PDM 6.30.14 10-Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________ 
FORM 10-Q
____________________________________________________  
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT of 1934
For the Quarterly Period Ended June 30, 2014
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT of 1934
For the Transition Period From                      To                     
Commission file number 001-34626
PIEDMONT OFFICE REALTY TRUST, INC.
(Exact name of registrant as specified in its charter)
 ____________________________________________________ 
Maryland
 
58-2328421
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)

11695 Johns Creek Parkway
Ste. 350
Johns Creek, Georgia 30097
(Address of principal executive offices)
(Zip Code)
(770) 418-8800
(Registrant’s telephone number, including area code)
N/A
(Former name, former address, and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No   o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated filer x
 
Accelerated filer o
 
Non-Accelerated filer o     (Do not check if a smaller reporting company)        
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o No   x
Number of shares outstanding of the Registrant’s
common stock, as of July 29, 2014:
154,325,169 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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Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q and other written or oral statements made by or on behalf of Piedmont Office Realty Trust, Inc. (“Piedmont”) may constitute forward-looking statements within the meaning of the federal securities laws. In addition, Piedmont, or its executive officers on Piedmont’s behalf, may from time to time make forward-looking statements in reports and other documents Piedmont files with the Securities and Exchange Commission or in connection with oral statements made to the press, potential investors, or others. Statements regarding future events and developments and Piedmont’s future performance, as well as management’s expectations, beliefs, plans, estimates, or projections relating to the future, are forward-looking statements within the meaning of these laws. Forward-looking statements include statements preceded by, followed by, or that include the words “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. Examples of such statements in this report include descriptions of our real estate, financing, and operating objectives; discussions regarding future dividends and stock repurchases; and discussions regarding the potential impact of economic conditions on our portfolio.
These statements are based on beliefs and assumptions of Piedmont’s management, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding the demand for office space in the sectors 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:
•
Market and economic conditions remain challenging in some markets we operate in and the demand for office space, rental rates and property values may continue to lag the general economic recovery causing our business, results of operations, cash flows, financial condition and access to capital to be adversely affected or otherwise impact performance, including the potential recognition of impairment charges;
•
The success of our real estate strategies and investment objectives, including our ability to identify and consummate suitable acquisitions;
•
Acquisitions of properties may have unknown risks and other liabilities at the time of acquisition;
•
Lease terminations or lease defaults, particularly by one of our large lead tenants;
•
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 of the office market in general and of the specific markets in which we operate;
•
Economic and regulatory changes, including accounting standards, that impact the real estate market generally;
•
Additional risks and costs associated with directly managing properties occupied by government tenants;
•
Adverse market and economic conditions may continue to negatively affect us and could cause us to recognize impairment charges or otherwise impact our performance;
•
Availability of financing and our lending banks’ ability to honor existing line of credit commitments;
•
Costs of complying with governmental laws and regulations;
•
Uncertainties associated with environmental and other regulatory matters;
•
Potential changes in political environment and reduction in federal and/or state funding of our governmental tenants;
•
We may be subject to litigation, which could have a material adverse effect on our financial condition;
•
Changes in tax laws impacting REITs and real estate in general, as well as Piedmont’s ability to continue to qualify as a REIT under the Internal Revenue Code (the “Code”); and
•
Other factors, including the risk factors discussed under Item 1A. of Piedmont’s Annual Report on Form 10-K for the year ended December 31, 2013.
Management believes these forward-looking statements are reasonable; however, undue reliance should not be placed on any forward-looking statements, which are based on current expectations. Further, forward-looking statements speak only as of the date they are made, and management undertakes no obligation to update publicly any of them in light of new information or future events.

3
Table of Contents

PART I. FINANCIAL STATEMENTS

ITEM 1.
CONSOLIDATED FINANCIAL STATEMENTS
The information presented in the accompanying consolidated balance sheets and related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows reflects all adjustments that are, in management’s opinion, necessary for a fair and consistent presentation of financial position, results of operations, and cash flows in accordance with U.S. generally accepted accounting principles.
The accompanying financial statements should be read in conjunction with the notes to Piedmont’s financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this report on Form 10-Q and with Piedmont’s Annual Report on Form 10-K for the year ended December 31, 2013. Piedmont’s results of operations for the six months ended June 30, 2014 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,
2014
 
December 31,
2013
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
690,559

 
$
688,761

Buildings and improvements, less accumulated depreciation of $1,030,098 and $979,934 as of June 30, 2014 and December 31, 2013, respectively
3,171,955

 
3,164,575

Intangible lease assets, less accumulated amortization of $74,132 and $71,820 as of June 30, 2014 and December 31, 2013, respectively
71,047

 
74,377

Construction in progress
34,768

 
24,270

Total real estate assets
3,968,329

 
3,951,983

Investments in and amounts due from unconsolidated joint ventures
7,549

 
14,388

Cash and cash equivalents
8,563

 
6,973

Tenant receivables, net of allowance for doubtful accounts of $285 and $346 as of June 30, 2014 and December 31, 2013, respectively
25,024

 
31,145

Straight-line rent receivables
156,010

 
139,406

Restricted cash and escrows
911

 
394

Prepaid expenses and other assets
32,132

 
24,771

Goodwill
180,097

 
180,097

Interest rate swaps
—

 
24,176

Deferred financing costs, less accumulated amortization of $5,056 and $13,041 as of June 30, 2014 and December 31, 2013, respectively
8,386

 
8,759

Deferred lease costs, less accumulated amortization of $132,777 and $126,465 as of June 30, 2014 and December 31, 2013, respectively
274,825

 
283,996

Total assets
$
4,661,826

 
$
4,666,088

Liabilities:
 
 
 
Unsecured debt, net of discount of $4,592 and $1,320 as of June 30, 2014 and December 31, 2013, respectively
$
1,657,408

 
$
1,014,680

Secured debt, inclusive of premium of $3,499 and $0 as of June 30, 2014 and December 31, 2013, respectively
449,677

 
987,525

Accounts payable, accrued expenses, and accrued capital expenditures
126,273

 
128,818

Deferred income
21,923

 
22,267

Intangible lease liabilities, less accumulated amortization of $40,054 and $44,256 as of June 30, 2014 and December 31, 2013, respectively
43,389

 
47,113

Interest rate swaps
5,971

 
4,526

Total liabilities
2,304,641

 
2,204,929

Commitments and Contingencies
—

 
—

Stockholders’ Equity:
 
 
 
Shares-in-trust, 150,000,000 shares authorized; none outstanding as of June 30, 2014 or December 31, 2013
—

 
—

Preferred stock, no par value, 100,000,000 shares authorized; none outstanding as of June 30, 2014 or December 31, 2013
—

 
—

Common stock, $.01 par value, 750,000,000 shares authorized; 154,324,076 and 157,460,903 shares issued and outstanding as of June 30, 2014 and December 31, 2013, respectively
1,543

 
1,575

Additional paid-in capital
3,668,836

 
3,668,906

Cumulative distributions in excess of earnings
(1,323,907
)
 
(1,231,209
)
Other comprehensive income
9,104

 
20,278

Piedmont stockholders’ equity
2,355,576

 
2,459,550

Noncontrolling interest
1,609

 
1,609

Total stockholders’ equity
2,357,185

 
2,461,159

Total liabilities and stockholders’ equity
$
4,661,826

 
$
4,666,088

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,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Rental income
$
113,287

 
$
107,951

 
$
224,191

 
$
214,006

Tenant reimbursements
24,745

 
24,101

 
49,674

 
49,566

Property management fee revenue
548

 
513

 
1,035

 
1,144

 
138,580

 
132,565

 
274,900

 
264,716

Expenses:
 
 
 
 
 
 
 
Property operating costs
57,136

 
52,223

 
115,407

 
104,378

Depreciation
34,144

 
30,169

 
67,788

 
58,994

Amortization
13,599

 
11,201

 
28,172

 
20,210

General and administrative
7,145

 
6,279

 
11,700

 
10,827

 
112,024

 
99,872

 
223,067

 
194,409

Real estate operating income
26,556

 
32,693

 
51,833

 
70,307

Other income (expense):
 
 
 
 
 
 
 
Interest expense
(18,012
)
 
(18,228
)
 
(36,938
)
 
(34,601
)
Other income/(expense)
(366
)
 
(72
)
 
(456
)
 
(1,349
)
Net recoveries from casualty events and litigation settlements
1,480

 
3,553

 
4,522

 
3,392

Equity in income/(loss) of unconsolidated joint ventures
(333
)
 
163

 
(599
)
 
558

 
(17,231
)

(14,584
)
 
(33,471
)
 
(32,000
)
Income from continuing operations
9,325

 
18,109

 
18,362

 
38,307

Discontinued operations:
 
 
 
 
 
 
 
Operating income
514

 
995

 
980

 
1,854

Impairment loss
—

 
—

 
—

 
(6,402
)
Gain on sale of real estate assets, net
1,304

 
16,258

 
1,198

 
16,258

Income from discontinued operations
1,818

 
17,253

 
2,178

 
11,710

Gain on sale of real estate assets
1,140

 
—

 
1,140

 
—

Net income
12,283

 
35,362

 
21,680

 
50,017

Less: Net income attributable to noncontrolling interest
(4
)
 
(4
)
 
(8
)
 
(8
)
Net income attributable to Piedmont
$
12,279

 
$
35,358

 
$
21,672

 
$
50,009

Per share information – basic and diluted:
 
 
 
 
 
 
 
Income from continuing operations and gain on sale of real estate assets
$
0.07

 
$
0.11

 
$
0.13

 
$
0.23

Income from discontinued operations
0.01

 
0.10

 
0.01

 
0.07

Net income available to common stockholders
$
0.08

 
$
0.21

 
$
0.14

 
$
0.30

Weighted-average common shares outstanding – basic
154,318,592

 
167,585,712

 
154,582,519

 
167,570,643

Weighted-average common shares outstanding – diluted
154,444,508

 
167,714,206

 
154,727,805

 
167,737,193

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,
 
2014
 
2013
2014
 
2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to Piedmont
 
 
$
12,279

 
 
 
$
35,358

 
 
$
21,672

 
 
 
$
50,009

Other comprehensive income/(loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective portion of gain/(loss) on derivative instruments that are designated and qualify as cash flow hedges (See Note 5)
(3,617
)
 
 
 
22,200

 
 
(13,502
)
 
 
 
21,860

 
 
Plus: Reclassification of previously recorded loss included in net income (See Note 5)
1,159

 
 
 
776

 
 
2,328

 


 
1,545

 


Other comprehensive income/(loss)
 
 
(2,458
)
 
 
 
22,976

 
 
(11,174
)
 
 
 
23,405

Comprehensive income attributable to Piedmont
 
 
$
9,821

 
 
 
$
58,334

 
 
$
10,498

 
 
 
$
73,414



See accompanying notes

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Table of Contents

PIEDMONT OFFICE REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2013
AND FOR THE SIX MONTHS ENDED JUNE 30, 2014 (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, 2012
167,556

 
$
1,676

 
$
3,667,051

 
$
(1,022,681
)
 
$
(7,160
)
 
$
1,609

 
$
2,640,495

Share repurchases as part of an announced plan
(10,246
)
 
(102
)
 
—

 
(175,167
)
 
—

 
—

 
(175,269
)
Offering costs associated with the issuance of common stock
—

 
—

 
(91
)
 
—

 
—

 
—

 
(91
)
Dividends to common stockholders ($0.80 per share), distributions to noncontrolling interest, and dividends reinvested
—

 
—

 
(197
)
 
(132,089
)
 
—

 
(15
)
 
(132,301
)
Shares issued and amortized under the 2007 Omnibus Incentive Plan, net of tax
151

 
1

 
2,143

 
—

 
—

 
—

 
2,144

Net income attributable to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
15

 
15

Net income attributable to Piedmont
—

 
—

 
—

 
98,728

 
—

 
—

 
98,728

Other comprehensive income
—

 
—

 
—

 
—

 
27,438

 
—

 
27,438

Balance, December 31, 2013
157,461

 
1,575

 
3,668,906

 
(1,231,209
)
 
20,278

 
1,609

 
2,461,159

Share repurchases as part of an announced plan
(3,183
)
 
(32
)
 
—

 
(52,648
)
 
—

 
—

 
(52,680
)
Retirement of shares returned from escrow
(85
)
 
(1
)
 
(1,478
)
 
—

 
—

 
—

 
(1,479
)
Dividends to common stockholders ($0.40 per share), distributions to noncontrolling interest, and dividends reinvested
—

 
—

 
(97
)
 
(61,722
)
 
—

 
(8
)
 
(61,827
)
Shares issued and amortized under the 2007 Omnibus Incentive Plan, net of tax
131

 
1

 
1,505

 
—

 
—

 
—

 
1,506

Net income attributable to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
8

 
8

Net income attributable to Piedmont
—

 
—

 
—

 
21,672

 
—

 
—

 
21,672

Other comprehensive loss
—

 
—

 
—

 
—

 
(11,174
)
 
—

 
(11,174
)
Balance, June 30, 2014
154,324

 
$
1,543

 
$
3,668,836

 
$
(1,323,907
)
 
$
9,104

 
$
1,609

 
$
2,357,185


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,
 
2014
 
2013
Cash Flows from Operating Activities:
 
 
 
Net income
$
21,680

 
$
50,017

Operating distributions received from unconsolidated joint ventures
266

 
921

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
67,871

 
60,449

Amortization of deferred financing costs
1,047

 
1,244

Settlement of forward starting interest rate swaps
14,960

 
672

Other amortization
27,649

 
19,792

Impairment loss on real estate assets
—

 
6,402

Stock compensation expense
1,907

 
770

Equity in loss/(income) of unconsolidated joint ventures
599

 
(558
)
Gain on sale of real estate assets, net
(2,338
)
 
(16,258
)
Retirement of shares returned from escrow
(1,479
)
 
—

Changes in assets and liabilities:
 
 
 
Increase in tenant and straight-line rent receivables, net
(14,236
)
 
(15,953
)
Increase in restricted cash and escrows
(117
)
 
(58
)
Increase in prepaid expenses and other assets
(7,062
)
 
(4,830
)
Decrease in accounts payable and accrued expenses
(1,396
)
 
(12,965
)
Decrease in deferred income
(456
)
 
(2,859
)
Net cash provided by operating activities
108,895

 
86,786

Cash Flows from Investing Activities:
 
 
 
Acquisition of real estate assets and related intangibles
(29,180
)
 
(247,499
)
Capitalized expenditures, net of accruals
(68,936
)
 
(84,334
)
Net sales proceeds from wholly-owned properties
46,240

 
49,326

Net sales proceeds from unconsolidated joint ventures
6,017

 
—

Investments in unconsolidated joint ventures
(42
)
 
(777
)
Deferred lease costs paid
(11,370
)
 
(13,180
)
Net cash used in investing activities
(57,271
)
 
(296,464
)
Cash Flows from Financing Activities:
 
 
 
Deferred financing costs paid
(1,016
)
 
(3,343
)
Proceeds from debt
846,564

 
694,604

Repayments of debt
(779,070
)
 
(402,000
)
Costs of issuance of common stock
—

 
(24
)
Repurchases of common stock as part of announced plan
(54,685
)
 
(14,844
)
Dividends paid and discount on dividend reinvestments
(61,827
)
 
(67,172
)
Net cash (used in)/provided by financing activities
(50,034
)
 
207,221

Net increase/(decrease) in cash and cash equivalents
1,590

 
(2,457
)
Cash and cash equivalents, beginning of period
6,973

 
12,957

Cash and cash equivalents, end of period
$
8,563

 
$
10,500

 
 
 
 
Supplemental Disclosures of Significant Noncash Investing and Financing Activities:
 
 
 
Change in accrued share repurchases as part of an announced plan
$
(2,005
)
 
$
2,976

Accrued capital expenditures and deferred lease costs
$
13,010

 
$
9,332


See accompanying notes

9
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PIEDMONT OFFICE REALTY TRUST, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(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 and ownership of commercial real estate properties throughout the United States, including properties that are under construction, are newly constructed, or have operating histories. Piedmont was incorporated in 1997 and commenced operations in 1998. Piedmont conducts business primarily through Piedmont Operating Partnership, L.P. (“Piedmont OP”), a Delaware limited partnership, as well as performing the management of its buildings through two wholly-owned subsidiaries, Piedmont Government Services, LLC and Piedmont Office Management, LLC. Piedmont owns 99.9% of, and is the sole general partner of, Piedmont OP and as such, possesses full legal control and authority over the operations of Piedmont OP. The remaining 0.1% ownership interest of Piedmont OP is held indirectly by Piedmont through its wholly-owned subsidiary, Piedmont Office Holdings, Inc. ("POH"), the sole limited partner of Piedmont OP. Piedmont OP owns properties directly, through wholly-owned subsidiaries, and through both consolidated and unconsolidated joint ventures. References to Piedmont herein shall include Piedmont and all of its subsidiaries, including Piedmont OP and its subsidiaries and joint ventures.

As of June 30, 2014, Piedmont owned 73 office properties, one redevelopment asset, and one office building through an unconsolidated joint venture. Piedmont's 73 consolidated office properties comprise 21.1 million square feet of primarily Class A commercial office space, and were 87.0% leased as of June 30, 2014. As of June 30, 2014, approximately 90% of Piedmont's annualized lease revenue was generated from nine key markets: Atlanta, Boston, Chicago, Dallas, Houston, Los Angeles, Minneapolis, New York, and and Washington, D.C.

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

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

The consolidated financial statements of Piedmont have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”), including the instructions to Form 10-Q and Article 10 of Regulation S-X, and do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of management, the statements for the unaudited interim periods presented include all adjustments, which are of a normal and recurring nature, necessary for a fair presentation of the results for such periods. Results for these interim periods are not necessarily indicative of a full year’s results. Effective April 1, 2014, Piedmont early adopted the amendments of Accounting Standards Update No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity ("ASU 2014-08") which changed the criteria for reporting discontinued operations. As a result, the sale of the 2020 W. 89th Street building in Leawood, Kansas during the three months ended June 30, 2014 did not meet the newly adopted definition of discontinued operations and the operational results of this property are included in income from continuing operations for all periods presented, while the gain on sale is presented in accordance with SEC Rule 3-15 of Regulation S-X in the accompanying consolidated statements of income between discontinued operations and net income. This gain, however, is included in continuing operations for purposes of calculating earnings per share data. Operational results related to properties sold or held for sale as of March 31, 2014 continue to be presented as discontinued operations because the adoption provisions of ASU 2014-08 require prospective implementation.

Piedmont’s consolidated financial statements include the accounts of Piedmont, Piedmont’s wholly-owned subsidiaries, any variable interest entity of which Piedmont or any of its wholly-owned subsidiaries is considered the primary beneficiary, or any entity in which Piedmont or any of its wholly-owned subsidiaries owns a controlling interest. 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, 2013.

All inter-company balances and transactions have been eliminated upon consolidation.


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

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.

Deferred Financing Costs    

Costs incurred in connection with obtaining financing which are paid to service providers other than the lenders, or customary fees paid to lenders which are not calculated based on the total commitment of the facility, are capitalized as deferred financing costs in the accompanying consolidated balance sheets. These costs are amortized to interest expense on a straight-line basis (which approximates the effective interest rate method) over the terms of the related financing arrangements.

Income Taxes

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

Recent Accounting Pronouncements

The Financial Accounting Standards Board has issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"). The amendments in ASU 2014-09 change the criteria for the recognition of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services using a five-step determination process. Steps 1 through 5 involve (i) identifying contracts with a customer, (ii) identifying the performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the performance obligations, and (v) recognizing revenue as an entity satisfies a performance obligation. Additionally, lease contracts are specifically excluded from ASU 2014-09. The amendments in ASU 2014-09 are effective in the first quarter of 2017 for Piedmont, and early adoption is not permitted. Piedmont is currently evaluating the potential impact, if any, of the amendments of ASU 2014-09.


3.Acquisitions
On June 27, 2014, Piedmont acquired a six-story office building in the Boston, Massachusetts metropolitan statistical area (the "5 Wall Street" building), totaling 181,680 square feet. The contractual purchase price of the property was approximately $62.5 million. The purchase included the assumption of a $35.0 million mortgage loan with a principal balance outstanding at acquisition of approximately $33.7 million, maturing on September 1, 2021. See further detail on the mortgage loan in Note 4.


4.Debt

During the six months ended June 30, 2014, Piedmont drew down the entire principal of the $300 Million Unsecured 2013 Term Loan, a delayed-draw loan facility established in December 2013. The proceeds of the $300 Million Unsecured 2013 Term Loan were used to repay the $200 Million Mortgage Note and the $25 Million Mortgage Note, as well as a portion of the amounts outstanding under the $500 Million Unsecured Line of Credit. Additionally during the six months ended June 30, 2014, Piedmont, through its wholly owned operating partnership, Piedmont OP, issued $400 million in aggregate principal amount of 4.450% senior notes which mature on March 15, 2024 (the “2014 Senior Notes”). Piedmont OP received proceeds upon issuance of approximately $399.2 million, reflecting a discount of approximately $0.8 million which will be amortized as interest expense under the effective interest method over the ten-year term of the 2014 Senior Notes. In addition, in conjunction with the issuance, Piedmont settled five forward starting rate swaps, consisting of notional amounts of $350 million. These swaps were settled in Piedmont's favor,

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resulting in a gain of approximately $15.0 million that was recorded as accumulated other comprehensive income and is being amortized as an offset to interest expense over the ten-year term of the 2014 Senior Notes. See Note 5 for further detail. The proceeds from the 2014 Senior Notes were used to repay the $350 Million Secured Pooled Facility, as well as a portion of the amounts outstanding under the $500 Million Unsecured Line of Credit.

On June 27, 2014 Piedmont, in conjunction with the purchase of the 5 Wall Street building, assumed a $35.0 million mortgage loan with a principal balance outstanding at acquisition of approximately $33.7 million, maturing on September 1, 2021. The loan is amortizing, and bears interest at the rate of 5.55% per annum. As a result of the acquisition and assumption, Piedmont recorded this mortgage loan in its consolidated financial statements as of June 30, 2014 at estimated fair market value, resulting in a premium of approximately $3.5 million which will be amortized as an offset against interest expense over the period through the stated maturity date of the loan using the effective interest method.

Finally, during the six months ended June 30, 2014, Piedmont incurred additional working capital borrowings of $188.0 million and, utilizing a portion of the proceeds of the $300 Million Unsecured 2013 Term Loan and the 2014 Senior Notes issuance described above, as well as other cash on hand, made repayments totaling $242.0 million on its $500 Million Unsecured Line of Credit. Piedmont also made interest payments on all debt facilities, including interest rate swap cash settlements, of approximately $16.7 million and $16.1 million for the three months ended June 30, 2014 and 2013, respectively, and $33.2 million and $31.8 million for the six months ended June 30, 2014 and 2013, respectively. Piedmont capitalized interest of $0.5 million and $0 for the three months ended June 30, 2014 and 2013, respectively, and $0.8 million and $0 for the six months ended June 30, 2014 and 2013, respectively.


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The following table summarizes the terms of Piedmont’s indebtedness outstanding as of June 30, 2014 and December 31, 2013 (in thousands):
Facility
 
Collateral
 
Rate(1)
 
Maturity
 
Amount Outstanding as of
 
June 30,
2014
 
December 31,
2013
Secured (Fixed)
 
 
 
 
 
 
 
 
 
 
$200 Million Mortgage Note
 
Aon Center
 
4.87
%
 
5/1/2014
 
$
—

 
$
200,000

$25 Million Mortgage Note
 
Aon Center
 
5.70
%
 
5/1/2014
 
—

 
25,000

$350 Million Secured Pooled Facility
 
Nine Property Collateralized
Pool (2)
 
4.84
%
 
6/7/2014
 
—

 
350,000

$105 Million Fixed-Rate Loan
 
US Bancorp Center
 
5.29
%
 
5/11/2015
 
105,000

 
105,000

$125 Million Fixed-Rate Loan
 
Four Property Collateralized
Pool (3)
 
5.50
%
 
4/1/2016
 
125,000

 
125,000

$42.5 Million Fixed-Rate Loan
 
Las Colinas Corporate
Center I & II
 
5.70
%
 
10/11/2016
 
42,525

 
42,525

$140 Million WDC Fixed-Rate Loans
 
1201 & 1225 Eye Street
 
5.76
%
 
11/1/2017
 
140,000

 
140,000

$35 Million Mortgage Note
 
5 Wall Street
 
5.55
%
(11) 
9/1/2021
 
37,152

 
—

Subtotal/Weighted Average (4)
 
 
 
5.55
%
 
 
 
449,677

 
987,525

Unsecured (Variable and Fixed)
 
 
 
 
 
 
 
 
 
 
$300 Million Unsecured 2011 Term Loan
 
 
 
LIBOR +  1.45%

(5) 
11/22/2016
 
300,000

 
300,000

$500 Million Unsecured Line of Credit
 
 
 
1.34
%
(6) 
8/19/2016
(7) 
312,000

 
366,000

$350 Million Unsecured Senior Notes
 
 
 
3.40
%
(8) 
6/1/2023
 
348,741

 
348,680

$300 Million Unsecured 2013 Term Loan
 
 
 
LIBOR + 1.20%

(9) 
1/31/2019
 
300,000

 
—

$400 Million Unsecured Senior Notes
 
 
 
4.45
%
(10) 
3/15/2024
 
396,667

 
—

Subtotal/Weighted Average (4)
 
 
 
2.94
%
 
 
 
1,657,408

 
1,014,680

Total/ Weighted Average (4)
 
 
 
3.49
%
 
 
 
$
2,107,085

 
$
2,002,205


(1) 
All of Piedmont’s outstanding debt as of June 30, 2014 and December 31, 2013 was interest-only debt, except for the amortizing mortgage loan assumed in conjunction with the purchase of the 5 Wall Street building.
(2) 
Nine property collateralized pool, which was repaid in full on March 7, 2014, included: 1200 Crown Colony Drive, Braker Pointe III, 2 Gatehall Drive, One and Two Independence Square, 2120 West End Avenue, 400 Bridgewater Crossing, 200 Bridgewater Crossing, and Fairway Center II.
(3) 
Four property collateralized pool includes 1430 Enclave Parkway, Windy Point I and II, and 1055 East Colorado Boulevard.
(4) 
Weighted average is based on contractual balance of outstanding debt and interest rates in the table as of June 30, 2014.
(5) 
The $300 Million Unsecured 2011 Term Loan has a stated variable rate; however, Piedmont entered into interest rate swap agreements which effectively fix, absent any changes to Piedmont's credit rating, the rate on this facility to 2.69%.
(6) 
Piedmont may select from multiple interest rate options with each draw, including the prime rate and various-length LIBOR locks. All LIBOR selections are subject to an additional spread (1.175% as of June 30, 2014) over the selected rate based on Piedmont’s current credit rating. The outstanding balance as of June 30, 2014 consisted of 30-day LIBOR draws at a rate of 0.16% (subject to the additional spread mentioned above).
(7) 
Piedmont may extend the term for up to one additional year (through two available six month extensions to a final extended maturity date of August 21, 2017) provided Piedmont is not then in default and upon payment of extension fees.

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(8) 
The $350 Million Senior Notes have a fixed coupon rate of 3.40%, however, as a result of the issuance of the notes at a discount, Piedmont recognizes an effective interest rate on this debt issuance of 3.45%. After consideration of the impact of settled interest rate swap agreements, in addition to the issuance discount, the effective interest rate on this debt is 3.43%.
(9) 
The $300 Million Unsecured 2013 Term Loan has a stated variable rate; however, Piedmont entered into interest rate swap agreements which effectively fix, absent any changes to Piedmont's credit rating, the rate for $200 million of the loan amount to 2.79% .
(10) 
The $400 Million Senior Notes have a fixed coupon rate of 4.45%, however, as a result of the issuance of the notes at a discount, Piedmont recognizes an effective interest rate on this debt issuance of 4.48%. After consideration of the impact of settled interest rate swap agreements, in addition to the issuance discount, the effective interest rate on this debt is 4.10%.
(11) 
The $35 Million Mortgage Note has a fixed rate of 5.55%, however, upon acquiring the mortgage note, it was marked to estimated fair value resulting in an effective interest rate of 3.75%.

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 changing the underlying notional amount. During the six months ended June 30, 2014, Piedmont continued to use four interest rate swap agreements with a total notional value of $300 million to hedge the variable cash flows associated with its $300 Million Unsecured 2011 Term Loan. In addition, Piedmont entered into four new interest rate swap agreements with a total notional value of $200 million to partially hedge the variable cash flows associated with its $300 Million Unsecured 2013 Term Loan during the six months ended June 30, 2014.

In conjunction with the issuance of the 2014 Senior Notes (see Note 4) during the six months ended June 30, 2014, Piedmont settled five previously outstanding forward starting swap agreements for a gain of approximately $15.0 million. The gain was recorded as accumulated other comprehensive income and is being amortized as an offset to interest expense over the ten-year term of the 2014 Senior Notes on a straight line basis, which approximates the effective interest method. Piedmont classifies cash flows from the settlement of hedging derivative instruments in the same category as the underlying exposure which is being hedged. As the cash settlement of approximately $15.0 million was the result of hedging Piedmont's exposure to interest rate changes and their effect on interest expense, such cash settlement is classified as an operating cash flow in the accompanying consolidated statements of cash flows.

The detail of Piedmont’s interest rate derivatives outstanding as of June 30, 2014 is as follows:

Interest Rate Derivative
Notional Amount
(in millions)
 
Effective Date
 
Maturity Date
Interest rate swap
$
125

 
11/22/2011
 
11/22/2016
Interest rate swap
75

 
11/22/2011
 
11/22/2016
Interest rate swap
50

 
11/22/2011
 
11/22/2016
Interest rate swap
50

 
11/22/2011
 
11/22/2016
Interest rate swap
50

 
1/30/2014
 
1/31/2019
Interest rate swap
50

 
1/30/2014
 
1/31/2019
Interest rate swap
50

 
1/30/2014
 
1/31/2019
Interest rate swap
50

 
1/30/2014
 
1/31/2019
Total
$
500

 
 
 
 

Piedmont has elected to present its interest rate derivatives on its consolidated balance sheets on a gross basis as interest rate swap assets and interest rate swap liabilities. The detail of Piedmont’s interest rate derivatives on a gross and net basis as of June 30, 2014 and December 31, 2013, respectively, is as follows (in thousands):


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Interest rate swaps classified as:
June 30,
2014
 
December 31,
2013
Gross derivative assets
$
—

 
$
24,176

Gross derivative liabilities
(5,971
)
 
(4,526
)
Net derivative asset/(liability)
$
(5,971
)
 
$
19,650


All of Piedmont's interest rate derivative agreements outstanding for the periods presented were designated as cash flow hedges of interest rate risk. As such, the effective portion of changes in the fair value of these derivatives designated as, and that qualify as, cash flow hedges is recorded in other comprehensive income ("OCI") and is reclassified into earnings as interest expense in the period that the hedged forecasted transaction affects earnings. The effective portion of Piedmont's interest rate derivatives that was recorded in the accompanying consolidated statements of income for the three and six months ended June 30, 2014 and 2013, respectively, was as follows:

 
Three Months Ended
 
Six Months Ended
Derivative in
Cash Flow Hedging
Relationships (Interest Rate Swaps) (in thousands)
June 30,
2014
 
June 30,
2013
 
June 30,
2014
 
June 30,
2013
Amount of gain/(loss) recognized in OCI on derivative
$
(3,617
)
 
$
22,200

 
$
(13,502
)
 
$
21,860

Amount of previously recorded loss reclassified from accumulated OCI into interest expense
$
1,159

 
$
776

 
$
2,328

 
$
1,545


Piedmont estimates that approximately $4.5 million will be reclassified from accumulated other comprehensive loss to interest expense over the next twelve months. No gain or loss was recognized related to hedge ineffectiveness or to amounts excluded from effectiveness testing on Piedmont’s cash flow hedges during the three and six months ended June 30, 2014 or 2013.

See Note 7 for fair value disclosures of Piedmont's derivative instruments.

Credit-risk-related Contingent Features

Piedmont has agreements with its derivative counterparties that contain a provision whereby if Piedmont defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then Piedmont could also be declared in default on its derivative obligations. If Piedmont were to breach any of the contractual provisions of the derivative contracts, it would be required to settle its obligations under the agreements at their termination value of the fair values plus accrued interest, or approximately $6.1 million as of June 30, 2014. Additionally, Piedmont has rights of set-off under certain of its derivative agreements related to potential termination fees and amounts payable under the agreements, if a termination were to occur.

6.Variable Interest Entities
Variable interest holders who have the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and have the obligation to absorb the majority of losses of the entity or the right to receive significant benefits of the entity must consolidate the VIE.
A summary of Piedmont’s interests in and consolidation treatment of its VIEs as of June 30, 2014 and December 31, 2013 is as follows (net carrying amount in millions):


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Table of Contents

Entity
 
Piedmont’s
%
Ownership
of Entity
 
Related
Building
 
Consolidated/
Unconsolidated
 
Net Carrying
Amount as of
June 30, 2014
 
Net Carrying
Amount as of
December 31,
2013
 
Primary Beneficiary
Considerations
1201 Eye Street NW Associates, LLC
 
49.5%
 
1201 Eye Street
 
Consolidated
 
$
(2.5
)
 
$
(5.3
)
 
In accordance with the partnership’s governing documents, Piedmont is entitled to 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 NW Associates, LLC
 
49.5%
 
1225 Eye Street
 
Consolidated
 
$
(1.8
)
 
$
(0.9
)
 
In accordance with the partnership’s governing documents, Piedmont is entitled to 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
 
Consolidated
 
$
240.3

 
$
228.3

 
The Omnibus Agreement with the previous owner includes equity participation rights for the previous owner, if certain financial returns are achieved; however, Piedmont has sole decision making authority and is entitled to the economic benefits of the property until such returns are met.
Suwanee Gateway One, LLC
 
100%
 
Suwanee Gateway One
 
Consolidated
 
$
7.2

 
$
7.4

 
The fee agreement includes equity participation rights for the incentive manager, if certain returns on investment are achieved; however, Piedmont has sole decision making authority and is entitled to the economic benefits of the property until such returns are met.
Medici Atlanta, LLC
 
100%
 
The Medici
 
Consolidated
 
$
15.3

 
$
14.4

 
The fee agreement includes equity participation rights for the incentive manager, if certain returns on investment are achieved; however, Piedmont has sole decision making authority and is entitled to the economic benefits of the property until such returns are met.
400 TownPark, LLC
 
100%
 
400 TownPark
 
Consolidated
 
$
22.2

 
$
22.3

 
The fee agreement includes equity participation rights for the incentive manager, if certain returns on investment are achieved; however, Piedmont has sole decision making authority and is entitled to the economic benefits of the property until such returns are met.

Each of the VIEs described above has the sole purpose of holding 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.


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7.Fair Value Measurement of Financial Instruments
Piedmont considers its cash, tenant receivables, 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, 2014 and December 31, 2013, respectively (in thousands):

 
June 30, 2014
 
December 31, 2013
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)
$
8,563

 
$
8,563

 
Level 1
 
$
6,973

 
$
6,973

Level 1
Tenant receivables, net(1)
$
25,024

 
$
25,024

 
Level 1
 
$
31,145

 
$
31,145

Level 1
Restricted cash and escrows(1)
$
911

 
$
911

 
Level 1
 
$
394

 
$
394

Level 1
Interest rate swap asset
$
—

 
$
—

 
Level 2
 
$
24,176

 
$
24,176

Level 2
Liabilities:
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses(1)
$
12,668

 
$
12,668

 
Level 1
 
$
16,680

 
$
16,680

Level 1
Interest rate swap liability
$
5,971

 
$
5,971

 
Level 2
 
$
4,526

 
$
4,526

Level 2
Debt
$
2,107,085

 
$
2,132,097

 
Level 2
 
$
2,002,205

 
$
2,004,870

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, 2014 and December 31, 2013; however, Piedmont's estimate of its fair value is disclosed in the table above. Piedmont uses widely accepted valuation techniques including discounted cash flow analysis based on the contractual terms of the debt facilities, including the period to maturity of each instrument, and uses observable market-based inputs for similar debt facilities which have transacted recently in the market. Therefore, the fair values determined are considered to be based on significant other observable inputs (Level 2). Scaling adjustments are made to these inputs to make them applicable to the remaining life of Piedmont's outstanding debt. Piedmont has not changed its valuation technique for estimating the fair value of its debt.

Piedmont’s interest rate swap and forward starting interest rate swap agreements presented above, and further discussed in Note 5, are classified as “Interest rate swap” assets and liabilities in the accompanying consolidated balance sheets and were carried at fair value as of June 30, 2014 and December 31, 2013. 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 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 fair value of its derivative financial instruments by estimating the current and potential future exposure under the derivative financial instruments that both Piedmont and the counterparties were at risk for as of the valuation date. The credit risk of Piedmont and its counterparties was factored into the calculation of the estimated fair value of the interest rate swaps; however, as of June 30, 2014 and December 31, 2013, 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 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.


8.Commitments and Contingencies

Commitments Under Existing Agreements

Certain lease agreements include provisions that, at the option of the tenant, may obligate Piedmont to provide funding for capital improvements. Under its existing lease agreements, Piedmont may be required to fund significant tenant improvements, leasing commissions, and building improvements. In addition, certain agreements contain provisions that require Piedmont to issue corporate or property guarantees to provide funding for capital improvements or other financial obligations. Further, Piedmont classifies such tenant and building improvements into two classes: (i) improvements which incrementally enhance the building's

17
Table of Contents

asset value by expanding its revenue generating capacity (“incremental capital expenditures”) and (ii) improvements which maintain the building's existing asset value and its revenue generating capacity (“non-incremental capital expenditures”). As of June 30, 2014, commitments for funding potential non-incremental capital expenditures for tenant improvements totaled approximately $63.4 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 several years. For most of Piedmont’s leases, the timing of the actual funding of these tenant improvements is largely dependent upon tenant requests for reimbursement. In some cases, these obligations may expire with the leases without further recourse to Piedmont.

Additionally, as of June 30, 2014, commitments for incremental capital expenditures for tenant improvements associated with new leases, primarily at value-add properties, totaled approximately $16.9 million.

Contingencies Related to Tenant Audits/Disputes

Certain lease agreements include provisions that grant tenants the right to engage independent auditors to audit their annual operating expense reconciliations. Such audits may result in the re-interpretation of language in the lease agreements which could result in the refund of previously recognized tenant reimbursement revenues, resulting in financial loss to Piedmont. Piedmont recorded reductions in reimbursement revenues related to such tenant audits/disputes of approximately $0.3 million and $0 during the three months ended June 30, 2014 and 2013, respectively, and $0.6 million and $0 during the six months ended June 30, 2014 and 2013, respectively.

Letters of Credit

As of June 30, 2014, Piedmont was subject to a letter of credit of approximately $0.4 million, which reduces the total outstanding capacity under its $500 Million Unsecured Line of Credit. This letter of credit agreement is scheduled to expire in July 2014; however, it contains an automatic renewal feature, consisting of successive one-year renewal periods, subject to the satisfaction of the credit obligation and certain other limitations.

9.Property Dispositions and Discontinued Operations

Sale of 2020 W. 89th Street building

During the three months ended June 30, 2014, Piedmont sold the 2020 W. 89th Street building for approximately $5.8 million, resulting in a gain of approximately $1.1 million and net sales proceeds of approximately $5.5 million. In accordance with ASU 2014-08 adopted effective April 1, 2014 (see Note 2), the operational results of the 2020 W. 89th Street building are presented as continuing operations in the accompanying consolidated statements of income, and the gain on sale is presented separately on the face of the income statement.

Sale of the Two Park Center building

During the three months ended June 30, 2014, Piedmont sold its 72% interest in the Two Park Center building in Hoffman Estates, Illinois for approximately $6.3 million which resulted in net sales proceeds of $6.0 million and a loss on sale of approximately $0.2 million, which is included in income from unconsolidated joint ventures in the accompanying consolidated statements of income.


18
Table of Contents

Discontinued Operations

Asset disposals previously classified as, and that continue to be reported as, discontinued operations for the three and six months ended June 30, 2014 and 2013 are as follows (in thousands):

Buildings Sold
 
Location
 
Date of Sale
Gain/(Loss) on Sale
 
Net Sales Proceeds
1111 Durham Avenue
 
South Plainfield, New Jersey
 
March 28, 2013
$
(9
)
 
$
3,752

1200 Enclave Parkway
 
Houston, Texas
 
May 1, 2013
$
16,246

 
$
45,552

350 Spectrum Loop
 
Colorado Springs, Colorado
 
November 1, 2013
$
7,959

 
$
29,676

8700 South Price Road
 
Tempe, Arizona
 
December 30, 2013
$
7,087

 
$
16,682

11107 and 11109 Sunset Hills Road
 
Reston, Virginia
 
March 19, 2014
$
(102
)
 
$
22,326

1441 West Long Lake Road
 
Troy, Michigan
 
April 30, 2014
$
562

 
$
7,202

4685 Investment Drive
 
Troy, Michigan
 
April 30, 2014
$
747

 
$
11,199


Details comprising income from discontinued operations are presented below (in thousands):

 
Three Months Ended
 
Six Months Ended
 
June 30, 2014
 
June 30, 2013
 
June 30, 2014
 
June 30, 2013
Revenues:
 
 
 
 
 
 
 
Rental income
$
191

 
$
2,289

 
$
1,365

 
$
5,217

Tenant reimbursements
2

 
308

 
114

 
742

Property management fee revenue
1

 
—

 
1

 
—

 
194

 
2,597

 
1,480

 
5,959

Expenses:
 
 
 
 
 
 
 
Property operating costs
(323
)
 
921

 
182

 
2,407

Depreciation
—

 
596

 
83

 
1,455

Amortization
—

 
105

 
223

 
274

General and administrative
3

 
10

 
6

 
11

 
(320
)
 
1,632

 
494

 
4,147

 
 
 
 
 
 
 
 
Other income/(expense)
—

 
13

 
(6
)
 
25

Net recoveries from casualty events and litigation settlements
—

 
17

 
—

 
17

 
—

 
30

 
(6
)
 
42

 
 
 
 
 
 
 
 
Operating income, excluding gain on sale
514

 
995

 
980

 
1,854

Impairment loss (1)
—

 
—

 
—

 
(6,402
)
Gain on sale of real estate assets
1,304

 
16,258

 
1,198

 
16,258

Income from discontinued operations
$
1,818

 
$
17,253

 
$
2,178

 
$
11,710


(1) 
Piedmont sold the 1111 Durham Avenue building in South Plainfield, New Jersey and recorded an impairment charge of $6.4 million based on the difference between carrying value and fair value of the asset at the time it was reclassified from real estate assets held-for-use (at cost) to real estate assets held for sale (at estimated fair value). The fair value measurement used in the evaluation of this non-financial asset was based upon the amount set forth in the purchaser's original letter of intent which approximated the land value of the asset due to the age of construction and lack of near term leasing prospects for the building.


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10.Stock Based Compensation
Deferred Stock Awards

From time to time, Piedmont has granted deferred stock awards to its employees. The awards are determined by the Compensation Committee of the board of directors of Piedmont and typically vest ratably over a multi-year period. In addition, Piedmont has adopted a multi-year performance share program for certain of its employees whereby shares may be earned based on the relative performance of Piedmont's total stockholder return as compared with a predetermined peer group's total stockholder return over the same multi-year period. Shares are not awarded until after the end of the third year in the performance period and vest immediately upon award.

A rollforward of Piedmont's deferred stock award activity for the six months ended June 30, 2014 is as follows:

 
Shares
 
Weighted-Average Grant Date Fair Value
Unvested Deferred Stock Awards as of December 31, 2013
265,139

 
$
18.65

Deferred Stock Awards Granted During Six Months Ended June 30, 2014
292,318

 
$
17.78

Adjustment to Estimated Future Grants of Performance Share Awards During Six Months Ended June 30, 2014
103,479

 
$
20.73

Deferred Stock Awards Vested During Six Months Ended June 30, 2014
(171,468
)
 
$
18.63

Deferred Stock Awards Forfeited During Six Months Ended June 30, 2014
(2,530
)
 
$
18.75

Unvested Deferred Stock Awards as of June 30, 2014
486,938

 
$
18.58


The following table provides additional information regarding stock award activity during the three and six months ended June 30, 2014 and 2013, respectively (in thousands except for per share data):

 
Three Months Ended
 
Six Months Ended
 
June 30,
2014
 
June 30,
2013
 
June 30,
2014
 
June 30,
2013
Weighted-Average Grant Date Fair Value of Shares Granted During the Period
$
18.51

 
$
19.47

 
$
17.78

 
$
19.47

Total Grant Date Fair Value of Shares Vested During the Period
$
3,191

 
$
3,839

 
$
3,195

 
$
3,839

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

 
$
103

 
$
—

 
$
103


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


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A detail of Piedmont’s outstanding employee deferred stock awards as of June 30, 2014 is as follows:

Date of grant
 
Type of Award
 
Net Shares
Granted (1)
 
Grant
Date Fair
Value
 
Vesting Schedule
 
Unvested Shares as of June 30, 2014
 
April 4, 2012
 
Deferred Stock Award
 
171,346

 
$
17.53

 
Of the shares granted, 25% vested on the date of grant, and 25% vested or will vest on April 4, 2013, 2014, and 2015, respectively.
 
61,290

 
April 4, 2012
 
Fiscal Year 2012-2014 Performance Share Program
 
—

 
$
17.42

 
Shares awarded, if any, will vest immediately upon determination of award in 2015.
 
—

(2) 
April 2, 2013
 
Deferred Stock Award
 
132,857

 
$
19.47

 
Of the shares granted, 25% vested on the date of grant, and 25% vested or will vest on April 2, 2014, 2015, and 2016, respectively.
 
77,806

 
April 2, 2013
 
Fiscal Year 2013-2015 Performance Share Program
 
—

 
$
18.91

 
Shares awarded, if any, will vest immediately upon determination of award in 2016.
 
—

(2) 
January 3, 2014
 
Deferred Stock Award
 
103,345

 
$
16.45

 
Of the shares granted, 20% will vest on January 3, 2015, 2016, 2017, 2018, and 2019, respectively.
 
103,345

 
May 9, 2014
 
Deferred Stock Award
 
170,896

 
$
18.51

 
Of the shares granted, 25% vested on the date of grant, and 25% vested or will vest on May 9, 2015, 2016, and 2017, respectively.
 
141,018

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

 
$
20.73

 
Shares awarded, if any, will vest immediately upon determination of award in 2017.
 
103,479

(2) 
Total
 
 
 
 
 
 
 
 
 
486,938

 

(1) 
Amounts reflect the total grant, net of shares surrendered upon vesting to satisfy required minimum tax withholding obligations through June 30, 2014.
(2) 
Estimated based on Piedmont's cumulative total stockholder return ("TSR") for the respective performance period through June 30, 2014. Such estimates are subject to change in future periods based on both Piedmont's and its peers' stock performance and dividends paid.

During the three months ended June 30, 2014 and 2013, respectively, Piedmont recognized approximately $2.5 million and $1.7 million of compensation expense related to deferred stock awards, of which $1.1 million and $0.5 million related to the amortization of unvested shares, respectively. During the six months ended June 30, 2014 and 2013, respectively, Piedmont recognized approximately $3.1 million and $2.3 million of compensation expense related to stock awards, of which $1.7 million and $1.1 million related to the amortization of unvested shares, respectively. During the six months ended June 30, 2014, a net total of 130,828 shares were issued to employees, directors, and officers. As of June 30, 2014, approximately $4.7 million of unrecognized compensation cost related to unvested deferred stock awards remained, which Piedmont will record in its consolidated statements of income over a weighted-average vesting period of approximately two years.

11.Earnings Per Share

There are no adjustments to “Net income attributable to Piedmont” or “Income from continuing operations” for the diluted earnings per share computations.

Net income per share-basic is calculated as net income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Net income per share-diluted is calculated as net income available to common 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

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Table of Contents

outstanding. Certain current quarter unvested deferred stock awards are not included in the calculation because they would be anti-dilutive and have no effect for the periods presented.

The following table reconciles the denominator for the basic and diluted earnings per share computations shown on the consolidated statements of income for the three and six months ended June 30, 2014 and 2013, respectively (in thousands):

 
Three Months Ended
 
Six Months Ended
 
June 30, 2014
 
June 30, 2013
 
June 30, 2014
 
June 30, 2013
Weighted-average common shares – basic
154,319
 
167,586
 
154,583
 
167,571
Plus incremental weighted-average shares from time-vested conversions:
 
 
 
 
 
 
 
Deferred stock awards
126
 
128
 
145
 
166
Weighted-average common shares – diluted
154,445
 
167,714
 
154,728
 
167,737


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12.Guarantor and Non-Guarantor Financial Information

The following condensed consolidating financial information for Piedmont Operating Partnership, L.P. (the "Issuer"), Piedmont Office Realty Trust, Inc. (the "Guarantor"), and the other directly and indirectly owned subsidiaries of the Guarantor (the "Non-Guarantor Subsidiaries") is provided pursuant to the requirements of Rule 3-10 of Regulation S-X regarding financial statements of guarantors and issuers of guaranteed registered securities. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions, including transactions with the Non-Guarantor Subsidiaries.


23
Table of Contents

Condensed Consolidated Balance Sheets
As of June 30, 2014
(in thousands)
Issuer
 
Guarantor
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets:
 
 
 
 
 
 
 
 
 
Real estate assets, at cost:
 
 
 
 
 
 
 
 
 
Land
$
82,922

 
$
—

 
$
607,637

 
$
—

 
$
690,559

Buildings and improvements, less accumulated depreciation
452,262

 
—

 
2,719,993

 
(300
)
 
3,171,955

Intangible lease assets, less accumulated amortization
2,084

 
—

 
68,963

 
—

 
71,047

Construction in progress
10,560

 
—

 
24,208

 
—

 
34,768

Total real estate assets
547,828

 
—

 
3,420,801

 
(300
)
 
3,968,329

Investments in and amounts due from unconsolidated joint ventures
7,549

 
—

 
—

 
—

 
7,549

Cash and cash equivalents
5,099

 
150

 
3,314

 
—

 
8,563

Tenant and straight-line rent receivables, net
34,072

 
—

 
146,962

 
—

 
181,034

Advances to affiliates
5,961,447

 
1,282,506

 
—

 
(7,243,953
)
 
—

Investment in subsidiary
—

 
3,942,084

 
195

 
(3,942,279
)
 
—

Notes receivable
160,100

 
2,000

 
23,889

 
(185,989
)
 
—

Prepaid expenses, restricted cash, escrows, and other assets
14,934

 
186

 
18,970

 
(1,047
)
 
33,043

Goodwill
180,097

 
—

 
—

 
—

 
180,097

Deferred financing costs, net
7,847

 
—

 
539

 
—

 
8,386

Deferred lease costs, net
32,372

 
—

 
242,453

 
—

 
274,825

Total assets
$
6,951,345

 
$
5,226,926

 
$
3,857,123

 
$
(11,373,568
)
 
$
4,661,826

Liabilities:
 
 
 
 
 
 
 
 
 
Debt
$
1,681,298

 
$
—

 
$
611,777

 
$
(185,990
)
 
$
2,107,085

Accounts payable, accrued expenses, and accrued capital expenditures
17,485

 
339

 
109,496

 
(1,047
)
 
126,273

Advances from affiliates
347,240

 
4,911,155

 
2,035,347

 
(7,293,742
)
 
—

Deferred income
6,214

 
—

 
15,709

 
—

 
21,923

Intangible lease liabilities, net
—

 
—

 
43,389

 
—

 
43,389

Interest rate swaps
5,971

 
—

 
—

 
—

 
5,971

Total liabilities
2,058,208

 
4,911,494

 
2,815,718

 
(7,480,779
)
 
2,304,641

Stockholders’ Equity:
 
 
 
 
 
 
 
 
 
Common stock
—

 
1,543

 
—

 
—

 
1,543

Additional paid-in capital
3,942,083

 
3,668,836

 
195

 
(3,942,278
)
 
3,668,836

Retained/(cumulative distributions in excess of) earnings
941,950

 
(3,354,947
)
 
1,039,601

 
49,489

 
(1,323,907
)
Other comprehensive loss
9,104

 
—

 
—

 
—

 
9,104

Piedmont stockholders’ equity
4,893,137

 
315,432

 
1,039,796

 
(3,892,789
)
 
2,355,576

Noncontrolling interest
—

 
—

 
1,609

 
—

 
1,609

Total stockholders’ equity
4,893,137

 
315,432

 
1,041,405

 
(3,892,789
)
 
2,357,185

Total liabilities and stockholders’ equity
$
6,951,345

 
$
5,226,926

 
$
3,857,123

 
$
(11,373,568
)
 
$
4,661,826


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Table of Contents

Condensed Consolidated Balance Sheets
As of December 31, 2013
(in thousands)
Issuer
 
Guarantor
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets:
 
 
 
 
 
 
 
 
 
Real estate assets, at cost:
 
 
 
 
 
 
 
 
 
Land
$
88,054

 
$
—

 
$
600,707

 
$
—

 
$
688,761

Buildings and improvements, less accumulated depreciation
477,712

 
—

 
2,687,163

 
(300
)
 
3,164,575

Intangible lease assets, less accumulated amortization
2,356

 
—

 
72,021

 
—

 
74,377

Construction in progress
4,627

 
—

 
19,643

 
—

 
24,270

Total real estate assets
572,749

 
—

 
3,379,534

 
(300
)
 
3,951,983

Investments in and amounts due from unconsolidated joint ventures
14,388

 
—

 
—

 
—

 
14,388

Cash and cash equivalents
3,352

 
150

 
3,471

 
—

 
6,973

Tenant receivables, net
36,142

 
—

 
134,409

 
—

 
170,551

Advances to affiliates
5,312,384

 
1,288,547

 
—

 
(6,600,931
)
 
—

Investment in subsidiary
—

 
4,003,806

 
197

 
(4,004,003
)

—

Notes receivable
160,000

 
2,000

 
23,890

 
(185,890
)
 
—

Prepaid expenses, restricted cash, escrows, and other assets
5,319

 
44

 
20,779

 
(977
)
 
25,165

Goodwill
180,097

 
—

 
—

 
—

 
180,097

Interest rate swaps
24,176

 
—

 
—

 
—

 
24,176

Deferred financing costs, net
7,764

 
—

 
995

 
—

 
8,759

Deferred lease costs, net
34,413

 
—

 
249,583

 
—

 
283,996

Total assets
$
6,350,784

 
$
5,294,547

 
$
3,812,858

 
$
(10,792,101
)
 
$
4,666,088

Liabilities:
 
 
 
 
 
 
 
 
 
Debt
$
1,038,570

 
$
—

 
$
1,149,525

 
$
(185,890
)
 
$
2,002,205

Accounts payable, accrued expenses, and accrued capital expenditures
13,824

 
2,376

 
113,595

 
(977
)
 
128,818

Advances from affiliates
312,881

 
4,863,672

 
1,467,334

 
(6,643,887
)
 
—