The Company is a fully integrated office real estate investment trust ("REIT")
that owns, develops, acquires, leases and manages properties primarily in the
best business districts (BBDs) of
You should read the following discussion and analysis in conjunction with the accompanying Consolidated Financial Statements and related notes contained elsewhere in this Quarterly Report.
Disclosure Regarding Forward-Looking Statements
Some of the information in this Quarterly Report may contain forward-looking statements. Such statements include, in particular, statements about our plans, strategies and prospects under this section. You can identify forward-looking statements by our use of forward-looking terminology such as "may," "will," "expect," "anticipate," "estimate," "continue" or other similar words. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that our plans, intentions or expectations will be achieved. When considering such forward-looking statements, you should keep in mind important factors that could cause our actual results to differ materially from those contained in any forward-looking statement. Currently, one of the most significant factors that could cause actual outcomes to differ materially from our forward-looking statements is the potential adverse effect of the COVID-19 pandemic, and federal, state, and/or local regulatory guidelines and private business actions to control it, on our financial condition, operating results and cash flows, our customers, the real estate market in which we operate, the global economy and the financial markets. The extent to which the COVID-19 pandemic impacts us and our customers will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic and the resulting economic recession and potential changes in customer behavior, among others. Additional factors, many of which may be influenced by the COVID-19 pandemic, that could cause actual outcomes or results to differ materially from those indicated in these statements include:
• the financial condition of our customers could deteriorate or further worsen;
• our assumptions regarding potential losses related to customer financial difficulties due to the COVID-19 pandemic could prove incorrect; • counterparties under our debt instruments, particularly our revolving credit facility, may attempt to avoid their obligations thereunder, which, if successful, would reduce our available liquidity; • we may not be able to lease or re-lease second generation space, defined as previously occupied space that becomes available for lease, quickly or on as favorable terms as old leases; • we may not be able to lease newly constructed buildings as quickly or on as favorable terms as originally anticipated; • we may not be able to complete development, acquisition, reinvestment, disposition or joint venture projects as quickly or on as favorable terms as anticipated; • development activity in our existing markets could result in an excessive supply relative to customer demand;
• our markets may suffer declines in economic and/or office employment growth;
• unanticipated increases in interest rates could increase our debt service costs; • unanticipated increases in operating expenses could negatively impact our operating results; • we may not be able to meet our liquidity requirements or obtain capital on favorable terms to fund our working capital needs and growth initiatives or repay or refinance outstanding debt upon maturity; and
• the Company could lose key executive officers.
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This list of risks and uncertainties, however, is not intended to be exhaustive. You should also review the other cautionary statements we make in "Business - Risk Factors" set forth in our 2019 Annual Report on Form 10-K and "Item 1A. Risk Factors" contained herein. Given these uncertainties, you should not place undue reliance on forward-looking statements. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements to reflect any future events or circumstances or to reflect the occurrence of unanticipated events.
Executive Summary
Our Strategic Plan focuses on:
• owning high-quality, differentiated office buildings in the BBDs of our core markets; • improving the operating results of our properties through concentrated leasing, asset management, cost control and customer service efforts; • developing and acquiring office buildings in BBDs that improve the overall quality of our portfolio and generate attractive returns over the long term for our stockholders; • disposing of properties no longer considered to be core assets primarily due to location, age, quality and/or overall strategic fit; and • maintaining a balance sheet with ample liquidity to meet our funding needs and growth prospects.
COVID-19
The unprecedented nationwide efforts to slow the spread of the COVID-19 virus
have obviously had a significant impact on the
It is still too early to predict when, if and to what extent economic activity will return to pre-COVID-19 levels. While the COVID-19 pandemic did not have a meaningful impact on our second quarter of 2020 financial results, we believe it is likely our financial results for the remainder of 2020 will be adversely impacted by the COVID-19 pandemic. Given the fluidity of the pandemic and its uncertain impact on economic activity, losses related to customer financial difficulties are difficult to predict.
This outlook reflects management's view of current and future market conditions, including assumptions such as potential losses related to customer financial difficulties and asset usage due to the COVID-19 pandemic, rental rates, occupancy levels, operating and general and administrative expenses, weighted average diluted shares outstanding and interest rates. Factors that could cause actual results to differ materially from our current expectations are set forth under "Disclosure Regarding Forward-Looking Statements."
While all buildings and parking facilities have remained open for business, the usage of our assets in the second quarter of 2020 was significantly lower than normal due to the COVID-19 pandemic. As a result, parking and parking-related revenues were lower than normal during this period. In addition, our operating expenses, net of expense recoveries, were lower during this period due to reduced electricity, janitorial and other variable expenses. Until usage returns to normal, we expect that reduced usage will continue to result in reduced parking revenues, which will be only partially offset by reduced operating expenses. Usage of our assets for the remainder of 2020, however, depends on the duration of the COVID-19 pandemic, which is difficult to estimate.
Given the COVID-19 pandemic, we have been experiencing and expect to continue to experience slower than originally anticipated speculative new leasing, which we expect will be partially offset by higher renewal activity. This would reduce our anticipated rental revenues. Because construction activities have generally been classified as essential activities throughout our markets during the COVID-19 pandemic, we do not currently expect meaningful delays in customers taking occupancy under recently-signed leases.
We assume we will incur losses due to customers that default on their leases,
file bankruptcy and/or otherwise experience significant financial difficulty as
a result of the COVID-19 pandemic (including
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The extent of any losses will depend on whether or not the collectability of
future rents from customers experiencing financial difficulty is deemed to be
probable under GAAP. Through
For a discussion of the impact of the COVID-19 pandemic on our liquidity and balance sheet, see "Liquidity and Capital Resources" below.
Revenues
Our operating results depend heavily on successfully leasing and operating the office space in our portfolio. Economic growth and office employment levels in our core markets are important factors, among others, in predicting our future operating results.
The key components affecting our rental and other revenues are average
occupancy, rental rates, cost recovery income, new developments placed in
service, acquisitions and dispositions. Average occupancy generally increases
during times of improving economic growth, as our ability to lease space
outpaces vacancies that occur upon the expirations of existing leases. Average
occupancy generally declines during times of slower or negative economic growth,
when new vacancies tend to outpace our ability to lease space. Asset
acquisitions, dispositions and new developments placed in service directly
impact our rental revenues and could impact our average occupancy, depending
upon the occupancy rate of the properties that are acquired, sold or placed in
service. A further indicator of the predictability of future revenues is the
expected lease expirations of our portfolio. As a result, in addition to seeking
to increase our average occupancy by leasing current vacant space, we also
concentrate our leasing efforts on renewing existing leases prior to expiration.
For more information regarding our lease expirations, see "Properties - Lease
Expirations" in our 2019 Annual Report on Form 10-K. Occupancy in our office
portfolio decreased from 92.0% at
Whether or not our rental revenue tracks average occupancy proportionally depends upon whether GAAP rents under signed new and renewal leases are higher or lower than the GAAP rents under expiring leases. Annualized rental revenues from second generation leases expiring during any particular year are typically less than 15% of our total annual rental revenues. The following table sets forth information regarding second generation office leases signed during the second quarter of 2020 (we define second generation office leases as leases with new customers and renewals of existing customers in office space that has been previously occupied under our ownership and leases with respect to vacant space in acquired buildings):
New Renewal All Office Leased space (in rentable square feet) 91,007 730,250 821,257 Average term (in years - rentable square foot weighted) 5.1 8.6 8.2 Base rents (per rentable square foot) (1)$ 30.02 $ 29.69 $ 29.73 Rent concessions (per rentable square foot) (1) (1.01 ) (0.87 ) (0.88 ) GAAP rents (per rentable square foot) (1)$ 29.01 $ 28.82 $ 28.85
Tenant improvements (per rentable square foot) (1)
__________
(1) Weighted average per rentable square foot on an annual basis over the lease
term.
Annual combined GAAP rents for new and renewal leases signed in the second
quarter were
We strive to maintain a diverse, stable and creditworthy customer base. We have
an internal guideline whereby customers that account for more than 3% of our
revenues are periodically reviewed with the Company's Board of Directors. As of
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III development project in
Expenses
Our expenses primarily consist of rental property expenses, depreciation and amortization, general and administrative expenses and interest expense. From time to time, expenses also include impairments of real estate assets. Rental property expenses are expenses associated with our ownership and operation of rental properties and include expenses that vary somewhat proportionately to occupancy levels, such as janitorial services and utilities, and expenses that do not vary based on occupancy, such as property taxes and insurance. Depreciation and amortization is a non-cash expense associated with the ownership of real property and generally remains relatively consistent each year, unless we buy, place in service or sell assets, since our properties and related building and tenant improvement assets are depreciated on a straight-line basis over fixed lives. General and administrative expenses consist primarily of management and employee salaries and benefits, corporate overhead and short and long-term incentive compensation.
Net Operating Income
Whether or not we record increasing net operating income ("NOI") in our same
property portfolio typically depends upon our ability to garner higher rental
revenues, whether from higher average occupancy, higher GAAP rents per rentable
square foot or higher cost recovery income, that exceed any corresponding growth
in operating expenses. Same property NOI was
In addition to the effect of same property NOI, whether or not NOI increases
typically depends upon whether the NOI from our acquired properties and
development properties placed in service exceeds the NOI from property
dispositions. NOI was
Cash Flows
In calculating net cash related to operating activities, depreciation and amortization, which are non-cash expenses, are added back to net income. We have historically generated a positive amount of cash from operating activities. From period to period, cash flow from operations depends primarily upon changes in our net income, as discussed more fully below under "Results of Operations," changes in receivables and payables and net additions or decreases in our overall portfolio.
Net cash related to investing activities generally relates to capitalized costs incurred for leasing and major building improvements and our acquisition, development, disposition and joint venture activity. During periods of significant net acquisition and/or development activity, our cash used in such investing activities will generally exceed cash provided by investing activities, which typically consists of cash received upon the sale of properties and distributions from our joint ventures.
Net cash related to financing activities generally relates to distributions, incurrence and repayment of debt, and issuances, repurchases or redemptions of Common Stock, Common Units and Preferred Stock. We use a significant amount of our cash to fund distributions. Whether or not we have increases in the outstanding balances of debt during a period depends generally upon the net effect of our acquisition, disposition, development and joint venture activity. We generally use our revolving credit facility for daily working capital purposes, which means that during any given period, in order to minimize interest expense, we may record significant repayments and borrowings under our revolving credit facility.
For a discussion regarding dividends and distributions, see "Liquidity and Capital Resources - Dividends and Distributions."
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Liquidity and Capital Resources
We continue to maintain a conservative and flexible balance sheet. We believe we
have ample liquidity. As of
Rental and other revenues are our principal source of funds to meet our
short-term liquidity requirements. Other sources of funds for short-term
liquidity needs include available working capital and borrowings under our
revolving credit facility, which had
Subject to potential losses in the remainder of 2020 related to customer
financial difficulties due to the COVID-19 pandemic, we generally believe
existing cash and rental and other revenues will continue to be sufficient to
fund short-term liquidity needs such as funding operating and general and
administrative expenses, paying interest expense, maintaining our existing
quarterly dividend and funding existing portfolio capital expenditures,
including building improvement costs, tenant improvement costs and lease
commissions. For the full year of 2020, such existing portfolio capital
expenditures are expected to be approximately
Our long-term liquidity uses generally consist of the retirement or refinancing
of debt upon maturity, funding of building improvements, new building
developments and land infrastructure projects and funding acquisitions of
buildings and development land. Our expected future capital expenditures for
started and/or committed new development projects were approximately
We expect to meet our long-term liquidity needs through a combination of:
• cash flow from operating activities;
• bank term loans and borrowings under our revolving credit facility;
• the issuance of unsecured debt;
• the issuance of secured debt;
• the issuance of equity securities by the Company or the Operating Partnership; and
• the disposition of non-core assets.
We have no debt scheduled to mature during the remainder of 2020 or 2021 except
for
Investment Activity
As noted above, a key tenet of our strategic plan is to continuously upgrade the quality of our office portfolio through acquisitions, dispositions and development. We generally seek to acquire and develop office buildings that improve the average quality of our overall portfolio and deliver consistent and sustainable value for our stockholders over the long-term. Whether or
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not an asset acquisition or new development results in higher per share net income or funds from operations ("FFO") in any given period depends upon a number of factors, including whether the NOI for any such period exceeds the actual cost of capital used to finance the acquisition or development. Additionally, given the length of construction cycles, development projects are not placed in service until, in some cases, several years after commencement. Sales of non-core assets could result in lower per share net income or FFO in any given period in the event the resulting use of proceeds does not exceed the capitalization rate on the sold properties.
Results of Operations
Three Months Ended
Rental and Other Revenues
Rental and other revenues were
Operating Expenses
Rental property and other expenses were
Depreciation and amortization was unchanged in the second quarter of 2020 as compared to 2019 due to acquisitions and development properties placed in service offset by property dispositions. We expect depreciation and amortization to be higher for the remainder of 2020 as compared to 2019 for similar reasons.
We recorded impairments of real estate assets of
General and administrative expenses were
Interest Expense
Interest expense was
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Other income was
Gains on Disposition of Property
Gains on disposition of property were
Equity in Earnings of Unconsolidated Affiliates
Equity in earnings of unconsolidated affiliates was
Earnings Per Common Share - Diluted
Diluted earnings per common share was
Six Months Ended
In the first quarter of 2019, we provided information on
Rental and Other Revenues
Rental and other revenues were
Operating Expenses
Rental property and other expenses were
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Depreciation and amortization was
We recorded impairments of real estate assets of
General and administrative expenses were
Interest Expense
Interest expense was
Other Income/(Loss)
Other income was
Gains on Disposition of Property
Gains on disposition of property were
Equity in Earnings of Unconsolidated Affiliates
Equity in earnings of unconsolidated affiliates was
Earnings Per Common Share - Diluted
Diluted earnings per common share was
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