Document
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, 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 August 2, 2016:
145,229,642 shares
 

Table of Contents

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


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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q may constitute forward-looking statements within the meaning of the federal securities laws. In addition, Piedmont Office Realty Trust, Inc. ("Piedmont"), 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 acts of terrorism in any of the major metropolitan areas in which we own properties, or future cybersecurity attacks against us or any of our tenants, 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
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PART I. FINANCIAL STATEMENTS

ITEM 1.
CONSOLIDATED FINANCIAL STATEMENTS
The information presented in the accompanying consolidated balance sheets and related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows reflects all adjustments that are, in management’s opinion, necessary for a fair and consistent presentation of financial position, results of operations, and cash flows in accordance with 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 six months ended June 30, 2016 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,
2016
 
December 31,
2015
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
656,240

 
$
676,091

Buildings and improvements, less accumulated depreciation of $919,863 and $889,857 as of June 30, 2016 and December 31, 2015, respectively
2,780,501

 
2,837,463

Intangible lease assets, less accumulated amortization of $95,908 and $93,012 as of June 30, 2016 and December 31, 2015, respectively
71,794

 
84,663

Construction in progress
25,187

 
20,975

Real estate assets held for sale, net
69,766

 
76,614

Total real estate assets
3,603,488

 
3,695,806

Investments in and amounts due from unconsolidated joint ventures
7,413

 
7,577

Cash and cash equivalents
21,109

 
5,441

Tenant receivables, net of allowance for doubtful accounts of $141 and $83 as of June 30, 2016 and December 31, 2015, respectively
21,338

 
26,339

Straight-line rent receivables
154,627

 
147,393

Note receivable
—

 
45,400

Restricted cash and escrows
10,595

 
5,174

Prepaid expenses and other assets
29,731

 
24,777

Goodwill
180,097

 
180,097

Deferred lease costs, less accumulated amortization of $157,609 and $146,700 as of June 30, 2016 and December 31, 2015, respectively
261,340

 
288,041

Other assets held for sale, net
8,761

 
8,490

Total assets
$
4,298,499

 
$
4,434,535

Liabilities:
 
 
 
Unsecured debt, net of discount and unamortized debt issuance costs of $11,551 and $12,779 as of June 30, 2016 and December 31, 2015, respectively
$
1,508,449

 
$
1,528,221

Secured debt, net of premiums and unamortized debt issuance costs of $1,249 and $1,319 as of June 30, 2016 and December 31, 2015, respectively
375,865

 
501,289

Accounts payable, accrued expenses, and accrued capital expenditures
122,387

 
128,465

Deferred income
24,036

 
27,270

Intangible lease liabilities, less accumulated amortization of $45,130 and $42,315 as of June 30, 2016 and December 31, 2015, respectively
38,970

 
42,853

Interest rate swaps
22,079

 
9,993

Total liabilities
2,091,786

 
2,238,091

Commitments and Contingencies
—

 
—

Stockholders’ Equity:
 
 
 
Shares-in-trust, 150,000,000 shares authorized; none outstanding as of June 30, 2016 or December 31, 2015
—

 
—

Preferred stock, no par value, 100,000,000 shares authorized; none outstanding as of June 30, 2016 or December 31, 2015
—

 
—

Common stock, $.01 par value, 750,000,000 shares authorized; 145,229,642 and 145,511,644 shares issued and outstanding as of June 30, 2016 and December 31, 2015, respectively
1,452

 
1,455

Additional paid-in capital
3,671,475

 
3,669,977

Cumulative distributions in excess of earnings
(1,456,129
)
 
(1,477,674
)
Other comprehensive income/(loss)
(11,110
)
 
1,661

Piedmont stockholders’ equity
2,205,688

 
2,195,419

Noncontrolling interest
1,025

 
1,025

Total stockholders’ equity
2,206,713

 
2,196,444

Total liabilities and stockholders’ equity
$
4,298,499

 
$
4,434,535

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,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Rental income
$
111,767

 
$
117,454

 
$
226,505

 
$
235,261

Tenant reimbursements
23,086

 
28,813

 
45,837

 
60,203

Property management fee revenue
454

 
467

 
977

 
1,029

 
135,307

 
146,734

 
273,319

 
296,493

Expenses:
 
 
 
 
 
 
 
Property operating costs
52,280

 
61,479

 
106,468

 
125,715

Depreciation
31,556

 
36,039

 
63,338

 
72,271

Amortization
17,402

 
14,955

 
35,208

 
29,625

Impairment loss on real estate assets
8,308

 
5,354

 
8,308

 
5,354

General and administrative
8,328

 
8,083

 
16,192

 
14,490

 
117,874

 
125,910

 
229,514

 
247,455

Real estate operating income
17,433

 
20,824

 
43,805

 
49,038

Other income (expense):
 
 
 
 
 
 
 
Interest expense
(16,413
)
 
(18,172
)
 
(32,798
)
 
(37,188
)
Other income/(expense)
(41
)
 
596

 
253

 
415

Equity in income of unconsolidated joint ventures
111

 
124

 
226

 
283

 
(16,343
)
 
(17,452
)
 
(32,319
)
 
(36,490
)
Income from continuing operations
1,090

 
3,372

 
11,486

 
12,548

Discontinued operations:
 
 
 
 
 
 
 
Operating loss
(1
)
 
(3
)
 
(1
)
 
(3
)
Loss from discontinued operations
(1
)
 
(3
)
 
(1
)
 
(3
)
Gain on sale of real estate assets
78,987

 
26,611

 
78,967

 
36,684

Net income
80,076

 
29,980

 
90,452

 
49,229

Less: Net income applicable to noncontrolling interest
(4
)
 
(4
)
 
(8
)
 
(8
)
Net income applicable to Piedmont
$
80,072

 
$
29,976

 
$
90,444

 
$
49,221

Per share information – basic and diluted:
 
 
 
 
 
 
 
Income from continuing operations and gain on sale of real estate assets
$
0.55

 
$
0.20

 
$
0.62

 
$
0.32

Net income applicable to common stockholders
$
0.55

 
$
0.20

 
$
0.62

 
$
0.32

Weighted-average common shares outstanding – basic
145,178,601

 
153,559,076

 
145,227,539

 
153,946,898

Weighted-average common shares outstanding – diluted
145,698,723

 
153,757,404

 
145,765,149

 
154,174,270

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,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income applicable to Piedmont
 
 
$
80,072

 
 
 
$
29,976

 
 
 
$
90,444

 
 
 
$
49,221

Other comprehensive income/(loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective portion of gain/(loss) on derivative instruments that are designated and qualify as cash flow hedges (See Note 5)
(4,068
)
 
 
 
16,079

 
 
 
(15,029
)
 
 
 
874

 
 
Plus: Reclassification of previously recorded loss included in net income (See Note 5)
1,113

 
 
 
1,602

 
 
 
2,246

 


 
3,069

 


Gain/(loss) on investment in available for sale securities
13

 
 
 
(2
)
 
 
 
12

 
 
 
(2
)
 
 
Other comprehensive income/(loss)
 
 
(2,942
)
 
 
 
17,679

 
 
 
(12,771
)
 
 
 
3,941

Comprehensive income applicable to Piedmont
 
 
$
77,130

 
 
 
$
47,655

 
 
 
$
77,673

 
 
 
$
53,162



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, 2015
AND FOR THE SIX MONTHS ENDED JUNE 30, 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 ($0.42 per share), dividends to stockholders of subsidiary, and dividends reinvested
—

 
—

 
(106
)
 
(60,961
)
 
—

 
(8
)
 
(61,075
)
Shares issued and amortized under the 2007 Omnibus Incentive Plan, net of tax
180

 
2

 
1,646

 
—

 
—

 
—

 
1,648

Net income applicable to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
8

 
8

Net income applicable to Piedmont
—

 
—

 
—

 
90,444

 
—

 
—

 
90,444

Other comprehensive loss
—

 
—

 
—

 
—

 
(12,771
)
 
—

 
(12,771
)
Balance, June 30, 2016
145,230

 
$
1,452

 
$
3,671,475

 
$
(1,456,129
)
 
$
(11,110
)
 
$
1,025

 
$
2,206,713


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,
 
2016
 
2015
Cash Flows from Operating Activities:
 
 
 
Net income
$
90,452

 
$
49,229

Operating distributions received from unconsolidated joint ventures
389

 
368

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
63,338

 
72,271

Amortization of debt issuance costs
842

 
866

Loss on settlement of forward starting interest rate swaps
—

 
(1,284
)
Other amortization
34,912

 
29,890

Impairment loss on real estate assets
8,308

 
5,354

Stock compensation expense
5,653

 
4,071

Equity in income of unconsolidated joint ventures
(226
)
 
(283
)
Gain on sale of real estate assets
(78,967
)
 
(36,684
)
Changes in assets and liabilities:
 
 
 
Increase in tenant and straight-line rent receivables, net
(8,795
)
 
(16,447
)
Decrease/(increase) in restricted cash and escrows
4,230

 
(266
)
Increase in prepaid expenses and other assets
(4,745
)
 
(5,071
)
Decrease in accounts payable and accrued expenses
(9,785
)
 
(9,762
)
(Decrease)/increase in deferred income
(2,862
)
 
4,235

Net cash provided by operating activities
102,744

 
96,487

Cash Flows from Investing Activities:
 
 
 
Acquisition of real estate assets and related intangibles
(10,000
)
 
(45,185
)
Capitalized expenditures, net of accruals
(54,422
)
 
(62,587
)
Redemption of noncontrolling interest in unconsolidated variable interest entity
—

 
(4,000
)
Net sales proceeds from wholly-owned properties
201,690

 
87,925

Deferred lease costs paid
(6,266
)
 
(10,678
)
Net cash provided by/(used in) investing activities
131,002

 
(34,525
)
Cash Flows from Financing Activities:
 
 
 
Debt issuance costs paid
(138
)
 
(830
)
Proceeds from debt
211,000

 
1,054,857

Repayments of debt
(357,597
)
 
(1,012,576
)
Costs of issuance of common stock
(42
)
 
(326
)
Shares withheld to pay tax obligations related to employee stock compensation
(2,283
)
 
(1,654
)
Repurchases of common stock as part of announced plan
(7,943
)
 
(39,914
)
Dividends paid and discount on dividend reinvestments
(61,075
)
 
(64,828
)
Net cash used in financing activities
(218,078
)
 
(65,271
)
Net increase/(decrease) in cash and cash equivalents
15,668

 
(3,309
)
Cash and cash equivalents, beginning of period
5,441

 
12,306

Cash and cash equivalents, end of period
$
21,109

 
$
8,997

 
 
 
 
Supplemental Disclosures of Significant Noncash Investing and Financing Activities:
 
 
 
Change in accrued share repurchases as part of an announced plan
$
—

 
$
6,345

Accrued capital expenditures and deferred lease costs
$
25,146

 
$
15,930

Accrued deferred financing costs
$
—

 
$
75


See accompanying notes

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PIEDMONT OFFICE REALTY TRUST, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 June 30, 2016, Piedmont owned 66 office properties, one redevelopment asset and two development assets, and one building through an unconsolidated joint venture. Piedmont's 66 office properties comprise 18.5 million square feet of primarily Class A commercial office space, and were 91.4% leased as of June 30, 2016. As of June 30, 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 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.

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. Consequently, the assets of these special purpose entities are not available to all creditors of Piedmont. The assets owned by these special purpose entities are being reported on a consolidated basis with Piedmont’s assets for financial reporting purposes only.


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Use of Estimates

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

Income Taxes

Piedmont has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, and has operated as such, beginning with its taxable year ended December 31, 1998. To qualify as a REIT, Piedmont must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of its annual REIT taxable income. As a REIT, Piedmont is generally not subject to federal income taxes. 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 Six Months Ended June 30, 2016

As of January 1, 2016, 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 $1.7 million related to income tax consequences for share-based compensation from cash outflows from operating activities to cash outflows from financing activities in the accompanying consolidated statements of cash flows for the six months ended June 30, 2015. Additionally, as of January 1, 2016, Piedmont also adopted 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. 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, and Piedmont does not anticipate any material impact to its consolidated financial statements as a result of adoption.

The FASB has issued Accounting Standards Update No. 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, as well as ASU 2016-10 and ASU 2016-12, 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, 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, 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

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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, and Piedmont is currently evaluating the potential impact of adoption.

The FASB has issued Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). The provisions of ASU 2016-13 replace the "incurred loss" approach with an "expected loss" model for impairing trade and other receivables, held-to-maturity debt securities, net investment in leases, and off-balance-sheet credit exposures, which will generally result in earlier recognition of allowance for losses. Additionally, the provisions change the classification of credit losses on available-for-sale securities as an allowance rather than reductions in the amortized cost of the securities. ASU 2016-13 is effective in the first quarter of 2020, with early adoption permitted as of January 1, 2019. Piedmont is currently evaluating the potential impact of adoption.

3.Debt

During the six months ended June 30, 2016, Piedmont repaid the outstanding balance of its $125.0 Million Fixed-Rate Loan and the balance outstanding on its $500 Million Unsecured 2015 Line of Credit primarily using proceeds from the sale of three properties and cash on hand. As of June 30, 2016, Piedmont believes it was in compliance with all financial covenants associated with its debt instruments. See Note 6 for a description of Piedmont’s estimated fair value of debt as of June 30, 2016.

Piedmont made interest payments on all debt facilities, including interest rate swap cash settlements, of approximately $15.4 million and $18.3 million for the three months ended June 30, 2016 and 2015, respectively, and approximately $34.7 million and $38.7 million for the six months ended June 30, 2016 and 2015, respectively. Piedmont capitalized interest of approximately $0.7 million and $0.9 million for the three months ended June 30, 2016 and 2015, respectively, and approximately $1.9 million and $1.7 million for the six months ended June 30, 2016 and 2015, respectively.


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The following table summarizes the terms of Piedmont’s indebtedness outstanding as of June 30, 2016 and December 31, 2015 (in thousands):
Facility
 
Collateral
 
Stated Rate(1)
 
Maturity
 
Amount Outstanding as of
 
June 30,
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

(2) 
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
%
(3) 
9/1/2021
 
32,091

 
32,445

$160.0 Million Fixed-Rate Loan
 
1901 Market Street
 
3.48
%
(4) 
7/5/2022
 
160,000

 
160,000

Net premium and unamortized debt issuance costs
 
 
 
 
 
 
 
1,249

 
1,319

Subtotal/Weighted Average (5)
 
 
 
4.76
%
 
 
 
375,865

 
501,289

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

(6) 
5/15/2018
 
170,000

 
170,000

$300 Million Unsecured 2013 Term Loan
 
 
 
LIBOR + 1.20%

(7) 
1/31/2019
 
300,000

 
300,000

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

(8) 
6/18/2019
(9) 
—

 
21,000

$300 Million Unsecured 2011 Term Loan
 
 
 
LIBOR +  1.15%

(10) 
1/15/2020
 
300,000

 
300,000

$350 Million Senior Notes
 
 
 
3.40
%
(11) 
6/01/2023
 
350,000

 
350,000

$400 Million Senior Notes
 
 
 
4.45
%
(12) 
3/15/2024
 
400,000

 
400,000

Discounts and unamortized debt issuance costs
 
 
 
 
 
 
 
(11,551)

 
(12,779)

Subtotal/Weighted Average (5)
 
 
 
3.15
%
 
 
 
1,508,449

 
1,528,221

Total/Weighted Average (5)
 
 
 
3.47
%
 
 
 
$
1,884,314

 
$
2,029,510


(1) 
Other than the $35 Million Fixed-Rate Loan, all of Piedmont’s outstanding debt as of June 30, 2016 and December 31, 2015 is interest-only.
(2) 
Amount was repaid in full on July 11, 2016.
(3) 
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%.
(4) 
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%.
(5) 
Weighted average is based on contractual balance of outstanding debt and interest rates in the table as of June 30, 2016.
(6) 
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 June 30, 2016) over the selected rate based on Piedmont’s current credit rating. The principal balance as of June 30, 2016 consisted of the 30-day LIBOR rate of 0.45% (subject to the additional spread mentioned above).
(7) 
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%.
(8) 
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 June 30, 2016) over the selected rate based on Piedmont’s current credit rating.

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(9) 
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.
(10) 
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.
(11) 
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%.
(12) 
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%.

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 June 30, 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
June 30, 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
 
$
(8.5
)
 
$
(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
 
$
9.3

 
$
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
 
$
252.1

 
$
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 previously had an equity participation rights agreement outstanding; however, during the six months ended June 30, 2016, Piedmont exercised its right to terminate the equity participation rights agreement related to Piedmont TownPark Land, LLC, without payment of any consideration.

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

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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. As of June 30, 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 42 months.

A detail of Piedmont’s interest rate derivatives outstanding as of June 30, 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 June 30, 2016 and December 31, 2015, respectively, is as follows (in thousands):

Interest rate swaps classified as:
June 30,
2016
 
December 31,
2015
Gross derivative assets
$
—

 
$
—

Gross derivative liabilities
22,079

 
9,993

Net derivative liability
$
22,079

 
$
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 and six months ended June 30, 2016 and 2015, respectively, were as follows (in thousands):

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Three Months Ended
 
Six Months Ended
Interest Rate Swaps in Cash Flow Hedging Relationships
June 30,
2016
 
June 30,
2015
 
June 30,
2016
 
June 30,
2015
Amount of gain/(loss) recognized in OCI on derivative
$
(4,068
)
 
$
16,079

 
$
(15,029
)
 
$
874

Amount of previously recorded loss reclassified from accumulated OCI into interest expense
$
1,113

 
$
1,602

 
$
2,246

 
$
3,069


Piedmont estimates that approximately $5.8 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 and six months ended June 30, 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 $22.5 million as of June 30, 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 June 30, 2016 and December 31, 2015, respectively (in thousands):

 
June 30, 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)
$
21,109

 
$
21,109

 
Level 1
 
$
5,441

 
$
5,441

 
Level 1
Tenant receivables, net(1)
$
21,338

 
$
21,338

 
Level 1
 
$
26,339

 
$
26,339

 
Level 1
Notes receivable (1)
$
—

 
$
—

 
Level 1
 
$
45,400

 
$
45,400

 
Level 1
Restricted cash and escrows(1)
$
10,595

 
$
10,595

 
Level 1
 
$
5,174

 
$
5,174

 
Level 1
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses(1)
$
10,934

 
$
10,934

 
Level 1
 
$
13,188

 
$
13,188

 
Level 1
Interest rate swap liability
$
22,079

 
$
22,079

 
Level 2
 
$
9,993

 
$
9,993

 
Level 2
Debt
$
1,884,314

 
$
1,930,100

 
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 June 30, 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.

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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 June 30, 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 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, 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.Impairment Loss on Real Estate Assets

During the three months ended June 30, 2016, Piedmont entered into a binding contract to sell the 88.2% leased, 150 West Jefferson building located in Detroit, Michigan. As a result, the property was reclassified as held for sale as of June 30, 2016, resulting in the recognition of an impairment loss of approximately $6.0 million during the three months ended June 30, 2016. The impaired loss was calculated as the difference between the carrying value of the asset and the contracted sales price, less estimated selling costs. See Note 9 for further details of amounts classified as held-for-sale in the accompanying consolidated balance sheets related to the 150 West Jefferson building.

Subsequent to June 30, 2016, Piedmont also entered into a binding contract to sell the 9221 Corporate Drive building located in Rockville, Maryland. Although the property did not meet the requirements for held for sale classification as of June 30, 2016, as part of management's quarterly assessment of the recoverability of these assets, Piedmont, using a probability-weighted model heavily weighted towards the short-term sale of the building, determined that the carrying value would not be recovered from the undiscounted future operating cash flows expected from the use of the asset and its eventual disposition. As a result, Piedmont recognized a loss on impairment of approximately $2.3 million during the three months ended June 30, 2016 calculated as the difference between the carrying value of the asset as of June 30, 2016 and the anticipated contract sales price, less estimated selling costs. The sales of both the 150 West Jefferson building and the 9221 Corporate Drive building subsequently closed during July 2016.

The fair value measurements used in the evaluation of both of the non-financial assets above are considered to be Level 1 valuations within the fair value hierarchy as defined by GAAP, as there are direct observations and transactions involving the assets by unrelated, third-party purchasers.

8.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. Piedmont classifies its capital 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 June 30, 2016, commitments to fund potential non-incremental capital expenditures over the next five years for tenant improvements totaled approximately $37.7 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 June 30, 2016, commitments for incremental capital expenditures for tenant improvements associated with executed leases totaled approximately $29.5 million.


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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 and six months ended June 30, 2016, and $0.1 million for the three and six months ended June 30, 2015.

Additionally, from time to time, tenants may attempt to dispute language in their lease agreements which could result in the refund of previously recognized tenant revenues, resulting in financial loss to Piedmont. During the three months ended June 30, 2016, Piedmont filed suit against one such tenant. While Piedmont believes it will ultimately prevail in this matter, due to the uncertainties inherent in any litigation, Piedmont has determined that the risk of financial loss is reasonably possible. As of June 30, 2016, the range of reasonably possible loss, net of reserves, is estimated to be $0 to $1.8 million.

9.Property Dispositions, Assets Held for Sale, and Discontinued Operations

Properties sold during the six months ended June 30, 2016 and 2015 did not meet the criteria to be reported as discontinued operations. The operational results for these properties prior to their sale dates 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. Details of such properties sold are presented below (in thousands):

Buildings Sold
 
Location
 
Date of Sale
 
Gain on Sale
 
Net Sales Proceeds
 
3900 Dallas Parkway
 
Plano, Texas
 
January 30, 2015
 
$
10,073

 
$
25,803

 
5601 Headquarters Drive
 
Plano, Texas
 
April 28, 2015
 
$
7,959

 
$
33,326

 
River Corporate Center
 
Tempe, Arizona
 
April 29, 2015
 
$
5,297

 
$
24,223

 
Copper Ridge Center
 
Lyndhurst, New Jersey
 
May 1, 2015
 
$
13,711

 
$
50,372

(1) 
1055 East Colorado
 
Pasadena, California
 
April 21, 2016
 
$
31,502

 
$
60,077

 
Fairway Center II
 
Brea, California
 
April 28, 2016
 
$
15,469

 
$
33,063

 
1901 Main Street
 
Irvine, California
 
May 2, 2016
 
$
32,016

 
$
63,150

(2) 

(1) 
As part of the transaction, Piedmont accepted a secured promissory note from the buyer for $45.4 million. During the six months ended June 30, 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.
(2) 
As part of the transaction, Piedmont accepted a secured promissory note from the buyer for $33.0 million; however, the note receivable was repaid in full by June 30, 2016. As such, the full proceeds from the sale of the property are reflected in the accompanying consolidated statements of cash flows as net sales proceeds from the sale of wholly-owned properties.

Assets Held for Sale

During the three months ended June 30, 2016, Piedmont reclassified the 150 West Jefferson building from real estate assets held for use to real estate assets held for sale as a result of entering into a binding agreement to sell the property. As such, assets held for sale as of June 30, 2016 and December 31, 2015 include the 150 West Jefferson building, and are presented below (in thousands):

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June 30, 2016
 
December 31, 2015
Real estate assets held for sale, net:
 
 
 
 
Land
 
$
9,759

 
$
9,759

Building and improvements, less accumulated depreciation of $33,336 and $32,162 as of June 30, 2016 and December 31, 2015, respectively
 
59,998

 
66,840

Construction in progress
 
9

 
15

Total real estate assets held for sale, net
 
$
69,766

 
$
76,614

 
 
 
 
 
Other assets held for sale, net:
 
 
 
 
Straight-line rent receivables
 
$
5,109

 
$
4,729

Prepaid expenses and other assets
 
36

 
66

Deferred lease costs, less accumulated amortization of $1,429 and $1,162 as of June 30, 2016 and December 31, 2015, respectively
 
3,616

 
3,695

Total other assets held for sale, net
 
$
8,761

 
$
8,490


Details comprising loss from discontinued operations activity on 1441 West Long Lake Road, 11109 Sunset Hills Road, and 1200 Enclave Parkway for the three and six months ended ended June 30, 2016 and 2015 are presented below (in thousands):

 
Three Months Ended
 
Six Months Ended
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
Revenues:
 
 
 
 
 
 
 
Tenant reimbursements
$
—

 
$
(3
)
 
$
—

 
$
(3
)
 
—

 
(3
)
 
—

 
(3
)
Expenses:
 
 
 
 
 
 
 
Property operating costs
—

 
(1
)
 
—

 
(1
)
General and administrative
1

 
1

 
1

 
1

 
1

 
—

 
1

 
—

 
 
 
 
 
 
 
 
Operating loss
(1
)
 
(3
)
 
(1
)
 
(3
)
Loss from discontinued operations
$
(1
)
 
$
(3
)
 
$
(1
)
 
$
(3
)



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Table of Contents

10.Stock Based Compensation
From time to time, Piedmont has granted equity awards to all of its employees and independent directors. 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, if earned, are not awarded until after the end of the multi-year performance period and vest upon award. Shares granted to independent directors generally vest over a one-year service period.

A rollforward of Piedmont's equity based award activity for the six months ended June 30, 2016 is as follows:

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

 
$
18.67

Deferred Stock Awards Granted
319,083

 
$
19.96

Increase in Estimated Potential Future Performance Share Awards
222,080

 
$
22.64

Performance Stock Awards Vested
(53,287
)
 
$
18.91

Deferred Stock Awards Vested
(250,323
)
 
$
18.61

Deferred Stock Awards Forfeited
(1,002
)
 
$
19.04

Unvested Stock Awards as of June 30, 2016
1,195,997

 
$
19.75


The following table provides additional information regarding stock award activity during the three and six months ended June 30, 2016 and 2015, respectively (in thousands except for per share data):

 
Three Months Ended
 
Six Months Ended
 
June 30,
2016
 
June 30,
2015
 
June 30,
2016
 
June 30,
2015
Weighted-Average Grant Date Fair Value of Shares Granted During the Period (per share)
$
19.96

 
$
17.59

 
$
19.96

 
$
17.59

Total Grant Date Fair Value of Shares Vested During the Period
$
4,319

 
$
3,727

 
$
4,659

 
$
4,073

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

 
$
—

 
$
1,127

 
$
—


(1) 
Amount reflects the issuance of performance share awards related to the 2013-15 Performance Share Plan during the period.

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A detail of Piedmont’s outstanding stock awards as of June 30, 2016 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, 2016
 
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
 
145,436

 
$
18.46

 
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.
 
48,205

 
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.
 
227,074

(2) 
May 1, 2015
 
Deferred Stock Award
 
244,283

 
$
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.
 
143,652

 
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.
 
329,921

(2) 
May 12, 2016
 
Deferred Stock Award-Board of Directors
 
31,368

 
$
20.40

 
Of the shares granted, 100% will vest on May 12, 2017.
 
31,368

 
May 24, 2016
 
Deferred Stock Award
 
260,335

 
$
19.91

 
Of the shares granted, 25% vested on the date of grant, and 25% vested or will vest on May 24, 2017, 2018, and 2019, respectively.
 
214,916

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

 
$
23.02

 
Shares awarded, if any, will vest immediately upon determination of award in 2019.
 
138,857

(2) 
Total
 
 
 
 
 
 
 
 
 
1,195,997

 

(1) 
Amounts reflect the total grant to employees and independent directors, net of shares surrendered upon vesting to satisfy required minimum tax withholding obligations through June 30, 2016.
(2) 
Estimated based on Piedmont's cumulative TSR for the respective performance period through June 30, 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 June 30, 2016 and 2015, Piedmont recognized approximately $3.2 million and $3.2 million of compensation expense related to stock awards, of which $1.7 million and $1.5 million related to the amortization of unvested shares, respectively. During the six months ended June 30, 2016 and 2015, Piedmont recognized approximately $5.7 million and $4.1 million of compensation expense related to stock awards, of which $4.2 million and $2.3 million related to the amortization of unvested shares, respectively. During the six months ended June 30, 2016, a net total of 179,498 shares were issued to employees. As of June 30, 2016, approximately $6.5 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.

11.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

21
Table of Contents

deferred stock awards. Diluted weighted average number of common shares reflects the potential dilution under the treasury stock method that would occur if the remaining unvested deferred stock awards vested and resulted in additional common shares outstanding. Unvested deferred stock awards which are determined to be anti-dilutive are not included in the calculation of diluted weighted average common shares.

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, 2016 and 2015, respectively (in thousands):

 
Three Months Ended
 
Six Months Ended
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
Weighted-average common shares – basic
145,179
 
153,559
 
145,228
 
153,947
Plus incremental weighted-average shares from time-vested conversions:
 
 
 
 
 
 
 
Deferred and performance stock awards
520
 
198
 
537
 
227
Weighted-average common shares – diluted (1)
145,699
 
153,757
 
145,765
 
154,174

(1) 
Due to repurchases of common stock during the current year, Piedmont has 145,229,642 shares of common stock outstanding as of June 30, 2016.


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Table of Contents


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 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.


23
Table of Contents

Condensed Consolidated Balance Sheets
As of June 30, 2016
(in thousands)
Issuer
 
Guarantor
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets:
 
 
 
 
 
 
 
 
 
Real estate assets, at cost:
 
 
 
 
 
 
 
 
 
Land
$
48,213

 
$
—

 
$
608,027

 
$
—

 
$
656,240

Buildings and improvements, less accumulated depreciation
242,179

 
—

 
2,538,622

 
(300
)
 
2,780,501

Intangible lease assets, less accumulated amortization
997

 
—

 
70,797

 
—

 
71,794

Construction in progress
387

 
—

 
24,800

 
—

 
25,187

Real estate assets held for sale, net
69,766

 
—

 
—

 
—

 
69,766

Total real estate assets
361,542

 
—

 
3,242,246

 
(300
)
 
3,603,488

Investments in and amounts due from unconsolidated joint ventures
7,413

 
—

 
—

 
—

 
7,413

Cash and cash equivalents
16,270

 
150

 
4,689

 
—

 
21,109

Tenant and straight-line rent receivables, net
20,448

 
—

 
155,517

 
—

 
175,965

Advances to affiliates
6,115,364

 
1,283,243

 
—

 
(7,398,607
)
 
—

Investment in subsidiary
—

 
3,691,562

 
184

 
(3,691,746
)
 
—

Notes receivable
89,350

 
—

 
14,289

 
(103,639
)
 
—

Prepaid expenses, restricted cash, escrows, and other assets
17,069

 
75

 
24,839

 
(1,657
)
 
40,326

Goodwill
180,097

 
—

 
—

 
—

 
180,097

Deferred lease costs, net
18,115

 
—

 
243,225

 
—

 
261,340

Other assets held for sale, net
8,761

 
—

 
—

 
—

 
8,761

Total assets
$
6,834,429

 
$
4,975,030

 
$
3,684,989

 
$
(11,195,949
)
 
$
4,298,499

Liabilities:
 
 
 
 
 
 
 
 
 
Debt, net
$
1,522,642

 
$
—

 
$
465,311

 
$
(103,639
)
 
$
1,884,314

Accounts payable, accrued expenses, and accrued capital expenditures
17,525

 
573

 
105,946

 
(1,657
)
 
122,387

Advances from affiliates
641,314

 
5,071,390

 
1,775,933

 
(7,488,637
)
 
—

Deferred income
4,077

 
—

 
19,959

 
—

 
24,036

Intangible lease liabilities, net
—

 
—

 
38,970

 
—

 
38,970

Interest rate swaps
22,079

 
—

 
—

 
—

 
22,079

Total liabilities
2,207,637

 
5,071,963

 
2,406,119

 
(7,593,933
)
 
2,091,786

Stockholders’ Equity:
 
 
 
 
 
 
 
 
 
Common stock
—

 
1,452

 
—

 
—

 
1,452

Additional paid-in capital
3,687,562

 
3,674,348

 
1,311

 
(3,691,746
)
 
3,671,475

Retained/(cumulative distributions in excess of) earnings
950,340

 
(3,772,733
)
 
1,276,534

 
89,730

 
(1,456,129
)
Other comprehensive loss
(11,110
)
 
—

 
—

 
—

 
(11,110
)
Piedmont stockholders’ equity
4,626,792

 
(96,933
)
 
1,277,845

 
(3,602,016
)
 
2,205,688

Noncontrolling interest
—

 
—

 
1,025

 
—

 
1,025

Total stockholders’ equity
4,626,792

 
(96,933
)
 
1,278,870

 
(3,602,016
)
 
2,206,713

Total liabilities and stockholders’ equity
$
6,834,429

 
$
4,975,030

 
$
3,684,989

 
$
(11,195,949
)
 
$
4,298,499


24
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
$
54,459

 
$
—

 
$
621,632

 
$
—

 
$
676,091

Buildings and improvements, less accumulated depreciation
270,057

 
—

 
2,567,706

 
(300
)
 
2,837,463

Intangible lease assets, less accumulated amortization
1,268

 
—

 
83,395

 
—

 
84,663

Construction in progress
240

 
—

 
20,735

 
—

 
20,975

Real estate assets held for sale, net
76,614

 
—

 
—

 
—

 
76,614

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
23,738

 
—

 
149,994

 
—

 
173,732

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
7,091

 
—

 
24,118

 
(1,258
)
 
29,951

Goodwill
180,097

 
—

 
—

 
—

 
180,097

Deferred lease costs, net
20,939

 
—

 
267,102

 
—

 
288,041

Other assets held for sale, net
8,490

 
—

 
—

 
—

 
8,490

Total assets
$
6,861,100

 
$