||||||||||||||
| ( | ( | ( | |||||||||||||||||||||
| Net income | |||||||||||||||||||||||
Net loss applicable to noncontrolling interest | |||||||||||||||||||||||
| Net income applicable to Piedmont | $ | $ | $ | $ | |||||||||||||||||||
| Per share information – basic: | |||||||||||||||||||||||
| Net income applicable to common stockholders | $ | $ | $ | $ | |||||||||||||||||||
| Per share information – diluted: | |||||||||||||||||||||||
| Net income applicable to common stockholders | $ | $ | $ | $ | |||||||||||||||||||
| Weighted-average common shares outstanding – basic | |||||||||||||||||||||||
| Weighted-average common shares outstanding – diluted | |||||||||||||||||||||||
See accompanying notes
7
PIEDMONT OFFICE REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||||||
| Net income applicable to Piedmont | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss: | |||||||||||||||||||||||||||||||||||||||||||||||
Effective portion of loss on derivative instruments that are designated and qualify as cash flow hedges (See Note 5) | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||
| ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||
Comprehensive income applicable to Piedmont | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
See accompanying notes
8
PIEDMONT OFFICE REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(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, June 30, 2020 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
Dividends to common stockholders ($ | — | — | — | ( | — | ( | ( | ||||||||||||||||||||||||||||||||||
Shares issued and amortized under the 2007 Omnibus Incentive Plan, net of tax | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Net loss applicable to noncontrolling interest | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Net income applicable to Piedmont | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Balance, September 30, 2020 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
| 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, June 30, 2019 | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Offering costs | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||
Dividends to common stockholders ($ | — | — | ( | ( | — | ( | ( | ||||||||||||||||||||||||||||||||||
Shares issued and amortized under the 2007 Omnibus Incentive Plan, net of tax | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||
| Net loss applicable to noncontrolling interest | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Net income applicable to Piedmont | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Balance, September 30, 2019 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
See accompanying notes
9
PIEDMONT OFFICE REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(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, 2019 | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||
Dividends to common stockholders ($ | — | — | ( | ( | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Shares issued and amortized under the 2007 Omnibus Incentive Plan, net of tax | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Net loss applicable to noncontrolling interest | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Net income applicable to Piedmont | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Balance, September 30, 2020 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
| 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, 2018 | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Share repurchases as part of an announced plan | ( | ( | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
| Offering costs | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||
Dividends to common stockholders ($ | — | — | ( | ( | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Shares issued and amortized under the 2007 Omnibus Incentive Plan, net of tax | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Net loss applicable to noncontrolling interest | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Net income applicable to Piedmont | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Balance, September 30, 2019 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
See accompanying notes
10
PIEDMONT OFFICE REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
| Nine Months Ended | |||||||||||
| September 30, | |||||||||||
| 2020 | 2019 | ||||||||||
| Cash Flows from Operating Activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation | |||||||||||
Amortization of debt issuance costs net of favorable settlement of interest rate swaps | |||||||||||
| Other amortization | |||||||||||
| Impairment loss on real estate assets | |||||||||||
| Loss on early extinguishment of debt | |||||||||||
| General reserve for uncollectible accounts | |||||||||||
| Stock compensation expense | |||||||||||
| Gain on sale of real estate assets | ( | ( | |||||||||
| Changes in assets and liabilities: | |||||||||||
| Increase in tenant and straight-line rent receivables | ( | ( | |||||||||
| Increase in prepaid expenses and other assets | ( | ( | |||||||||
| Cash paid upon settlement of interest rate swaps | ( | ||||||||||
| Increase/(decrease) in accounts payable and accrued expenses | ( | ||||||||||
| Increase in deferred income | |||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash Flows from Investing Activities: | |||||||||||
| Acquisition of real estate assets and intangibles | ( | ( | |||||||||
| Capitalized expenditures | ( | ( | |||||||||
| Net sales proceeds from wholly-owned properties | |||||||||||
| Deferred lease costs paid | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash Flows from Financing Activities: | |||||||||||
| Debt issuance and other costs paid | ( | ( | |||||||||
| Proceeds from debt | |||||||||||
| Repayments of debt | ( | ( | |||||||||
| Discount paid due to loan modification | ( | ||||||||||
| Costs of issuance of common stock | ( | ||||||||||
| Value of shares withheld for payment of taxes related to employee stock compensation | ( | ( | |||||||||
| Repurchases of common stock as part of announced plan | ( | ||||||||||
| Dividends paid and discount on dividend reinvestments | ( | ( | |||||||||
| Net cash provided by financing activities | |||||||||||
| Net increase in cash, cash equivalents, and restricted cash and escrows | |||||||||||
| Cash, cash equivalents, and restricted cash and escrows, beginning of period | |||||||||||
| Cash, cash equivalents, and restricted cash and escrows, end of period | $ | $ | |||||||||
See accompanying notes
11
PIEDMONT OFFICE REALTY TRUST, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
(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, redevelopment, management, and ownership of commercial real estate properties located primarily in select sub-markets within seven major Eastern U.S. office markets, 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, taxable REIT 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 it controls. References to Piedmont herein shall include Piedmont and all of its subsidiaries, including Piedmont OP and its subsidiaries and joint ventures.
As of September 30, 2020, Piedmont owned 57 in-service office properties in select sub-markets located within seven major U.S. office markets: Atlanta, Boston, Dallas, Minneapolis, New York, Orlando, and Washington, D.C. As of September 30, 2020, Piedmont's 57 in-service office properties comprised approximately 17.2 million square feet of primarily Class A commercial office space and were 86.9 % leased.
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
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, 2019.
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.
12
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. The most significant of these estimates include the underlying cash flows and holding periods used in assessing impairment, judgements regarding the recoverability of goodwill, and the assessment of the collectibility of receivables. Future impacts of the COVID-19 pandemic on Piedmont and its tenants may affect these and other estimates used in the preparation of these financial statements. While Piedmont has made, what it believes to be, appropriate accounting estimates based on the facts and circumstances available as of the reporting date, actual results could materially 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.
Operating Leases
Piedmont recognized the following fixed and variable lease payments, which together comprised rental and tenant reimbursement revenue in the accompanying consolidated statements of income for the three and nine months ended September 30, 2020 and 2019, respectively, as follows (in thousands):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2020 | September 30, 2019 | September 30, 2020 | September 30, 2019 | ||||||||||||||||||||
| Fixed payments | $ | $ | $ | $ | |||||||||||||||||||
| Variable payments | |||||||||||||||||||||||
Total Rental and Tenant Reimbursement Revenue | $ | $ | $ | $ | |||||||||||||||||||
Operating leases where Piedmont is the lessee relate primarily to office space in buildings owned by third parties. For both the three and nine months ended September 30, 2020 and 2019, Piedmont recognized approximately $20,000 60,000 three years , and the weighted-average discount rate is 3.35 %.
Intangible Assets and Liabilities Resulting from Purchasing Real Estate Assets
Upon the acquisition of real properties, Piedmont allocates the purchase price of the properties to tangible assets, consisting of land, building, site improvements, and identified intangible assets and liabilities, including the value of in-place leases, based in each case on Piedmont's estimate of their fair values in accordance with Accounting Standards Codification ("ASC") 820 Fair Value Measurements.
Gross intangible lease assets and liabilities arising from in-place leases, inclusive of amounts classified as real estate assets held for sale, recorded at acquisition as of September 30, 2020 and December 31, 2019, respectively, are as follows (in thousands):
| September 30, 2020 | December 31, 2019 | ||||||||||
| Intangible Lease Assets: | |||||||||||
| Above-Market In-Place Lease Assets | $ | $ | |||||||||
| In-Place Lease Valuation | $ | $ | |||||||||
| Intangible Lease Origination Costs (included as component of Deferred Lease Costs) | $ | $ | |||||||||
| Intangible Lease Liabilities (Below-Market In-Place Leases) | $ | $ | |||||||||
13
For the three and nine months ended September 30, 2020 and 2019, respectively, Piedmont recognized amortization of intangible lease costs as follows (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||||||
| September 30, 2020 | September 30, 2019 | September 30, 2020 | September 30, 2019 | |||||||||||||||||
Amortization of Intangible Lease Origination Costs and In-Place Lease Valuation included in amortization expense | $ | $ | $ | $ | ||||||||||||||||
Amortization of Above-Market and Below-Market In-Place Lease intangibles as a net increase to rental revenues | $ | $ | $ | $ | ||||||||||||||||
Net intangible assets and liabilities as of September 30, 2020 will be amortized as follows (in thousands):
| Intangible Lease Assets | |||||||||||||||||||||||
| Above-Market In-place Lease Assets | In-Place Lease Valuation | Intangible Lease Origination Costs (1) | Below-Market In-place Lease Liabilities | ||||||||||||||||||||
| For the remainder of 2020 | $ | $ | $ | $ | |||||||||||||||||||
| For the years ending December 31: | |||||||||||||||||||||||
| 2021 | |||||||||||||||||||||||
| 2022 | |||||||||||||||||||||||
| 2023 | |||||||||||||||||||||||
| 2024 | |||||||||||||||||||||||
| 2025 | |||||||||||||||||||||||
| Thereafter | |||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
| Weighted-Average Amortization Period (in years) | |||||||||||||||||||||||
(1)Included as a component of Deferred Lease Costs in the accompanying consolidated balance sheets.
Accounting Pronouncements and Amendments Adopted during the Nine Months Ended September 30, 2020
Reference Rate Reform Relief
Accounting Standards Update No. 2020-04, Reference Rate Reform (Topic 848) ("ASU 2020-04"), was issued in March 2020. ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the nine months ended September 30, 2020, Piedmont elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. Piedmont continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
Financial Instruments- Credit Loss Amendments
On January 1, 2020, Piedmont adopted ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, as well as ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, and ASU No. 2019-05, Financial Instruments- Credit Losses: Targeted Transition Relief (collectively the "Credit Loss Amendments"). The provisions of the Credit Loss Amendments 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. However, the Financial Accounting Standards Board (the "FASB") also issued ASU No. 2018-19 Codification Improvements to Topic 326, Financial Instruments - Credit
14
Losses, which is effective concurrent with the Credit Loss Amendments, and excludes receivables arising from operating leases from the scope of the Credit Loss Amendments and affirms that such receivables should be evaluated for collectibility as prescribed by ASC 842 Leases. As substantially all of Piedmont's receivables are operating lease receivables there was no material impact to Piedmont's accompanying consolidated financial statements or disclosures as a result of adoption of the Credit Loss Amendments.
During the nine months ended September 30, 2020, the FASB issued a Staff Q&A on Topic 842 and Topic 840 (lease accounting guidance): Accounting for lease concessions related to the effects of the COVID-19 pandemic. Generally, changes to payment terms not contemplated by the lease contract should be accounted for under Topic 842 as a lease modification. The FASB staff has provided relief from this modification guidance through an accounting policy election, provided that changes to the payment terms do not result in a substantial increase in the rights of either the lessee or the lessor under the lease. Piedmont has elected not to apply the relief provided by the FASB Staff, and has instead accounted for all rent relief agreements as result of COVID-19 as lease modifications. See further details concerning rent relief agreements with Piedmont's tenants in Note 7 below.
Reclassifications
Certain prior period amounts presented in the accompanying consolidated balance sheets have been reclassified as of December 31, 2019 to conform to the current period financial statement presentation related to the 1901 Market Street building, which was classified as held for sale as of March 31, 2020, and sold on June 25, 2020. (see Note 8).
3. Acquisitions
During the nine months ended September 30, 2020, Piedmont acquired three properties and adjacent developable land (collectively the "Dallas Galleria Office Towers") using cash on hand and available funds from the $500 Million Unsecured 2018 Line of Credit, 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(1)(in millions) | ||||||||||||||||||||||||||||||||
| Dallas Galleria Office Towers | Dallas, Texas | February 12, 2020 | $ | |||||||||||||||||||||||||||||||||||
(1)Price includes the purchase of an adjacent parcel of approximately 1.9 acres of developable land.
The purchase price of the Dallas Galleria Office Towers and undeveloped land, inclusive of approximately $0.6 million of closing costs, was allocated as follows:
| Dallas Galleria Office Towers and Undeveloped Land | |||||
| Land | $ | ||||
| Building and improvements | |||||
Intangible lease assets (1) | |||||
Lease acquisition costs, net of tenant credits received from seller (1) | |||||
Intangible lease origination costs (1) | |||||
Intangible lease liabilities (1) | ( | ||||
Total purchase price | $ | ||||
(1)Amortization of in-place lease intangibles and lease acquisition costs are recognized using the straight-line method over approximately 5.2 years, the average remaining life of in-place leases.
15
4. Debt
During the three months ended September 30, 2020, Piedmont issued, through its wholly owned operating partnership, Piedmont OP, $300 million in aggregate principal amount of 3.15 % Senior Notes due 2030 (the “$300 Million Unsecured Senior Notes”), which mature on August 15, 2030. Upon issuance of the $300 Million Unsecured Senior Notes, Piedmont OP received proceeds of approximately $297.7 million, reflecting a discount of approximately $2.3 million which will be amortized as interest expense under the effective interest method over the ten-year term of the $300 Million Unsecured Senior Notes. In addition, in conjunction with the issuance, Piedmont settled four forward starting rate swaps, consisting of notional amounts of $200 million. These swaps were settled at a loss of approximately $19.9 million that was recorded as accumulated other comprehensive income and is being amortized as an increase in interest expense over the ten-year term of the $300 Million Unsecured Senior Notes. See Note 5 for further detail. The proceeds from the $300 Million Unsecured Senior Notes were used to fully repay the $300 Million Unsecured 2020 Term Loan that was obtained for the purchase of the Dallas Galleria Office Towers.
Additionally, during the nine months ended September 30, 2020, Piedmont amended the $250 Million Unsecured 2018 Term Loan to reduce the applicable interest rate spread from LIBOR plus 160 basis points to LIBOR plus 95 basis points, based on Piedmont's current credit rating.
Interest on the $300 Million Unsecured Senior Notes is payable semi-annually in arrears on February 15 and August 15 of each year, beginning on February 15, 2021. The $300 Million Unsecured Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by Piedmont. Piedmont OP may, at its option, redeem the $300 Million Unsecured Senior Notes, in whole or in part, prior to May 15, 2030, at a redemption price equal to the greater of (i) 100 % of the principal amount of the $300 Million Unsecured Senior Notes to be redeemed and (ii) a “make-whole” amount, plus any unpaid accrued interest. In addition, at any time on or after May 15, 2030, Piedmont OP may, at its option, redeem the $300 Million Unsecured Senior Notes, in whole or in part, at a redemption price equal to 100 % of the principal amount of the $300 Million Unsecured Senior Notes to be redeemed plus unpaid accrued interest. The $300 Million Unsecured Senior Notes are subject to certain typical covenants that, subject to certain exceptions: (a) limit the ability of Piedmont and Piedmont OP to, among other things, incur additional secured and unsecured indebtedness; (b) limit the ability of Piedmont and Piedmont OP to merge, consolidate, sell, lease or otherwise dispose of their properties and assets substantially as an entirety; and (c) require Piedmont to maintain a pool of unencumbered assets. The $300 Million Unsecured Senior Notes are also subject to customary events of default which, if any of them occurs, would permit or require the principal of and accrued interest on the $300 Million Unsecured Senior Notes to become or to be declared due and payable.
16
Finally, during the nine months ended September 30, 2020, Piedmont sold the 1901 Market Street building (see Note 8 for further details) and used the majority of the net sale proceeds to repay the $160 Million Fixed-Rate Loan that was secured by the property and all remaining outstanding borrowings under the $500 Million Unsecured 2018 Line of Credit. As a result of repaying the $160 Million Fixed-Rate Loan in advance of its stated maturity, Piedmont recognized a $9.3 million loss on early extinguishment of debt comprised of a prepayment penalty and unamortized deferred financing costs.
The following table summarizes the terms of Piedmont’s indebtedness outstanding as of September 30, 2020 and December 31, 2019 (in thousands):
Facility (1) | Stated Rate | Effective Rate (2) | Maturity | Amount Outstanding as of | ||||||||||||||||||||||||||||
| September 30, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||
| Secured (Fixed) | ||||||||||||||||||||||||||||||||
$ | % | % | 9/1/2021 | $ | $ | |||||||||||||||||||||||||||
$ | % | % | 7/5/2022 | |||||||||||||||||||||||||||||
Net premium and unamortized debt issuance costs | ||||||||||||||||||||||||||||||||
Subtotal/Weighted Average (5) | % | |||||||||||||||||||||||||||||||
| Unsecured (Variable and Fixed) | ||||||||||||||||||||||||||||||||
Amended and Restated $ | LIBOR + | % | 11/30/2021 | |||||||||||||||||||||||||||||
$ | LIBOR + | % | 9/30/2022 | (7) | ||||||||||||||||||||||||||||
$ | % | % | 6/01/2023 | |||||||||||||||||||||||||||||
$ | % | % | 3/15/2024 | |||||||||||||||||||||||||||||
$ | LIBOR + | % | (8) | 3/31/2025 | ||||||||||||||||||||||||||||
$ | % | % | (9) | 8/15/2030 | ||||||||||||||||||||||||||||
Discounts and unamortized debt issuance costs | ( | ( | ||||||||||||||||||||||||||||||
Subtotal/Weighted Average (5) | % | |||||||||||||||||||||||||||||||
Total/Weighted Average (5) | % | $ | $ | |||||||||||||||||||||||||||||
(1)Other than one mortgage, the $35
(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)Previously 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 September 30, 2020.
(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)Piedmont may extend the term for up to additional year (through two available six month extensions to a final extended maturity date of September 29, 2023) provided Piedmont is not then in default and upon payment of extension fees.
(8)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, $100 million of the principal balance to 3.56 % 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 September 30, 2020 (see Note 5 for more detail).
17
Piedmont made interest payments on all debt facilities, including interest rate swap cash settlements, of approximately $12.8 million and $17.8 million for the three months ended September 30, 2020 and 2019, respectively, and approximately $41.8 million and $49.7 million for the nine months ended September 30, 2020 and 2019, respectively. Also, Piedmont capitalized interest of approximately $0.2 million and $0.5 million for the three months ended September 30, 2020 and 2019, respectively, and approximately $0.6 million and $1.6 million for the nine months ended September 30, 2020 and 2019, respectively. As of September 30, 2020, Piedmont believes it was in compliance with all financial covenants associated with its debt instruments.
5. Derivative Instruments
Risk Management Objective of Using Derivatives
In addition to operational risks which arise in the normal course of business, Piedmont is exposed to economic risks such as interest rate, liquidity, and credit risk. In certain situations, Piedmont has entered into derivative financial instruments such as interest rate swap agreements and other similar agreements to manage interest rate risk exposure arising from current or future 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.
During the nine months ended September 30, 2020, Piedmont entered into four forward starting interest rate swap agreements with a total notional value of $200 million to hedge the risk of changes in the interest-related cash flows associated with an expected issuance of long-term debt. In conjunction with the issuance of the $300 Million Unsecured Senior Notes (see Note 4), Piedmont settled these forward starting swap agreements for a loss of approximately $19.9 million. The loss was recorded as accumulated other comprehensive income and is being amortized as additional interest expense over the ten-year term of the $300 Million Unsecured Senior Notes. Further, as of September 30, 2020, Piedmont was party to two other interest rate swap agreements, which are designated as effective cash flow hedges and hedge the variable cash flows covering $100 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 54 months.
A detail of Piedmont’s interest rate derivatives outstanding as of September 30, 2020 is as follows:
| Interest Rate Derivatives: | Number of Swap Agreements | Associated Debt Instrument | Total Notional Amount (in millions) | Effective Date | Maturity Date | |||||||||||||||||||||||||||