News Column

PIEDMONT OFFICE REALTY TRUST, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

July 30, 2014

The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and notes thereto of Piedmont Office Realty Trust, Inc. ("Piedmont"). See also "Cautionary Note Regarding Forward-Looking Statements" preceding Part I, as well as the notes to our consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2013. Liquidity and Capital Resources We intend to use cash flows generated from the operation of our properties, proceeds from our $500 Million Unsecured Line of Credit, and proceeds from selective property dispositions as our primary sources of immediate liquidity. As of the time of this filing, we had approximately $187.6 million of capacity remaining under our $500 Million Unsecured Line of Credit available for future borrowing. Depending on the timing and volume of our property acquisition and disposition activities and debt maturities, we may also issue additional equity or debt securities from time to time. We may also seek additional borrowings from third-party lenders as further sources of capital. The availability and attractiveness of terms for these additional sources of capital is highly dependent on market conditions.



Our most consistent use of capital has historically been, and will continue to be, to fund capital expenditures related to our existing portfolio of properties. During the six months ended June 30, 2014 and June 30, 2013 we incurred the following types of capital expenditures (in thousands):

Six Months Ended June 30, 2014 June 30, 2013 Capital expenditures for new development $ 4,242 $ 204 Capital expenditures for redevelopment/renovations 2,922 - Other capital expenditures, including tenant improvements 61,772 84,130 Total capital expenditures(1) $ 68,936 $ 84,334



(1) Of the total amounts capitalized, approximately $1.6 million and $0

relates to soft costs such as capitalized interest, payroll, and other

general and administrative expenses for the six months ended June 30, 2014

and 2013, respectively.

"Capital expenditures for new development" relate to the construction of a 300,000 square foot, 11-story office tower in Houston, Texas. We broke ground on the development in April 2014 and anticipate expending approximately $60-$65 million for the project over the course of the next twelve months, and approximately $25 million in leasing commissions and tenant improvements during subsequent lease-up of the property. "Capital expenditures for redevelopment/renovation" relate to repositioning our 3100 Clarendon Boulevard building in Arlington, Virginia from governmental use to private sector use. We anticipate spending approximately $25-$30 million related to the project and expect to complete the project by early 2015. Following completion of the redevelopment of the asset, we anticipate spending approximately $20 million in re-leasing costs, consisting of both leasing commissions and tenant improvements. "Other capital expenditures" include two types of specifically identified projects: (i) building improvement projects that we as the owner may choose to perform at our discretion at any of our various properties; and (ii) tenant improvement allowances that we have committed to as part of executed leases with our tenants, with the majority of such expenditures typically relating to the latter type. During the six months ended June 30, 2014 and 2013, we committed to spend approximately $2.45 and $2.53 per square foot per year of lease term, respectively, for tenant improvement allowances related to new and renewal leases executed during such period. As of June 30, 2014, unrecorded contractual obligations for non-incremental tenant improvements related to our existing lease portfolio totaled $63.4 million, down from $99.4 million as of June 30, 2013. The timing of the funding of these commitments is largely dependent upon tenant requests for reimbursement; however, we would anticipate that a significant portion of these improvement allowances may be requested over the next 3 years based on when the underlying leases commence. In some instances, these obligations may expire with the respective lease, without further recourse to us. Commitments for incremental tenant improvements associated with new leases, primarily at value-add properties, totaled approximately $16.9 million as of June 30, 2014, down from $28.2 million as of June 30, 2013. Additionally, during the six months ended June 30, 2014 and 2013, we paid $11.4 million and $13.2 million , respectively, in leasing commissions and committed to pay $1.31 and $1.06 per square foot per year of lease term, respectively, for new and renewal leases. 33



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In addition to the amounts that we have committed to as part of already executed leases, we anticipate continuing to incur similar market-based tenant improvement allowances and leasing commissions in conjunction with procuring future leases. Given that our primary operating model is to lease large blocks of space to credit-worthy tenants, some of these items can result in significant capital outlays. Both the timing and magnitude of such expenditures have yet to be determined and are highly dependent on competitive market conditions of the respective office market at the time of lease negotiations. In particular, there are a total of four blocks of space in excess of 200,000 square feet in our Chicago and Washington, D.C portfolios that are currently vacant and we may grant significant concession packages to secure new tenants for those spaces, among others. Subject to the identification and availability of attractive investment opportunities and our ability to consummate such acquisitions on satisfactory terms, acquiring new assets compatible with our investment strategy could also be a significant use of capital. In addition, our board of directors has authorized a repurchase plan for our common stock for use when we believe that our stock is trading at a meaningful discount to what we believe the fair value of our net assets to be and we may use capital resources to make purchases under this plan. As of June 30, 2014, there was $37.2 million of authorized capacity remaining on the program which may be spent prior to the program's expiration in October 2015. Finally, although we currently only have $105.0 million of secured debt on our US Bancorp building maturing over the next twelve months, on a longer term basis, we expect to use capital to repay debt when obligations become due. During the six months ended June 30, 2014, we used the proceeds of a $400 million unsecured senior note issuance, as well as a $300 million unsecured term loan to repay $575 million in secured debt which was scheduled to mature during the six months ended June 30, 2014. The remaining $125 million of proceeds was used to pay down outstanding balances on our $500 Million Unsecured Line of Credit. In conjunction with the issuance of the $400 million unsecured senior notes, and considering the historically low interest rate environment, we settled five forward starting interest rate swaps, at the time of the issuance of the notes, resulting in a cash settlement in our favor of approximately $15.0 million. The amount and form of payment (cash or stock issuance) of future dividends to be paid to our stockholders will continue to be largely dependent upon (i) the amount of cash generated from our operating activities; (ii) our expectations of future cash flows; (iii) our determination of near-term cash needs for debt repayments, development projects, and selective acquisitions of new properties; (iv) the timing of significant expenditures for tenant improvements, building redevelopment projects, and general property capital improvements; (v) long-term payout ratios for comparable companies; (vi) our ability to continue to access additional sources of capital, including potential sales of our properties; and (vii) the amount required to be distributed to maintain our status as a REIT. Given the fluctuating nature of cash flows and expenditures, we may periodically borrow funds on a short-term basis to cover timing differences in cash receipts and cash disbursements. Results of Operations Overview Our income from continuing operations per share on a fully diluted basis decreased from $0.11 for the three months ended June 30, 2013 to $0.07 for the three months ended June 30, 2014. The current quarter's results include increases in income associated with new leases commencing, several lease renewals at increased rental rates, and properties acquired during or after the second quarter of 2013; however, this additional income was more than offset by (i) $4.9 million of higher property operating costs attributable to newly acquired properties; (ii) $3.9 million of higher depreciation expense associated with tenant and building improvements placed into service during 2013 and 2014; and (iii) $2.4 million of higher amortization expense associated with properties acquired after the second quarter of 2013. Additionally, the prior quarter's recoveries associated with previously recognized casualty losses and litigation settlement expense were approximately $2.0 million higher due to the timing of reimbursements as compared to the current period. 34



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Comparison of the three months ended June 30, 2014 versus the three months ended June 30, 2013

Income from Continuing Operations

The following table sets forth selected data from our consolidated statements of income for the three months ended June 30, 2014 and 2013, respectively, as well as each balance as a percentage of total revenues for the same periods presented (dollars in millions): $ June 30, June 30, Increase 2014 % 2013 % (Decrease) Revenue: Rental income $ 113.3$ 108.0$ 5.3 Tenant reimbursements 24.7 24.1 0.6 Property management fee revenue 0.5 0.5 - Total revenues 138.5 100 % 132.6 100 % 5.9



Expense:

Property operating costs 57.1 41 % 52.2 39 % 4.9 Depreciation 34.1 25 % 30.2 23 % 3.9 Amortization 13.6 10 % 11.2 8 % 2.4 General and administrative 7.1 5 % 6.3 5 % 0.8 Real estate operating income 26.6 19 % 32.7 25 % (6.1 ) Other income (expense): Interest expense (18.0 ) (13 )% (18.2 ) (14 )% 0.2 Other income/(expense) (0.4 ) - % (0.1 ) - % (0.3 ) Net recoveries from casualty events and litigation settlements 1.5 1 % 3.5 3 % (2.0 ) Equity in income/(loss) of unconsolidated joint ventures (0.4 ) - % 0.2 - % (0.6 ) Income from continuing operations $ 9.3 7 % $ 18.1 14 % $ (8.8 ) Income from discontinued operations $ 1.8$ 17.3$ (15.5 ) Revenue Rental income increased from approximately $108.0 million for the three months ended June 30, 2013 to approximately $113.3 million for the three months ended June 30, 2014 primarily due to approximately $4.2 million of additional revenue attributable to properties acquired during 2013, the renewal of a lease at a higher rental rate with the sole tenant at our 1901 Market Street building in Philadelphia, Pennsylvania, as well as higher rental rates for the main tenant at our 1201 Eye Street building in Washington, D.C. These increases were partially offset by the expiration of a 220,000 square foot lease at our 3100 Clarendon Boulevard building in December 2013. Tenant reimbursements increased from approximately $24.1 million for the three months ended June 30, 2013 to approximately $24.7 million for the three months ended June 30, 2014. The increase is mainly attributable to the expiration of certain operating expense abatements for a major tenant at our 500 West Monroe Street building in Chicago, Illinois coupled with higher recoverable operating expenses at the same location.



Expense

Property operating costs increased approximately $4.9 million for the three months ended June 30, 2014 compared to the same period in the prior year due to approximately $1.8 million of additional operating expenses attributable to properties acquired during 2013. Property tax expense increased approximately $2.0 million amongst our existing portfolio of assets as compared to the same period in the prior year, half of which is associated with an increase at our Aon Center building in Chicago, Illinois. We also incurred higher utility expenses of approximately $0.5 million, which in large part is due to the harsh weather in markets in which we own and operate properties. Depreciation expense increased approximately $3.9 million for the three months ended June 30, 2014 compared to the same period in the prior year. The variance is largely attributable to depreciation on additional tenant and building improvements placed in service 35



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subsequent to April 1, 2013 which contributed approximately $2.5 million of the increase. The remainder of the increase is mainly due to additional depreciation recognized on new properties acquired during 2013. Amortization expense increased approximately $2.4 million for the three months ended June 30, 2014 compared to the same period in the prior year. The increase is solely due to additional amortization associated with intangible lease assets on new properties acquired during 2013. General and administrative expenses increased approximately $0.8 million for the three months ended June 30, 2014 compared to the same period in the prior year. The increase is mainly attributable to higher stock compensation costs, as well as higher state and local taxes due to a non-recurring refund recognized in the prior year. Other Income (Expense) Interest expense decreased approximately $0.2 million for the three months ended June 30, 2014 compared to the same period in the prior year due to lower average interest rates as a result of refinancing activity during the first quarter of 2014.



The variance in other income/(expense) is primarily due to acquisition costs of approximately $0.3 million incurred in the current year associated with the acquisition of the 5 Wall Street building in Burlington, Massachusetts.

We recognized a decrease in net recoveries of casualty loss and litigation settlement expense for the three months ended June 30, 2014 compared to the same period in the prior year of approximately $2.0 million. Amounts recognized in both periods are largely associated with the receipt of insurance proceeds related to litigation settlement expense previously incurred, as well as insurance proceeds associated with damage to certain of our assets in the New York/New Jersey markets as a result of Hurricane Sandy. The timing of such reimbursements is dependent upon outside parties. Equity in income/(loss) of unconsolidated joint ventures decreased approximately $0.6 million during the three months ended June 30, 2014, as compared to the prior year. In August 2013, we purchased all of the remaining interests in three office properties previously held through two unconsolidated joint ventures. The acquisition resulted in a decrease in equity in income/(loss) of unconsolidated joint ventures as compared to the prior period, as the results of operations of these properties are now consolidated on the same basis as our other wholly-owned properties. In addition, one of the two remaining unconsolidated assets, Two Park Center in Hoffman Estates, Illinois, was sold in May 2014 and our pro-rata share of the loss on sale of approximately $0.2 million is included in the current period.



Income from Discontinued Operations

The operations of assets that we have sold or classified as held for sale during periods prior to April 1, 2014 are presented in the accompanying statement of operations as discontinued operations for all period presented (see Note 9 to our accompanying consolidated financial statements for a complete listing of assets sold and classified as discontinued operations). Income from discontinued operations decreased approximately $15.5 million for the three months ended June 30, 2014 compared to the same period in the prior year primarily due to the recognition of a gain on the sale of our 1200 Enclave Parkway building in Houston, Texas in the prior period of approximately $16.2 million as compared to a gain on the sale of the 1441 West Long Lake Road building and the 4685 Investment Drive building in Troy, Michigan for a total gain of $1.3 million in the current period. We do not expect that income from discontinued operations will be comparable to future periods, as such income is subject to the occurrence and timing of future property dispositions that may be classified as discontinued operations. 36



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Comparison of the six months ended June 30, 2014 versus the six months ended June 30, 2013

Income from Continuing Operations

The following table sets forth selected data from our consolidated statements of income for the six months ended June 30, 2014 and 2013, respectively, as well as each balance as a percentage of total revenues for the same periods presented (dollars in millions): $ June 30, June 30, Increase 2014 % 2013 % (Decrease) Revenue: Rental income $ 224.2$ 214.0$ 10.2 Tenant reimbursements 49.7 49.6 0.1 Property management fee revenue 1.0 1.1 (0.1 ) Total revenues 274.9 100 % 264.7 100 % 10.2 Expense: Property operating costs 115.4 42 % 104.4 39 % 11.0 Depreciation 67.8 25 % 59.0 22 % 8.8 Amortization 28.2 10 % 20.2 8 % 8.0 General and administrative 11.7 4 % 10.8 4 % 0.9 Real estate operating income 51.8 19 % 70.3 27 % (18.5 ) Other income (expense): Interest expense (36.9 ) (14 )% (34.6 ) (13 )% (2.3 ) Other income/(expense) (0.4 ) - % (1.4 ) (1 )% 1.0 Net recoveries from casualty events and litigation settlements 4.5 2 % 3.4 1 % 1.1 Equity in income/(loss) of unconsolidated joint ventures (0.6 ) - % 0.6 - % (1.2 ) Income from continuing operations $ 18.4 7 % $ 38.3 14 % $ (19.9 ) Income from discontinued operations $ 2.2$ 11.7$ (9.5 ) Revenue Rental income increased from approximately $214.0 million for the six months ended June 30, 2013 to approximately $224.2 million for the six months ended June 30, 2014 primarily due to approximately $12.0 million of additional revenue attributable to properties acquired during 2013, the renewal of a lease at a higher rental rate with the sole tenant at our 1901 Market Street building, as well as higher rental rates for the main tenant at our 1201 Eye Street building. These increases were partially offset by the expiration of a 330,000 square foot lease at our One Independence Square building in Washington, D.C. during March 2013 and a 220,000 square foot lease at our 3100 Clarendon Boulevard building in December 2013. Tenant reimbursements increased from approximately $49.6 million for the six months ended June 30, 2013 to approximately $49.7 million for the six months ended June 30, 2014. Although we recognized approximately $1.3 million of additional tenant reimbursements associated with properties acquired during 2013 during the current period, these increases were offset by a reduction in such reimbursements as a result of abatements on new leases commencing at our Aon Center building. Expense Property operating costs increased approximately $11.0 million for the six months ended June 30, 2014 compared to the same period in the prior year primarily due to approximately $5.3 million of additional operating expenses attributable to properties acquired during 2013. We also incurred higher utility and snow removal costs of $1.5 million and $0.6 million, respectively, which in large part is due to the harsh weather in markets in which we own and operate properties. Additionally, property tax expense increased by approximately $1.6 million at certain of our properties. Depreciation expense increased approximately $8.8 million for the six months ended June 30, 2014 compared to the same period in the prior year. The variance is largely attributable to depreciation on additional tenant and building improvements placed in service subsequent to January 1, 2013 which contributed approximately $5.1 million of the increase. Properties acquired during 2013 provided an additional increase of $2.0 million of depreciation expense. 37



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Amortization expense increased approximately $8.0 million for the six months ended June 30, 2014 compared to the same period in the prior year. Of the total variance, approximately $5.7 million of expense is due to additional amortization on new properties acquired during 2013. The acceleration of amortization expense related to the early termination of a lease at our 400 Bridgewater Crossing building in Bridgewater, New Jersey and a structured partial lease termination at our 1430 Enclave Parkway building in Houston, Texas contributed approximately $2.7 million to the increase. General and administrative expenses increased approximately $0.9 million for the six months ended June 30, 2014 compared to the same period in the prior year. The increase is mainly attributable to higher stock compensation costs and higher state and local taxes due to a non-recurring refund recognized in the prior year. Other Income (Expense) Interest expense increased approximately $2.3 million for the six months ended June 30, 2014 compared to the same period in the prior year. The increase is attributable to higher outstanding debt balances during the current year primarily as a result of property acquisitions during 2013 and shares repurchased pursuant to our stock repurchase plan, offset by lower average interest rates due to refinancing activity during the first quarter of 2014.



The variance in other income/(expense) is primarily due to acquisition costs of approximately $0.9 million incurred in the prior year associated with acquisition transactions as compared to the current year.

We recognized an increase in net recoveries of casualty loss and litigation settlement expense for the six months ended June 30, 2014 compared to the same period in the prior year of approximately $1.1 million. These recoveries are non-recurring in nature and are largely associated with the receipt of insurance proceeds related to litigation settlement expense previously incurred, as well as insurance proceeds associated with damage to certain of our assets in the New York/New Jersey markets as a result of Hurricane Sandy. The timing of such reimbursements is dependent upon outside parties. Equity in income/(loss) of unconsolidated joint ventures decreased approximately $1.2 million during the six months ended June 30, 2014, as compared to the prior year. In August 2013, we purchased all of the remaining interests in three office properties previously held through two unconsolidated joint ventures. The acquisition resulted in a decrease in equity in income/(loss) of unconsolidated joint ventures as compared to the prior period, as the results of operations of these properties are now consolidated on the same basis as our other wholly-owned properties. In addition, one of the two remaining unconsolidated assets, Two Park Center, was sold in May 2014 and our pro-rata share of the loss on sale of approximately $0.2 million is included in the current period.



Income from Discontinued Operations

The operations of assets that we have sold or classified as held for sale during periods prior to April 1, 2014 are presented in the accompanying statement of operations as discontinued operations for all period presented (see Note 9 to our accompanying consolidated financial statements for a complete listing of assets sold and classified as discontinued operations). Income from discontinued operations decreased approximately $9.5 million for the six months ended June 30, 2014 compared to the same period in the prior year primarily due to the recognition of a gain on the sale of the 1200 Enclave Parkway building of approximately $16.2 million in the prior year offset by an impairment charge, also in the prior period, of $6.4 million at the 1111 Durham Avenue building in South Plainfield, New Jersey. We do not expect that income from discontinued operations will be comparable to future periods, as such income is subject to the occurrence and timing of future property dispositions that may be classified as discontinued operations.



Funds From Operations ("FFO"), Core FFO, and Adjusted Funds from Operations ("AFFO")

Net income calculated in accordance with U.S. generally accepted accounting principles ("GAAP") is the starting point for calculating FFO, Core FFO, and AFFO. FFO, Core FFO, and AFFO are non-GAAP financial measures and should not be viewed as an alternative measurement of our operating performance to net income. Management believes that accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. As a result, we believe that the use of FFO, Core FFO, and AFFO, together with the required GAAP presentation, provides a more complete understanding of our performance relative to our competitors and a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities. We calculate FFO in accordance with the current National Association of Real Estate Investment Trusts ("NAREIT") definition as follows: Net income (computed in accordance with GAAP), excluding gains or losses from sales of property and impairment charges 38



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(including our proportionate share of any impairment charges and/or gains or losses from sales of property related to investments in unconsolidated joint ventures), plus depreciation and amortization on real estate assets (including our proportionate share of depreciation and amortization related to investments in unconsolidated joint ventures). Other REITs may not define FFO in accordance with the NAREIT definition, or may interpret the current NAREIT definition differently than we do; therefore, our computation of FFO may not be comparable to such other REITs. We calculate Core FFO as FFO (calculated as set forth above) less acquisition costs and other significant, non-recurring items, such as the infrequent and non-recurring litigation settlements expense and casualty losses, and their subsequent insurance recoveries. We calculate AFFO as Core FFO (calculated as set forth above) exclusive of the net effects of: (i) amortization associated with deferred financing costs; (ii) depreciation of non real estate assets; (iii) straight-line lease revenue/expense; (iv) amortization of above and below-market lease intangibles; (v) stock-based and other non-cash compensation expense; (vi) amortization of mezzanine discount income; (vii) acquisition costs, and (viii) non-incremental capital expenditures (as defined below). Our proportionate share of such adjustments related to investments in unconsolidated joint ventures are also included when calculating AFFO. Reconciliations of net income to FFO, Core FFO, and AFFO are presented below (in thousands except per share amounts): Three Months Ended Six Months Ended Per Per Per June 30, Per June 30, 2014 Share(1) June 30, 2013



Share(1) June 30, 2014 Share(1) 2013 Share(1) Net income attributable to Piedmont

$ 12,279$ 0.08$ 35,358$ 0.21$ 21,672$ 0.14$ 50,009$ 0.30 Depreciation of real estate assets(2) 34,119 0.22 30,969 0.19 67,846 0.44 60,855 0.36 Amortization of lease-related costs(2) 13,608 0.09 11,350 0.07 28,412 0.18 20,570 0.12 Impairment loss - - - - - - 6,402 0.04 Gain on sale - wholly-owned properties (2,444 ) (0.02 ) (16,258 ) (0.10 ) (2,338 ) (0.01 ) (16,258 ) (0.10 ) Loss on sale- unconsolidated partnership 169 - - - 169 - - -



Funds From Operations $ 57,731$ 0.37$ 61,419

$ 0.37$ 115,761$ 0.75$ 121,578$ 0.72 Adjustments: Acquisition costs

363 0.01 70 - 429 - 1,314 0.01 Net loss/(recoveries) from casualty events and litigation settlements (1,480 ) (0.01 ) (3,570 ) (0.02 ) (4,522 ) (0.03 ) (3,409 ) (0.02 )



Core Funds From Operations $ 56,614$ 0.37$ 57,919

$ 0.35$ 111,668$ 0.72$ 119,483$ 0.71 Adjustments: Deferred financing cost amortization 615 0.01 643 - 1,478 0.01 1,237 0.01 Amortization of note payable step-up (6 ) - - - (6 ) - - - Amortization of discount on senior notes 47 - 17 - 81 - 17 - Depreciation of non real estate assets 115 - 105 - 229 - 203 - Straight-line effects of lease revenue (2) (7,758 ) (0.05 ) (5,547 )



(0.03 ) (17,170 ) (0.10 ) (9,579 ) (0.05 ) Stock-based and other non-cash compensation

1,271 0.01 176 - 1,907 0.01 770 - Net effect of amortization of above and below-market in-place lease intangibles (1,279 ) (0.01 ) (1,245 ) (0.01 ) (2,643 ) (0.02 ) (2,310 ) (0.01 ) Acquisition costs (363 ) (0.01 ) (70 ) - (429 ) - (1,314 ) (0.01 ) Non-incremental capital expenditures (3) (26,151 ) (0.17 ) (18,367 ) (0.11 ) (39,972 ) (0.26 ) (38,287 ) (0.23 ) Adjusted Funds From Operations $ 23,105$ 0.15$ 33,631$ 0.20$ 55,143$ 0.36$ 70,220$ 0.42 Weighted-average shares outstanding - diluted 154,445 167,714 154,728 167,737 39



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(1) Based on weighted average shares outstanding - diluted.



(2) Includes amounts for wholly-owned properties, as well as such amounts for

our proportionate ownership in unconsolidated joint ventures. (3) Piedmont defines non-incremental capital expenditures as capital



expenditures of a recurring nature related to tenant improvements, leasing

commissions, and building capital that do not incrementally enhance the underlying assets' income generating capacity. Tenant improvements, leasing commissions, building capital and deferred lease incentives



incurred to lease space that was vacant at acquisition, leasing costs for

spaces vacant for greater than one year, leasing costs for spaces at newly

acquired properties for which in-place leases expire shortly after

acquisition, improvements associated with the expansion of a building, and

renovations that either change the underlying classification from a Class B to a Class A property or enhance the marketability of a building are excluded from this measure.



Property and Same Store Net Operating Income (Cash Basis)

Property Net Operating Income on a cash basis ("Property NOI") is a non-GAAP measure which we use to assess our property-level operating results. It is calculated as real estate operating income with the add-back of corporate general and administrative expense, depreciation and amortization, impairment losses, and the deduction of income associated with property management performed by Piedmont for other organizations. We present this measure on a cash basis, which eliminates the effects of straight lined rents and fair value lease revenue. We use this measure as a proxy for the cash generated by our real estate properties. Same Store Net Operating Income on a cash basis ("SSNOI") is another non-GAAP measure very similar to Property NOI, however, SSNOI only reflects Property NOI attributable to the properties owned or placed in service during the entire span of the current and prior year reporting periods. SSNOI excludes amounts attributable to unconsolidated joint venture assets. We believe SSNOI is an important measure because it allows us to compare the cash flows generated by our same real estate properties from one period to another. Other REITs may calculate SSNOI differently and our calculation should not be compared to that of other REITs. 40



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The following table sets forth our Property NOI and SSNOI with a reconciliation to net income attributable to Piedmont (GAAP basis) for the three and six months ended June 30, 2014 and 2013, respectively (in thousands): Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2014 2013 2014 2013 Net income attributable to Piedmont (GAAP basis) $ 12,279$ 35,358 $



21,672 $ 50,009

Net income attributable to noncontrolling interest 4 4 8 8 Interest expense 18,012 18,228 36,938 34,601 Depreciation (1) 34,234 31,074 68,075 61,058 Amortization (1) 13,608 11,350 28,412 20,570 Acquisition costs 363 70 429 1,314 Impairment loss (1) - - - 6,402 Net recoveries of casualty events and litigation settlements (1) (1,480 ) (3,570 ) (4,522 ) (3,409 ) Gain on sale of properties (1) (2,275 ) (16,258 ) (2,169 ) (16,258 ) General & administrative expenses(1) 7,159 6,410 11,742 11,019 Management fee income (281 ) (256 ) (540 ) (612 ) Other (income)/expense(1) 3 (12 ) 32 9 Straight line rent effects of lease revenue(1) (7,758 ) (5,547 ) (17,170 ) (9,579 ) Amortization of lease-related intangibles(1) (1,279 ) (1,245 ) (2,643 ) (2,310 ) Property NOI (cash basis) $ 72,589$ 75,606$ 140,264$ 152,822 Net operating loss/(income) from: Acquisitions(2) (5,890 ) (3,705 ) (11,348 ) (4,566 ) Dispositions(3) (590 ) (1,482 ) (1,517 ) (2,689 ) Other investments(4) 90 (2,507 ) 472 (5,211 ) Same Store NOI (cash basis) $ 66,199$ 67,912$ 127,871$ 140,356 Change period over period in Same Store NOI (cash basis) (2.5 )% N/A (8.9 )% N/A



(1) Includes amounts attributable to consolidated properties, including

discontinued operations, and our proportionate share of amounts attributable

to unconsolidated joint ventures.

(2) Acquisitions consist of Arlington Gateway in Arlington, Virginia, purchased

on March 4, 2013; 5 & 15 Wayside Road in Burlington, Massachusetts,

purchased on March 22, 2013; Royal Lane Land in Irving, Texas, purchased on

August 1, 2013; 5301 Maryland Way in Brentwood, Tennessee, the remaining

equity interest in which was purchased on August 12, 2013; 6565 North

MacArthur Boulevard in Irving, Texas, purchased on December 5, 2013; One

Lincoln Park in Dallas, Texas, purchased on December 20, 2013; 161 Corporate

Center in Irving, Texas, purchased on December 30, 2013; and 5 Wall Street

in Burlington, Massachusetts, purchased on June 27, 2014.

(3) Dispositions consist of 1111 Durham Avenue in South Plainfield, New Jersey,

sold on March 28, 2013; 1200 Enclave Parkway in Houston, Texas, sold on May

1, 2013; 350 Spectrum Loop in Colorado Springs, Colorado, sold on November

1, 2013; 8700 South Price Road in Tempe, Arizona, sold on December 30, 2013;

11107 and 11109 Sunset Hills Road in Reston, Virginia, sold on March 19,

2014; 1441 West Long Lake Road and 4685 Investment Drive in Troy, Michigan,

sold on April 30, 2014; and 2020 West 89th Street in Leawood, Kansas, sold

on May 19, 2014.

(4) Other investments consist of operating results from our investments in

unconsolidated joint ventures and our redevelopment project at 3100 Clarendon Boulevard. Overview Our portfolio is a national portfolio located in several geographic markets. We typically lease space to large, credit-worthy corporate or governmental tenants on a long-term basis. Our average lease is approximately 30,000 square feet with 7.2 years of lease term remaining as of June 30, 2014. As a result, occupancy as well as rent roll ups and roll downs, which we experience as a result of re-leasing, can fluctuate widely between markets, between buildings, and between tenants within a given market depending on when 41



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a particular lease is scheduled to expire. Over the last several years we have worked through a period of high lease expirations which have temporarily impacted negatively our SSNOI. As abatement periods related to certain significant renewals and replacement leases expire, SSNOI comparisons are expected to improve. As of June 30, 2014 we still have 0.7 million square feet of executed leases for currently vacant space that have yet to commence and another 1.4 million square feet of commenced leases in some form of rental abatement; therefore, we anticipate additional improvement in SSNOI comparisons as the year progresses. Additionally, any absorption of currently vacant space in the portfolio due to additional new leasing activity could also favorably impact comparisons depending on commencement dates and abatement periods of the new lease. Occupancy Excluding one property that was not in service due to a redevelopment project as of June 30, 2014, our portfolio in total was 87.0% leased as of June 30, 2014, up from 86.4% leased as of June 30, 2013. Scheduled expirations over the next three years for the portfolio as a whole are limited to less than 6% of our Annualized Lease Revenue ("ALR") in any given year; therefore, the majority of our leasing efforts over the next several years will be focused on leasing currently vacant space. To the extent we are able to execute leases for currently vacant space, these additional rental payments should favorably impact overall occupancy and our SSNOI comparisons once any associated abatement periods expire.



Impact of Downtime, Abatement Periods, and Rental Rate Changes

We have executed a large number of leasing transactions over the past several years, approximately 700,000 square feet of which relates to currently vacant space and which has not commenced as of June 30, 2014. Commencement of new leases typically occurs 6-24 months from the execution date after refurbishment of the space is completed. The downtime between lease expirations and the new leases' commencement can negatively impact SSNOI. In addition, office leases typically contain upfront rental and/or operating expense abatement periods which delay the cash flow benefits of the lease even after a lease has commenced. As of June 30, 2014, approximately 1.4 million square feet of commenced leases were still in some form of abatement. Finally, in some cases we have not yet identified a replacement tenant for an expired lease or have entered into renewal leases for decreased square footage or for lower market rental rates than the previous lease. All of the above items negatively impacted our SSNOI for the quarter ended June 30, 2014 as compared to the quarter ended June 30, 2013, however to a lesser degree than during the first three months of 2014. Additionally, on a prospective basis, we anticipate that SSNOI on a quarter over quarter basis will continue to improve during the last six months of 2014 as certain significant leases for currently vacant space commence and rental abatement periods expire. Election as a REIT We have elected to be taxed as a REIT under the Code and have operated as such beginning with our taxable year ended December 31, 1998. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our adjusted REIT taxable income, computed without regard to the dividends-paid deduction and by excluding net capital gains attributable to our stockholders, as defined by the Code. As a REIT, we generally will not be subject to federal income tax on income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we may be subject to federal income taxes on our taxable income for that year and for the four years following the year during which qualification is lost and/or penalties, unless the IRS grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders. However, we believe that we are organized and operate in such a manner as to qualify for treatment as a REIT and intend to continue to operate in the foreseeable future in such a manner that we will remain qualified as a REIT for federal income tax purposes. We have elected to treat Piedmont Office Holdings, Inc. ("POH"), a wholly-owned subsidiary of Piedmont, as a taxable REIT subsidiary. We perform non-customary services for tenants of buildings that we own, including solar power generation, real estate and non-real estate related-services; however, any earnings related to such services performed by our taxable REIT subsidiary are subject to federal and state income taxes. In addition, for us to continue to qualify as a REIT, our investments in taxable REIT subsidiaries cannot exceed 25% of the value of our total assets. Inflation We are exposed to inflation risk, as income from long-term leases is the primary source of our cash flows from operations. There are provisions in the majority of our tenant leases that are intended to protect us from, and mitigate the risk of, the impact of inflation. These provisions include rent steps, reimbursement billings for operating expense pass-through charges, real estate tax, and insurance reimbursements on a per square-foot basis, or in some cases, annual reimbursement of operating expenses above certain per square-foot allowance. However, due to the long-term nature of the leases, the leases may not readjust their reimbursement rates frequently enough to fully cover inflation. 42



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Off-Balance Sheet Arrangements

We are not dependent on off-balance sheet financing arrangements for liquidity. As of June 30, 2014, our off-balance sheet arrangements consist of one investment in an unconsolidated joint venture and operating lease obligations related to ground leases at two of our properties. The unconsolidated joint venture in which we currently invest is prohibited by its governing documents from incurring debt. For further information regarding our commitments under operating lease obligations, see the Contractual Obligations table below.



Application of Critical Accounting Policies

Our accounting policies have been established to conform with GAAP. The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied, thus, resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses. The critical accounting policies outlined below have been discussed with members of the Audit Committee of the board of directors.



Investment in Real Estate Assets

We are required to make subjective assessments as to the useful lives of our depreciable assets. We consider the period of future benefit of the asset to determine the appropriate useful lives. These assessments have a direct impact on net income attributable to Piedmont. The estimated useful lives of our assets by class are as follows: Buildings 40 years Building improvements 5-25 years Land improvements 20-25 years Tenant improvements Shorter of economic life or lease term Intangible lease assets Lease term



Allocation of Purchase Price of Acquired Assets

Upon the acquisition of real properties, it is our policy to allocate the purchase price of properties to acquired tangible assets, consisting of land and building, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases, based on their estimated fair values. The fair values of the tangible assets of an acquired property (which includes land and buildings) are determined by valuing the property as if it were vacant, and the "as-if-vacant" value is then allocated to land and building based on our determination of the fair value of these assets. We determine the as-if-vacant fair value of a property using methods similar to those used by independent appraisers. Factors considered by us in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. In estimating carrying costs, we include real estate taxes, insurance, and other operating expenses and estimates of lost rental revenue during the expected lease-up periods based on current market demand. We also estimate the cost to execute similar leases including leasing commissions, legal, and other related costs. The fair values of above-market and below-market in-place lease values are recorded based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) our estimate of market rates for the corresponding in-place leases, measured over a period equal to the remaining terms of the leases, taking into consideration the probability of renewals for any below-market leases. The capitalized above-market and below-market lease values are recorded as intangible lease assets or liabilities and amortized as an adjustment to rental revenues over the remaining terms of the respective leases. The fair values of in-place leases include an estimate of the direct costs associated with obtaining the acquired or "in place" tenant, estimates of opportunity costs associated with lost rentals that are avoided by acquiring an in-place lease. The amount capitalized as direct costs associated with obtaining a tenant include commissions, tenant improvements, and other direct costs and are estimated 43



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based on management's consideration of current market costs to execute a similar lease. These direct lease origination costs are included in deferred lease costs in the accompanying consolidated balance sheets and are amortized to expense over the remaining terms of the respective leases. The value of opportunity costs is calculated using the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease. These lease intangibles are included in intangible lease assets in the accompanying consolidated balance sheets and are amortized to expense over the remaining terms of the respective leases. Estimates of the fair values of the tangible and intangible assets require us to estimate market lease rates, property operating expenses, carrying costs during lease-up periods, discount rates, market absorption periods, and the number of years the property is held for investment. The use of inappropriate estimates would result in an incorrect assessment of our purchase price allocations, which could impact the amount of our reported net income attributable to us.



Valuation of Real Estate Assets and Investments in Joint Ventures Which Hold Real Estate Assets

We continually monitor events and changes in circumstances that could indicate that the carrying amounts of the real estate and related intangible assets, both operating properties and properties under construction, in which we have an ownership interest, either directly or through investments in joint ventures, may not be recoverable. When indicators of potential impairment are present for wholly-owned properties, which indicate that the carrying amounts of real estate and related intangible assets may not be recoverable, we assess the recoverability of these assets by determining whether the carrying value will be recovered from the undiscounted future operating cash flows expected from the use of the asset and its eventual disposition. In the event that such expected undiscounted future cash flows do not exceed the carrying value, we adjust the real estate and related intangible assets to the fair value and recognize an impairment loss. For our investments in unconsolidated joint ventures, we assess the fair value of our investment, as compared to our carrying amount. If we determine that the carrying value is greater than the fair value at any measurement date, we must also determine if such a difference is temporary in nature. Value fluctuations which are "other than temporary" in nature are then recorded to adjust the carrying value to the fair value amount. Projections of expected future cash flows require that we estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, the number of months it takes to re-lease the property, and the number of years the property is held for investment, among other factors. The subjectivity of assumptions used in the future cash flow analysis, including capitalization and discount rates, could result in an incorrect assessment of the property's fair value and, therefore, could result in the misstatement of the carrying value of our real estate and related intangible assets and our net income attributable to Piedmont.



Goodwill

Goodwill is the excess of cost of an acquired entity over the amounts specifically assigned to assets acquired and liabilities assumed in purchase accounting for business combinations, as well as costs incurred as part of the acquisition. We test the carrying value of our goodwill for impairment on an annual basis, or on an interim basis if an event occurs or circumstances change that would indicate the carrying amount may be impaired. Such interim circumstances may include, but are not limited to, significant adverse changes in legal factors or in the general business climate, adverse action or assessment by a regulator, unanticipated competition, the loss of key personnel, or persistent declines in an entity's stock price below carrying value of the entity. We have the option, should we choose to use it, to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, we conclude that the estimated fair value is greater than the carrying amount, then performing the two-step impairment test is unnecessary. However, if we chose to forgo the availability of the qualitative analysis, the test prescribed by authoritative accounting guidance is a two-step test. The first step involves comparing the estimated fair value of the entity to its carrying value, including goodwill. Fair value is determined by adjusting the trading price of the stock for various factors including, but not limited to: (i) liquidity or transferability considerations, (ii) control premiums, and/or (iii) fully distributed premiums, if necessary, multiplied by the common shares outstanding. If such calculated fair value exceeds the carrying value, no further procedures or analysis is required. However, if the carrying value exceeds the calculated fair value, goodwill is potentially impaired and step two of the analysis would be required. Step two of the test involves calculating the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets of the entity from the entity's fair value calculated in step one of the test. If the implied value of the goodwill (the remainder left after deducting the fair values of the entity from its calculated overall fair value in step one of the test) is less than the carrying value of goodwill, an impairment loss would be recognized. We have determined through the testing noted above that there are no indicators of impairment related to our goodwill as of June 30, 2014. 44



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Investment in Variable Interest Entities

Variable Interest Entities ("VIEs") are defined by GAAP as entities in which equity investors do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. If an entity is determined to be a VIE, it must be consolidated by the primary beneficiary. The primary beneficiary is the enterprise that has the power to direct the activities of the VIE that most significantly impact the VIE's economic performance, absorbs the majority of the entity's expected losses, or receives a majority of the entity's expected residual returns. Generally, expected losses and expected residual returns are the anticipated negative and positive variability, respectively, in the fair value of the VIE's net assets. When we make an investment, we assess whether the investment represents a variable interest in a VIE and, if so, whether we are the primary beneficiary of the VIE. Incorrect assumptions or assessments may result in an inaccurate determination of the primary beneficiary. The result could be the consolidation of an entity acquired or formed in the future that would otherwise not have been consolidated or the non-consolidation of such an entity that would otherwise have been consolidated. We evaluate each investment to determine whether it represents variable interests in a VIE. Further, we evaluate the sufficiency of the entities' equity investment at risk to absorb expected losses, and whether as a group, the equity has the characteristics of a controlling financial interest. See Note 6 to our accompanying consolidated financial statements for further detail on our investment in variable interest entities as of June 30, 2014.



Interest Rate Derivatives

We periodically enter into interest rate derivative agreements to hedge our exposure to changing interest rates on variable rate debt instruments. As required by GAAP, we record all derivatives on the balance sheet at fair value. We reassess the effectiveness of our derivatives designated as cash flow hedges on a regular basis to determine if they continue to be highly effective and also to determine if the forecasted transactions remain highly probable. Currently, we do not use derivatives for trading or speculative purposes. The changes in fair value of interest rate swap agreements designated as effective cash flow hedges are recorded in other comprehensive income ("OCI"), and subsequently reclassified to earnings when the hedged transactions occur. Changes in the fair values of derivatives designated as cash flow hedges that do not qualify for hedge accounting treatment, if any, would be recorded as gain/(loss) on interest rate swap in the consolidated statements of income. The fair value of the interest rate derivative agreement is recorded as interest rate derivative asset or as interest rate derivative liability in the accompanying consolidated balance sheets. Amounts received or paid under interest rate derivative agreements are recorded as interest expense in the consolidated income statements as incurred. All of our interest rate derivative agreements as of June 30, 2014 are designated as effective cash flow hedges. See Note 5 to our accompanying consolidated financial statements for further detail on our interest rate derivatives as of June 30, 2014.



Stock-based Compensation

We have issued stock-based compensation in the form of deferred stock awards to our employees and directors. For employees, such compensation has been issued pursuant to our Long-term Incentive Compensation ("LTIC") program. The LTIC program is comprised of an annual deferred stock grant component and a multi-year performance share component. Awards granted pursuant to the annual deferred stock component are considered equity awards and expensed straight-line over the vesting period, with issuances recorded as a reduction to additional paid in capital. Awards granted pursuant to the performance share component are considered liability awards and are expensed over the service period, with issuances recorded as a reduction to accrued expense. The compensation expense recognized related to both of these award types is recorded as property operating costs for those employees whose job is related to property operation and as general and administrative expense for all other employees and directors in the accompanying consolidated statements of income. See Note 10 to our accompanying consolidated financial statements for further detail on our stock-based compensation as of June 30, 2014.



Contractual Obligations Our contractual obligations as of June 30, 2014 are as follows (in thousands):

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Table of Contents Payments Due by Period Contractual Less than More than Obligations Total 1 year 1-3 years 3-5 years 5 years Long-term debt(1) $ 2,108,178$ 105,726$ 781,244 (2)

(3) $ 441,920 (4) $ 779,288 Operating lease obligations(5) 43,101 450 902 902 40,847 Total $ 2,151,279$ 106,176$ 782,146$ 442,822$ 820,135 (1) Amounts include principal payments only and balances outstanding as of



June 30, 2014, not including unamortized issuance discounts or estimated

fair value adjustments. We made interest payments, including payments

under our interest rate swaps, of approximately $33.2 million during the six months ended June 30, 2014, and expect to pay interest in future periods on outstanding debt obligations based on the rates and terms



disclosed herein and in Note 4 of our accompanying consolidated financial

statements.

(2) Includes the $300 Million Unsecured 2011 Term Loan which has a stated

variable rate; however, we entered into interest rate swap agreements

which effectively fix, exclusive of changes to our credit rating, the rate

on this facility to 2.69% through maturity. As such, we estimate

incurring, exclusive of changes to our credit rating, approximately $8.1

million per annum in total interest (comprised of combination of variable

contractual rate and settlements under interest rate swap agreements)

through maturity in November 2016.

(3) Includes the balance outstanding as of June 30, 2014 of the $500 Million

Unsecured Line of Credit. However, Piedmont may extend the term for up to

one additional year (through two available six month extensions to a final

extended maturity date of August 21, 2017) provided Piedmont is not then

in default and upon payment of extension fees.

(4) Includes the $300 Million Unsecured 2013 Term Loan which has a stated

variable rate; however, we entered into interest rate swap agreements

which effectively fix $200 million of the outstanding balance, exclusive

of changes to our credit rating, the rate on this portion of the facility

to 2.79% through maturity. As such, we estimate incurring, exclusive of changes to our credit rating, approximately $5.6 million per annum in



total interest (comprised of combination of variable contractual rate and

settlements under interest rate swap agreements) through maturity in

January 2019.

(5) Two properties (the 2001 NW 64th Street building in Ft. Lauderdale,

Florida and the River Corporate Center building in Tempe, Arizona) are

subject to ground leases with expiration dates of 2048 and 2101,

respectively. The aggregate remaining payments required under the terms of

these operating leases as of June 30, 2014 are presented above.

Commitments and Contingencies We are subject to certain commitments and contingencies with regard to certain transactions. Refer to Note 8 of our consolidated financial statements for further explanation. Examples of such commitments and contingencies include: Commitments Under Existing Lease Agreements;



Contingencies Related to Tenant Audits/Disputes; and

Letters of Credit.


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