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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________ 
FORM 10-Q
____________________________________________________  
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT of 1934
For the Quarterly Period Ended June 30, 2017
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large Accelerated filer x
 
Accelerated filer o
 
Non-Accelerated filer o     (Do not check if a smaller reporting company)        
 
Smaller reporting company o
 
 
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o No   x
Number of shares outstanding of the Registrant’s
common stock, as of August 1, 2017:
145,489,845 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
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q may constitute forward-looking statements within the meaning of the federal securities laws. In addition, Piedmont Office Realty Trust, Inc. ("Piedmont," "we," "our," or "us"), or its executive officers on Piedmont’s behalf, may from time to time make forward-looking statements in reports and other documents Piedmont files with the Securities and Exchange Commission or in connection with other written or oral statements made to the press, potential investors, or others. Statements regarding future events and developments and Piedmont’s future performance, as well as management’s expectations, beliefs, plans, estimates, or projections relating to the future, are forward-looking statements. Forward-looking statements include statements preceded by, followed by, or that include the words “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. Examples of such statements in this report include descriptions of our real estate, financing, and operating objectives; discussions regarding future dividends and share repurchases; and discussions regarding the potential impact of economic conditions on our real estate and lease portfolio.

These statements are based on beliefs and assumptions of Piedmont’s management, which in turn are based on information available at the time the statements are made. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding the demand for office space in the markets in which Piedmont operates, competitive conditions, and general economic conditions. These assumptions could prove inaccurate. The forward-looking statements also involve risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. Many of these factors are beyond Piedmont’s ability to control or predict. Such factors include, but are not limited to, the following:

•
Economic, regulatory, and/or socio-economic changes (including accounting standards) that impact the real estate market generally, or that could affect patterns of use of commercial office space;
•
The impact of competition on our efforts to renew existing leases or re-let space on terms similar to existing leases;
•
Changes in the economies and other conditions affecting the office sector in general and 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 our Annualized Lease Revenue (see definition below);
•
Lease terminations or lease defaults, particularly by one of our large lead tenants;
•
The effect on us of adverse market and economic conditions, including any resulting impairment charges on both our long-lived assets or goodwill;
•
The success of our real estate strategies and investment objectives, including our ability to identify and consummate suitable acquisitions and divestitures;
•
The illiquidity of real estate investments, including the resulting impediment on our ability to quickly respond to adverse changes in the performance of our properties;
•
The risks and uncertainties associated with our acquisition of properties, many of which risks and uncertainties may not be known at the time of acquisition;
•
Development and construction delays and resultant increased costs and risks;
•
Our real estate development strategies may not be successful;
•
Future acts of terrorism in any of the major metropolitan areas in which we own properties, or future cybersecurity attacks against us or any of our tenants;
•
Costs of complying with governmental laws and regulations;
•
Additional risks and costs associated with directly managing properties occupied by government tenants;
•
The effect of future offerings of debt or equity securities or changes in market interest rates on the value of our common stock;
•
Uncertainties associated with environmental and other regulatory matters;
•
Potential changes in political environment and reduction in federal and/or state funding of our governmental tenants;
•
Any change in the financial condition of any of our large lead tenants;
•
The effect of any litigation to which we are, or may become, subject;
•
Changes in tax laws impacting REITs and real estate in general, as well as our ability to continue to qualify as a REIT under the Internal Revenue Code of 1986 (the “Code”);
•
The future effectiveness of our internal controls and procedures; and
•
Other factors, including the risk factors discussed under Item 1A. of our Amended Annual Report on Form 10-K/A for the year ended December 31, 2016.
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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Information Regarding Disclosures Presented

Annualized Lease Revenue ("ALR"), a non-GAAP measure, is calculated by multiplying (i) rental payments (defined as base rent plus operating expense reimbursements, if payable by the tenant on a monthly basis under the terms of a lease that has been executed, but excluding (a) rental abatements and (b) rental payments related to executed but not commenced leases for space that was covered by an existing lease), by (ii) 12. In instances in which contractual rents or operating expense reimbursements are collected on an annual, semi-annual, or quarterly basis, such amounts are multiplied by a factor of 1, 2, or 4, respectively, to calculate the annualized figure. For leases that have been executed but not commenced relating to un-leased space, ALR is calculated by multiplying (i) the monthly base rental payment (excluding abatements) plus any operating expense reimbursements for the initial month of the lease term, by (ii) 12. Unless stated otherwise, this measure excludes our one property held in an unconsolidated joint venture.



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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 ("GAAP").
The accompanying financial statements should be read in conjunction with the notes to Piedmont’s financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this report on Form 10-Q and with Piedmont’s Amended Annual Report on Form 10-K/A for the year ended December 31, 2016. Piedmont’s results of operations for the six months ended June 30, 2017 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,
2017
 
December 31,
2016
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
614,934

 
$
617,138

Buildings and improvements, less accumulated depreciation of $896,964 and $856,254 as of June 30, 2017 and December 31, 2016, respectively
2,742,327

 
2,754,106

Intangible lease assets, less accumulated amortization of $94,551 and $109,152 as of June 30, 2017 and December 31, 2016, respectively
84,989

 
99,695

Construction in progress
15,651

 
34,814

Real estate assets held for sale, net
225,071

 
225,939

Total real estate assets
3,682,972

 
3,731,692

Investments in and amounts due from unconsolidated joint ventures
7,762

 
7,360

Cash and cash equivalents
9,596

 
6,992

Tenant receivables, net of allowance for doubtful accounts of $587 and $197 as of June 30, 2017 and December 31, 2016, respectively
24,269

 
26,494

Straight-line rent receivables
177,463

 
163,789

Restricted cash and escrows
1,290

 
1,212

Prepaid expenses and other assets
29,454

 
23,201

Goodwill
98,918

 
98,918

Deferred lease costs, less accumulated amortization of $187,122 and $175,643 as of June 30, 2017 and December 31, 2016, respectively
278,366

 
298,695

Other assets held for sale, net
10,222

 
9,815

Total assets
$
4,320,312

 
$
4,368,168

Liabilities:
 
 
 
Unsecured debt, net of discount and unamortized debt issuance costs of $9,014 and $10,269 as of June 30, 2017 and December 31, 2016, respectively
$
1,720,986

 
$
1,687,731

Secured debt, net of premiums and unamortized debt issuance costs of $1,063 and $1,161 as of June 30, 2017 and December 31, 2016, respectively
332,196

 
332,744

Accounts payable, accrued expenses, and accrued capital expenditures
111,011

 
165,410

Deferred income
27,416

 
28,406

Intangible lease liabilities, less accumulated amortization of $52,751 and $49,225 as of June 30, 2017 and December 31, 2016, respectively
43,328

 
48,005

Interest rate swaps
5,061

 
8,169

Total liabilities
2,239,998

 
2,270,465

Commitments and Contingencies
—

 
—

Stockholders’ Equity:
 
 
 
Shares-in-trust, 150,000,000 shares authorized; none outstanding as of June 30, 2017 or December 31, 2016
—

 
—

Preferred stock, no par value, 100,000,000 shares authorized; none outstanding as of June 30, 2017 or December 31, 2016
—

 
—

Common stock, $.01 par value, 750,000,000 shares authorized; 145,489,845 and 145,235,313 shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively
1,455

 
1,452

Additional paid-in capital
3,675,562

 
3,673,128

Cumulative distributions in excess of earnings
(1,603,119
)
 
(1,580,863
)
Other comprehensive income
4,547

 
2,104

Piedmont stockholders’ equity
2,078,445

 
2,095,821

Noncontrolling interest
1,869

 
1,882

Total stockholders’ equity
2,080,314

 
2,097,703

Total liabilities and stockholders’ equity
$
4,320,312

 
$
4,368,168

See accompanying notes

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Table of Contents

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,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Rental income
$
124,248

 
$
111,767

 
$
247,698

 
$
226,505

Tenant reimbursements
24,044

 
23,086

 
48,544

 
45,837

Property management fee revenue
387

 
454

 
900

 
977

 
148,679

 
135,307

 
297,142

 
273,319

Expenses:
 
 
 
 
 
 
 
Property operating costs
55,779

 
52,292

 
111,163

 
106,571

Depreciation
30,059

 
31,556

 
60,827

 
63,338

Amortization
19,314

 
17,402

 
39,729

 
35,208

Impairment loss on real estate assets
—

 
10,950

 
—

 
10,950

General and administrative
8,036

 
8,316

 
16,632

 
16,089

 
113,188

 
120,516

 
228,351

 
232,156

Real estate operating income
35,491

 
14,791

 
68,791

 
41,163

Other income (expense):
 
 
 
 
 
 
 
Interest expense
(18,421
)
 
(16,413
)
 
(36,478
)
 
(32,798
)
Other income/(expense)
38

 
(41
)
 
(62
)
 
253

Equity in income of unconsolidated joint ventures
107

 
110

 
118

 
225

 
(18,276
)
 
(16,344
)
 
(36,422
)
 
(32,320
)
Income/(loss) from continuing operations
17,215

 
(1,553
)
 
32,369

 
8,843

Discontinued operations:
 
 
 
 
 
 
 
Operating loss
—

 
(1
)
 
—

 
(1
)
Loss from discontinued operations
—

 
(1
)
 
—

 
(1
)
Gain on sale of real estate assets, net
6,492

 
73,835

 
6,439

 
73,815

Net income
23,707

 
72,281

 
38,808

 
82,657

Less: Net loss/(income) applicable to noncontrolling interest
3

 
(3
)
 
6

 
(7
)
Net income applicable to Piedmont
$
23,710

 
$
72,278

 
$
38,814

 
$
82,650

Per share information – basic and diluted:
 
 
 
 
 
 
 
Income from continuing operations and gain on sale of real estate assets
$
0.16

 
$
0.50

 
$
0.27

 
$
0.57

Loss from discontinued operations
—

 
—

 
—

 
—

Net income applicable to common stockholders
$
0.16

 
$
0.50

 
$
0.27

 
$
0.57

Weighted-average common shares outstanding – basic
145,412,524

 
145,178,601

 
145,350,074

 
145,227,539

Weighted-average common shares outstanding – diluted
145,813,130

 
145,698,723

 
145,779,709

 
145,765,149

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,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income applicable to Piedmont
 
 
$
23,710

 
 
 
$
72,278

 
 
 
$
38,814

 
 
 
$
82,650

Other comprehensive income/(loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective portion of gain/(loss) on derivative instruments that are designated and qualify as cash flow hedges (See Note 5)
(911
)
 
 
 
(4,068
)
 
 
 
132

 
 
 
(15,029
)
 
 
Plus: Reclassification of previously recorded loss included in net income (See Note 5)
977

 
 
 
1,113

 
 
 
2,283

 


 
2,246

 


Gain on investment in available for sale securities
15

 
 
 
13

 
 
 
28

 
 
 
12

 
 
Other comprehensive income/(loss)
 
 
81

 
 
 
(2,942
)
 
 
 
2,443

 
 
 
(12,771
)
Comprehensive income applicable to Piedmont
 
 
$
23,791

 
 
 
$
69,336

 
 
 
$
41,257

 
 
 
$
69,879



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, 2016
AND FOR THE SIX MONTHS ENDED JUNE 30, 2017 (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, 2015
145,512

 
$
1,455

 
$
3,669,977

 
$
(1,550,698
)
 
$
1,661

 
$
1,025

 
$
2,123,420

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

 
(7,938
)
 
—

 
—

 
(7,943
)
Offering costs
—

 
—

 
(342
)
 
—

 
—

 
—

 
(342
)
Noncontrolling interest in consolidated joint venture
—

 
—

 
—

 
—

 
—

 
888

 
888

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

 
—

 
(173
)
 
(121,959
)
 
—

 
(16
)
 
(122,148
)
Shares issued and amortized under the 2007 Omnibus Incentive Plan, net of tax
185

 
2

 
3,666

 
—

 
—

 
—

 
3,668

Net loss applicable to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
(15
)
 
(15
)
Net income applicable to Piedmont
—

 
—

 
—

 
99,732

 
—

 
—

 
99,732

Other comprehensive income
—

 
—

 
—

 
—

 
443

 
—

 
443

Balance, December 31, 2016
145,235

 
1,452

 
3,673,128

 
(1,580,863
)
 
2,104

 
1,882

 
2,097,703

Offering costs


 


 
(76
)
 


 


 


 
(76
)
Dividends to common stockholders ($0.42 per share), dividends to preferred stockholders of subsidiary, and dividends reinvested


 


 
(55
)
 
(61,070
)
 


 
(7
)
 
(61,132
)
Shares issued and amortized under the 2007 Omnibus Incentive Plan, net of tax
255

 
3

 
2,565

 


 


 


 
2,568

Net loss applicable to noncontrolling interest


 


 


 


 


 
(6
)
 
(6
)
Net income applicable to Piedmont


 


 


 
38,814

 


 


 
38,814

Other comprehensive income


 


 


 


 
2,443

 


 
2,443

Balance, June 30, 2017
145,490

 
$
1,455

 
$
3,675,562

 
$
(1,603,119
)
 
$
4,547

 
$
1,869

 
$
2,080,314


See accompanying notes

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Table of Contents

PIEDMONT OFFICE REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) 
 
(Unaudited)
 
Six Months Ended
 
June 30,
 
2017
 
2016
Cash Flows from Operating Activities:
 
 
 
Net income
$
38,808

 
$
82,657

Operating distributions received from unconsolidated joint ventures
—

 
389

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
60,827

 
63,338

Amortization of debt issuance costs
810

 
842

Other amortization
39,034

 
34,912

Impairment loss on real estate assets
—

 
10,950

Stock compensation expense
5,403

 
5,653

Equity in income of unconsolidated joint ventures
(118
)
 
(225
)
Gain on sale of real estate assets, net
(6,439
)
 
(73,815
)
Changes in assets and liabilities:
 
 
 
Increase in tenant and straight-line rent receivables, net
(13,078
)
 
(8,795
)
(Increase)/decrease in restricted cash and escrows
(428
)
 
4,230

Increase in prepaid expenses and other assets
(6,558
)
 
(4,745
)
Decrease in accounts payable and accrued expenses
(5,471
)
 
(9,785
)
Decrease in deferred income
(1,128
)
 
(2,862
)
Net cash provided by operating activities
111,662

 
102,744

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

 
(10,000
)
Capitalized expenditures, net of accruals
(58,320
)
 
(54,422
)
Net sales proceeds from wholly-owned properties
23,023

 
201,690

Investments in unconsolidated joint ventures
(284
)
 
—

Deferred lease costs paid
(9,563
)
 
(6,266
)
Net cash (used in)/provided by investing activities
(45,144
)
 
131,002

Cash Flows from Financing Activities:
 
 
 
Debt issuance costs paid
(102
)
 
(138
)
Proceeds from debt
147,000

 
211,000

Repayments of debt
(115,694
)
 
(357,597
)
Costs of issuance of common stock
(74
)
 
(42
)
Shares withheld to pay tax obligations related to employee stock compensation
(3,380
)
 
(2,283
)
Repurchases of common stock as part of announced plan
—

 
(7,943
)
Dividends paid and discount on dividend reinvestments
(91,664
)
 
(61,075
)
Net cash used in financing activities
(63,914
)
 
(218,078
)
Net increase in cash and cash equivalents
2,604

 
15,668

Cash and cash equivalents, beginning of period
6,992

 
5,441

Cash and cash equivalents, end of period
$
9,596

 
$
21,109

 
 
 
 
Supplemental Disclosures of Significant Noncash Investing and Financing Activities:
 
 
 
Accrued dividends and discount on dividend reinvestments
$
(30,532
)
 
$
—

Accrued capital expenditures and deferred lease costs
$
9,417

 
$
25,146


See accompanying notes

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PIEDMONT OFFICE REALTY TRUST, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017
(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, 2017, Piedmont owned 67 in-service office properties, and one building through an unconsolidated joint venture. Piedmont's total consolidated portfolio consists of approximately 20 million square feet of primarily Class A commercial office space, and was 91.0% leased as of June 30, 2017. As of June 30, 2017, approximately 88% of Piedmont's ALR was generated from select sub-markets located primarily within eight major office markets located in the Eastern-half of the United States: Atlanta, Boston, Chicago, Dallas, Minneapolis, New York, Orlando, and Washington, D.C.

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

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

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

Piedmont’s consolidated financial statements include the accounts of Piedmont, Piedmont’s wholly-owned subsidiaries, any variable interest entity ("VIE") for which Piedmont or any of its wholly-owned subsidiaries is considered to have the power to direct the activities of the entity and the obligation to absorb losses/right to receive benefits, or any entity in which Piedmont or any of its wholly-owned subsidiaries owns a controlling interest. In determining whether Piedmont or Piedmont OP has a controlling interest, the following factors, among others, are considered: equity ownership, voting rights, protective rights of investors, and participatory rights of investors. For further information, refer to the financial statements and footnotes included in Piedmont’s Amended Annual Report on Form 10-K/A for the year ended December 31, 2016.

All intercompany balances and transactions have been eliminated upon consolidation.

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


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Use of Estimates

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

Income Taxes

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

Reclassifications

Certain prior period amounts presented in Piedmont's Amended Annual Report on Form 10-K/A for the year ended December 31, 2016 have been reclassified to conform to the current period financial statement presentation. The reclassifications relate to the Two Independence Square building, located in Washington, D.C., which was first classified as held for sale as of March 31, 2017, and continues to be presented as held for sale as of June 30, 2017. Applicable balances related to the same asset have been reclassified as held for sale as of December 31, 2016.

Recent Accounting Pronouncements

The Financial Accounting Standards Board (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 Accounting Standards Update 2016-10, Accounting Standards Update 2016-12, and Accounting Standards Update 2016-20 (collectively the "Revenue Recognition Amendments"), change the criteria for the recognition of certain revenue streams to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in 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. The revenues impacted by the Revenue Recognition Amendments include a portion of Piedmont's tenant reimbursement revenues and property management fee revenues. Lease contracts and reimbursement revenues associated with property taxes and insurance are specifically excluded from the Revenue Recognition Amendments. The Revenue Recognition Amendments are effective in the first quarter of 2018 for Piedmont. Management has substantially completed its initial assessment of the impact of adoption of the Revenue Recognition Amendments. Approximately 90% of Piedmont's total revenues are derived from either long-term leases with its tenants or reimbursement of property tax and insurance expenses, which are excluded from the scope of the Revenue Recognition Amendments. In addition, based on management's assessment to date, Piedmont does not expect the timing of the recognition of reimbursement revenue and revenue from management agreements to change as a result of the new guidance, though certain classifications will change between rental revenue and tenant reimbursements. Finally, management has determined, and the FASB has confirmed, that the evaluation of non-lease components under the new Revenue Recognition Amendments will not be effective until Accounting Standards Update No. 2016-02, Leases (Topic 842), ("ASU 2016-02") becomes effective (see further discussion below), which will be first quarter of 2019 for Piedmont. As a result, although management continues to evaluate the guidance and disclosures required by the Revenue Recognition Amendments, 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. 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets ("ASU 2017-05"). The provisions of ASU 2017-05 define the term "in substance nonfinancial asset" as a financial asset promised to a counterparty in a contract if substantially all of the fair value of the assets (recognized and unrecognized) is concentrated in nonfinancial assets. Further, it states that nonfinancial assets should be derecognized once the counterparty obtains control. Finally, the amendments provide clarification for partial sales of nonfinancial assets. ASU 2017-05 is effective concurrent with the Revenue Recognition Amendments (detailed above), which will be the first quarter of 2018 for Piedmont. Although management continues to evaluate the guidance and disclosures required by ASU 2017-05, Piedmont does not anticipate a material change in how it recognizes the disposition of real estate in its consolidated financial statements as a result of adoption.

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

The FASB has issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash (a consensus of the FASB Emerging Issues Task Force) ("ASU 2016-18"). The provisions of ASU 2016-18 require entities to show changes in restricted cash and cash equivalents in addition to cash and cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between restricted and unrestricted cash in the statement of cash flows. Disclosures are required to reconcile the amount presented on the statement of cash flows to the balance sheet, as well as disclosing the nature of restriction on the restricted cash balances. ASU 2016-18 is effective for Piedmont in the first quarter of 2018, with early adoption permitted. Piedmont does not anticipate any material impact to its consolidated financial statements as a result of adoption.

The FASB has issued ASU 2016-02, which fundamentally changes the definition of a lease, as well as the accounting for operating leases by requiring lessees to recognize assets and liabilities which arise from the lease, consisting of a liability to make lease payments (the lease liability) and a right-of-use asset, representing the right to use the leased asset over the term of the lease. Accounting for leases by lessors is substantially unchanged from prior practice as lessors will continue to recognize lease revenue on a straight-line basis; however, ASU 2016-02 defines certain tenant reimbursements as non-lease components which will be subject to the guidance under ASU 2014-09. 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 allowances for credit losses. Additionally, the provisions change the classification of credit losses related to available-for-sale securities to an allowance, rather than a direct reduction of the amortized cost of the securities. ASU 2016-13 is effective in the first quarter of 2020, with early adoption permitted as of January 1, 2019. Piedmont is currently evaluating the potential impact of adoption.

The FASB has issued Accounting Standards Update No. 2017-04, Intangibles—Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). The provisions of ASU 2017-04 simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test, which is generally performed annually unless events or circumstances arise which would necessitate evaluating the carrying value for impairment in the interim. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a entity’s goodwill with the carrying amount of that goodwill by determining the fair value of its assets and liabilities (including unrecognized assets and liabilities) following the procedures that would be required in a business combination. Under the provisions of ASU 2017-04, an entity would instead recognize an impairment charge for the amount by which the carrying amount exceeds the entity’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that entity. ASU 2017-04 is effective in the first quarter of 2020, with early adoption permitted as of the first interim or annual impairment test of goodwill after January 1, 2017. Piedmont is currently evaluating the potential impact of adoption.


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3.Debt

The following table summarizes the terms of Piedmont’s indebtedness outstanding as of June 30, 2017 and December 31, 2016 (in thousands):
Facility (1)
 
Stated Rate
 
Effective Rate (2)
 
Maturity
 
Amount Outstanding as of
 
June 30, 2017
 
December 31, 2016
Secured (Fixed)
 
 
 
 
 
 
 
 
 
 
$140 Million WDC Fixed-Rate Loans (3)
 
5.76
%
 
5.76
%
 
11/1/2017
 
$
140,000

(4) 
$
140,000

$35 Million Fixed-Rate Loan (5)
 
5.55
%
 
3.75
%
 
9/1/2021
 
31,133

 
31,583

$160 Million Fixed-Rate Loan (6)
 
3.48
%
 
3.58
%
 
7/5/2022
 
160,000

 
160,000

Net premium and unamortized debt issuance costs
 
 
 
 
 
 
 
1,063

 
1,161

Subtotal/Weighted Average (7)
 
4.64
%
 
 
 
 
 
332,196

 
332,744

Unsecured (Variable and Fixed)
 
 
 
 
 
 
 
 
 
 
$170 Million Unsecured 2015 Term Loan (8)
 
LIBOR + 1.125%

 
2.29
%
 
5/15/2018
 
170,000

 
170,000

$300 Million Unsecured 2013 Term Loan
 
LIBOR + 1.20%

 
2.78
%
 
1/31/2019
 
300,000

 
300,000

$500 Million Unsecured 2015 Line of Credit (8)
 
LIBOR + 1.00%

 
2.14
%
 
6/18/2019
(9) 
210,000

(10) 
178,000

$300 Million Unsecured 2011 Term Loan
 
LIBOR +  1.15%

 
3.35
%
 
1/15/2020
 
300,000

 
300,000

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

 
350,000

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

 
400,000

Discounts and unamortized debt issuance costs
 
 
 
 
 
 
 
(9,014)

 
(10,269)

Subtotal/Weighted Average (7)
 
3.26
%
 
 
 
 
 
1,720,986

 
1,687,731

Total/Weighted Average (7)
 
3.48
%
 
 
 
 
 
$
2,053,182

 
$
2,020,475


(1) 
Other than the $35 Million Fixed-Rate Loan, all of Piedmont’s outstanding debt as of June 30, 2017 and December 31, 2016 is interest-only.
(2) 
Effective rate after consideration of settled or in place interest rate swap agreements and/or issuance premiums or discounts.
(3) 
Collateralized by the 1201 and 1225 Eye Street buildings in Washington, D.C.
(4) 
On August 1, 2017, Piedmont fully repaid the $140 Million WDC Fixed-Rate Loans without penalty using a portion of the net proceeds from the sale of the Two Independence Square building (see Note 9 and Note 13).
(5) 
Collateralized by the 5 Wall Street building in Burlington, Massachusetts.
(6) 
Collateralized by the 1901 Market Street building in Philadelphia, Pennsylvania.
(7) 
Weighted average is based on contractual balance of outstanding debt and the stated or effectively fixed interest rates in the table as of June 30, 2017.
(8) 
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 over the selected rate based on Piedmont’s current credit rating.
(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) 
On July 5, 2017, Piedmont repaid the outstanding balance of the $500 Million Unsecured 2015 Line of Credit, using a portion of the net proceeds from the sale of the Two Independence Square building (see Note 9 and Note 13).

Piedmont made interest payments on all debt facilities, including interest rate swap cash settlements, of approximately $16.7 million and $15.4 million for the three months ended June 30, 2017 and 2016, respectively, and approximately $36.0 million and $34.7 million for the six months ended June 30, 2017 and 2016, respectively. Also, Piedmont capitalized interest of approximately $35,000 and $735,000 for the three months ended June 30, 2017 and 2016, respectively, and approximately $0.1 million and $1.9 million for the six months ended June 30, 2017 and 2016, respectively. As of June 30, 2017, 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, 2017.

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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, 2017 and December 31, 2016 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, 2017
 
Net Carrying
Amount as of
December 31, 2016
 
Primary Beneficiary
Considerations
1201 Eye Street N.W. Associates, LLC
 
49.5%
 
1201 Eye Street
 
Consolidated
 
$
(0.9
)
 
$
(6.7
)
 
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
 
$
8.8

 
$
9.9

 
In accordance with the partnership’s governing documents, Piedmont is entitled to 100% of the cash flow of the entity and has sole discretion in directing the management and leasing activities of the building.
Piedmont 500 W. Monroe Fee, LLC
 
100%
 
500 W. Monroe
 
Consolidated
 
$
267.6

 
$
262.4

 
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.

5.Derivative Instruments
Risk Management Objective of Using Derivatives

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

Cash Flow Hedges of Interest Rate Risk

Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for Piedmont making fixed-rate payments over the life of the agreements without changing the underlying notional amount. As of June 30, 2017, Piedmont was party to various interest rate swap agreements, all of which are designated as effective cash flow hedges and fully hedge the variable cash flows associated with its $300 Million Unsecured 2011 Term Loan and its $300 Million Unsecured 2013 Term Loan. The maximum length of time over which Piedmont is hedging its exposure to the variability in future cash flows for forecasted transactions is 30 months.


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A detail of Piedmont’s interest rate derivatives outstanding as of June 30, 2017 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 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
Interest rate swaps
 
3
 
$300 Million Unsecured 2011 Term Loan
 
300

 
11/22/2016
 
1/15/2020
Total
 
 
 
 
 
$
600

 
 
 
 

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, 2017 and December 31, 2016, respectively, is as follows (in thousands):

Interest rate swaps classified as:
June 30,
2017
 
December 31,
2016
Gross derivative assets
$
—

 
$
—

Gross derivative liabilities
5,061

 
8,169

Net derivative liability
$
5,061

 
$
8,169


The effective portion of Piedmont's interest rate derivatives, including the gain/(loss) on previously settled forward swaps, that was recorded in the accompanying consolidated statements of income for the three and six months ended June 30, 2017 and 2016, respectively, was as follows (in thousands):
 
Three Months Ended
 
Six Months Ended
Interest Rate Swaps in Cash Flow Hedging Relationships
June 30,
2017
 
June 30,
2016
 
June 30,
2017
 
June 30,
2016
Amount of gain/(loss) recognized in OCI
$
(911
)
 
$
(4,068
)
 
$
132

 
$
(15,029
)
Amount of previously recorded loss reclassified from accumulated OCI into interest expense
$
977

 
$
1,113

 
$
2,283

 
$
2,246


Piedmont estimates that approximately $1.7 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 of its cash flow hedges during the three and six months ended June 30, 2017 and 2016, 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 could be required to settle its obligations under the agreements at their termination value of the estimated fair values plus accrued interest, or approximately $5.2 million as of June 30, 2017. 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.


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6.Fair Value Measurement of Financial Instruments
Piedmont considers its cash and cash equivalents, tenant receivables, restricted cash and escrows, accounts payable and accrued expenses, interest rate swap agreements, and debt to meet the definition of financial instruments. The following table sets forth the carrying and estimated fair value for each of Piedmont’s financial instruments, as well as its level within the GAAP fair value hierarchy, as of June 30, 2017 and December 31, 2016, respectively (in thousands):

 
June 30, 2017
 
December 31, 2016
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)
$
9,596

 
$
9,596

 
Level 1
 
$
6,992

 
$
6,992

 
Level 1
Tenant receivables, net(1)
$
24,269

 
$
24,269

 
Level 1
 
$
26,494

 
$
26,494

 
Level 1
Restricted cash and escrows(1)
$
1,290

 
$
1,290

 
Level 1
 
$
1,212

 
$
1,212

 
Level 1
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses(1)
$
12,935

 
$
12,935

 
Level 1
 
$
44,733

 
$
44,733

 
Level 1
Interest rate swap
$
5,061

 
$
5,061

 
Level 2
 
$
8,169

 
$
8,169

 
Level 2
Debt, net
$
2,053,182

 
$
2,081,120

 
Level 2
 
$
2,020,475

 
$
2,027,436

 
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, 2017 and December 31, 2016; 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 June 30, 2017 and December 31, 2016. 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, 2017 and December 31, 2016, 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.


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7.Impairment Loss on Real Estate Assets

Piedmont recorded impairment loss on real estate assets for the three and six months ended June 30, 2017 and 2016, respectively, as follows (in thousands):

 
Three Months Ended
 
Six Months Ended
 
2017
 
2016
 
2017
 
2016
150 West Jefferson(1)
$
—

 
$
8,259

 
$
—

 
$
8,259

9221 Corporate Boulevard (2)
—

 
2,691

 
—

 
2,691

Total impairment loss on real estate assets(3)
$
—

 
$
10,950

 
$
—

 
$
10,950


(1) 
Piedmont recognized an impairment loss on real estate assets based upon the difference between the carrying value of the asset and the anticipated contract sales price, less estimated selling costs.

(2) 
Piedmont, using a probability-weighted model heavily weighted towards the short-term sale of the 9221 Corporate Boulevard building in Rockville, Maryland, 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 $2.7 million during the six months ended June 30, 2016 calculated as the difference between the carrying value of the asset and the anticipated contract sales price, less estimated selling costs.

(3) 
The fair value measurements used in the evaluation 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

Under its existing lease agreements, Piedmont may be required to fund significant tenant improvements, leasing commissions, and building improvements. In addition, certain agreements contain provisions that require Piedmont to issue corporate or property guarantees to provide funding for capital improvements or other financial obligations. Piedmont classifies its capital improvements into two categories: (i) improvements which maintain the building's existing asset value and its revenue generating capacity (“non-incremental capital expenditures”) and (ii) improvements which incrementally enhance the building's asset value by expanding its revenue generating capacity (“incremental capital expenditures”). As of June 30, 2017, commitments to fund potential non-incremental capital expenditures over the next five years for tenant improvements totaled approximately $31.4 million related to Piedmont's existing lease portfolio over the respective lease terms, the majority of which Piedmont estimates may be required to be funded over the next three years based on when the underlying leases commence. For most of Piedmont’s leases, the timing of the actual funding of these tenant improvements is largely dependent upon tenant requests for reimbursement. In some cases, these obligations may expire with the leases without further recourse to Piedmont. As of June 30, 2017, commitments for incremental capital expenditures for tenant improvements associated with executed leases totaled approximately $13.2 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 $20,000 and $0 of such reductions in reimbursement revenues related to such tenant audits/disputes during the three months ended June 30, 2017 and 2016, respectively, and $0.3 million and $0 of such reductions in reimbursement revenues related to such tenant audits/disputes during the six months ended June 30, 2017 and 2016, respectively.


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

Properties sold during the six months ended June 30, 2017 and 2016 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/(loss) on sale is presented separately on the face of the income statement. Details of such properties sold are presented below (in thousands):

Buildings Sold(1)
 
Location
 
Date of Sale
 
Gain/(Loss) on Sale
 
Net Sales Proceeds
1055 East Colorado Boulevard
 
Pasadena, California
 
April 21, 2016
 
$
29,462

 
$
60,076

Fairway Center II
 
Brea, California
 
April 28, 2016
 
$
14,406

 
$
33,062

1901 Main Street
 
Irvine, California
 
May 2, 2016
 
$
29,964

 
$
63,149

Sarasota Commerce Center II
 
Sarasota, Florida
 
June 16, 2017
 
$
6,497

 
$
23,094


Assets Held for Sale

In February 2017, Piedmont reclassified the Two Independence Square 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. The sale of the Two Independence Square building closed on July 5, 2017. Details of assets held for sale as of June 30, 2017 and December 31, 2016 are presented below (in thousands):
 
 
June 30, 2017
 
December 31, 2016
Real estate assets held for sale, net:
 
 
 
 
Land
 
$
52,710

 
$
52,710

Building and improvements, less accumulated depreciation of $89,187 and $88,319 as of June 30, 2017 and December 31, 2016, respectively
 
172,350

 
173,218

Construction in progress
 
11

 
11

Total real estate assets held for sale, net
 
$
225,071

 
$
225,939

 
 
 
 
 
Other assets held for sale, net:
 
 
 
 
Straight-line rent receivables
 
$
2,225

 
$
2,059

Prepaid expenses and other assets
 
762

 
454

Deferred lease costs, less accumulated amortization of $2,892 and $2,825 as of June 30, 2017 and December 31, 2016, respectively
 
7,235

 
7,302

Total other assets held for sale, net
 
$
10,222

 
$
9,815


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Details comprising loss from discontinued operations activity for the three and six months ended ended June 30, 2017 and 2016 are presented below (in thousands):

 
Three Months Ended
 
Six Months Ended
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
Revenues:
 
 
 
 
 
 
 
Rental income
$
—

 
$
—

 
$
—

 
$
—

Tenant reimbursements
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Expenses:
 
 
 
 
 
 
 
Property operating costs
—

 
—

 
—

 
—

General and administrative
—

 
1

 
—

 
1

 
—

 
1

 
—

 
1

 
 
 
 
 
 
 
 
Operating income
—

 
(1
)
 
—

 
(1
)
Loss on sale of real estate assets
—

 
—

 
—

 
—

Income from discontinued operations
$
—

 
$
(1
)
 
$
—

 
$
(1
)



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

A rollforward of Piedmont's equity based award activity for the six months ended June 30, 2017 is as follows:

 
Shares
 
Weighted-Average Grant Date Fair Value
Unvested Stock Awards as of December 31, 2016
944,223

 
$
19.44

Deferred Stock Awards Granted
299,251

 
$
21.38

Increase in Estimated Potential Future Performance Share Awards, net of forfeitures
150,537

 
$
28.37

Performance Stock Awards Vested
(118,446
)
 
$
22.00

Deferred Stock Awards Vested
(301,921
)
 
$
19.35

Deferred Stock Awards Forfeited
(4,761
)
 
$
19.57

Unvested Stock Awards as of June 30, 2017
968,883

 
$
21.94


The following table provides additional information regarding stock award activity during the three and six months ended June 30, 2017 and 2016, respectively (in thousands, except per share amounts):

 
Three Months Ended
 
Six Months Ended
 
June 30,
2017
 
June 30,
2016
 
June 30,
2017
 
June 30,
2016
Weighted-Average Grant Date Fair Value of Deferred Stock Granted During the Period
$
21.38

 
$
19.96

 
$
21.38

 
$
19.96

Total Grant Date Fair Value of Deferred Stock Vested During the Period
$
5,551

 
$
4,319

 
$
5,841

 
$
4,659

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

 
$
—

 
$
2,877

 
$
1,127


(1) 
Amounts reflect the issuance of performance share awards related to the 2014-16 and 2013-15 Performance Share Plans during the six months ended June 30, 2017 and 2016, respectively.

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A detail of Piedmont’s outstanding stock awards as of June 30, 2017 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, 2017
 
January 3, 2014
 
Deferred Stock Award
 
86,769

 
$
16.56

 
Of the shares granted, 20% vested or will vest on January 3, 2015, 2016, 2017, 2018, and 2019, respectively.
 
35,094

 
May 1, 2015
 
Deferred Stock Award
 
216,919

 
$
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.
 
67,747

 
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.
 
229,828

(2) 
May 24, 2016
 
Deferred Stock Award
 
233,073

 
$
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.
 
134,117

 
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.
 
85,792

(2) 
May 18, 2017
 
Deferred Stock Award-Board of Directors
 
26,187

 
$
21.38

 
Of the shares granted, 100% will vest by May 18, 2018.
 
26,187

 
May 18, 2017
 
Deferred Stock Award
 
246,808

 
$
21.38

 
Of the shares granted, 25% vested on the date of grant, and 25% vested or will vest on May 18, 2018, 2019, and 2020, respectively.
 
202,233

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

 
$
30.45

 
Shares awarded, if any, will vest immediately upon determination of award in 2020.
 
187,885

(2) 
Total
 
 
 
 
 
 
 
 
 
968,883

 

(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, 2017.
(2) 
Estimated based on Piedmont's cumulative TSR for the respective performance period through June 30, 2017. 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, 2017 and 2016, Piedmont recognized approximately $2.6 million and $3.2 million of compensation expense related to stock awards, of which $1.1 million and $1.7 million related to the amortization of unvested shares, respectively. During the six months ended June 30, 2017 and 2016, Piedmont recognized approximately $5.7 million and $5.7 million of compensation expense related to stock awards, of which $3.9 million and $4.2 million related to the amortization of unvested shares, respectively. During the six months ended June 30, 2017, a net total of 254,532 shares were issued to employees and independent directors. As of June 30, 2017, approximately $6.4 million of unrecognized compensation cost related to unvested deferred stock awards remained, which Piedmont will record in its consolidated statements of income over a weighted-average vesting period of approximately two years.

11.Earnings Per Share

There are no adjustments to “Net income applicable to Piedmont” for the diluted earnings per share computations. Adjustments to the carrying amount of non-controlling interest as a result of the measurement of a redeemable equity participation do not impact net income or comprehensive income; rather such adjustments are treated as the repurchase of a non-controlling interest.


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

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, 2017 and 2016, respectively (in thousands):

 
Three Months Ended
 
Six Months Ended
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
Weighted-average common shares – basic
145,413
 
145,179
 
145,350
 
145,228
Plus: Incremental weighted-average shares from time-vested deferred and performance stock awards

400
 
520
 
430
 
537
Weighted-average common shares – diluted
145,813
 
145,699
 
145,780
 
145,765
 
 
 
 
 
 
 
 
Common stock issued and outstanding as of period end
 
 
 
 
145,490
 
145,230


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12.Guarantor and Non-Guarantor Financial Information

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


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Condensed Consolidated Balance Sheets
As of June 30, 2017
(in thousands)
Issuer
 
Guarantor
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets:
 
 
 
 
 
 
 
 
 
Real estate assets, at cost:
 
 
 
 
 
 
 
 
 
Land
$
43,929

 
$
—

 
$
571,005

 
$
—

 
$
614,934

Buildings and improvements, less accumulated depreciation
209,091

 
—

 
2,533,536

 
(300
)
 
2,742,327

Intangible lease assets, less accumulated amortization
453

 
—

 
84,536

 
—

 
84,989

Construction in progress
572

 
—

 
15,079

 
—

 
15,651

Real estate assets held for sale, net
—

 
—

 
225,071

 
—

 
225,071

Total real estate assets
254,045

 
—

 
3,429,227

 
(300
)
 
3,682,972

Investments in and amounts due from unconsolidated joint ventures
7,762

 
—

 
—

 
—

 
7,762

Cash and cash equivalents
5,181

 
150

 
4,265

 
—

 
9,596

Tenant and straight-line rent receivables, net
17,266

 
—

 
184,466

 
—

 
201,732

Advances to affiliates
6,465,350

 
1,316,446

 
—

 
(7,781,796
)
 
—

Investment in subsidiary
—

 
3,569,494

 
178

 
(3,569,672
)
 
—

Notes receivable
88,910

 
—

 
95,790

 
(184,700
)
 
—

Prepaid expenses, restricted cash, escrows, and other assets
5,007

 
76

 
26,752

 
(1,091
)
 
30,744

Goodwill
98,918

 
—

 
—

 
—

 
98,918

Deferred lease costs, net
14,500

 
—

 
263,866

 
—

 
278,366

Other assets held for sale, net
—

 
—

 
10,222

 
—

 
10,222

Total assets
$
6,956,939

 
$
4,886,166

 
$
4,014,766

 
$
(11,537,559
)
 
$
4,320,312

Liabilities:
 
 
 
 
 
 
 
 
 
Debt, net
$
1,735,196

 
$
—

 
$
502,686

 
$
(184,700
)
 
$
2,053,182

Accounts payable, accrued expenses, and accrued capital expenditures
16,328

 
565

 
95,209

 
(1,091
)
 
111,011

Advances from affiliates
729,007

 
5,100,839

 
2,050,205

 
(7,880,051
)
 
—

Deferred income
2,934

 
—

 
24,482

 
—

 
27,416

Intangible lease liabilities, net
—

 
—

 
43,328

 
—

 
43,328

Interest rate swaps
5,061

 
—

 
—

 
—

 
5,061

Total liabilities
2,488,526

 
5,101,404

 
2,715,910

 
(8,065,842
)
 
2,239,998

Stockholders’ Equity:
 
 
 
 
 
 
 
 
 
Common stock
—

 
1,455

 
—

 
—

 
1,455

Additional paid-in capital
3,565,494

 
3,678,434

 
1,306

 
(3,569,672
)
 
3,675,562

Retained/(cumulative distributions in excess of) earnings
898,372

 
(3,895,127
)
 
1,295,681

 
97,955

 
(1,603,119
)
Other comprehensive loss
4,547

 
—

 
—

 
—

 
4,547

Piedmont stockholders’ equity
4,468,413

 
(215,238
)
 
1,296,987

 
(3,471,717
)
 
2,078,445

Noncontrolling interest
—

 
—

 
1,869

 
—

 
1,869

Total stockholders’ equity
4,468,413

 
(215,238
)
 
1,298,856

 
(3,471,717
)
 
2,080,314

Total liabilities and stockholders’ equity
$
6,956,939

 
$
4,886,166

 
$
4,014,766

 
$
(11,537,559
)
 
$
4,320,312


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Condensed Consolidated Balance Sheets
As of December 31, 2016
(in thousands)
Issuer
 
Guarantor
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets:
 
 
 
 
 
 
 
 
 
Real estate assets, at cost:
 
 
 
 
 
 
 
 
 
Land
$
46,133

 
$
—

 
$
571,005

 
$
—

 
$
617,138

Buildings and improvements, less accumulated depreciation
228,194

 
—

 
2,526,212

 
(300
)
 
2,754,106

Intangible lease assets, less accumulated amortization
725

 
—

 
98,970

 
—

 
99,695

Construction in progress
145

 
—

 
34,669

 
—

 
34,814

Real estate assets held for sale, net
—

 
—

 
225,939

 
—

 
225,939

Total real estate assets
275,197

 
—

 
3,456,795

 
(300
)
 
3,731,692

Investments in and amounts due from unconsolidated joint ventures
7,360

 
—

 
—

 
—

 
7,360

Cash and cash equivalents
3,674

 
150

 
3,168

 
—

 
6,992

Tenant and straight-line rent receivables, net
20,159

 
—

 
170,124

 
—

 
190,283

Advances to affiliates
6,464,135

 
1,315,616

 
—

 
(7,779,751
)
 
—

Investment in subsidiary
—

 
3,630,564

 
181

 
(3,630,745
)

—

Notes receivable
88,910

 
—

 
95,790

 
(184,700
)
 
—

Prepaid expenses, restricted cash, escrows, and other assets
6,189

 
—

 
20,121

 
(1,897
)
 
24,413

Goodwill
98,918

 
—

 
—

 
—

 
98,918

Deferred lease costs, net
16,550

 
—

 
282,145

 
—

 
298,695

Other assets held for sale, net
—

 
—

 
9,815

 
—

 
9,815

Total assets
$
6,981,092

 
$
4,946,330

 
$
4,038,139

 
$
(11,597,393
)
 
$
4,368,168

Liabilities:
 
 
 
 
 
 
 
 
 
Debt, net
$
1,701,933

 
$
—

 
$
503,242

 
$
(184,700
)
 
$
2,020,475

Accounts payable, accrued expenses, and accrued capital expenditures
17,365

 
31,230

 
118,712

 
(1,897
)
 
165,410

Advances from affiliates
708,340

 
5,071,521

 
2,098,146

 
(7,878,007
)
 
—

Deferred income
5,206