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 March 31, 2016
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 April 28, 2016:
145,115,847 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.


2
Table of Contents

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"), or its executive officers on Piedmont’s behalf, may from time to time make forward-looking statements in reports and other documents Piedmont files with the Securities and Exchange Commission or in connection with other written or oral statements made to the press, potential investors, or others. Statements regarding future events and developments and Piedmont’s future performance, as well as management’s expectations, beliefs, plans, estimates, or projections relating to the future, are forward-looking statements within the meaning of these laws. Forward-looking statements include statements preceded by, followed by, or that include the words “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. Examples of such statements in this report include descriptions of our real estate, 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 demands for office space in the markets in which Piedmont operates, competitive conditions, and general economic conditions. These assumptions could prove inaccurate. The forward-looking statements also involve risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. Many of these factors are beyond Piedmont’s ability to control or predict. Such factors include, but are not limited to, the following:

•
Economic, regulatory, and/or socio-economic changes (including accounting standards) that impact the real estate market generally, or that could affect patterns of use of commercial office space, may cause our operating results to suffer and decrease the value of our real estate properties;
•
The impact of competition on our efforts to renew existing leases or re-let space on terms similar to existing leases;
•
Changes in the economies and other conditions affecting the office sector in general and the specific markets in which we operate, particularly in Washington, D.C., the New York metropolitan area, and Chicago where we have high concentrations of office properties;
•
Lease terminations or lease defaults, particularly by one of our large lead tenants;
•
Adverse market and economic conditions may negatively affect us and could cause us to recognize impairment charges on both our long-lived assets or goodwill or otherwise impact our performance;
•
The success of our real estate strategies and investment objectives, including our ability to identify and consummate suitable acquisitions and divestitures;
•
The illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our properties;
•
Acquisitions of properties may have unknown risks and other liabilities at the time of acquisition;
•
Development and construction delays and resultant increased costs and risks may negatively impact our operating results;
•
Our real estate development strategies may not be successful;
•
Future terrorist attacks in the major metropolitan areas in which we own properties could significantly impact the demand for, and value of, our properties;
•
Costs of complying with governmental laws and regulations;
•
Additional risks and costs associated with directly managing properties occupied by government tenants;
•
Future offerings of debt or equity securities may adversely affect the market price of our common stock;
•
Changes in market interest rates may have an effect on the value of our common stock;
•
Uncertainties associated with environmental and other regulatory matters;
•
Potential changes in political environment and reduction in federal and/or state funding of our governmental tenants;
•
We may be subject to litigation, which could have a material adverse effect on our financial condition;
•
Changes in tax laws impacting REITs and real estate in general, as well as Piedmont’s ability to continue to qualify as a REIT under the Internal Revenue Code of 1986, as amended; 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, 2015.
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 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 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, 2015. Piedmont’s results of operations for the three months ended March 31, 2016 are not necessarily indicative of the operating results expected for the full year.

4
Table of Contents

PIEDMONT OFFICE REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share and per share amounts)
 
(Unaudited)
 
 
 
March 31,
2016
 
December 31,
2015
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
685,850

 
$
685,850

Buildings and improvements, less accumulated depreciation of $951,484 and $922,019 as of March 31, 2016 and December 31, 2015, respectively
2,893,233

 
2,904,303

Intangible lease assets, less accumulated amortization of $98,314 and $93,012 as of March 31, 2016 and December 31, 2015, respectively
78,122

 
84,663

Construction in progress
25,901

 
20,990

Total real estate assets
3,683,106

 
3,695,806

Investments in and amounts due from unconsolidated joint ventures
7,483

 
7,577

Cash and cash equivalents
4,732

 
5,441

Tenant receivables, net of allowance for doubtful accounts of $136 and $83 as of March 31, 2016 and December 31, 2015, respectively
22,040

 
26,339

Straight-line rent receivables
161,087

 
152,122

Notes receivable
—

 
45,400

Restricted cash and escrows
591

 
5,174

Prepaid expenses and other assets
24,708

 
24,843

Goodwill
180,097

 
180,097

Deferred lease costs, less accumulated amortization of $159,518 and $147,862 as of March 31, 2016 and December 31, 2015, respectively
271,173

 
291,736

Total assets
$
4,355,017

 
$
4,434,535

Liabilities:
 
 
 
Unsecured debt, net of discount and unamortized debt issuance costs of $12,201 and $12,779 as of March 31, 2016 and December 31, 2015, respectively
$
1,626,799

 
$
1,528,221

Secured debt, net of premiums and unamortized debt issuance costs of $1,289 and $1,319 as of March 31, 2016 and December 31, 2015, respectively
376,119

 
501,289

Accounts payable, accrued expenses, and accrued capital expenditures
103,894

 
128,465

Deferred income
28,143

 
27,270

Intangible lease liabilities, less accumulated amortization of $44,242 and $42,315 as of March 31, 2016 and December 31, 2015, respectively
40,926

 
42,853

Interest rate swaps
19,473

 
9,993

Total liabilities
2,195,354

 
2,238,091

Commitments and Contingencies
—

 
—

Stockholders’ Equity:
 
 
 
Shares-in-trust, 150,000,000 shares authorized; none outstanding as of March 31, 2016 or December 31, 2015
—

 
—

Preferred stock, no par value, 100,000,000 shares authorized; none outstanding as of March 31, 2016 or December 31, 2015
—

 
—

Common stock, $.01 par value, 750,000,000 shares authorized; 145,093,025 and 145,511,644 shares issued and outstanding as of March 31, 2016 and December 31, 2015, respectively
1,451

 
1,455

Additional paid-in capital
3,671,055

 
3,669,977

Cumulative distributions in excess of earnings
(1,505,704
)
 
(1,477,674
)
Other comprehensive income/(loss)
(8,168
)
 
1,661

Piedmont stockholders’ equity
2,158,634

 
2,195,419

Noncontrolling interest
1,029

 
1,025

Total stockholders’ equity
2,159,663

 
2,196,444

Total liabilities and stockholders’ equity
$
4,355,017

 
$
4,434,535

See accompanying notes

5
Table of Contents

PIEDMONT OFFICE REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except for share and per share amounts)
 
 
(Unaudited)
 
Three Months Ended
 
March 31,
 
2016
 
2015
Revenues:
 
 
 
Rental income
$
114,738

 
$
117,807

Tenant reimbursements
22,751

 
31,390

Property management fee revenue
523

 
562

 
138,012

 
149,759

Expenses:
 
 
 
Property operating costs
54,188

 
64,236

Depreciation
31,782

 
36,232

Amortization
17,806

 
14,670

General and administrative
7,864

 
6,407

 
111,640

 
121,545

Real estate operating income
26,372

 
28,214

Other income (expense):
 
 
 
Interest expense
(16,385
)
 
(19,016
)
Other income/(expense)
294

 
(181
)
Equity in income of unconsolidated joint ventures
115

 
159

Gain/(loss) on sale of real estate assets
(20
)
 
10,073

Net income
10,376

 
19,249

Less: Net income applicable to noncontrolling interest
(4
)
 
(4
)
Net income applicable to Piedmont
$
10,372

 
$
19,245

Per share information – basic and diluted:
 
 
 
Net income applicable to common stockholders
$
0.07

 
$
0.12

Weighted-average common shares outstanding – basic
145,276,476

 
154,339,029

Weighted-average common shares outstanding – diluted
145,791,365

 
154,580,335

See accompanying notes

6
Table of Contents


PIEDMONT OFFICE REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
 
(Unaudited)
 
Three Months Ended
 
March 31,
 
2016
 
2015
 
 
 
 
 
 
 
 
Net income applicable to Piedmont
 
 
$
10,372

 
 
 
$
19,245

Other comprehensive income/(loss):
 
 
 
 
 
 
 
Effective portion of loss on derivative instruments that are designated and qualify as cash flow hedges (See Note 5)
(10,961
)
 
 
 
(15,205
)
 
 
Plus: Reclassification of previously recorded loss included in net income (See Note 5)
1,133

 


 
1,467

 


Loss on investment in available for sale securities
(1
)
 
 
 
—

 
 
Other comprehensive loss
 
 
(9,829
)
 
 
 
(13,738
)
Comprehensive income applicable to Piedmont
 
 
$
543

 
 
 
$
5,507



See accompanying notes

7
Table of Contents

PIEDMONT OFFICE REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2015
AND FOR THE THREE MONTHS ENDED MARCH 31, 2016 (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, 2014
154,324

 
$
1,543

 
$
3,666,182

 
$
(1,365,620
)
 
$
8,301

 
$
1,609

 
$
2,312,015

Share repurchases as part of an announced plan
(8,980
)
 
(90
)
 
—

 
(158,770
)
 
—

 
—

 
(158,860
)
Offering costs
—

 
—

 
(326
)
 
—

 
—

 
—

 
(326
)
Redemption of noncontrolling interest in consolidated variable interest entity
—

 
—

 
54

 
—

 
—

 
—

 
54

Reallocation of noncontrolling interest of subsidiary
—

 
—

 
1,128

 
—

 
—

 
(584
)
 
544

Dividends to common stockholders ($0.84 per share), dividends to stockholders of subsidiary, and dividends reinvested
—

 
—

 
(242
)
 
(126,274
)
 
—

 
(15
)
 
(126,531
)
Shares issued and amortized under the 2007 Omnibus Incentive Plan, net of tax
168

 
2

 
3,181

 
—

 
—

 
—

 
3,183

Net income applicable to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
15

 
15

Net income applicable to Piedmont
—

 
—

 
—

 
172,990

 
—

 
—

 
172,990

Other comprehensive loss
—

 
—

 
—

 
—

 
(6,640
)
 
—

 
(6,640
)
Balance, December 31, 2015
145,512

 
1,455

 
3,669,977

 
(1,477,674
)
 
1,661

 
1,025

 
2,196,444

Share repurchases as part of an announced plan
(462
)
 
(5
)
 
—

 
(7,938
)
 
—

 
—

 
(7,943
)
Offering costs
—

 
—

 
(42
)
 
—

 
—

 
—

 
(42
)
Dividends to common stockholders ($0.21 per share), dividends to stockholders of subsidiary, and dividends reinvested
—

 
—

 
(69
)
 
(30,464
)
 
—

 
—

 
(30,533
)
Shares issued and amortized under the 2007 Omnibus Incentive Plan, net of tax
43

 
1

 
1,189

 
—

 
—

 
—

 
1,190

Net income applicable to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
4

 
4

Net income applicable to Piedmont
—

 
—

 
—

 
10,372

 
—

 
—

 
10,372

Other comprehensive loss
—

 
—

 
—

 
—

 
(9,829
)
 
—

 
(9,829
)
Balance, March 31, 2016
145,093

 
$
1,451

 
$
3,671,055

 
$
(1,505,704
)
 
$
(8,168
)
 
$
1,029

 
$
2,159,663


See accompanying notes

8
Table of Contents

PIEDMONT OFFICE REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) 
 
(Unaudited)
 
Three Months Ended
 
March 31,
 
2016
 
2015
Cash Flows from Operating Activities:
 
 
 
Net income
$
10,376

 
$
19,249

Operating distributions received from unconsolidated joint ventures
209

 
137

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
31,782

 
36,232

Amortization of debt issuance costs
425

 
387

Other amortization
17,685

 
14,806

Stock compensation expense
2,469

 
901

Equity in income of unconsolidated joint ventures
(115
)
 
(159
)
Loss/(gain) on sale of real estate assets
20

 
(10,073
)
Changes in assets and liabilities:
 
 
 
Increase in tenant and straight-line rent receivables, net
(5,131
)
 
(11,234
)
Decrease/(increase) in restricted cash and escrows
4,409

 
(148
)
(Increase)/decrease in prepaid expenses and other assets
(18
)
 
1,037

Decrease in accounts payable and accrued expenses
(13,225
)
 
(11,074
)
Increase in deferred income
822

 
3,745

Net cash provided by operating activities
49,708

 
43,806

Cash Flows from Investing Activities:
 
 
 
Acquisition of real estate assets and related intangibles
—

 
(41,554
)
Capitalized expenditures, net of accruals
(26,537
)
 
(39,804
)
Redemption of noncontrolling interest in unconsolidated variable interest entity
—

 
(4,000
)
Net sales proceeds from wholly-owned properties
45,400

 
25,803

Deferred lease costs paid
(2,860
)
 
(4,414
)
Net cash provided by/(used in) investing activities
16,003

 
(63,969
)
Cash Flows from Financing Activities:
 
 
 
Debt issuance costs paid
(99
)
 
(242
)
Proceeds from debt
178,000

 
257,575

Repayments of debt
(205,262
)
 
(209,254
)
Costs of issuance of common stock
(42
)
 
(90
)
Shares withheld to pay tax obligations related to employee stock compensation
(541
)
 
(176
)
Repurchases of common stock as part of announced plan
(7,943
)
 
—

Dividends paid and discount on dividend reinvestments
(30,533
)
 
(32,477
)
Net cash (used in)/provided by financing activities
(66,420
)
 
15,336

Net decrease in cash and cash equivalents
(709
)
 
(4,827
)
Cash and cash equivalents, beginning of period
5,441

 
12,306

Cash and cash equivalents, end of period
$
4,732

 
$
7,479

 
 
 
 
Supplemental Disclosures of Significant Noncash Investing and Financing Activities:
 
 
 
Accrued capital expenditures and deferred lease costs
$
11,876

 
$
12,946


See accompanying notes

9
Table of Contents

PIEDMONT OFFICE REALTY TRUST, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
(unaudited)

1.Organization
Piedmont Office Realty Trust, Inc. (“Piedmont”) (NYSE: PDM) is a Maryland corporation that operates in a manner so as to qualify as a real estate investment trust (“REIT”) for federal income tax purposes and engages in the acquisition, development, management, and ownership of commercial real estate properties 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 March 31, 2016, Piedmont owned 69 office properties, one redevelopment asset and two development assets, and one building through an unconsolidated joint venture. Piedmont's 69 office properties comprise 18.9 million square feet of primarily Class A commercial office space, and were 91.7% leased as of March 31, 2016. As of March 31, 2016, approximately 80% of Piedmont's Annualized Lease Revenue was generated from select office sub-markets in the following cities: Atlanta, Boston, Chicago, Dallas, Minneapolis, New York, Orlando, and Washington, D.C.

Piedmont internally evaluates all of the 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.

Piedmont’s consolidated financial statements include the accounts of Piedmont, Piedmont’s wholly-owned subsidiaries, any variable interest entity ("VIE") of 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, 2015.

All inter-company 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 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.


10
Table of Contents

Use of Estimates

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

Income Taxes

Piedmont has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, and has operated as such, beginning with its taxable year ended December 31, 1998. To qualify as a REIT, Piedmont must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of its annual REIT taxable income. As a REIT, Piedmont is generally not subject to federal income taxes. 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.

Accounting Pronouncements Adopted during the Quarter

Piedmont early adopted the provisions of Financial Accounting Standards Board (the "FASB") Accounting Standards Update No. 2016-09, Compensation- Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). The provisions in ASU 2016-09 simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The implementation of ASU 2016-09 resulted in the reclassification of approximately $0.2 million from cash outflows from operating activities to cash outflows from financing activities for the three months ended March 31, 2015. Additionally, Piedmont elected to implement the guidance issued in Accounting Standards Update No. 2015-05, Intangibles- Goodwill and Other- Internal-Use Software (Subtopic 350-40) “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement on a prospective basis.

Other Recent Accounting Pronouncements

The FASB has issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09") and Accounting Standards Update No. 2016-08, Revenue from Contracts with Customers (Topic 606) Principal versus Agent Considerations (Reporting Revenue Gross versus Net) ("ASU 2016-08"). The amendments in ASU 2014-09, which are further clarified in ASU 2016-08, 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 and ASU 2016-08 are effective in the first quarter of 2018 for Piedmont, and Piedmont is currently evaluating the potential impact, if any, of adoption.

The FASB has issued Accounting Standards Update No. 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"). The amendments in ASU 2016-01 require equity investments, except those accounted for under the equity method of accounting, to be measured at estimated fair value with changes in fair value recognized in net income. Additionally, ASU 2016-01 simplifies the impairment assessment of equity investments, and eliminates certain disclosure requirements. The amendments in ASU 2016-01 are effective in the first quarter of 2018 for Piedmont, and Piedmont is currently evaluating the potential impact of adoption.

The FASB has issued Accounting Standards Update No. 2016-02, Leases (Topic 842), ("ASU 2016-02"). The amendments in ASU 2016-02 fundamentally change the definition of a lease, as well as the accounting for operating leases by requiring leasees to recognize assets and liabilities which arise from the lease, consisting of a liability to make lease payments (the lease liability) and a right-of-use asset, representing the right to use the leased asset over the term of the lease. Accounting for leases for lessors is substantially unchanged from prior practice, which means continuing to recognize lease revenue on a straight-line basis. The amendments in ASU 2016-02 are effective in the first quarter of 2019 for Piedmont, and Piedmont is currently evaluating the potential impact of adoption.

The FASB has issued Accounting Standards Update No. 2016-05, Derivatives and Hedging (Topic 815), Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships ("ASU 2016-05"). The amendments in ASU 2016-05 clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require de-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The amendments in ASU 2016-05 are effective in the first quarter of 2017 for Piedmont, and Piedmont does not anticipate any material

11
Table of Contents

impact to its consolidated financial statements as a result of adoption.


3.Debt

During the three months ended March 31, 2016, Piedmont repaid the outstanding balance of its $125.0 Million Fixed-Rate Loan utilizing the $500 Million Unsecured 2015 Line of Credit and cash on hand. As such, during the three months ended March 31, 2016, Piedmont incurred net additional working capital borrowings on its $500 Million Unsecured 2015 Line of Credit of approximately $98.0 million. As of March 31, 2016, Piedmont believes it was in compliance with all financial covenants associated with its debt instruments. Finally, see Note 6 for a description of Piedmont’s estimated fair value of debt as of March 31, 2016.

Piedmont made interest payments on all debt facilities, including interest rate swap cash settlements, of approximately $19.3 million and $20.4 million for the three months ended March 31, 2016 and 2015, respectively. Piedmont capitalized interest of approximately $1.2 million and $0.8 million for the three months ended March 31, 2016 and 2015, respectively.

The following table summarizes the terms of Piedmont’s indebtedness outstanding as of March 31, 2016 and December 31, 2015 (in thousands):
Facility
 
Collateral
 
Stated Rate(1)
 
Maturity
 
Amount Outstanding as of
 
March 31,
2016
 
December 31,
2015
Secured (Fixed)
 
 
 
 
 
 
 
 
 
 
$125.0 Million Fixed-Rate Loan
 
Four Property Collateralized Pool
 
5.50
%
 
4/1/2016
 
$
—

 
$
125,000

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

 
42,525

$140.0 Million WDC Fixed-Rate Loans
 
1201 & 1225 Eye Street
 
5.76
%
 
11/1/2017
 
140,000

 
140,000

$35.0 Million Fixed-Rate Loan
 
5 Wall Street
 
5.55
%
(2) 
9/1/2021
 
32,305

 
32,445

$160.0 Million Fixed-Rate Loan
 
1901 Market Street
 
3.48
%
(3) 
7/5/2022
 
160,000

 
160,000

Net premium and unamortized debt issuance costs
 
 
 
 
 
 
 
1,289

 
1,319

Subtotal/Weighted Average (4)
 
 
 
4.76
%
 
 
 
376,119

 
501,289

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

(5) 
5/15/2018
 
170,000

 
170,000

$300 Million Unsecured 2013 Term Loan
 
 
 
LIBOR + 1.20%

(6) 
1/31/2019
 
300,000

 
300,000

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

(7) 
6/18/2019
(8) 
119,000

 
21,000

$300 Million Unsecured 2011 Term Loan
 
 
 
LIBOR +  1.15%

(9) 
1/15/2020
 
300,000

 
300,000

$350 Million Senior Notes
 
 
 
3.40
%
(10) 
6/01/2023
 
350,000

 
350,000

$400 Million Senior Notes
 
 
 
4.45
%
(11) 
3/15/2024
 
400,000

 
400,000

Discounts and unamortized debt issuance costs
 
 
 
 
 
 
 
(12,201)

 
(12,779)

Subtotal/Weighted Average (4)
 
 
 
3.02
%
 
 
 
1,626,799

 
1,528,221

Total/ Weighted Average (4)
 
 
 
3.35
%
 
 
 
$
2,002,918

 
$
2,029,510


12
Table of Contents


(1) 
Other than the $35 Million Fixed-Rate Loan, all of Piedmont’s outstanding debt as of March 31, 2016 and December 31, 2015 is interest-only.
(2) 
The $35 Million Fixed-Rate Loan has a contractual fixed rate of 5.55% ; however, the amortization of the premium recorded in order to adjust the note to its estimated fair value, results in an effective interest rate of 3.75%.
(3) 
The $160 Million Fixed-Rate Loan has a fixed coupon rate of 3.48%, however, after consideration of the impact of settled interest rate swap agreements, the effective interest rate on this debt is 3.58%.
(4) 
Weighted average is based on contractual balance of outstanding debt and interest rates in the table as of March 31, 2016.
(5) 
On a periodic basis, Piedmont may select from multiple interest rate options, including the prime rate and various-length LIBOR locks. All LIBOR selections are subject to an additional spread (1.125% as of March 31, 2016) over the selected rate based on Piedmont’s current credit rating. The principal balance as of March 31, 2016 consisted of the 30-day LIBOR rate of 0.44% (subject to the additional spread mentioned above).
(6) 
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 on this facility to 2.78%.
(7) 
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 (1.00% as of March 31, 2016) over the selected rate based on Piedmont’s current credit rating. The outstanding balance as of March 31, 2016 consists of 30-day LIBOR draws at an average rate of 0.45% (subject to the additional spread mentioned above).
(8) 
Piedmont may extend the term for up to one additional year (through two available six month extensions to a final extended maturity date of June 18, 2020) provided Piedmont is not then in default and upon payment of extension fees.
(9) 
The $300 Million Unsecured 2011 Term Loan 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, the rate on this facility to 2.39% through the original maturity date of November 22, 2016 and 3.35% from November 22, 2016 to January 15, 2020.
(10) 
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%.
(11) 
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%.


13
Table of Contents

4.Variable Interest Entities
Variable interest holders who have the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and have the obligation to absorb the majority of losses of the entity or the right to receive significant benefits of the entity must consolidate the VIE. Each of the following VIEs has the sole purpose of holding land and office buildings and their resulting operations, and are classified in the accompanying consolidated balance sheets in the same manner as Piedmont’s wholly-owned properties.
A summary of Piedmont’s interests in, and consolidation treatment of, its VIEs and their related carrying values as of March 31, 2016 and December 31, 2015 is as follows (net carrying amount in millions):

Entity
 
Piedmont’s
%
Ownership
of Entity
 
Related
Building
 
Consolidated/
Unconsolidated
 
Net Carrying
Amount as of
March 31, 2016
 
Net Carrying
Amount as of
December 31,
2015
 
Primary Beneficiary
Considerations
1201 Eye Street N.W. Associates, LLC
 
49.5%
 
1201 Eye Street
 
Consolidated
 
$
(7.5
)
 
$
(7.4
)
 
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 N.W. Associates, LLC
 
49.5%
 
1225 Eye Street
 
Consolidated
 
$
6.7

 
$
3.8

 
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
 
$
253.2

 
$
251.4

 
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 100% of the economic benefits of the property until such returns are met.
Piedmont TownPark Land, LLC (1)
 
100%
 
Land Parcel Adjacent to 400 and 500 TownPark
 
Consolidated
 
$
6.0

 
$
6.0

 
The equity participation and service fee agreement includes equity participation rights for the third party manager if certain defined events occur and 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 events occur and returns are achieved. (1)

(1) 
As of April 25, 2016, Piedmont terminated the equity participation rights agreement related to Piedmont TownPark Land, LLC., without any pay out required.

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.


14
Table of Contents

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. As of March 31, 2016, Piedmont was party to various interest rate swap agreements which fully hedge the variable cash flows associated with its $300 Million Unsecured 2011 Term Loan and its $300 Million Unsecured 2013 Term Loan. Piedmont continues to hold forward starting interest rate swap agreements related to the extension period of the $300 Million Unsecured 2011 Term Loan, and the maximum length of time over which Piedmont is hedging its exposure to the variability in future cash flows for forecasted transactions is 45 months.

A detail of Piedmont’s interest rate derivatives outstanding as of March 31, 2016 is as follows:

Interest Rate Derivatives:
 
Number of Swap Agreements
 
Associated Debt Instrument
 
Total Notional Amount
(in millions)
 
Effective Date
 
Maturity Date
Interest rate swaps
 
4
 
$300 Million Unsecured 2011 Term Loan
 
$
300

 
11/22/2011
 
11/22/2016
Interest rate swaps
 
4
 
$300 Million Unsecured 2013 Term Loan
 
200

 
1/30/2014
 
1/31/2019
Interest rate swaps
 
2
 
$300 Million Unsecured 2013 Term Loan
 
100

 
8/29/2014
 
1/31/2019
Forward starting interest rate swaps
 
3
 
$300 Million Unsecured 2011 Term Loan
 
300

 
11/22/2016
 
1/15/2020
Total
 
 
 
 
 
$
900

 
 
 
 

Piedmont presents its interest rate derivatives on its consolidated balance sheets on a gross basis as interest rate swap assets and interest rate swap liabilities. A detail of Piedmont’s interest rate derivatives on a gross and net basis as of March 31, 2016 and December 31, 2015, respectively, is as follows (in thousands):

Interest rate swaps classified as:
March 31,
2016
 
December 31,
2015
Gross derivative assets
$
—

 
$
—

Gross derivative liabilities
19,473

 
9,993

Net derivative liability
$
19,473

 
$
9,993


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 estimated fair value of these derivatives 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. In addition, in conjunction with the issuance of various unsecured notes, Piedmont settled various forward starting swap agreements for gains/losses which were recorded as accumulated other comprehensive income and are being amortized as an offset to interest expense over the term of the respective notes on a straight line basis (which approximates the effective interest method).

The effective portion of Piedmont's interest rate derivatives, including the gain/(loss) on previously settled forward swaps, that were recorded in the accompanying consolidated statements of income for the three months ended March 31, 2016 and 2015, respectively, were as follows (in thousands):
 
Three Months Ended
Interest Rate Swaps in Cash Flow Hedging Relationships
March 31, 2016
 
March 31, 2015
Amount of loss recognized in OCI on derivative
$
(10,961
)
 
$
(15,205
)
Amount of previously recorded loss reclassified from accumulated OCI into interest expense
$
1,133

 
$
1,467



15
Table of Contents

Piedmont estimates that approximately $4.7 million will be reclassified from accumulated other comprehensive loss to interest expense over the next twelve months. Piedmont recognized no loss related to hedge ineffectiveness and terminations of its cash flow hedges during the three months ended March 31, 2016 and 2015, respectively.

Additionally. see Note 6 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 estimated fair values plus accrued interest, or approximately $19.9 million as of March 31, 2016. 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.Fair Value Measurement of Financial Instruments
Piedmont considers its cash and cash equivalents, tenant receivables, notes receivable, restricted cash and escrows, accounts payable and accrued expenses, interest rate swap agreements, and debt to meet the definition of financial instruments. The following table sets forth the carrying and estimated fair value for each of Piedmont’s financial instruments, as well as its level within the GAAP fair value hierarchy, as of March 31, 2016 and December 31, 2015, respectively (in thousands):

 
March 31, 2016
 
December 31, 2015
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)
$
4,732

 
$
4,732

 
Level 1
 
$
5,441

 
$
5,441

 
Level 1
Tenant receivables, net(1)
$
22,040

 
$
22,040

 
Level 1
 
$
26,339

 
$
26,339

 
Level 1
Notes receivable (1)
$
—

 
$
—

 
Level 1
 
$
45,400

 
$
45,400

 
Level 1
Restricted cash and escrows(1)
$
591

 
$
591

 
Level 1
 
$
5,174

 
$
5,174

 
Level 1
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses(1)
$
14,798

 
$
14,798

 
Level 1
 
$
13,188

 
$
13,188

 
Level 1
Interest rate swap liability
$
19,473

 
$
19,473

 
Level 2
 
$
9,993

 
$
9,993

 
Level 2
Debt
$
2,002,918

 
$
2,023,529

 
Level 2
 
$
2,029,510

 
$
2,039,139

 
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 March 31, 2016 and December 31, 2015; however, Piedmont's estimate of its estimated fair value is disclosed in the table above. Piedmont uses widely accepted valuation techniques including discounted cash flow analysis based on the contractual terms of the debt facilities, including the period to maturity of each instrument, and uses observable market-based inputs for similar debt facilities which have transacted recently in the market. Therefore, the estimated fair values determined are considered to be based on significant other observable inputs (Level 2). Scaling adjustments are made to these inputs to make them applicable to the remaining life of Piedmont's outstanding debt. Piedmont has not changed its valuation technique for estimating the fair value of its debt.

Piedmont’s interest rate swap and forward starting interest rate swap agreements presented above, and further discussed in Note 5, are classified as “Interest rate swap” liabilities in the accompanying consolidated balance sheets and were carried at estimated fair value as of March 31, 2016 and December 31, 2015. The valuation of these derivative instruments was determined using widely accepted valuation techniques including discounted cash flow analysis based on the contractual terms of the derivatives, including the period to maturity of each instrument, and uses observable market-based inputs, including interest rate curves and implied volatilities. Therefore, the estimated fair values determined are considered to be based on significant other observable inputs (Level 2). In addition, Piedmont considered both its own and the respective counterparties’ risk of nonperformance in determining the estimated fair value of its derivative financial instruments by estimating the current and potential future exposure under the derivative financial instruments that both Piedmont and the counterparties were at risk for as of the valuation date. The

16
Table of Contents

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 March 31, 2016 and December 31, 2015, this credit valuation adjustment did not comprise a material portion of the estimated fair value. Therefore, Piedmont believes that any unobservable inputs used to determine the estimated fair values of its derivative financial instruments are not significant to the fair value measurements in their entirety, and does not consider any of its derivative financial instruments to be Level 3 liabilities.

7.Commitments and Contingencies

Commitments Under Existing Lease 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 categories: (i) improvements which incrementally enhance the building's asset value by expanding its revenue generating capacity (“incremental capital expenditures”) and (ii) improvements which maintain the building's existing asset value and its revenue generating capacity (“non-incremental capital expenditures”). As of March 31, 2016, commitments for funding potential non-incremental capital expenditures over the next five years for tenant improvements totaled approximately $35.7 million related to Piedmont's existing lease portfolio over the respective lease terms, the majority of which Piedmont estimates may be required to be funded over the next three years based on when the underlying leases commence. For most of Piedmont’s leases, the timing of the actual funding of these tenant improvements is largely dependent upon tenant requests for reimbursement. In some cases, these obligations may expire with the leases without further recourse to Piedmont.

Additionally, as of March 31, 2016, commitments for incremental capital expenditures for tenant improvements associated with executed leases totaled approximately $42.4 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 no such reductions in reimbursement revenues related to such tenant audits/disputes during the three months ended March 31, 2016 or 2015, respectively.

8.Net Sales Proceeds from Property Dispositions

During the three months ended March 31, 2015, Piedmont sold the 3900 Dallas Parkway building located in Plano, Texas. The transaction resulted in net sales proceeds of $25.8 million and a gain on sale of $10.1 million which are included in the accompanying consolidated statements of cash flows and the consolidated statements of income, respectively.

Additionally, as part of the sale of the Copper Ridge Center building in May 2015, Piedmont accepted a secured promissory note from the buyer for $45.4 million. During the three months ended March 31, 2016, the note receivable was repaid in full and such proceeds are reflected in the accompanying consolidated statements of cash flows as net sales proceeds from the sale of wholly-owned properties.


9.Stock Based Compensation
From time to time, Piedmont has granted equity awards to all of its employees. The deferred stock awards are determined by the Compensation Committee of the board of directors of Piedmont and typically vest on the award anniversary date ratably over a multi-year period. Piedmont also has a multi-year performance share program for certain of its employees whereby equity awards may be earned based on the relative performance of Piedmont's total stockholder return ("TSR") 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 multi-year performance period and vest upon award.


17
Table of Contents

A rollforward of Piedmont's equity based award activity for the three months ended March 31, 2016 is as follows:

 
Shares
 
Weighted-Average Grant Date Fair Value
Unvested Stock Awards as of December 31, 2015
959,446

 
$
18.67

Increase in Estimated Potential Future Performance Share Awards
49,711

 
$
21.01

Performance Stock Awards Vested
(53,287
)
 
$
18.91

Deferred Stock Awards Vested
(20,669
)
 
$
16.45

Unvested Stock Awards as of March 31, 2016
935,201

 
$
18.83


The following table provides additional information regarding stock award activity during the three months ended March 31, 2016 and 2015, respectively (in thousands except for per share data):

 
Three Months Ended
 
March 31,
2016
 
March 31,
2015
Total Grant Date Fair Value of Shares Vested During the Period
$
340

 
$
346

Share-based Liability Awards Paid During the Period(1)
$
1,127

 
$
—


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

18
Table of Contents

A detail of Piedmont’s outstanding employee stock awards as of March 31, 2016 is as follows:

Date of grant
 
Type of Award
 
Net Shares
Granted (1)
 
Grant
Date Fair
Value
 
Vesting Schedule
 
Unvested Shares as of March 31, 2016
 
April 2, 2013
 
Deferred Stock Award
 
118,174

 
$
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.
 
37,084

 
January 3, 2014
 
Deferred Stock Award
 
87,706

 
$
16.45

 
Of the shares granted, 20% vested or will vest on January 3, 2015, 2016, 2017, 2018, and 2019, respectively.
 
62,004

 
May 9, 2014
 
Deferred Stock Award
 
162,517

 
$
18.47

 
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.
 
93,659

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

 
$
22.00

 
Shares awarded, if any, will vest immediately upon determination of award in 2017.
 
179,822

(2) 
May 1, 2015
 
Deferred Stock Award
 
271,970

 
$
17.59

 
Of the shares granted, 25% vested on the date of grant, and 25% vested or will vest on May 1, 2016, 2017, and 2018, respectively.
 
218,971

 
May 1, 2015
 
Fiscal Year 2015-2017 Performance Share Program
 
—

 
$
18.42

 
Shares awarded, if any, will vest immediately upon determination of award in 2018.
 
343,661

(2) 
Total
 
 
 
 
 
 
 
 
 
935,201

 

(1) 
Amounts reflect the total grant to employees, net of shares surrendered upon vesting to satisfy required minimum tax withholding obligations through March 31, 2016.
(2) 
Estimated based on Piedmont's cumulative TSR for the respective performance period through March 31, 2016. Share 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 March 31, 2016 and 2015, Piedmont recognized approximately $2.5 million and $0.9 million of compensation expense related to stock awards, of which $2.5 million and $0.8 million related to the amortization of unvested shares, respectively. During the three months ended March 31, 2016, a net total of 42,881 shares were issued to employees. As of March 31, 2016, approximately $2.5 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 one year.

10.Earnings Per Share

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

Net income per share-basic is calculated as net income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Net income per share-diluted is calculated as net income available to common stockholders divided by the diluted weighted average number of common shares outstanding during the period, including unvested deferred stock awards. Diluted weighted average number of common shares reflects the potential dilution under the treasury stock method that would occur if the remaining unvested deferred stock awards vested and resulted in additional common shares outstanding.


19
Table of Contents

The following table reconciles the denominator for the basic and diluted earnings per share computations shown on the consolidated statements of income for the three months ended March 31, 2016 and 2015, respectively (in thousands):

 
Three Months Ended
 
March 31, 2016
 
March 31, 2015
Weighted-average common shares – basic
145,276
 
154,339
Plus incremental weighted-average shares from time-vested conversions:
 
 
 
Deferred and performance stock awards
515
 
241
Weighted-average common shares – diluted (1)
145,791
 
154,580

(1) 
Due to repurchases of common stock during the current year, Piedmont has 145,093,025 shares of common stock outstanding as of March 31, 2016.


20
Table of Contents

11.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 Issuer is a wholly-owned subsidiary of the Guarantor, and all guarantees by the Guarantor of securities issued by the Issuer are full and unconditional. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions, including transactions with the Non-Guarantor Subsidiaries.


21
Table of Contents

Condensed Consolidated Balance Sheets
As of March 31, 2016
(in thousands)
Issuer
 
Guarantor
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets:
 
 
 
 
 
 
 
 
 
Real estate assets, at cost:
 
 
 
 
 
 
 
 
 
Land
$
64,218

 
$
—

 
$
621,632

 
$
—

 
$
685,850

Buildings and improvements, less accumulated depreciation
333,198

 
—

 
2,560,335

 
(300
)
 
2,893,233

Intangible lease assets, less accumulated amortization
1,132

 
—

 
76,990

 
—

 
78,122

Construction in progress
56

 
—

 
25,845

 
—

 
25,901

Total real estate assets
398,604

 
—

 
3,284,802

 
(300
)
 
3,683,106

Investments in and amounts due from unconsolidated joint ventures
7,483

 
—

 
—

 
—

 
7,483

Cash and cash equivalents
1,481

 
150

 
3,101

 
—

 
4,732

Tenant and straight-line rent receivables, net
28,813

 
—

 
154,314

 
—

 
183,127

Advances to affiliates
6,183,071

 
1,250,315

 
—

 
(7,433,386
)
 
—

Investment in subsidiary
—

 
3,722,060

 
185

 
(3,722,245
)
 
—

Notes receivable
89,350

 
—

 
14,290

 
(103,640
)
 
—

Prepaid expenses, restricted cash, escrows, and other assets
8,119

 
112

 
18,524

 
(1,456
)
 
25,299

Goodwill
180,097

 
—

 
—

 
—

 
180,097

Deferred lease costs, net
24,150

 
—

 
247,023

 
—

 
271,173

Total assets
$
6,921,168

 
$
4,972,637

 
$
3,722,239

 
$
(11,261,027
)
 
$
4,355,017

Liabilities:
 
 
 
 
 
 
 
 
 
Debt, net
$
1,640,988

 
$
—

 
$
465,570

 
$
(103,640
)
 
$
2,002,918

Accounts payable, accrued expenses, and accrued capital expenditures
16,411

 
640

 
88,299

 
(1,456
)
 
103,894

Advances from affiliates
595,065

 
5,039,044

 
1,882,665

 
(7,516,774
)
 
—

Deferred income
4,786

 
—

 
23,357

 
—

 
28,143

Intangible lease liabilities, net
—

 
—

 
40,926

 
—

 
40,926

Interest rate swaps
19,473

 
—

 
—

 
—

 
19,473

Total liabilities
2,276,723

 
5,039,684

 
2,500,817

 
(7,621,870
)
 
2,195,354

Stockholders’ Equity:
 
 
 
 
 
 
 
 
 
Common stock
—

 
1,451

 
—

 
—

 
1,451

Additional paid-in capital
3,718,060

 
3,673,927

 
1,313

 
(3,722,245
)
 
3,671,055

Retained/(cumulative distributions in excess of) earnings
934,553

 
(3,742,425
)
 
1,219,080

 
83,088

 
(1,505,704
)
Other comprehensive loss
(8,168
)
 
—

 
—

 
—

 
(8,168
)
Piedmont stockholders’ equity
4,644,445

 
(67,047
)
 
1,220,393

 
(3,639,157
)
 
2,158,634

Noncontrolling interest
—

 
—

 
1,029

 
—

 
1,029

Total stockholders’ equity
4,644,445

 
(67,047
)
 
1,221,422

 
(3,639,157
)
 
2,159,663

Total liabilities and stockholders’ equity
$
6,921,168

 
$
4,972,637

 
$
3,722,239

 
$
(11,261,027
)
 
$
4,355,017


22
Table of Contents

Condensed Consolidated Balance Sheets
As of December 31, 2015
(in thousands)
Issuer
 
Guarantor
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets:
 
 
 
 
 
 
 
 
 
Real estate assets, at cost:
 
 
 
 
 
 
 
 
 
Land
$
64,218

 
$
—

 
$
621,632

 
$
—

 
$
685,850

Buildings and improvements, less accumulated depreciation
336,897

 
—

 
2,567,706

 
(300
)
 
2,904,303

Intangible lease assets, less accumulated amortization
1,268

 
—

 
83,395

 
—

 
84,663

Construction in progress
255

 
—

 
20,735

 
—

 
20,990

Total real estate assets
402,638

 
—

 
3,293,468

 
(300
)
 
3,695,806

Investments in and amounts due from unconsolidated joint ventures
7,577

 
—

 
—

 
—

 
7,577

Cash and cash equivalents
2,174

 
150

 
3,117

 
—

 
5,441

Tenant and straight-line rent receivables, net
28,467

 
—

 
149,994

 
—

 
178,461

Advances to affiliates
6,073,606

 
1,251,530

 
—

 
(7,325,136
)
 
—

Investment in subsidiary
—

 
3,752,523

 
186

 
(3,752,709
)

—

Notes receivable
134,750

 
—

 
23,890

 
(113,240
)
 
45,400

Prepaid expenses, restricted cash, escrows, and other assets
7,157

 
—

 
24,118

 
(1,258
)
 
30,017

Goodwill
180,097

 
—

 
—

 
—

 
180,097

Deferred lease costs, net
24,634

 
—

 
267,102

 
—

 
291,736

Total assets
$
6,861,100

 
$
5,004,203

 
$
3,761,875

 
$
(11,192,643
)
 
$
4,434,535

Liabilities:
 
 
 
 
 
 
 
 
 
Debt, net
$
1,552,007

 
$
—

 
$
590,743

 
$
(113,240
)
 
$
2,029,510

Accounts payable, accrued expenses, and accrued capital expenditures
18,954

 
580

 
110,189

 
(1,258
)
 
128,465

Advances from affiliates
580,526

 
5,033,266

 
1,788,840

 
(7,402,632
)
 
—

Deferred income
5,905

 
—

 
21,365

 
—

 
27,270

Intangible lease liabilities, net
—

 
—

 
42,853

 
—

 
42,853

Interest rate swaps
9,993

 
—

 
—

 
—

 
9,993

Total liabilities
2,167,385

 
5,033,846

 
2,553,990

 
(7,517,130
)
 
2,238,091

Stockholders’ Equity:
 
 
 
 
 
 
 
 
 
Common stock
—

 
1,455

 
—

 
—

 
1,455

Additional paid-in capital
3,748,524

 
3,672,849

 
1,314

 
(3,752,710
)
 
3,669,977

Retained/(cumulative distributions in excess of) earnings
943,530

 
(3,703,947
)
 
1,205,546

 
77,197

 
(1,477,674
)
Other comprehensive loss
1,661

 
—

 
—

 
—

 
1,661

Piedmont stockholders’ equity
4,693,715

 
(29,643
)
 
1,206,860

 
(3,675,513
)
 
2,195,419

Noncontrolling interest
—

 
—

 
1,025

 
—

 
1,025

Total stockholders’ equity
4,693,715

 
(29,643
)
 
1,207,885

 
(3,675,513
)
 
2,196,444

Total liabilities and stockholders’ equity
$
6,861,100

 
$
5,004,203

 
$
3,761,875

 
$
(11,192,643
)
 
$
4,434,535


23
Table of Contents

Condensed Consolidated Statements of Income
For the three months ended March 31, 2016
(in thousands)
Issuer
 
Guarantor
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
Rental income
$
15,467

 
$
—

 
$
100,036

 
$
(765
)
 
$
114,738

Tenant reimbursements
3,272

 
—

 
19,572

 
(93
)
 
22,751

Property management fee revenue
—

 
—

 
4,317

 
(3,794
)
 
523

 
18,739

 
—

 
123,925

 
(4,652
)
 
138,012

Expenses:
 
 
 
 
 
 
 
 
 
Property operating costs
8,352

 
—

 
50,515

 
(4,679
)
 
54,188

Depreciation
4,899

 
—

 
26,883

 
—

 
31,782

Amortization
1,051

 
—

 
16,755

 
—

 
17,806

General and administrative
7,600

 
76

 
9,651

 
(9,463
)
 
7,864

 
21,902

 
76

 
103,804

 
(14,142
)
 
111,640

Real estate operating income/(loss)
(3,163
)
 
(76
)
 
20,121

 
9,490

 
26,372

Other income (expense):
 
 
 
 
 
 
 
 
 
Interest expense
(12,190
)
 
—

 
(6,738
)
 
2,543

 
(16,385
)
Other income/(expense)
2,665

 
—

 
172

 
(2,543
)
 
294

Equity in income of unconsolidated joint ventures
115

 
—

 
—

 
—

 
115

Loss on sale of real estate assets
(4
)
 
—

 
(16
)
 
—

 
(20
)
Net income/(loss)
(12,577
)
 
(76
)
 
13,539

 
9,490

 
10,376

Less: Net income applicable to noncontrolling interest
—

 
—

 
(4
)
 
—

 
(4
)
Net income/(loss) applicable to Piedmont
$
(12,577
)
 
$
(76
)
 
$
13,535

 
$
9,490

 
$
10,372


24
Table of Contents

Condensed Consolidated Statements of Income
For the three months ended March 31, 2015
(in thousands)
Issuer
 
Guarantor
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
Rental income
$
18,937

 
$
—

 
$
99,577

 
$
(707
)
 
$
117,807

Tenant reimbursements
4,246

 
—

 
27,272

 
(128
)
 
31,390

Property management fee revenue
—

 
—

 
4,439

 
(3,877
)
 
562

 
23,183

 
—

 
131,288

 
(4,712
)
 
149,759

Expenses:
 
 
 
 
 
 
 
 
 
Property operating costs
10,661

 
—

 
58,494

 
(4,919
)
 
64,236

Depreciation
5,803

 
—

 
30,429

 
—

 
36,232

Amortization
1,254

 
—

 
13,416

 
—

 
14,670

General and administrative
6,200

 
111

 
7,724

 
(7,628
)
 
6,407

 
23,918

 
111

 
110,063

 
(12,547
)
 
121,545

Real estate operating income
(735
)
 
(111
)
 
21,225

 
7,835

 
28,214

Other income (expense):
 
 
 
 
 
 
 
 
 
Interest expense
(13,188
)
 
—

 
(8,949
)
 
3,121

 
(19,016
)
Other income/(expense)
2,766

 
—

 
174

 
(3,121
)
 
(181
)
Equity in loss of unconsolidated joint ventures
159

 
—

 
—

 
—

 
159

Gain on sale of real estate assets
10,073

 
—

 
—

 
—

 
10,073

Net income/(loss)
(925
)
 
(111
)
 
12,450

 
7,835

 
19,249

Less: Net income applicable to noncontrolling interest
—

 
—

 
(4
)
 
—

 
(4
)
Net income/(loss) applicable to Piedmont
$
(925
)
 
$
(111
)
 
$
12,446

 
$
7,835

 
$
19,245


25
Table of Contents

Condensed Consolidated Statements of Cash Flows
For the three months ended March 31, 2016
(in thousands)
Issuer
 
Guarantor
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net Cash Provided by Operating Activities
$
(10,726
)
 
$
679

 
$
50,265

 
$
9,490

 
$
49,708

 
 
 
 
 
 
 
 
 
 
Cash Flows from Investing Activities:
 
 
 
 
 
 
 
 
 
Investment in real estate assets and real estate related intangibles, net of accruals