UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark one)
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| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the fiscal year ended | December 31, 20202023 |
or
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the transition period from | | to | |
Commission file number 1-14023 (Corporate Office Properties Trust)
Commission file number 333-189188 (Corporate Office Properties, L.P.)
CORPORATE OFFICECOPT DEFENSE PROPERTIES TRUST
CORPORATE OFFICE PROPERTIES, L.P.
(Exact name of registrant as specified in its charter)
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Corporate Office Properties Trust | | Maryland | | 23-2947217 |
| | (State or other jurisdiction of | | (IRS Employer |
| | incorporation or organization) | | Identification No.) |
Corporate Office Properties, L.P. | | Delaware | | 23-2930022 |
| | (State or other jurisdiction of | | (IRS Employer |
| | incorporation or organization) | | Identification No.) |
| | | | | |
6711 Columbia Gateway Drive,, Suite 300,, Columbia,, MD | 21046 |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (443) 285-5400
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Shares of beneficial interest, $0.01 par value | OFCCDP | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Corporate Office Properties Trust ☒ Yes ☐ No
Corporate Office Properties, L.P. ☒ Yes ☐ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Corporate Office Properties Trust ☐ Yes ☒ No
Corporate Office Properties, L.P. ☐ Yes ☒ No
Indicate by check mark whether the registrant: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 ☐ No
Corporate Office Properties Trust ☒ Yes ☐ No
Corporate Office Properties, L.P. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Corporate Office Properties Trust ☒ Yes ☐ No
Corporate Office Properties, L.P. ☒ Yes ☐ No
Indicatendicate 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.
Corporate Office Properties Trust
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| Large accelerated filer | ☒ | | Accelerated filer | ☐ | | Non-accelerated filer | ☐ | | Smaller reporting company | ☐ | | Emerging growth company | ☐ |
Corporate Office Properties, L.P.
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Large accelerated filer
| ☐ | | Accelerated filer | ☐ | | Non-accelerated filer | ☒ | | Smaller reporting company | ☐ | | Emerging growth company | ☐ |
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. ☐
Corporate Office Properties Trust ☐
Corporate Office Properties, L.P. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the
registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Corporate Office Properties Trust ☒
Corporate Office Properties, L.P. ☒Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to
§240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Corporate Office Properties Trust ☐ Yes ☒ No
Corporate Office Properties, L.P. ☐ Yes ☒ No
The aggregate market value of the voting and nonvotingnon-voting shares of common stock held by non-affiliates of Corporate OfficeCOPT Defense Properties Trust was approximately $2.2$2.3 billion, as calculated using the closing price of such shares on the New York Stock Exchange as of and the number of outstanding shares as of June 30, 2020.2023. For purposes of calculating this amount only, affiliates are defined as Trustees, executive owners and beneficial owners of more than 10% of Corporate Office Properties Trust’sCOPT Defense Properties’ outstanding common shares, $0.01 par value. At January 22, 2021, 112,181,219February 7, 2024, 112,548,467 of Corporate Office Properties Trust’sCOPT Defense Properties’ common shares were outstanding.
The aggregate market value of the voting and nonvoting common units of limited partnership interest held by non-affiliates of Corporate Office Properties, L.P. was approximately $24.2 million, as calculated using the closing price of the common shares of Corporate Office Properties Trust (into which common units not held by Corporate Office Properties Trust are exchangeable) on the New York Stock Exchange as of June 30, 2020 and the number of outstanding units as of June 30, 2020.
Portions of the proxy statement of Corporate OfficeCOPT Defense Properties Trust for its 20212024 Annual Meeting of Shareholders to be filed within 120 days after the end of the fiscal year covered by this Form 10-K are incorporated by reference into Part III of this Form 10-K.
EXPLANATORY NOTE
This report combines the annual reports on Form 10-K for the year ended December 31, 2020 of Corporate Office Properties Trust (“COPT”) and subsidiaries (collectively, the “Company”) and Corporate Office Properties, L.P. (“COPLP”) and subsidiaries (collectively, the “Operating Partnership”). Unless stated otherwise or the context otherwise requires, “we,” “our,” and “us” refer collectively to COPT, COPLP and their subsidiaries.
COPT is a real estate investment trust, or REIT, and the sole general partner of COPLP. As of December 31, 2020, COPT owned 98.6% of the outstanding common units in COPLP; the remaining common units and all of the outstanding COPLP preferred units were owned by third parties. As the sole general partner of COPLP, COPT controls COPLP and can cause it to enter into major transactions including acquisitions, dispositions and refinancings and cause changes in its line of business, capital structure and distribution policies.
There are a few differences between the Company and the Operating Partnership which are reflected in this Form 10-K. We believe it is important to understand the differences between the Company and the Operating Partnership in the context of how the two operate as an interrelated, consolidated company. COPT is a REIT whose only material asset is its ownership of partnership interests of COPLP. As a result, COPT does not conduct business itself, other than acting as the sole general partner of COPLP, issuing public equity and guaranteeing certain debt of COPLP. COPT itself is not directly obligated under any indebtedness but guarantees some of the debt of COPLP. COPLP owns substantially all of the assets of COPT either directly or through its subsidiaries, conducts almost all of the operations of the business and is structured as a limited partnership with no publicly traded equity. Except for net proceeds from public equity issuances by COPT, which are contributed to COPLP in exchange for partnership units, COPLP generates the capital required by COPT’s business.
Noncontrolling interests, shareholders’ equity and partners’ capital are the main areas of difference between the consolidated financial statements of COPT and those of COPLP. The common limited partnership interests in COPLP not owned by COPT are accounted for as partners’ capital in COPLP’s consolidated financial statements and as noncontrolling interests in COPT’s consolidated financial statements. The
only other significant differences between the consolidated financial statements of COPT and those of COPLP are assets in connection with a non-qualified elective deferred compensation plan and the corresponding liability to the plan’s participants that are held directly by COPT.
We believe combining the annual reports on Form 10-K of the Company and the Operating Partnership into this single report results in the following benefits:
•combined reports better reflect how management, investors and the analyst community view the business as a single operating unit;
•combined reports enhance investors’ understanding of the Company and the Operating Partnership by enabling them to view the business as a whole and in the same manner as management;
•combined reports are more efficient for the Company and the Operating Partnership and result in savings in time, effort and expense; and
•combined reports are more efficient for investors by reducing duplicative disclosure and providing a single document for their review.
To help investors understand the differences between the Company and the Operating Partnership, this report presents the following separate sections for each of the Company and the Operating Partnership:
•consolidated financial statements;
•the following notes to the consolidated financial statements:
•Note 3, Fair Value Measurements of COPT and subsidiaries and COPLP and subsidiaries;
•Note 9, Prepaid Expenses and Other Assets, Net of COPT and subsidiaries and COPLP and subsidiaries;
•Note 13, Equity of COPT and subsidiaries;
•Note 14, Equity of COPLP and subsidiaries; and
•Note 19, Earnings per Share of COPT and subsidiaries and Earnings per Unit of COPLP and subsidiaries;
•“Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources of COPT”; and
•“Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources of COPLP.”
This report also includes separate sections under Part II, Item 9A. Controls and Procedures and separate Exhibit 31 and Exhibit 32 certifications for each of COPT and COPLP to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the requisite certifications and that COPT and COPLP are compliant with Rule 13a-15 and Rule 15d-14 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and 18 U.S.C. §1350.
TABLE OF CONTENTS
Form 10-K
Forward-lookingForward-Looking Statements
This Form 10-K contains “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995, that are based on our current expectations, estimates and projections about future events and financial trends affecting the financial condition and operations of our business. Additionally, documents we subsequently file with the SEC and incorporated by reference will contain forward-looking statements.
Forward-looking statements can be identified by the use of words such as “may,” “will,” “should,” “could,” “believe,” “anticipate,” “expect,” “estimate,” “plan” or other comparable terminology. Forward-looking statements are inherently subject to risks and uncertainties, many of which we cannot predict with accuracy and some of which we might not even anticipate. Although we believe that the expectations, estimates and projections reflected in such forward-looking statements are based on reasonable assumptions at the time made, we can give no assurance that these expectations, estimates and projections will be achieved. Future events and actual results may differ materially from those discussed in the forward-looking statements. We caution readers that forward-looking statements reflect our opinion only as of the date on which they were made. You should not place undue reliance on forward-looking statements. The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:
•>general economic and business conditions, which will, among other things, affect office property and data center demand and rents, tenant creditworthiness, interest rates, financing availability, property operating and construction costs, and property values;
•>adverse changes in the real estate markets, including, among other things, increased competition with other companies;
•risks and uncertainties regarding the impact of the COVID-19 pandemic, and similar pandemics, along with restrictive measures instituted to prevent spread, on our business, the real estate industry and national, regional and local economic conditions;
•governmental actions and initiatives, including risks associated with the impact of a prolonged government shutdown or budgetary reductions or impasses, such as a reduction in rental revenues, non-renewal of leases and/or reduced or delayed demand for additional space by our strategic customers;
•>our ability to borrow on favorable terms;
•>risks of real estateproperty acquisition and development activities, including, among other things, risks that development projects may not be completed on schedule, that tenants may not take occupancy or pay rent or that development or operating costs may be greater than anticipated;
•>risks of investing through joint venture structures, including risks that our joint venture partners may not fulfill their financial obligations as investors or may take actions that are inconsistent with our objectives;
•>changes in our plans for properties or views of market economic conditions or failure to obtain development rights, either of which could result in recognition of significant impairment losses;
•>potential impact of a prolonged government shutdowns or budgetary reductions or impasses, such as a reduction of rental revenues, non-renewal of leases and/or reduced or delayed demand for additional space by existing or new tenants;
>potential additional costs, such as capital improvements, fees and penalties, associated with environmental laws or regulations;
>adverse changes resulting from other government actions and initiatives, such as changes in taxation, zoning laws or other regulations.
>our ability to satisfy and operate effectively under Federalfederal income tax rules relating to real estate investment trusts and partnerships;
•possible adverse changes in tax laws;
•>the dilutive effects of issuing additional common shares; and
•our ability to achieve projected results;
•>security breaches relating to cyber attacks, cyber intrusions or other factors;factors, and
•environmental requirements. other significant disruptions of our information technology networks and related systems.
We undertake no obligation to publicly update or supplement forward-looking statements, whether as a result of new information, future events or otherwise. For further information on these and other factors that could affect us and the statements contained herein, you should refer to the section below entitled “Item 1A. Risk Factors.”
PART I
Item 1. Business
OUR COMPANYGeneral
General. Corporate OfficeCOPT Defense Properties Trust (“COPT”COPT Defense”) and subsidiaries (collectively, the “Company”, “we” or “us”) is a fully-integrated and self-managed real estate investment trust (“REIT”) focused on owning, operating and developing properties in locations proximate to, or sometimes containing, key U.S. Government (“USG”) defense installations and missions (which we refer to herein as our Defense/IT Portfolio). Our tenants include the USG and their defense contractors, who are primarily engaged in priority national security activities, and who generally require mission-critical and high security property enhancements. In September 2023, we changed our name from Corporate Office Properties L.P. (“COPLP”) and subsidiaries (collectively, the “Operating Partnership”) is the entity through whichTrust to COPT the sole general partner of COPLP, conducts almost all of its operations and owns almost all of its assets. Unless otherwise expressly stated or the context otherwise requires, “we”, “us” and “our” as used herein referDefense Properties to each of the Company and the Operating Partnership. We own, manage, lease, develop and selectively acquire office and data center properties. The majority ofbetter describe our portfolio is ininvestment strategy’s focus on locations that support the United States Government (“USG”) and its contractors, most of whom are engaged in national security,serving our country’s priority defense and information technology (“IT”) related activities servicing what we believe are growing, durable, priority missions (“Defense/IT Locations”). We also own a portfolio of office properties located in select urban/urban-like submarkets in the Greater Washington, DC/Baltimore region with durable Class-A office fundamentals and characteristics (“Regional Office”).activities. As of December 31, 2020,2023, our properties included the following:Defense/IT Portfolio included:
•>181190 operating properties totaling 21.021.7 million square feet comprised of 16.216.0 million square feet in 155160 office properties and 4.75.7 million square feet in 2630 single-tenant data center shell properties (“data center shells”).shells. We owned 1724 of these data center shells through unconsolidated real estate joint ventures;
•>a wholesale data center with a critical load of 19.25 megawatts;
•11five properties under development (nine(two office properties and twothree data center shells), including three partially-operational properties, that we estimate will total approximately 1.5 million817,000 square feet upon completion; and
•>approximately 830660 acres of land controlled for future development that we believe could be developed into approximately 10.47.9 million square feet.
We also owned eight other operating properties totaling 2.1 million square feet and 43approximately 50 acres of other land.developable land in the Greater Washington, DC/Baltimore region as of December 31, 2023.
COPLPWe conduct almost all of our operations and own almost all of our assets through our operating partnership, COPT Defense Properties, L.P. (“CDPLP”) and subsidiaries (collectively, the “Operating Partnership”), of which COPT Defense is the sole general partner. CDPLP owns real estate directly and through subsidiary partnerships and limited liability companies (“LLCs”). In addition to owning real estate, COPLPCDPLP also owns subsidiaries that provide real estate services such as property management, development and construction services primarily for our properties but also for third parties. Some of these services are performed by a taxable REIT subsidiary (“TRS”). In September 2023, we changed CDPLP’s name from Corporate Office Properties, L.P. to COPT Defense Properties, L.P.
Equity interests in COPLPCDPLP are in the form of common and preferred units. As of December 31, 2020,2023, COPT Defense owned 98.6%97.8% of the outstanding COPLPCDPLP common units (“common units”) and there were no preferred units outstanding. Common units not owned by COPT Defense carry certain redemption rights. The number of common units owned by COPT Defense is equivalent to the number of outstanding common shares of beneficial interest (“common shares”) of COPT Defense, and the entitlement of common units to quarterly distributions and payments in liquidation is substantially the same as that of COPT Defense common shareholders.
COPT’sIn September 2023, the ticker symbol under which our common shares are publicly traded on the New York Stock Exchange (“NYSE”) under the ticker symbolchanged from “OFC”.
Because COPLP is managed by COPT, and COPT conducts substantially all of its operations through COPLP, we refer to COPT’s executive officers as COPLP’s executive officers; similarly, although COPLP does not have a board of trustees, we refer to COPT’s Board of Trustees as COPLP’s Board of Trustees.“CDP”.
We believe that COPT Defense is organized and has operated in a manner that satisfies the requirements for taxation as a REIT under the Internal Revenue Code of 1986, as amended, and we intend to continue to operate COPT Defense in such a manner. If COPT Defense continues to qualify for taxation as a REIT, it generally will not be subject to Federalfederal income tax on its taxable income (other than that of its TRS entities) that is distributed to its shareholders. A REIT is subject to a number of organizational and operational requirements, including a requirement that it distribute at least 90% of its annual taxable income to its shareholders.
Our executive offices are located at 6711 Columbia Gateway Drive, Suite 300, Columbia, Maryland 21046 and our telephone number is (443) 285-5400.
Our Internet address is www.copt.com. We make available on our Internet website free of charge our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably possible after we file such material with the Securities and Exchange Commission (the “SEC”). In addition, we have made available on our Internet website under the heading “Corporate Governance” the charters for our Board of Trustees’
Audit, Nominating and Corporate Governance, Compensation and Investment Committees, as well as our Corporate Governance Guidelines, Code of Business Conduct and Ethics and Code of Ethics for Financial Officers. We intend to make available on our website any future amendments or waivers to our Code of Business Conduct and Ethics and Code of Ethics for Financial Officers within four business days after any such amendments or waivers. The information on our Internet site is not part of this report.
The SEC maintains an Internet website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. This Internet website can be accessed at www.sec.gov.
Business and Growth Strategies
Our primary goal is to create value and deliver attractive and competitive total returns to our shareholders. This section sets forth key components of our business and growth strategies that we have in place to support this goal.
Defense/IT Locations Strategy: We specializefocus on owning, operating and developing Defense/IT Portfolio properties, which as of December 31, 2023 accounted for 190 of our 198 properties, representing 89.8% of our annualized rental revenue, and we control developable land to accommodate future growth in serving the unique requirements of tenantsthis portfolio. The properties in our Defense/IT Locations properties. These propertiesthis portfolio are primarily occupied by the USG and contractor tenants engaged in what we believe are high priority security, defense and IT missions. These tenants’ missionsadjacent to, or contain, their demand drivers, whose activities pertain more to knowledge-knowledge and technology-based activitiestechnology (i.e., cyber security, research and development and other highly technicalhighly-technical defense and security areas) than to force structure (i.e., troops) and weapon system mass production. Our officeDemand drivers for our Defense/IT Portfolio include:
>mission-critical facilities and missions of USG organizations and agencies supporting defense and national security activities, such as intelligence, surveillance, reconnaissance, missile defense, cybersecurity, space exploration, research and development and advanced weapons systems testing and engineering, in Maryland, Northern Virginia, Washington, D.C., Huntsville, Alabama and San Antonio Texas; and
>data center shell portfolio is significantly concentratedshells in Defense/IT Locations, which as of December 31, 2020 accounted for 171Northern Virginia, one of the portfolio’s 181 properties, representing 87.1% of its annualized rental revenue, and we control developable land to accommodate future growthlargest data center markets in this portfolio. These properties generally have higher tenant renewal rates than is typical in commercial office spacethe world due in large part to: their to its central location along the United States’ Eastern Seaboard, robust fiber connectivity infrastructure and access to reliable and affordable utilities required to support operations.
Due to this business strategy, our Defense/IT Portfolio has certain distinguishing characteristics relative to typical commercial office properties, including:
>proximity to defense installations or other key demand drivers;drivers, which is generally preferred, and often required, for tenants to execute their missions;
>demand that is driven by, and correlated with, national security spending for activities occurring in the abilityproperties’ respective demand drivers, which we believe has made them less susceptible to the effects of manyconditions in the overall economy than typical office properties;
>higher likelihood of thesesignificant tenant investments in properties to meet Anti-Terrorism Force Protection (“ATFP”) requirements; and significant investments often made by tenants for unique needs such as SecureSensitive Compartmented Information Facility (“SCIF”), critical power supply and operational redundancy.redundancy, which we believe may make tenants unable, or less likely, to relocate;
>ability of many of the properties leased to the USG to meet Anti-Terrorism Force Protection (“ATFP”) requirements; and
>higher preponderance of tenants who require their employees to work in the properties for security purposes, which we believe makes them less susceptible to remote work trends.
In recent years,Our Defense/IT Portfolio includes data center shells, have been a significant growth driver for our Defense/IT Locations. Data center shellswhich are properties leased to tenants to be operated as data centers in which we provide tenants with only the core building and basic power, while the tenants fund the costs for the critical power, fiber connectivity and data center infrastructure. From 2013 through 2020, we placed into service 26 data center shells totaling 4.7 million square feet, and we had an additional two under development totaling 420,000 square feet as of December 31, 2020. We enter into long-term leases for these properties prior to commencing development, with triple-net structures, rent escalators and multiple extension options and rent escalators to provide future growth.options. Additionally, our tenants’ significant funding of the costs to fully power and equip these properties significantlygreatly enhances the value of these properties and creates high barriers to exit for such tenants.
We believe that our properties and teamcross-discipline teams collectively complement our Defense/IT Locations strategy due to our:to:
•properties’ proximity to defense installations and other knowledge- and technology-based government demand drivers. Such proximity is generally preferred and often required for our tenants to execute their missions. Specifically, our:
•office properties are proximate to such mission-critical facilities as Fort George G. Meade (which houses over 100 Department of Defense organizations and agencies, including ones engaged in signals intelligence, such as U.S. Cyber Command and Defense Information Systems Agency) and Redstone Arsenal (one of the largest defense installations in the United States, housing priority missions such as Army procurement, missile defense, space exploration, and research and development, testing and engineering of advanced weapons systems); and
•data center shells located in Northern Virginia, proximate to the MAE-East Corridor, which is a major Network Access Point in the United States for interconnecting traffic between Internet service providers;
•>well-established relationships with the USG and its contractors;contractors, many of whom lease space in more than one of our properties, and in multiple geographic locations in some cases;
•>extensive experience in developing:
•>high quality highly-efficient office properties;
•>secured, specialized space, with the ability to satisfy the USG’s unique needs (including SCIF, ATFP and ATFPaccess control requirements); and
•>data center shells to customer specifications within very condensed timeframes to accommodate time-sensitive tenant demand; and
•>depth of knowledge, specialized skills and credentialed personnel in operating highly-specialized properties with uniquecomplex space and security-oriented requirements.needs.
RegionalOther Office StrategyProperties: WhileIn addition to our Defense/IT Locations are our primary focus,Portfolio, we also ownowned eight other office properties as of December 31, 2023, representing 10.2% of our annualized rental revenue. Included among these properties is a portfolio of office properties located in select urban/urban-like submarkets in the Greater Washington, DC/Baltimore region, duewhich we historically referred to as Regional Office; in 2023, we concluded that these properties were no longer strategic holdings since they do not align with our strong market knowledge in that region.Defense/IT strategy. We intend to sell our other office properties when we believe that these submarkets possess the following favorable characteristics: (1) mixed-use, lifestyle oriented locations with a robust residentialmarket conditions and retail base; (2) proximityopportunities position us to public transportation and major transportation routes; (3) an educated workforce; and (4) a diverse employment base. As of December 31, 2020, we owned eight Regional Office properties, representing 12.5% ofbe able to optimize our office and data center shell portfolio’s annualized rental revenue. These properties were comprised of: three high-rise Baltimore City properties proximate to the city’s waterfront; four Northern Virginia properties proximate to existing or future Washington Metropolitan Area Metrorail stations and major interstates; and a newly-developed property in Washington, D.C.’s central business district.return on investment.
Asset Management Strategy: We aggressively manage our portfolio to maximize the value and operating performance of each property through: (1) proactive property management and leasing; (2) maximizing tenant retention in order to minimize space downtime and additional capital requirements associated with space rollover; (3) increasing rental rates where market conditions permit; (4) leasing vacant space; (5) achievement of operating efficiencies by increasing economies of scale and, where possible, aggregating vendor contracts to achieve volume pricing discounts; and (6) redevelopment when we believe property conditions and market demand warrant. We also continuously evaluate our portfolio and consider dispositions when properties no longer meet our strategic objectives, or when capital markets and the circumstances pertaining to such holdings otherwise warrant, in order to maximize our return on invested capital or support our property development and capital strategy.
We aim to sustainably develop and operate our portfolio to create healthier work environments and reduce consumption of resources by: (1) developing new buildings designed to use resources with a high level of efficiency and low impact on human health and the environment during their life cycles through our participation in the U.S. Green Building Council’s Leadership in Energy and Environmental Design (“LEED”) program;program, targeting new office properties to meet LEED certification standards or, when not possible, striving to otherwise incorporate LEED criteria into property designs; (2) investing in energy systems and other equipment that reduce energy consumption and operating costs; (3) adopting select LEED for Building Operations and Maintenance (“LEED O+M: Existing Buildings”) prerequisitesguidelines for much of our portfolio, including guidelines pertainingcleaning, recycling, energy reduction and landscaping practices; (3) investing in building automation systems and high-efficiency heating and air conditioning equipment and implementing resource conservation practices to cleaningreduce energy consumption; (4) investing in water-saving features; and recycling practices and energy reduction; and (4)(5) participating in the annual Global Real Estate Sustainability Benchmark (“GRESB”) survey, which is widely recognized for measuring the environmental, social and governance (“ESG”) performance of real estate companies and funds. We earned an overall score of “Green Star” on the GRESB survey in each of the last sixnine years, representing the highest quadrant of achievement on the survey.
Property Development and Acquisition Strategy: We expand our portfolio of operating portfolioproperties primarily through property developmentsdevelopment in support of our Defense/IT Locations strategy, and we have significant land holdings that we believe can further support that growth while serving as a barrier against competitive supply. We pursue development activities as market conditions and leasing opportunities support favorable risk-adjusted returns on investment, and thereforeinvestment. While we typically prefer properties to be significantly leased prior to commencing development.development, we develop properties ahead of completed leasing in certain locations where we believe that consistent demand and high occupancy rates warrant building of inventory to accommodate future anticipated USG and contractor demand. To a lesser extent, we may also pursue growth through acquisitions, seeking to execute such transactions at attractive yields and below replacement cost.
Capital Strategy: Our capital strategy is aimed at maintaining continuous access to capital irrespective of market conditions in the most cost-effective manner by:
•>maintaining an investment grade rating to enable us to use debt comprised primarily of unsecured, primarily fixed-rate debt (including the effect of interest rate swaps) from public markets and banks;
•>using secured nonrecourse debt from institutional lenders and banks;
•>managing our debt by monitoring, among other things: (1) the relationship of certain measures of earnings to our debt level and to certain capital costs; (2) the timing of debt maturities to ensure that maturities in any one year do not exceed levels that we believe we can refinance; (3) our exposure to changes in interest rates; and (4) our total and secured debt levels relative to our overall capital structure;
•raising equity through issuances of common shares in COPT and common units in COPLP, joint venture structures for certain investments and, to a lesser extent, issuances of preferred shares in COPT and preferred units in COPLP;
•>monitoring capacity available under revolving credit facilities and equity offering programs to provide liquidity to fund investment activities;activities and other capital needs;
•>raising equity through issuances of common shares and, to a lesser extent, issuances of common equity in CDPLP and preferred equity;
>recycling proceeds from sales of interests in properties, including through joint venture structures for certain investments, to fund property development and other investment activities and/or reduce overall debt;
>paying dividends at a level that is at least sufficient for us to maintain our REIT status;
•recycling proceeds from sales of interests in properties to fund our investment activities and/or reduce overall debt; and
•>continuously evaluating the ability of our capital resources to accommodate our plans for growth.
Industry Segments
As of December 31, 2020,2023, our operations included the following reportable segments: Defense/IT Locations; Regional Office; Wholesale Data Center;Portfolio and Other. Our Defense/IT LocationsPortfolio segment included the following sub-segments:
•>Fort George G. Meade and the Baltimore/Washington Corridor (referred to herein as “Fort(“Fort Meade/BW Corridor”);
•>Northern Virginia Defense/IT Locations;Locations (“NoVA Defense/IT”);
•>Lackland Air Force Base in San Antonio, Texas;
•>locations serving the U.S. Navy (referred to herein as “Navy Support Locations”(“Navy Support”). Properties in this sub-segment as of December 31, 20202023 were proximate to the Washington Navy Yard in Washington, D.C., the Naval Air Station Patuxent River in Maryland and the Naval Surface Warfare Center Dahlgren Division in Virginia;
•>Redstone Arsenal in Huntsville, Alabama; and
>data center shells in Northern Virginia (including 17 owned through unconsolidated real estate joint ventures).Virginia.
As of December 31, 2020,2023: our Defense/IT Locations comprised 171Portfolio segment included 190 of our office and data center shell portfolio’soperating properties, representing 89.4%91.0% of itsour square feet in operations, while Regional Office comprisedand all of our properties under development were for this segment; and our Other segment included our remaining eight operating properties, representing 9.0% of the portfolio’s properties, or 9.9% of itsour square feet in operations. Our Wholesale Data Center segment is comprised of one property in Manassas, Virginia.
For information relating to our reportable segments, refer to Note 1713 to our consolidated financial statements, which isare included in a separate section at the end of this Annual Report on Form 10-K beginning on page F-1.
Human Capital
Our Workforce: As of December 31, 2020,2023, our workforce was comprised of 406410 employees based in Maryland, where we are headquartered, Texas, Virginia, Washington, D.C., Alabama and Washington, D.C.Texas. Our workforce has varying expertise, and includes:
•>Building Technicians (175(172 employees): Skilled, of which approximately 32% were of minority race. Building technicians are skilled trades professionals who perform mechanical maintenance, maintain ourand operating systems maintenance and otherwise service our buildings overall.properties; and
•>Office Staff, outlined below, of which approximately 53% were female and approximately 32% of minority race:
>Operations Management (70(73 employees): Property managers and support staff who supportservice our tenant customer needs.
•>Asset Management and Leasing (11(10 employees): Customer-facing leaders who drive the financial performance of our assets.
•>Development and Construction (30 employees): Project managers and support staff who drive our development pipeline and interior design.
•>Finance and Accounting (65(68 employees): Professionals who manage our financial activities.
•>Company Support Functions (42(44 employees): Includes Human Resources, Investor Relations, Investments, Legal, Marketing, Information Technology, Facility Security and Corporate Administrative Support.
•>Senior Leadership (13 employees): Our business line and Company leaders, including our Named Executive Officers, who interface with our Board of Trustees and shareholders and manage our business strategy, functional activities, risk and overall success.
In support of our Defense/IT LocationsPortfolio strategy, approximatelyover one-third of our employees carry government credentials.
We operate in markets in which we compete for human capital. We rely on our employees to drive our success and we support them with a variety of programs to enhance their workplace engagement and job fulfillment.
Culture and Workforce Engagement: We develop and reinforce our culture by emphasizing our core values, illustrated by the actiiVe acronym. actiiVeacronym that stands for: Accountability, Commitment, Teamwork, Integrity, Innovation, Value Creation and Excellence. These values are intended to serve as a compass to our workforce to inform behavior and fuel our success.
We believe in equal opportunity, engagement and ethics. All employees must adhere to our Code of Business Conduct. We typically survey our workforce annually to measure engagement, use the feedback to enhanceemployee engagement and identify opportunities for further improvement, which we believe that this has helped us to achieve annual “best workplace” honors for over a decade.
Compensation Program: Our compensation philosophy is driven by accountability, which results in a pay-for-performance structure. Our compensation program includes: base salary; an annual cash bonus program based on the achievement of individual, business unit and company objectives; health and welfare benefits; a retirement savings plan with a company match;
financially supported financially-supported learning programs; and employee recognition programs. We also grant common equity to all new full-time employees and provide our senior leadershipmanagement team and high performers with the ability to earn additional grants to align their interests with those of our shareholders and to incent retention.
Wellbeing and Safety: We view wellbeing as including five pillars:dimensions: Physical, Emotional, Career, Financial and Community. We design programs to support each of these pillars.dimensions. We directly incent wellbeing behaviors through a points-driven program each year. Employees who achieve the points threshold receive reductions in medical premiums or funds towardscontributions to their health savings accounts. We believe this program enhances employee wellbeing and reduces medical costs.
Safety is a key part of our employee wellbeing, largely weighted in the Physical pillar.dimension. Recognizing this, we conduct job-tailored safety training on an ongoing basis. We also monitor our workers’ compensation claims to measure the effectiveness of our safety program.
With wellbeing and safety in mind, during the COVID-19 pandemic in 2020, we:
•consulted with medical experts in developing an approach to safely operate our properties and workplaces;
•required our on-site property operations staff to use COPT-provided personal protective equipment, such as masks, gloves and hand sanitizer, and implement other procedural changes to enhance separation and minimize spread;
•instituted enhanced cleaning measures, particularly for high touch areas and flat surfaces;
•provided signage promoting proper social distancing practices and hand sanitizer stations for property common areas; and
•had most of our employees (other than on-site property operations staff) work from home from mid-March until the end of May, when most began reporting to their normal work locations on a bi-weekly rotational basis.
Talent Development: We aim to attract, retain and develop our top talent throughout the employment cycle in order to enhance our talent pool. During 2020,2023, our workforce grew to support the business’ overall growthsize did not change significantly, with 72 new hires and we hired 39 employees. In 2020, 27 employees departed the Company, resulting in a 6.75%57 departures (an attrition rate.rate of approximately 13.9%).
We offer robust learning programs to all employees, including educational assistance for college-level and vocational degree programs, and cover all expenses for licenses and certifications, management and leadership courses, key skills training and industry and professional conferences. Further, we offer internship and mentorship programs to facilitate teaching and learning from others.
Community Engagement: We encourage employee engagement with our communities to facilitate personal growth and connection and to enhance our citizenship within our communities. We provide a platform for employees to engage with communities by contributing time, effort, money and expertise, which includes providing employees eight hours of paid time per year to engage in volunteer activities to serve our community directly in a company-organized team or individual format. Our employees select community non-profits for Corporate giving grants and for volunteer time contributions. We empower our employees to become involved and fuel our success in community partnerships.
Competition
The commercial real estate market is highly competitive. Numerous commercial landlords compete with us for tenants. Some of the properties competing with ours may be newer or in more desirable locations, or the competing properties’ owners may be willing to accept lower rents. We also compete with our own tenants, many of whom have the right to sublease their space. The competitive environment for leasing is affected considerably by a number of factors including, among other things, changes in economic conditions and supply of and demand for space. These factors may make it difficult for us to lease existing vacant space and space associated with future lease expirations at rental rates that are sufficient to produce acceptable operating cash flows.
We occasionally compete for the acquisition of land and commercial properties with manyother entities, including other publicly-traded commercial REITs.REITs, for acquisitions of land and/or commercial properties. Competitors for such acquisitions may have substantially greater financial resources than ours. In addition, our competitors may be willing to accept lower returns on their investments or may be willing to incur higher leverage.
We also compete with manyother entities, including other publicly-traded commercial office REITs, for capital. This competition could adversely affect our ability to raise capital that we may need to fulfill our capital strategy.
In addition, we compete with manyother entities for talent. If there is an increase in the costs for us to retain employees, or if we otherwise fail to attract and retain such employees, our business and operating results could be adversely effected.affected.
Item 1A. Risk Factors
Set forth below are risks and uncertainties relating to our business and the ownership of our securities. These risks and uncertainties may lead to outcomes that could adversely affect our financial position, results of operations, cash flows andor ability to make expected distributions to our equityholders.shareholders. You should carefully consider each of these risks and uncertainties, along with all of the information in this Annual Report on Form 10-K and its Exhibits, including our consolidated financial statements and notes thereto for the year ended December 31, 20202023 included in a separate section at the end of this report beginning on page F-1.
Risks Associated with the Real Estate Industry and Our Properties
Our performance and asset value are subject to risks associated with our properties and with the real estate industry. Real estate investments are subject to various risks and fluctuations in value and demand, many of which are beyond our control. Our performance and the value of our real estate assets may decline due to conditions in the general economy and the real estate industry, which in turn, could have an adverse effect onadversely affect our financial position, results of operations, cash flows andor ability to make expected distributions to our shareholders. These conditions include, but are not limited to:
•>downturns in national, regional and local economic environments, including increases in the unemployment rate and inflation or deflation;
•>competition from other properties;
•>trends in office real estate that may adversely affect future demand, including telecommutingremote work and flexible workplaces;work arrangements, open workspaces and coworking spaces;
•>deteriorating local real estate market conditions, such as oversupply, reduction in demand and decreasing rental rates;
•>declining real estate valuations;
•>adverse developments concerning our tenants, which could affect our ability to collect rents and execute lease renewals;
•>adverse changes resulting from the COVID-19 pandemic, and similar pandemics, along with restrictive measures instituted to prevent spread, on our business, theincreasing operating costs, including real estate industrytaxes, utilities, insurance and national, regional and local economic conditions;other expenses, some of which we may not be able to pass through to tenants;
•>government actionsincreasing vacancies and initiatives, including risks associated with the need to periodically repair, renovate and re-lease space;
>increasing interest rates and unavailability of financing on acceptable terms or at all;
>unavailability of financing for potential purchasers of our properties;
>potential impact of prolonged government shutdowns andor budgetary reductions or impasses, such as a reduction of rental revenues, non-renewal of leases and/or reduced or delayed demand for additional space by our strategic customers;
•increasing operating costs, including insurance, utilities, real estate taxes and other expenses, some of which we may not be able to pass through toexisting or new tenants;
•>increasing vacanciespotential additional costs, such as capital improvements, fees and the need to periodically repair, renovatepenalties, associated with environmental laws and re-lease space;regulations;
•increasing interest rates and unavailability of financing on acceptable terms or at all;
•unavailability of financing for potential purchasers of our properties;
•>adverse changes from other government actions and initiatives, such as changes in taxation, zoning laws or zoning laws;other regulations;
•>potential inability to secure adequate insurance;
•>adverse consequences resulting from civil disturbances, natural disasters, terrorist acts or acts of war; and
•>potential liability under environmental or other laws or regulations.adverse consequences resulting from climate-related risks.
Our business may be affected by adverse economic conditions. Our business may be affected by adverse economic conditions in the United States, economy or real estate industry as a whole or by the local economic conditions in the markets in which our properties are located, including the impact of high unemployment, inflation or deflation, constrained credit and constrained credit.shortages of goods or services. Such conditions could potentially be triggered by geopolitical or other world events. Adverse economic conditions could increase the likelihood of tenants encountering financial difficulties, including bankruptcy, insolvency or general downturn of business, and as a result could increase the likelihood of tenants defaulting on their lease obligations to us. Such conditions could also decrease our likelihood of successfully renewing tenants at favorable terms or at all or leasing vacant space in existing properties or newly-developed properties. In addition, such conditions could disrupt the operations or profitability of our business or increase the level of risk that we may not be able to obtain new financing for development activities, refinancing of existing debt, acquisitions or other capital requirements at reasonable terms, if at all.
We may suffer adverse consequences as a result of our reliance on rental revenues for our income. We earn revenue from rentingleasing our properties. Certain of our operating costs do not necessarily fluctuate in relation to changes in our occupancy and rental revenue. This means thatAs a result, these costs will not necessarily decline and may increase even if our revenues decline.
For new tenants or upon expiration of existing leases, we generally must make improvements and pay other leasing costs for which we may not receive increased rents. We also make building-related capital improvements for which tenants may not reimburse us.
If our properties do not generate revenue sufficient to meet our operating expenses and capital costs, we may need to borrow additional amounts to cover these costs. In such circumstances, we would likely have lower profits or possibly incur losses. We may also find in such circumstances that we are unable to borrow to coverfund such costs, in which case our operations could be adversely affected.
In addition, the competitive environment for leasing is affected considerably by a number of factors including, among other things, changes due to economic factors such as supply and demand. These factors may make it difficult for us to lease existing vacant space in existing properties or newly-developed properties and space associated with future lease expirations at rental rates that are sufficient to meet our short-term capital needs.
We rely on the ability of our tenants to pay rent and would be harmed by their inability to do so. Our performance depends on the ability of our tenants to fulfill their lease obligations by paying their rental payments in a timely manner. As a result, we would be harmed if one or more of our major tenants, or a number of our smaller tenants, were to experience financial difficulties, including bankruptcy, insolvency prolonged government shutdown or general downturn of business.
We may be adversely affected by developments concerning our major tenants, orincluding the USG and its contractors, including prolonged shutdowns ofor the government and actual,defense installations or potential, reductions in government spending targeting knowledge- and technology-based activities.missions from which demand for our Defense/IT Portfolio’s properties is driven. As of December 31, 2020,2023, our 10 largest tenants accounted for 62.7%63.5% of our total annualized rental revenue, the three largest of these tenants accounted for 48.8%49.6%, and the USG, our largest tenant, accounted for 34.1%35.9%. We calculate annualized rental revenue by multiplying by 12 the sum of monthly contractual base rents and estimated monthly expense reimbursements under active leases in our portfolio as of December 31, 2020; with regard to properties owned through unconsolidated real estate joint ventures, we include the portion of annualized rental revenue allocable to our ownership interest. For additional information regarding our tenant concentrations, refer to the section entitled “Concentration of Operations” within the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We calculate annualized rental revenue by multiplying by 12 the sum of monthly contractual base rents (ignoring free rent then in effect and rent associated with tenant funded landlord assets) and estimated monthly expense reimbursements under active leases in our portfolio as of the date defined; with regard to properties owned through unconsolidated real estate joint ventures, we include the portion of annualized rental revenue allocable to our ownership interests.
Most of our leases with the USG provide for one-year terms, with a series of one-year terms.renewal options. The USG may terminate its leases if, among other reasons, the United States Congress fails to provide funding. We would be harmed if any of our largest tenants fail to make rental payments to us over an extended period of time, including as a result of a prolonged government shutdown, or if the USG elects to terminate some or all of its leases and the space cannot be re-leased on satisfactory terms.
As of December 31, 2020, 87.1%2023, 89.8% of our office and data center shell properties’ total annualized rental revenue was from our Defense/IT Locations, and we expect to maintain a similarly high revenue concentration from properties in these locations.Portfolio. A reduction in government spending targeting the activities of the government andUSG or its contractors (such as knowledge- and technology-based defense and security activities) in these locationsthis portfolio’s demand drivers could adversely affect our tenants’ ability to fulfill lease obligations, renew leases or enter into new leases and limit our future growth from properties in these locations. Moreover,whose demand rely on such activities. In addition, uncertainty regarding the potential for future reduction in government spending targetingfor such activities could also decrease or delay leasing activity from existing or new tenants engaged in these activities. Moreover, we may face additional economic harm in the event of long-term displacement, or elimination, of government spending for defense installations or missions from which demand for our Defense/IT Portfolio’s properties is driven.
Our future ability to fuel growth and raise capital throughdevelop data center shell development mayshells will be adversely affected shouldlimited without additional land to do so. Since 2013, we suffer a loss of future development opportunities with ourhave developed 30 data center shell customer. Data center shells have beenin Northern Virginia totaling 5.7 million square feet for a significant growth driverFortune 100 Company tenant, and we had an additional three under development totaling 643,000 square feet for us in recent years, enabling us to develop and place into service fully-occupied, single-tenant properties, with long-term leases and rent escalators for future growth.that tenant as of December 31, 2023. These properties have also garnered the interest of outside investors, enabling us to raise capital by selling ownership interests through joint venture structures in recent years at favorable profit margins, and to apply the proceeds towards other development opportunities. OurAs of December 31, 2023, we did not have additional land under control in Northern Virginia for the future development of data center shells. If we are unable to locate additional data center shell activity is concentrated with one customer. If that customerdevelopment opportunities, we may no longer choosesbe able to allocate development opportunities to us, we may have limited opportunities to continue to usedevelop data center shells as a growth driver and possible source of future capital.shells.
We may suffer economic harm in the event of a decline in the real estate market or general economic conditions in the Mid-Atlantic region, particularly in the Greater Washington, DC/Baltimore region, or in particular business parks. Most of our properties are located in the Mid-Atlantic region of the United States, particularly in the Greater Washington, DC/Baltimore region. OurMany of our properties are also often concentrated in business parks in which we own most of the properties. Consequently, our portfolio of properties is not broadly distributed geographically. As a result, we wouldcould be harmed by a decline in the real estate market or general economic conditions in the Mid-Atlantic region, the Greater Washington, DC/Baltimore region or themarkets, submarkets or business parks in which our properties are located.
We would suffer economic harm if we were unable to renew our leases on favorable terms. When leases expire, our tenants may not renew or may renew on terms less favorable to us than the terms of their original leases. If a tenant vacates a property, we can expect to experience a vacancy for some period of time, as well as incur higher leasing costs than we would likely incur if a tenant renews. As a result, we may be harmed if we experience a high volume of tenant departures at the end of their lease terms.
We may be adversely affected by trends in the office real estate industry. Businesses are increasingly permitting employee telecommuting,Certain businesses have implemented remote work and flexible work schedules,arrangements and/or utilized open workplacesworkspaces and teleconferencing. There has also been a trend of businesses utilizing shared office and co-workingcoworking spaces. These practices could enable businesses to reduce their office space requirements. TheseA continuation or acceleration of these trends some of which could potentially accelerate as a result of changes in work practices during the COVID-19 pandemic, could over time erode the overall demand for commercial office space and, in turn, place downward pressure on occupancy, rental rates and property valuations.
We may encounter a significant decline in the value of our real estate. The value of our real estate could be adversely affected by general economic and market conditions connected to a specific property or property type, a market or submarket, a broader economic region or the office real estate industry. Examples of such conditions include a broader economic recession, declining demand for space and decreases in market rental rates and/or market values of real estate assets. If our real estate assets significantly decline in value, it could result in our recognition of impairment losses. Moreover, a decline in the value of our real estate could adversely affect the amount of borrowings available to us under future credit facilities and other loans.our ability, or willingness, to execute plans to sell properties.
We may not be able to compete successfully with other entities that operate in our industry. The commercial real estate market is highly competitive. Numerous commercial properties compete with our properties for tenants; some of the properties competing with ours may be newer or in more desirable locations, or the competing properties’ owners may be willing to accept lower rates than are acceptable to us. In addition, we compete for the acquisition of land and commercial properties with many entities, including other publicly traded commercial office REITs;publicly-traded REITs and large private equity backed entities and funds; competitors for such acquisitions may have substantially greater financial resources than ours, or may be willing to accept lower returns on their investments or incur higher leverage.
Real estate investments are illiquid, and we may not be able to dispose of properties on a timely basis when we determine it is appropriate to do so. Real estate investments can be difficult to sell and convert to cash quickly, especially if market conditions, including real estate lending conditions, are not favorable. Such illiquidity could limit our ability to fund capital needs or quickly change our portfolio of properties in response to changes in economic or other conditions. Moreover, under certain circumstances, the Internal Revenue Code imposes penalties on a REIT that sells property held for less than two years and limits the number of properties it can sell in a given year.
We may be unable to successfully execute our plans to develop additional properties. Although the majority of our investments are in operating properties, we also develop and redevelop properties, including some that are not fully pre-leased. When we develop andor redevelop properties, we assume a number of risks, including, but not limited to, the risk ofof: actual costs
exceeding our budgets,budgets; conditions or events occurring that delay or preclude our ability to complete the project completion andas originally planned or at all; projected leasing not occurring. In addition, we may find that we are unable to successfully execute plansoccurring as expected or at all, or occurring at lower than expected rental rates; and not being able to obtain financing to fund property development activities.
We may suffer adverse effects from acquisitions of commercial real estate properties. We may pursue acquisitions of existing commercial real estate properties as part of our property development and acquisition strategy. Acquisitions of commercial properties entail risks, such as the risk that we may not be in a position, or have the opportunity in the future, to make suitable property acquisitions on advantageous terms and/or that such acquisitions fail to perform as expected.
We may pursue selective acquisitions of properties in regions where we have not previously owned properties. These acquisitions may entail risks in addition to those we face with acquisitions in more familiar regions, such as our not sufficiently anticipating conditions or trends in a new marketsuch regions and therefore not being able to operate the acquired propertyproperties profitably.
In addition, we may acquire properties that are subject to liabilities in situations where we have no recourse, or only limited recourse, against the prior owners or other third parties with respect to unknown liabilities. As a result, if a liability were asserted against us based upon ownership of those properties, we might have to pay substantial sums to settle or contest it. Examples of unknown liabilities with respect to acquired properties include, but are not limited to:
•liabilities for remediation of disclosed or undisclosed environmental contamination;
•claims by tenants, vendors or other persons dealing with the former owners of the properties;
•liabilities incurred in the ordinary course of business; and
•claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the properties.
Our wholesale data center may become obsolete. Wholesale data centers are much more expensive investments on a per square foot basis than office properties due to the level of infrastructure required to operate the centers. At the same time, technology, industry standards and service requirements for wholesale data centers are rapidly evolving and, as a result, the risk of investments we make in our wholesale data center becoming obsolete is higher than other commercial real estate properties. Our wholesale data center may become obsolete due to the development of new systems to deliver power to, or eliminate heat from, the servers housed in the properties, or due to other technological advances. In addition, we may not be able to efficiently upgrade or change power and cooling systems to meet new demands or industry standards without incurring significant costs that we may not be able to pass on to our tenants.
Data center space in certain of our office properties may be difficult to reposition for alternative uses. Certain of our office properties contain data center space, which is highly specialized space containing extensive electrical and mechanical systems that are uniquely designed to run and maintain banks of computer servers. Data centers are subject to obsolescence risks. In the event that we needed to reposition such space for another use, the renovations required to do so could be difficult and costly, and we may, as a result, deem such renovations to be impractical.
We may be subject to possible environmental liabilities. We are subject to various Federal,federal, state and local environmental laws, including air and water quality, hazardous or toxic substances and health and safety. These laws can impose liability on current and prior property owners or operators for the costs of removal or remediation of hazardous substances released on a property, even if the property owner was not responsible for, or even aware of, the release of the hazardous substances. Costs resulting from environmental liability could be substantial. The presence of hazardous substances on our properties may also adversely affect occupancy and our ability to sell or borrow against those properties. In addition to the costs of government claims under environmental laws, private plaintiffs may bring claims for personal injury or other reasons. Additionally, various laws impose liability for the costs of removal or remediation of hazardous substances at the disposal or treatment facility. Anyonefacility; anyone who arranges for the disposal or treatment of hazardous substances at such a facility is potentially liable under such laws.
Although most of our properties have been subject to varying degrees of environmental assessment, many of these assessments are limited in scope and may not include or identify all potential environmental liabilities or risks associated with the property. Identification of new compliance concerns or undiscovered areas of contamination, changes in the extent or known scope of contamination, discovery of additional sites, human exposure to the contamination or changes in cleanup or compliance requirements could result in significant costs to us.
We would incur losses if third parties to whom we make loans fail to service or repay such loans. We enter into loan arrangements with tenants of our properties and other third parties. We would incur losses if these parties failed to fulfill their obligations to service and repay such loans.
We may be adversely affected by natural disastersthe impact of climate-related risks. We may be adversely affected by extreme weather events, such as hurricanes, floods and tornadoes, which could result in significant property damage and make it more difficult for us to obtain affordable insurance coverage in the effects of climate change. Natural disasters, including earthquakes and severe storms could adversely impact our properties. The potential consequences of climate changefuture. Longer term, we could also adversely impact our properties, particularly those locatedface the potential for more frequent or destructive severe weather events and shifts in Baltimore City near the waterfront,temperature and over time,precipitation amounts. Such events could adversely affect our properties in a number of ways, including, but not limited to: declining demand for spacespace; our ability to operate them effectively and profitably; their valuations; and our ability to operate the properties effectively and result in additional operating costs.sell them or use them as collateral for future debt.
Terrorist attacks or incidents relatedWe may be adversely affected by legislation and regulatory changes relating to social unrestcombating climate change. We may be adversely affectaffected by legislation and regulatory changes aimed at combating climate change. For example, the valueState of Maryland enacted legislation that will subject our properties in the state (approximately half of our properties, our financial positionportfolio at year end) to future energy performance standards, with potential monetary penalties for failing to meet such standards, building code changes and cash flows. We have significantother requirements. In order to meet these performance standards and other requirements, we expect that we will need to make additional investments in properties locatedbuilding systems for new and existing properties. Other jurisdictions in large metropolitan areas or near military installations. Future terrorist attacks or incidents related to social unrest could directly or indirectly damagewhich our properties are located have also either enacted similar legislation or cause losses that materially exceed our insurance coverage. After such an attack or incident, tenants in these areas may choose to relocate their businesses to areas of the United States that may be perceived to be less likely targets of future terrorist activity or unrest, and fewer customers may choose to patronize businesses in these areas. This in turn would trigger a decreaseare considering doing so in the demand for spacefuture. We believe that our future additional capital investments and potential fees and penalties resulting from the State of Maryland legislation, and other similar federal, state or local laws or regulations in these areas, whichthe future, could increase vacancies in our properties and force us to lease space on less favorable terms.potentially be substantial.
We may be subject to other possible liabilities that would adversely affect our financial position and cash flows. Our properties may be subject to other risks related to current or future laws, including laws relating to zoning, development, fire and life safety requirements and other matters. These laws may require significant property modifications in the future and could result in the levy of fines against us. In addition, although we believe that we adequately insure
Attacks by terrorists or foreign nations or incidents related to social unrest may adversely affect the value of our properties, we are subjectour financial position and cash flows. We have significant investments in properties located in large metropolitan areas or near military installations. Attacks by terrorists or foreign nations, or incidents related to the risksocial unrest, could directly or
indirectly damage our properties or cause losses that materially exceed our insurance coverage. After such an attack or incident, tenants in these areas may not cover allchoose to relocate their businesses to areas of the costsUnited States that may be perceived to restorebe less likely targets of future attacks or unrest, and fewer customers may choose to patronize businesses in these areas. This in turn would trigger a decrease in demand for space in these areas that could increase vacancies in our properties and adversely affect property that is damaged by a fire or other catastrophic events, including acts of war or, as mentioned above, terrorism.rental rates and valuations.
We may be subject to increased costs of insurance and limitations on coverage. Our portfolio of properties is insured for losses under our property, casualty and umbrella insurance policies. These policies include coverage for acts of terrorism. Future changes in the insurance industry’s risk assessment approach and pricing structure may increase the cost of insuring our properties and decrease the scope of insurance coverage. Most of our loan agreements contain customary covenants requiring us to maintain insurance. Although we believe that we have adequate insurance coverage for purposes of these agreements, we may not be able to obtain an equivalent amount of coverage at reasonable costs, or at all, in the future. In addition, if lenders insist on greater coverage than we are able to obtain, it could adversely affect our ability to finance and/or refinance our properties and execute our growth strategies. Moreover, there are some loss events for which we cannot obtain insurance at reasonable costs, or at all, such as acts of war. With respect to such losses and losses from acts of terrorism, earthquakes, fires, pandemics or other catastrophic events, if we experience a loss that is uninsured or that exceeds policy limits, we could lose the capital invested in the damaged properties, as well as the anticipated future revenue from those properties.
We may suffer economic harm as a result of the actions of our partners in real estate joint ventures and other investments. We may invest in certain entities in which we are not the exclusive investor or principal decision maker. Investments in such entities may, under certain circumstances, involve risks not present when a third party is not involved, including the possibility that the other parties to these investments might become bankrupt or fail to fund their share of required capital contributions. Our partners in these entities may have economic, tax or other business interests or goals that are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. SuchThese investments may also lead to impasses on major decisions, such as whether or not to sell a property, because neither we nor the other parties to these investments may have full control over the entity.entity; such a dispute could also result in a sale of either our ownership interest in a joint venture or the joint venture’s underlying properties at a suboptimal price or time. In addition, we may in certain circumstances be liable for the actions of the other parties to these investments.
Our business could be adversely affected by a negative audit by the USG. Agencies of the USG, including the Defense Contract Audit Agency and various agency Inspectors General, routinely audit and investigate government contractors.parties that provide goods and services to the USG. These agencies review a contractor’ssuch parties’ performance under its contracts, cost structure, internal controls systems and policies and compliance with applicable laws, regulations and standards. The USG also reviews the adequacy of, and a contractor’s compliance with, its internal control systems and policies. Any costs found to be misclassified may be subject to repayment. If an audit or investigation uncoversof us were to uncover improper or illegal activities associated with our activities for the USG, we may be subject to civil or criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the USG. In addition, we could suffer serious reputational harm if allegations of impropriety were made against us.
Risks Associated with Financing and Other Capital-Related Matters
We are dependent on external sources of capital for growth. Because COPT Defense is a REIT, it must distribute at least 90% of its annual taxable income to its shareholders. DueThis requirement may limit the extent to this requirement,which we are not able to significantly fund our investment activities using retained cash flow from operations. Therefore, our ability to fund much of these activities is dependent on our ability to access debt or equity capital. Suchexternally generate capital could be in the formthrough issuances of new debt, common shares, preferred shares, common andor preferred units in COPLP, joint venture fundingCDPLP or sales of interests in properties. These capital sources may not be available on favorable terms or at all. Moreover, additional debt financing may substantially increase our leverage and subject us to covenants that restrict management’s flexibility in directing our operations. Our inability to obtain capital when needed could have a material adverse effect on our ability to expand our business and fund other cash requirements.
We often use our Revolving Credit Facility to initially finance much of our investing activities and certain financing activities. Our lenders under this and other facilities could, for financial hardship or other reasons, fail to honor their commitments to fund our requests for borrowings under these facilities. If lenders default under these facilities by not being able or willing to fund a borrowing request, it would adversely affect our ability to access borrowing capacity under these facilities.
We may suffer adverse effects as a result of the indebtedness that we carry and the terms and covenants that relate to this debt. As of December 31, 2023, we had $2.4 billion in debt, the future maturities of which are set forth in Note 8 to our consolidated financial statements. Payments of principal and interest on our debt may leave us with insufficient cash to operate our properties or pay
our properties or pay distributions to COPT’sCOPT Defense’s shareholders required to maintain COPT’sCOPT Defense’s qualification as a REIT. We are also subject to the risks that:
•>we may not be able to refinance our existing indebtedness, or may only be able to do so on terms that are less favorable to us than the terms of our existing indebtedness;
•>in the event of our default under the terms of our Revolving Credit Facility, COPLPCDPLP could be restricted from making cash distributions to COPT Defense unless such distributions are required to maintain COPT’sCOPT Defense’s qualification as a REIT, which could result in reduced distributions to our equityholders or the need for us to incur additional debt to fund such distributions; and
•>if we are unable to pay our debt service on time or are unable to comply with restrictive financial covenants for certain of our debt, our lenders could foreclose on our properties securing such debt and, in some cases, other properties and assets that we own.debt.
MostVirtually all of our unsecured debt is cross-defaulted, which means that failure to pay interest or principal on the debt above a threshold value will create a default on certain of our other debt.
If interest rates were to rise, our debt service payments on debt with variable interest rates would increase.
As of December 31, 2020, we had $2.1 billion in debt, the future maturities of which are set forth in Note 10 to our consolidated financial statements. Our operations likely will not generate enough cash flow to repay all of thisour debt without additional borrowings, equity issuances and/or property sales.sales of interests in properties. If we cannot refinance, extend the repayment date of, or otherwise raise funds required to repay, our debt by its maturity date, we would default on such debt.
Our organizational documents do not limit the amount of indebtedness that we may incur. Therefore, we may incur additional indebtedness and become more highly leveraged, which could harm our financial position.
We may suffer adverse effects from changes in the method of determining LIBOR or the replacement of LIBOR with an alternative interest rate. Our variable-rate debt and interest rate swaps use as a reference rate the London Interbank Offered Rate (“LIBOR”), as calculated for the U.S. dollar (“USD-LIBOR”). In July 2017, the Financial Conduct Authority (“FCA”) that regulates LIBOR announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. As a result, the Federal Reserve Board and the Federal Reserve Bank of New York organized the Alternative Reference Rates Committee (“ARRC”), which identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative rate for USD LIBOR in derivatives and other financial contracts. While we have been closely monitoring developments in the LIBOR transition, we are not able to predict whether LIBOR will actually cease to be available after 2021 or whether SOFR will become the market benchmark in its place. Any changes announced or adopted by the FCA or other governing bodies in the method used for determining LIBOR rates may result in a sudden or prolonged increase or decrease in reported LIBOR rates. If that were to occur, the level of interest payments we incur may change. In addition, although our variable rate debt and interest rate swaps will likely provide for alternative methods of calculating the interest rate if LIBOR is not reported, uncertainty as to the extent and manner of future changes may result in interest rates and/or payments that are higher or lower than if the LIBOR rate were to remain available in its current form.
A downgrade in our credit ratings would materially adversely affect our business and financial condition. COPLP’sOur Senior Notes are currently rated investment grade, with stable outlooks, by the three major rating agencies. These credit ratings are subject to ongoing evaluation by the credit rating agencies and can change. Any downgrades of our ratings or a negative outlook by the credit rating agencies would have a materially adverse impact on our cost and availability of capital and also could have a materially adverse effect on the market price of COPT’sour common shares. In addition, since the variable interest rate spread and facility fees on certain of our debt, including our Revolving Credit Facility and a term loan facility, is determined based on our credit ratings, a downgrade in our credit ratings would increase the payments required on such debt.
We have certain distribution requirements that reduce cash available for other business purposes. Since COPT Defense is a REIT, it must distribute to its shareholders at least 90% of its annual taxable income, which limits the amount of cash that can be retained for other business purposes, including amounts to fund development activities and acquisitions. Also, due to the difference in time between when we receive revenue orand pay expenses and when we report such items for distribution purposes, it is possible that we may need to borrow funds for COPT Defense to meet the 90% distribution requirement.
We may issue additional common or preferred shares/unitsequity that dilutedilutes our equityholders’shareholders’ interests. We may issue additional common andshares or new issuances of preferred shares/unitsshares without shareholder approval. Similarly, COPTwe may cause COPLP to issue its
additional common or preferred units in CDPLP for contributions of cash or property without approval by the limited partners of COPLP or COPT’sour shareholders. Our existing equityholders’shareholders’ interests could be diluted if such additional issuances were to occur.
A number of factors could cause our security prices to decline. As is the case with any publicly-traded securities, certain factors outside of our control could influence the value of our equity security issuances. These conditions include, but are not limited to:
•>market perception of REITs in general and office REITs in particular;
•>market perception regarding our major tenants and sectorproperty concentrations;
•>the level of institutional investor interest in COPT;us;
•>general economic and business conditions;
•>prevailing interest rates;
•>our financial performance;
•>our underlying asset value;
•>our actual, or market perception of our, financial condition, performance, dividends and growth potential; and
•>adverse changes in tax laws.laws; and
>market perception regarding our commitment to environmental, social and governance matters.
We may be unable to continue to make distributions to our equityholdersshareholders at expected levels. We expect to make regular quarterly cash distributions to our equityholders.shareholders. However, our ability to make such distributions depends on a number of factors, some of which are beyond our control. Some of our loan agreements contain provisions that could, in the event of default, restrict future distributions unless we meet certain financial tests or such payments or distributions are required to
maintain COPT’sCOPT Defense’s qualification as a REIT. Our ability to make distributions at expected levels is also dependent, in part, on other matters, including, but not limited to:
•>continued property occupancy and timely receipt of rent from our tenants;
•>the amount of future capital expenditures and expenses relating tofor our properties;
•>our leasing activity and future rental rates;
•>the strength of the commercial real estate market;
•>our ability to compete;
•>governmental actions and initiatives, including risks associated with the impact of a prolonged government shutdown or budgetary reductions or impasses;
•>our costs of compliance with environmental and other laws;
•>our corporate overhead levels; and
•>our amount of uninsured losses; and
•our decision to reinvest in operations rather than distribute available cash.losses.
In addition, we can make distributions to the holders of our common shares/unitsshares only after we make preferential distributions to holders of any outstanding preferred shares/units.equity.
Our ability to pay distributions may be limited, and we cannot provide assurance that we will be able to pay distributions regularly. Our ability to pay distributions will depend on a number of things discussed elsewhere herein, including our ability to operate profitably and generate cash flow from our operations. We cannot guarantee that we will be able to pay distributions on a regular quarterly basis in the future. Additionally, the terms of some of COPLP’sour debt may limit itsour ability to make some types of payments and other distributions to COPT in the event of certain default situations. This in turn may limit our ability to make some types of payments, including payment of distributions on common or preferred shares/units,shares, unless we meet certain financial tests or such payments or distributions are required to maintain COPT’sCOPT Defense’s qualification as a REIT. As a result, if we are unable to meet the applicable financial tests, we may not be able to pay distributions in one or more periods. Furthermore, any new common or preferred shares/unitsequity that we may be issuedissue in the future for raising capital, financing acquisitions, share-based compensation arrangements or otherwise will increase the cash required to continue to pay cash distributions at current levels.
We may experience significant losses and harm to our financial condition if financial institutions holding our cash and cash equivalents file for bankruptcy protection. We believe that we maintain our cash and cash equivalents with high quality financial institutions. We have not experienced any losses to date on our deposited cash. However, we may incur significant losses and harm to our financial condition in the future if we were holding large sums of cash in any of these financial institutions at a time when they filed for bankruptcy protection.
Risks Associated with COVID-19
We may suffer further adverse effects from the COVID-19 pandemic, and similar pandemics, along with restrictive measures instituted to prevent spread.Since first being declared a pandemic by the World Health Organization in early March 2020, the coronavirus, or COVID-19, has spread worldwide. In an effort to control its spread, governments and other authorities imposed restrictive measures affecting freedom of movement and business operations, such as shelter-in-place orders and business closures. Strong restrictive measures were put into place in much of the United States beginning in March 2020, bringing many businesses to a halt while forcing others to change the way in which they conduct their operations, with much of the workforce working from their homes to the extent they were able. States and local governments began easing these measures to varying extents in late April 2020, with some lifting restrictive measures entirely, while others chose a more gradual, extended easing approach. While the easing of these measures enabled many businesses to gradually resume normal operations, most businesses continue to be hindered to varying extents by either measures still in effect, operational challenges resulting from social distancing requirements/expectations and/or a reluctance by much of the population to engage in certain activities while the pandemic is still active. As of the date of this filing, COVID-19 spread continues world- and nation-wide, and is expected to continue until vaccinations have been administered to much of the population, which is not expected to occur in the United States until at least mid- to late 2021. As a result, there continues to be significant uncertainty regarding the duration and extent of this pandemic. The outbreak significantly disrupted financial and economic markets worldwide, as well as in the United States at a national, regional and local level. These conditions could continue or further deteriorate as businesses feel the prolonged effects of stalled or reduced operations and uncertainty regarding the pandemic continues.
COVID-19, and any similar pandemics should they occur, along with measures instituted to prevent spread, may adversely affect us in many ways, including, but not limited to:
•disruption of our tenants’ operations, which could adversely affect their ability, or willingness, to sustain their businesses and/or fulfill their lease obligations;
•our ability to maintain occupancy in our properties and obtain new leases for unoccupied and new development space at favorable terms or at all;
•shortages in supply of products or services from our and our tenants’ vendors that are needed for us and our tenants to operate effectively, and which could lead to increased costs for such products and services;
•access to debt and equity capital on attractive terms or at all. Severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions may affect our or our tenants’ ability to access capital necessary to fund operations, refinance debt or fund planned investments on a timely basis, and may adversely affect the valuation of financial assets and liabilities;
•our and our tenants’ ability to continue or complete planned development, including the potential for delays in the supply of materials or labor necessary for development; and
•an increase in the pace of businesses implementing remote work arrangements over the long-term, which would adversely effect demand for office space.
The extent of the effect on our operations, financial condition, cash flows and ability to make expected distributions to shareholders will be dependent on future developments, including the duration of the pandemic and any future resurgence or variants thereof, the prevalence, strength and duration of restrictive measures and the resulting effects on our tenants, potential future tenants, the commercial real estate industry and the broader economy, all of which are uncertain and difficult to predict. Moreover, some of the risks described in other risk factors set forth in this Annual Report on Form 10-K may be more likely to impact us as a result of COVID-19 and the responses to curb its spread, including, but not limited to: downturns in national, regional and local economic environments; deteriorating local real estate market conditions; and declining real estate valuations.
Other Risks
Our business could be adversely affected by security breaches through cyber attacks, cyber intrusions or otherwise.other factors, and other significant disruptions of our IT networks and related systems. We face risks associated with security breaches and other significant disruptions of our information technologyIT networks and related systems, which are essential to our business operations. Such breaches and disruptions may occur through cyber attackscyber-attacks or cyber intrusions-intrusions over the Internet, malware, computer viruses, attachments to e-mails or by actions of persons inside our organization, or personsincluding those with access to systems inside our organization.systems. Because of our concentration on serving the USG and its contractors with a general focus on national security and information technology, we may be more likely to behave a heightened likelihood of being targeted by cyber attacks,for cyber-attacks or -intrusions, including by governments, organizations or persons hostile to the USG. Additionally, a successful attack on our vendors or service providers could result in a compromise of our own network or a disruption in our supply chain or services upon which we rely.
We have preventative, detective, and responsive measures in place to maintain the security and integrity of our networks and related systems that have to date enabled us to
avoid breaches and disruptions that were individually, or in the aggregate, material. We also have insurance coverage in place in the event of significant future losses from breaches and disruptions. However, despite our activities to maintain the security and integrity of our networks and related systems, there can be no absolute assurance that these activities will be effective in mitigating these risks. We also have insurance coverage in place in the event of significant future losses from breaches and disruptions; however, continuing changes in the insurance industry’s risk assessment approach and pricing structure could in the future increase the cost for us to obtain insurance coverage or decrease the scope of such coverage available to us.
Like other businesses, we and our vendors and service providers have been, and expect to continue to be, subject to cyber-attacks or -intrusions, computer viruses or malware, attempts at unauthorized access and other events of varying degrees. A security breach or other significant disruption involving our IT networks and related systems, could disrupt our operations in numerous ways, including compromising the confidential informationor those of certain of our tenants, customers, vendors and employees, which could damage our relationships with such parties, and disruptingor service providers, could:
>disrupt the proper functioning of our networks and systems on which muchand therefore our operations and/or those of certain of our operations depend.tenants;
>increase the likelihood of missed reporting or permitting deadlines;
>affect our ability to properly monitor our compliance with rules and regulations regarding our qualification as a REIT;
>result in unauthorized access to, and/or destruction, loss, theft, misappropriation or release of, proprietary, confidential, sensitive or otherwise valuable information of ours or others, which others could use to compete against us or which could expose us to damage claims by third-parties;
>disrupt or disable the building systems relied upon by us and our tenants for the effective and efficient use of our properties;
>require significant management attention and resources to remedy any resulting damages;
>subject us to termination of leases or other agreements or claims for breach of contract, damages or other penalties; and
>damage our reputation among our tenants and investors generally.
Please refer to Item 1C for disclosure regarding our cybersecurity risk management, strategy and governance.
COPT’s ownership limitsWe may be adversely affected by environmental, social and governance matters. Certain investors and other stakeholders are important factors.increasingly focused on environmental, social and governance matters. If our perceived commitment to environmental, social and governance matters fails to meet the expectations of investors and other stakeholders, it could adversely affect their willingness to invest in, or otherwise do business with, us.
We may suffer adverse effects from epidemics or pandemics. The occurrence of epidemics or pandemics may adversely affect us in many ways, including, but not limited to:
>disruption of our tenants’ operations, which could adversely affect their ability, or willingness, to sustain their businesses and/or fulfill their lease obligations;
>our ability to maintain occupancy in our properties and obtain new leases for unoccupied and new development space at favorable terms or at all;
>shortages in supply of products or services from vendors that are needed for us and our tenants to operate effectively, and which could lead to increased costs for such products and services;
>access to debt and equity capital on attractive terms or at all. Severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions may affect our or our tenants’ ability to access capital necessary to fund operations, refinance debt or fund planned investments on a timely basis, and may adversely affect the valuation of financial assets and liabilities; and
>our and our tenants’ ability to continue or complete planned development, including the potential for delays in the supply of materials or labor necessary for development.
The extent of any effect on our operations, financial condition and cash flows will be dependent on various factors, such as the duration and extent of the epidemic or pandemic, the prevalence, strength and duration of restrictive measures implemented in response and the resulting effects on our tenants, potential future tenants, the commercial real estate industry and the broader economy. Moreover, some of the risks described in other risk factors set forth in this Annual Report on Form 10-K may be more likely to impact us as a result of epidemics or pandemics, including, but not limited to: downturns in national, regional and local economic environments; deteriorating local real estate market conditions; and declining real estate valuations.
Our business could be adversely impacted if we are unable to attract and retain highly-qualified personnel. COPT’sOur ability to operate effectively and succeed in the future is dependent in large part on our employees. Our Defense/IT strategy in particular relies on the knowledge, specialized skills and credentialed personnel on our teams that serve those properties’ unique needs. We face very intense competition for highly-qualified personnel in the labor market. We also occasionally face even greater competition for personnel with certain skill sets or qualifications. As a result, we may not be successful in retaining our existing talent or attracting, training and retaining new personnel with the requisite skills. We may also find that we need to further increase compensation costs in response to this competition. Our business could be harmed by the loss of key employees, a significant number of employees or a significant number of employees in a specialized area of the Company.
We have certain provisions or statutes that may serve to delay or prevent a transaction or a change in control that would be advantageous to our shareholders from occurring. COPT Defense’s Declaration of Trust limits ownership of its common shares by any single shareholder to 9.8% of the number of the outstanding common shares or 9.8% of the value of the outstanding common shares, whichever is more restrictive. COPT’sCOPT Defense’s Declaration of Trust also limits ownership by any single shareholder of our common and preferred shares in the aggregate to 9.8% of the aggregate value of our outstanding common and preferred shares. We callrefer to these restrictions as the “Ownership Limit.” COPT’sCOPT Defense’s Declaration of Trust allows our Board of Trustees to exempt shareholders from the Ownership Limit. The Ownership Limit and the restrictions on ownership of our common shares may delay or prevent a transaction or a change of control that might involve a premium price for our common shares/unitsshares or otherwise be in the best interest of our equityholders.shareholders.
COPT’s Declaration of Trust includes other provisions that may prevent or delay a change of control.Subject to the requirements of the New York Stock Exchange, our Board of Trustees has the authority, without shareholder approval, to issue additional securities on terms that could delay or prevent a change in control. In addition, our Board of Trustees has the authority to reclassify any of our unissued common shares into preferred shares. Our Board of Trustees may issue preferred shares with such preferences, rights, powers and restrictions as our Board of Trustees may determine,if it chooses to do so, which could also delay or prevent a change in control.
The Maryland business statutes impose potential restrictions that may discourage a change of control of our company.
Various
In addition, various Maryland laws may have the effect of discouraging offers to acquire us, even if the acquisition would be advantageous to equityholders.shareholders. Resolutions adopted by our Board of Trustees and/or provisions of our bylaws exempt us from such laws, but our Board of Trustees can alter its resolutions or change our bylaws at any time to make these provisionslaws applicable to us.
COPT’sCOPT Defense’s failure to qualify as a REIT would have adverse tax consequences, which would substantially reduce funds available to make distributions to our equityholders.shareholders. We believe that COPT Defense has qualified for taxation as a REIT for Federalfederal income tax purposes since 1992. We plan for COPT Defense to continue to meet the requirements for taxation as a REIT. Many of these requirements, however, are highly technical and complex. The determination that we areCOPT Defense is a REIT requires an analysis of various factual matters and circumstances that may not be totally within our control. For example, to qualify as a REIT, at least 95% of COPT’sCOPT Defense’s gross income must come from certain sources that are specified in the REIT tax laws. COPT Defense is also required to distribute to shareholders at least 90% of its annual taxable income. The fact that COPT Defense holds most of its assets through COPLPCDPLP and its subsidiaries further complicates the application of the REIT requirements. Even a technical or inadvertent mistake could jeopardize COPT’sCOPT Defense’s REIT status. Furthermore, Congress and the Internal Revenue Service might make changes to the tax laws and regulations and the courts might issue new rulings that make it more difficult or impossible for COPT Defense to remain qualified as a REIT.
If COPT Defense fails to qualify as a REIT, it would be subject to Federalfederal income tax at regular corporate rates. Also, unless the Internal Revenue Service granted us relief under certain statutory provisions, COPT Defense would remain disqualified asfrom being a REIT for four years following the year it first fails to qualify. If COPT Defense fails to qualify as a REIT, it would have to pay significant income taxes and would therefore have less money available for investments or for distributions to our equityholders.shareholders. In addition, if COPT Defense fails to qualify as a REIT, it would no longer be required to pay distributions to shareholders. As a result of all these factors, COPT’sCOPT Defense’s failure to qualify as a REIT could impair our ability to expand our business and raise capital and would likely have a significant adverse effect on the value of our shares/units.shares.
We may be adversely impacted by changes in tax laws. At any time, U.S. federal tax laws or the administrative interpretations of those laws may be changed. We cannot predict whether, when or to what extent new U.S. federal tax laws, regulations, interpretations or rulings will be issued. In addition, while REITs generally receive certain tax advantages compared to entities taxed as C corporations, it is possible that future legislation could result in REITs having fewer tax advantages, and therefore becoming a less attractive investment alternative. As a result, changes in U.S. federal tax laws could negatively impact our operating results, financial condition and business operations, and adversely impact our equityholders.shareholders.
Occasionally, changes in state and local tax laws or regulations are enacted that may result in an increase in our tax liability. Shortfalls in tax revenues for states and municipalities may lead to an increase in the frequency and size of such changes. If such changes occur, we may be required to pay additional taxes on our assets, revenue or income.
Our tenants and contractual counterparties could be designated “Prohibited Persons” by the Office of Foreign Assets Control. The Office of Foreign Assets Control of the United States Department of the Treasury (“OFAC”) maintains a list of persons designated as terrorists or who are otherwise blocked or banned (“Prohibited Persons”). OFAC regulations and other laws prohibit us from conducting business or engaging in transactions with Prohibited Persons. If a tenant or other party with whom we conduct business is placed on the OFAC list or is otherwise a party with whom we are prohibited from doing business, we would be required to terminate theour lease or other agreement.agreement with them.
Item 1B. Unresolved Staff Comments
NoneNone.
Item 1C. Cybersecurity
(a) As discussed in Item 1A, Risk Factors, we face risks associated with security breaches and other significant disruptions of our IT networks and related information systems, which are essential to our business operations. Due to our Defense/IT strategy and the nature of the customers and activities it serves, we may have a heightened likelihood of being targeted for cyber-attacks or -intrusions, including by governments, organizations or persons hostile to the USG.
Our cybersecurity risk management efforts are informed by a cyber risk assessment, a continuous evaluation of our risks and vulnerabilities and risk tolerances. Our processes for assessing, identifying and managing cybersecurity risks are led by our Vice President – Information Technology and Chief Information Officer (our “CIO”), a management-level position reporting directly to our Executive Vice President and Chief Financial Officer (our “CFO”). Our CIO, a Certified Information Systems Security Professional (“CISSP”) with over 20 years of information systems and information security leadership experience, leads our information technology team members, many of whom have USG security clearances and include one additional CISSP certified team member, in supporting our cybersecurity risk management efforts. This team’s efforts are further informed through their participation in external cybersecurity-related panels, industry presentations and advisory boards, tabletop exercises and information-sharing collaborations and partnerships.
Our information technology team executes a series of preventive, detective and responsive measures aimed towards managing our cybersecurity risks, including the following:
>administering a series of processes and automated tools to monitor and alert for potentially malicious activities and vulnerabilities on our network, systems, applications and devices, with the ability to terminate processes and isolate potential vulnerabilities;
>employing tools and controls to support our efforts in identity and access management and device and user management and authentication;
>ongoing cybersecurity maintenance activities, including scheduled maintenance time windows for comprehensive system updates to occur, with additional ad hoc updates occurring as needed, monitoring of all Company devices for timeliness of security updates and pushing time-sensitive updates to our system infrastructure and devices, as appropriate;
>recurring, redundant backups of our applications, servers and data, with replication to remote storage locations;
>assessing audit reports issued on controls of certain outsourced, or externally-hosted, systems or applications; and
>periodically evaluating our readiness by performing testing of our process and system for responding to cyber events, including our ability to recover following such events.
We engage consultants:
>on an ongoing basis for certain aspects of our information technology team’s recurring monitoring and alert processes and round-the-clock support, as needed; and
>periodically to perform penetration testing and vulnerability scanning of our systems, websites and properties, run or support tabletop exercises and complete cyber risk-based assessments of us.
Organizationally, we aim to further support the forementioned measures through:
>purchase and contracting controls aimed at preventing our entry into purchases or service arrangements: with entities blocked or banned by OFAC or the Federal Trade Commission; or outside of manufacturer authorized distribution channels; and
>education of our employees, including cybersecurity-related training and periodic reminders and promotions regarding potential risks.
Our CIO routinely apprises our CFO regarding cyber risk management activities and provides updates and data, as needed, to our executive team to facilitate decisions regarding our cyber risk posture and related considerations regarding our enterprise risk management assessment. Our CIO and CFO provide to the Audit Committee of our Board of Trustees: quarterly updates on our cybersecurity risk management strategy and related activities; annual reviews of our cyber risk assessment; and other information as needed to facilitate the committee’s oversight of our cybersecurity risk. Two members of this committee possess cybersecurity and information systems experience, which we believe brings valuable insight and perspective to our risk management strategy. Our CIO and CFO also provide an annual review of our cyber risk assessment to our full Board of Trustees.
While to date, we have not experienced cybersecurity events that were individually, or in the aggregate, material, we have developed a cyber-incident response playbook that sets forth our process for responding in the event of certain defined cyber incidents. Under our response protocols, following identification of such an incident, our CIO or other members of the information technology team would notify our executive team, which then would notify the Chairman of our Board of Trustees and assemble an Incident Management Team, comprised of certain defined management team members and external consultants, who collectively would assess and monitor the situation and manage internal and external communications.
We also are subject to legal and regulatory requirements that affect our response to cybersecurity-risk management, including the Sarbanes-Oxley Act, state data breach notification requirements and certain requirements under our leases with tenants.
Item 2. Properties
The following table provides certain information about our operating property segments as of December 31, 20202023 (dollars and square feet in thousands, except per square foot amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Segment | | Number of Properties | | Rentable Square Feet or Megawatts (“MW”) | | Occupancy (1) | | Annualized Rental Revenue (2) | | Annualized Rental Revenue per Occupied Square
Foot (2)(3) |
| Office and Data Center Shell Portfolio | | | | | | | | | | |
| Defense/IT Locations: | | | | | | | | | | |
| Fort Meade/BW Corridor: | | | | | | | | | | |
| National Business Park (Annapolis Junction, MD) | | 31 | | | 3,821 | | | 91.7 | % | | $ | 141,020 | | | $ | 40.26 | |
| Howard County, MD | | 35 | | | 2,857 | | | 89.5 | % | | 71,930 | | | 28.09 | |
| Other | | 23 | | | 1,679 | | | 92.2 | % | | 46,816 | | | 30.09 | |
| Fort Meade/BW Corridor Subtotal / Average | | 89 | | | 8,357 | | | 91.0 | % | | 259,766 | | | 34.10 | |
| Northern Virginia Defense/IT | | 13 | | | 1,992 | | | 88.1 | % | | 61,334 | | | 34.96 | |
| Lackland Air Force Base | | 7 | | | 953 | | | 100.0 | % | | 53,402 | | | 53.57 | |
| Navy Support Locations | | 21 | | | 1,241 | | | 97.2 | % | | 34,556 | | | 28.65 | |
| Redstone Arsenal | | 15 | | | 1,454 | | | 99.4 | % | | 30,439 | | | 20.96 | |
| Data Center Shells: | | | | | | | | | | |
| Consolidated Properties | | 9 | | | 1,990 | | | 100.0 | % | | 32,349 | | | 16.26 | |
| Unconsolidated Joint Venture Properties (4) | | 17 | | | 2,749 | | | 100.0 | % | | 3,842 | | | 13.97 | |
| Defense/IT Locations Subtotal / Average | | 171 | | | 18,736 | | | 94.5 | % | | 475,688 | | | 31.05 | |
| Regional Office | | 8 | | | 2,066 | | | 92.5 | % | | 68,086 | | | 35.51 | |
| Other Properties | | 2 | | | 157 | | | 68.4 | % | | 2,623 | | | 24.37 | |
| Total Office and Data Center Shell Portfolio | | 181 | | | 20,959 | | | 94.1 | % | | 546,397 | | | $ | 31.50 | |
| Wholesale Data Center | | 1 | | | 19.25 MW | | 86.7 | % | | 24,638 | | | N/A |
| Total Operating Properties | | | | | | | | $ | 571,035 | | | |
| Total Consolidated Operating Properties | | | | | | | | $ | 567,193 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Segment | | Number of Properties | | Operational Square Feet | | Occupancy (1) | | Annualized Rental Revenue (2) | | Annualized Rental Revenue per Occupied Square
Foot (2) |
| Defense/IT Portfolio: | | | | | | | | | | |
| Fort Meade/BW Corridor: | | | | | | | | | | |
| National Business Park (Annapolis Junction, MD) | | 34 | | | 4,293 | | | 99.3 | % | | $ | 176,899 | | | $ | 41.49 | |
| Howard County, MD | | 35 | | | 2,862 | | | 93.9 | % | | 78,389 | | | $ | 29.12 | |
| Other | | 23 | | | 1,725 | | | 93.1 | % | | 53,064 | | | $ | 32.90 | |
| Fort Meade/BW Corridor Subtotal / Average | | 92 | | | 8,880 | | | 96.4 | % | | 308,352 | | | $ | 35.99 | |
| NoVA Defense/IT | | 16 | | | 2,501 | | | 88.9 | % | | 82,482 | | | $ | 37.09 | |
| Lackland Air Force Base | | 8 | | | 1,062 | | | 100.0 | % | | 61,383 | | | $ | 53.27 | |
| Navy Support | | 22 | | | 1,273 | | | 87.4 | % | | 33,420 | | | $ | 30.04 | |
| Redstone Arsenal | | 22 | | | 2,300 | | | 97.5 | % | | 56,918 | | | $ | 25.24 | |
| Data Center Shells: | | | | | | | | | | |
| Consolidated Properties | | 6 | | | 1,408 | | | 100.0 | % | | 31,087 | | | $ | 22.08 | |
| Unconsolidated Joint Venture Properties | | 24 | | | 4,295 | | | 100.0 | % | | 6,741 | | | $ | 15.69 | |
| Defense/IT Portfolio Subtotal / Average | | 190 | | | 21,719 | | | 96.2 | % | | 580,383 | | | $ | 33.74 | |
| Other | | 8 | | | 2,140 | | | 73.2 | % | | 66,277 | | | $ | 38.42 | |
| Total Operating Properties / Average | | 198 | | | 23,859 | | | 94.2 | % | | $ | 646,660 | | | $ | 34.14 | |
| Total Consolidated Operating Properties | | | | | | | | $ | 639,920 | | | |
(1)This percentage is based upon all rentable square feet or megawatts under lease terms that were in effect as of December 31, 2020.2023.
(2)Annualized rental revenue is the monthly contractual base rent as of December 31, 20202023 (ignoring free rent then in effect)effect and rent associated with tenant funded landlord assets) multiplied by 12, plus the estimated annualized expense reimbursements under existing leases.leases for occupied space. With regard to properties owned through unconsolidated real estate joint ventures, we include the portion of annualized rental revenue allocable to our ownership interest. We consider annualized rental revenue to be a useful measure for analyzing revenue sources because, since it is point-in-time based, it does not contain increases and decreases in revenue associated with periods in which lease terms were not in effect; historical revenue under generally accepted accounting principles does contain such fluctuations. We find the measure particularly useful for leasing, tenant, segment and segmentindustry analysis.
(3)Annualized Our calculation of annualized rental revenue per occupied square foot is a property’s annualized rentalexcludes revenue divided by that property’s occupied square feet as of December 31, 2020. Our computation of annualized rental revenue excludes the effect of lease incentives. The annualized rent per occupied square foot, including the effect of lease incentives, was $31.11 for our total office and data center shell portfolio, $33.66 for the Fort Meade/BW Corridor (our largest Defense/IT Location sub-segment) and $34.85 forreportable segments from leases not associated with our Regional Office portfolio.
(4)Represents properties owned through unconsolidated real estate joint ventures. The amounts reported above reflect 100% of the properties’ square footage but only reflect the portion of Annualized Rental Revenue that was allocable to our ownership interest.buildings.
The following table provides certain information about office and data center shell properties that were under, development, or otherwise approved,contractually committed for, development as of December 31, 20202023 (dollars and square feet in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Property and Location | | Estimated Rentable Square Feet Upon Completion | | Percentage Leased | | Calendar Quarter Anticipated to be Operational | | Costs Incurred to Date (1) | | Estimated Costs to Complete (1) |
| Under Development | | | | | | | | | | |
| Fort Meade/BW Corridor: | | | | | | | | | | |
4600 River Road (2)
College Park, Maryland | | 102 | | | 54 | % | | 4Q 21 | | $ | 24,024 | | | $ | 6,710 | |
610 Guardian Way
Annapolis Junction, Maryland | | 107 | | | 100 | % | | 1Q 22 | | 22,043 | | | 45,307 | |
| Subtotal / Average | | 209 | | | 78 | % | | | | 46,067 | | | 52,017 | |
| | | | | | | | | | |
| NoVA Defense/IT: | | | | | | | | | | |
NoVA Office C
Chantilly, Virginia | | 348 | | | 100 | % | | 4Q 21 | | 59,914 | | 46,305 | |
| | | | | | | | | | |
| Lackland Air Force Base: | | | | | | | | | | |
Project EL
San Antonio, Texas | | 107 | | | 100 | % | | 4Q 21 | | 15,409 | | 39,841 | |
| | | | | | | | | | |
| Navy Support: | | | | | | | | | | |
Expedition VII
St. Mary’s County, Maryland | | 30 | | | 60 | % | | 4Q 22 | | 1,567 | | 6,622 | |
| | | | | | | | | | |
| Redstone Arsenal: | | | | | | | | | |
6000 Redstone Gateway (2)
Huntsville, Alabama | | 42 | | | 100 | % | | 3Q 21 | | 8,639 | | | 1,157 | |
8000 Rideout Road
Huntsville, Alabama | | 100 | | | 9 | % | | 1Q 22 | | 16,242 | | | 10,485 | |
7100 Redstone Gateway
Huntsville, Alabama | | 46 | | | 100 | % | | 1Q 21 | | 9,100 | | | 2,066 | |
| Subtotal / Average | | 188 | | | 52 | % | | | | 33,981 | | | 13,708 | |
| | | | | | | | | | |
| Data Center Shells: | | | | | | | | | | |
Parkstone A
Northern Virginia | | 227 | | | 100 | % | | 2Q 23 | | 5,199 | | | 60,401 | |
Parkstone B
Northern Virginia | | 193 | | | 100 | % | | 2Q 24 | | 4,421 | | | 50,579 | |
| Subtotal / Average | | 420 | | | 100 | % | | | | 9,620 | | | 110,980 | |
| | | | | | | | | | |
| Regional Office: | | | | | | | | | | |
2100 L Street (2)
Washington, D.C. | | 190 | | | 56 | % | | 2Q 21 | | 157,813 | | 19,187 | |
| | | | | | | | | | |
| Total Under Development | | 1,492 | | 84 | % | | | | $ | 324,371 | | | $ | 288,660 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Property and Location | | Estimated Rentable Square Feet Upon Completion | | Percentage Leased | | Calendar Quarter Anticipated to be Operational | | Costs Incurred to Date (1) | | Estimated Costs to Complete (1) |
| | | | | | | | | | |
| | | | | | | | | | |
| Redstone Arsenal: | | | | | | | | | |
5300 Redstone Gateway Huntsville, Alabama | | 46 | | | 100% | | 1Q 24 | | $ | 17,973 | | | $ | 2,578 | |
8100 Rideout Road Huntsville, Alabama | | 128 | | | 42% | | 3Q 24 | | 30,485 | | | 13,478 | |
| Subtotal / Average | | 174 | | | 57% | | | | 48,458 | | | 16,056 | |
| Data Center Shells: | | | | | | | | | | |
Southpoint Phase 2 Bldg A Northern Virginia | | 225 | | | 100% | | 3Q 24 | | 20,760 | | | 61,740 | |
Southpoint Phase 2 Bldg B Northern Virginia | | 193 | | | 100% | | 3Q 25 | | 5,150 | | | 59,850 | |
MP 3 Northern Virginia | | 225 | | | 100% | | 4Q 25 | | 10,031 | | | 101,769 | |
| Subtotal / Average | | 643 | | | 100% | | | | 35,941 | | | 223,359 | |
| Total Under Development | | 817 | | | 91% | | | | $ | 84,399 | | | $ | 239,415 | |
(1)Includes land, development, leasing costs and allocated portion of structured parking and other shared infrastructure, if applicable.
(2)This property had occupied square feet in service as of December 31, 2020. Therefore, the property and its occupied square feet are included in our operating property statistics, including the information set forth on the previous page.
The following table provides certain information about land that we owned or controlled as of December 31, 2020,2023, including properties under ground lease to us (square feet in thousands):
| | | | | | | | | | | | | | |
| Segment | | Acres | | Estimated Developable Square Feet |
| Defense/IT Locations: | | | | |
| Fort Meade/BW Corridor: | | | | |
| National Business Park (Annapolis Junction, MD) | | 175 | | 1,999 | |
| Howard County, MD | | 19 | | 290 | |
| Other | | 126 | | 1,338 | |
| Total Fort Meade/BW Corridor | | 320 | | 3,627 | |
| Northern Virginia Defense/IT Locations | | 29 | | 1,136 | |
| Lackland Air Force Base | | 19 | | 410 | |
| Navy Support Locations | | 38 | | 64 | |
| Redstone Arsenal (1) | | 358 | | 3,125 | |
| Data Center Shells | | 53 | | 1,180 | |
| Total Defense/IT Locations | | 817 | | 9,542 | |
| Regional Office | | 10 | | 900 | |
| | | | |
| Total land owned/controlled for future development | | 827 | | 10,442 | |
| Other land owned/controlled | | 43 | | 638 | |
| | | | |
| Total Land Owned/Controlled | | 870 | | | 11,080 | |
| | | | |
| | | | |
| | | | | | | | | | | | | | |
| Segment | | Acres | | Estimated Developable Square Feet |
| Defense/IT Portfolio land owned/controlled for future development: | | | | |
| Fort Meade/BW Corridor: | | | | |
| National Business Park (Annapolis Junction, MD) | | 144 | | 1,630 | |
| Howard County, MD | | 19 | | 290 | |
| Other | | 126 | | 1,338 | |
| Total Fort Meade/BW Corridor | | 289 | | 3,258 | |
| NoVA Defense/IT | | 29 | | 1,171 | |
| | | | |
| Navy Support | | 38 | | 64 | |
| Redstone Arsenal (1) | | 300 | | 3,400 | |
| | | | |
| Total Defense/IT Portfolio land owned/controlled for future development | | 656 | | 7,893 | |
| | | | |
| | | | |
| Other land owned/controlled | | 53 | | 1,538 | |
| | | | |
| Total Land Owned/Controlled | | 709 | | 9,431 | |
(1)This land is owned by the USG and is controlled under a long-term master lease agreement to a consolidated joint venture. As this land is developed in the future, the joint venture will execute site-specific leases under the master lease agreement. RentalLease payments will commence under the site-specific leases as cash rents under tenant leases commence at the respective properties.
Lease Expirations
The following table provides a summary schedule of lease expirations for leases in place at our operating properties as of December 31, 20202023 based on the non-cancelable term of tenant leases determined in accordance with generally accepted accounting principles (dollars and square feet in thousands, except per square foot amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year of Lease Expiration | | | | Square Footage of Leases Expiring | | Annualized Rental Revenue of Expiring Leases (1) | | Percentage of Total Annualized Rental Revenue Expiring (1) | | Total Annualized Rental Revenue of Expiring Leases Per Occupied Square Foot |
| 2021: Office and Data Center Shells | | | | 1,485 | | | $ | 51,342 | | | 9.0 | % | | $ | 34.56 | |
| Wholesale Data Center | | | | N/A | | 15,011 | | | 2.6 | % | | N/A |
| 2022: Office and Data Center Shells | | | | 2,311 | | | 73,574 | | | 12.9 | % | | 31.81 | |
| Wholesale Data Center | | | | N/A | | 2,493 | | | 0.4 | % | | N/A |
| 2023: Office and Data Center Shells | | | | 1,868 | | | 64,560 | | | 11.3 | % | | 34.53 | |
| Wholesale Data Center | | | | N/A | | 1,694 | | | 0.3 | % | | N/A |
| 2024: Office and Data Center Shells | | | | 2,538 | | | 67,288 | | | 11.8 | % | | 32.85 | |
| Wholesale Data Center | | | | N/A | | 10 | | | — | % | | N/A |
| 2025: Office and Data Center Shells | | | | 2,978 | | | 110,868 | | | 19.4 | % | | 38.59 | |
| Wholesale Data Center | | | | N/A | | 5,168 | | | 0.9 | % | | N/A |
| 2026: Office and Data Center Shells | | | | 1,481 | | | 38,332 | | | 6.7 | % | | 35.61 | |
| 2027: Office and Data Center Shells | | | | 970 | | | 20,901 | | | 3.7 | % | | 32.51 | |
| Wholesale Data Center | | | | N/A | | 29 | | | — | % | | N/A |
| 2028: Office and Data Center Shells | | | | 1,181 | | | 21,245 | | | 3.7 | % | | 29.63 | |
| Wholesale Data Center | | | | N/A | | 233 | | | — | % | | N/A |
| 2029: Office and Data Center Shells | | | | 1,405 | | | 29,072 | | | 5.1 | % | | 26.45 | |
| 2030: Office and Data Center Shells | | | | 817 | | | 12,775 | | | 2.2 | % | | 23.76 | |
| 2031: Office and Data Center Shells | | | | 657 | | | 11,601 | | | 2.0 | % | | 17.66 | |
| 2032: Office and Data Center Shells | | | | 21 | | | 576 | | | 0.1 | % | | 27.95 | |
| 2033: Office and Data Center Shells | | | | 255 | | | 9,236 | | | 1.6 | % | | 36.21 | |
| 2034: Office and Data Center Shells | | | | 369 | | | 4,187 | | | 0.7 | % | | 11.34 | |
| 2035: Office and Data Center Shells | | | | 497 | | | 9,570 | | | 1.7 | % | | 19.24 | |
| 2036: Office and Data Center Shells | | | | 748 | | | 14,462 | | | 2.5 | % | | 19.34 | |
| 2037: Office and Data Center Shells | | | | 102 | | | 6,061 | | | 1.1 | % | | 58.30 | |
| 2038: Office and Data Center Shells | | | | 39 | | | 618 | | | 0.1 | % | | 15.92 | |
| 2063: Office and Data Center Shells (2) | | | | — | | | 129 | | | — | % | | N/A |
| Total Operating Properties | | | | 19,722 | | | $ | 571,035 | | | 100.0 | % | | N/A |
| Total Office and Data Center Shells | | | | 19,722 | | | $ | 546,397 | | | 100.0 | % | | $ | 31.50 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year of Lease Expiration | | | | Square Footage of Leases Expiring | | Annualized Rental Revenue of Expiring Leases (1) | | Percentage of Total Annualized Rental Revenue Expiring (1) | | Total Annualized Rental Revenue of Expiring Leases Per Occupied Square Foot (1) |
| | | | | | | | | | |
| 2024 | | | | 2,576 | | | $ | 82,599 | | | 12.8 | % | | $ | 35.92 | |
| 2025 | | | | 3,645 | | | 145,662 | | | 22.5 | % | | $ | 39.51 | |
| 2026 | | | | 1,959 | | | 61,398 | | | 9.5 | % | | $ | 39.41 | |
| 2027 | | | | 1,714 | | | 49,383 | | | 7.6 | % | | $ | 35.59 | |
| 2028 | | | | 2,418 | | | 64,392 | | | 10.0 | % | | $ | 32.92 | |
| 2029 | | | | 2,321 | | | 52,455 | | | 8.1 | % | | $ | 30.72 | |
| 2030 | | | | 1,320 | | | 29,624 | | | 4.6 | % | | $ | 28.51 | |
| 2031 | | | | 959 | | | 16,649 | | | 2.6 | % | | $ | 29.19 | |
| 2032 | | | | 230 | | | 7,209 | | | 1.1 | % | | $ | 31.30 | |
| 2033 | | | | 646 | | | 22,836 | | | 3.5 | % | | $ | 35.37 | |
| 2034 | | | | 1,438 | | | 32,661 | | | 5.1 | % | | $ | 29.46 | |
| 2035 | | | | 1,080 | | | 33,217 | | | 5.1 | % | | $ | 30.75 | |
| 2036 | | | | 1,010 | | | 9,908 | | | 1.5 | % | | $ | 29.44 | |
| 2037 | | | | 102 | | | 9,573 | | | 1.5 | % | | $ | 92.86 | |
| 2038 | | | | 569 | | | 14,207 | | | 2.2 | % | | $ | 24.96 | |
| 2039 | | | | 483 | | | 9,786 | | | 1.5 | % | | $ | 20.25 | |
| 2041 (2) | | | | — | | | 4,841 | | | 0.8 | % | | N/A |
| | | | | | | | | | |
| 2063 (2) | | | | — | | | 135 | | | — | % | | N/A |
| 2072 (2) | | | | — | | | 125 | | | — | % | | N/A |
| Total | | | | 22,470 | | | $ | 646,660 | | | 100.0 | % | | $ | 34.14 | |
| | | | | | | | | | |
(1)Refer to definition provided on first page of Item 2 of this Annual Report on Form 10-K.
(2)Includes only ground leases.
With regard to office and data center shell propertythe leases reported above as expiring in 2021,2024, we believe that the weighted average annualized rental revenue per occupied square foot for such leases as of December 31, 2020 was,2023, on average, approximately 1.5% to 3.5% higher thanapproximated estimated current market rents for the related space, with specific results varying by market.
Item 3. Legal Proceedings
We are not currently involved in any material litigation nor, to our knowledge, is any material litigation currently threatened against the Company or the Operating Partnershipus (other than routine litigation arising in the ordinary course of business, substantially all of which is expected to be covered by liability insurance).
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrants’Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
COPT’s
(a) In September 2023, the ticker symbol under which our common shares tradeare publicly traded on the New York Stock Exchange (“NYSE”) under the symbol “OFC.”changed from “OFC” to “CDP”. The number of holders of record of COPT’sour common shares was 462439 as of January 22, 2021.February 7, 2024. This number does not include shareholders whose shares were held of record by a brokerage house or clearing agency, but does include any such brokerage house or clearing agency as one record holder.
There is no established public trading market for COPLP’s partnership units. Quarterly common unit distributions per unit were the same as quarterly common dividends per share declared by COPT. As of January 22, 2021, there were 28 holders of record of COPLP’s common units.
Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended December 31, 2020, COPT issued 2,000 common shares in exchange for 2,000 COPLP common units in accordance with COPLP’s Third Amended and Restated Limited Partnership Agreement, as amended. The issuance of these common shares was effected in reliance upon the exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended.
COPT’s Common Shares Performance Graph
The graph and the table set forth below assume $100 was invested on December 31, 20152018 in COPT’sour common shares. The graph and the table compare the cumulative return (assuming reinvestment of dividends) of this investment with a $100 investment at that time in the S&P 500 Index, or the FTSE All Equity REITREITs Index of the National Association of Real Estate Investment Trusts (“Nareit”) (the “All Equity REITs Index”) and the Office Property Sector of the FTSE All Equity REITs Index of Nareit (the “Office Sector Index”):
| | Period Ended |
| | Period Ended | | | | Period Ended |
| Index | Index | | 12/31/15 | | 12/31/16 | | 12/31/17 | | 12/31/18 | | 12/31/19 | | 12/31/20 | Index | | 12/31/18 | | 12/31/19 | | 12/31/20 | | 12/31/21 | | 12/31/22 | | 12/31/23 |
| Corporate Office Properties Trust | | $ | 100.00 | | | $ | 148.61 | | | $ | 143.77 | | | $ | 108.05 | | | $ | 156.91 | | | $ | 145.75 | |
| COPT Defense Properties | |
| S&P 500 Index | S&P 500 Index | | $ | 100.00 | | | $ | 111.96 | | | $ | 136.40 | | | $ | 130.42 | | | $ | 171.49 | | | $ | 203.04 | |
| FTSE Nareit All Equity REIT Index | | $ | 100.00 | | | $ | 108.63 | | | $ | 118.05 | | | $ | 113.28 | | | $ | 145.75 | | | $ | 138.28 | |
| Office Property Sector of FTSE Nareit All Equity REITs Index | |
| FTSE Nareit All Equity REITs Index | |
In our 2022 Annual Report on Form 10-K, we used the All Equity REITs Index for purposes of comparing the performance of our shares to an industry index of our peers. Effective for our 2023 Annual Report on Form 10-K, we changed the industry index of our peers to the Office Sector Index as we believe it to be a closer representation of our business model than the broader index we previously used. Since 2023 is the initial year for our change in the industry index of our peers, we are presenting both of these indexes in the graph and table included above.
Shares Authorized for Issuance Under Equity Compensation Plans
For the information required by Item 5 (a) related to shares authorized for issuance under equity compensation plan, you should refer to our definitive proxy statement relating to the 2024 Annual Meeting of our Shareholders to be filed with the
Securities and Exchange Commission no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
(b) Not applicable
(c) None
Item 6. Selected Financial Data
Omitted pursuant to our election to apply rules adopted by the SEC effective February 10, 2021 to eliminate Item 301 of Regulation S-K.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
You should refer to our consolidated financial statements and the notes thereto and our Selected Financial Data table as you read this section.
This section contains “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995, that are based on our current expectations, estimates and projections about future events and financial trends affecting the financial condition and operations of our business. Forward-looking statements can be identified by the use of words such as “may,” “will,” “should,” “could,” “believe,” “anticipate,” “expect,” “estimate,” “plan” or other comparable terminology. Forward-looking statements are inherently subject to risks and uncertainties, many of which we cannot predict with accuracy and some of which we might not even anticipate. Although we believe that the expectations, estimates and projections reflected in such forward-looking statements are based on reasonable assumptions at the time made, we can give no assurance that these expectations, estimates and projections will be achieved. Future events and actual results may differ materially from those discussed in the forward-looking statements. Important factors that may affect these expectations, estimates and projections include, but are not limited to:
•>general economic and business conditions, which will, among other things, affect office property and data center demand and rents, tenant creditworthiness, interest rates, financing availability, property operating and construction costs, and property values;
•>adverse changes in the real estate markets, including, among other things, increased competition with other companies;
•risks and uncertainties regarding the impact of the COVID-19 pandemic, and similar pandemics, along with restrictive measures instituted to prevent spread, on our business, the real estate industry and national, regional and local economic conditions;
•governmental actions and initiatives, including risks associated with the impact of a prolonged government shutdown or budgetary reductions or impasses, such as a reduction in rental revenues, non-renewal of leases and/or reduced or delayed demand for additional space by our strategic customers;
•>our ability to borrow on favorable terms;
•>risks of real estateproperty acquisition and development activities, including, among other things, risks that development projects may not be completed on schedule, that tenants may not take occupancy or pay rent or that development or operating costs may be greater than anticipated;
•>risks of investing through joint venture structures, including risks that our joint venture partners may not fulfill their financial obligations as investors or may take actions that are inconsistent with our objectives;
•>changes in our plans for properties or views of market economic conditions or failure to obtain development rights, either of which could result in recognition of significant impairment losses;
•>potential impact of a prolonged government shutdowns or budgetary reductions or impasses, such as a reduction of rental revenues, non-renewal of leases and/or reduced or delayed demand for additional space by existing or new tenants;
>potential additional costs, such as capital improvements, fees and penalties, associated with environmental laws or regulations;
>adverse changes resulting from other government actions and initiatives, such as changes in taxation, zoning laws or other regulations.
>our ability to satisfy and operate effectively under Federalfederal income tax rules relating to real estate investment trusts and partnerships;
•possible adverse changes in tax laws;
•>the dilutive effects of issuing additional common shares; and
•our ability to achieve projected results;
•>security breaches relating to cyber attacks, cyber intrusions or other factors;factors, and
•environmental requirements. other significant disruptions of our information technology networks and related systems.
We undertake no obligation to publicly update or supplement forward-looking statements.
Overview
While 2020 will most likely be remembered for the COVID-19 pandemic, including the restrictive measures instituted to prevent spread and the resulting economic uncertainty, we do not believe that the pandemic significantly affectedIn 2023, we:
>experienced continued strong demand across our ability to execute our business strategy due primarily to our portfolio’s significant concentration in Defense/IT Locations. The tenantsPortfolio segments that drove:
>strengthened occupancy of our operating properties, with year-end occupancy and leased rates at near-record levels; and
>near-record tenant retention rates, at increased rent levels;
>continued growth through substantially pre-leased development, with space placed in service during the year that was virtually full and a pipeline of substantially pre-leased properties under development at year end;
>raised capital from a sale of interests in data center shell properties, using the proceeds to create borrowing capacity to fund future development activities;
>opportunistically issued debt through a private placement to pre-fund the expected borrowings needed to fund our forecasted development activities for most of these properties were designated as “essential businesses,”the next three years; and therefore exempt from use and occupancy restrictions that otherwise affected much of
>ended the commercial real estate industry. Furthermore, since the tenants in these properties continued to be compensated by the USG for their services, we believe that their ability, and willingness, to fulfill their lease obligations was not significantly disrupted. As a result, while COVID-19 affected the manner in which we conducted our operations and adversely impacted certainyear with no significant debt maturing until 2026, most of our other tenantsRevolving Credit Facility’s borrowing capacity available and significant cash balances on hand.
Strong demand from our Defense/IT Portfolio drove increased property types, we do not believeoccupancy that it significantly affectedmore than offset the continuing effects of lagging demand in our financial condition, resultsOther segment. Our strengthened operating property occupancy in 2023 included increases in:
>total portfolio year-end occupancy rate from 92.7% to 94.2%, with a year-end leased rate of operations and cash flows in 2020. Please refer95.3%;
>Defense/IT Portfolio year-end occupancy rate from 94.1% to the section below entitled “Effects96.2%, with a year-end leased rate of COVID-19” for additional related disclosure.
97.2%;
We ended 2020>Same Property year-end occupancy rate from 92.0% to 93.4%, with highera year-end leased and occupancy percentages for our office and data center shell portfolio both portfolio-wide andrate of 94.7% for our Same Properties in total and notably,96.8% for the Defense/IT Portfolio component; and
>average Same Property occupancy from 91.6% to 92.7%, and from 92.9% to 94.7% for the Defense/IT Portfolio component.
We also in 2023 achieved a tenant retention rate of 79.7% for the portfolio, and 85.7% for our highestDefense/IT Portfolio segment, which were near record levels. Our increased occupancy and leased rates were attributable primarily to our strong tenant retention coupled with the effects of our vacant space leasing efforts.
Defense/IT Portfolio demand also continued to feed growth in our portfolio through property development. In 2023, our Defense/IT Portfolio:
>placed into service 848,000 square feet in six properties that were 98% leased, mostly in our Data Center Shells, Redstone Arsenal and Fort Meade/BW Corridor sub-segments; and
>ended the year end portfolio-wide occupancy since 2001. We ended 2020 with our office and817,000 square feet under development in an additional five properties that were 91% leased, three of which were scheduled to be placed in service in 2024. Our properties under development included three data center shellshells and two properties in Redstone Arsenal.
We believe that our Defense/IT Portfolio has strongly benefited from continued:
>defense budget appropriation increases, with bipartisan support, and without extended delays in appropriations in recent years. As global threats to our national security and that of our allies continue to evolve and, in some cases, escalate, we believe that defense spending for the critical missions that our portfolio 94.8% leased (comparedsupports, such as intelligence, surveillance and cyber, will continue to 94.4%be considered vital for the foreseeable future. However, future leasing demand could be delayed or diminish if this bipartisan support does not continue or if appropriations legislation to fund approved defense budgets faces extended delays (including the USG’s 2024 fiscal year defense budget, which was authorized but was awaiting appropriations as of the date of this filing); and
>demand for data center shells in Northern Virginia, one of the largest data center markets in the world. We believe that our properties in operations and undergoing development in this sub-segment will continue to benefit from strong demand through high tenant retention, with renewals at increased rental rates. However, as of December 31, 2019) while2023, we did not have additional land under control in Northern Virginia for the future development of data center shells. As a result, our Same Properties were 93.1% leased (comparedability to 93.0%continue to develop data center shells, as we have for the past decade, may be limited.
As of December 31, 2019). Our year end portfolio-wide office2023, we had scheduled lease expirations for 2.6 million square feet in 2024, representing 11.5% of our total occupied square feet and data center shell occupancy was 94.1% (compared12.8% of our total annualized rental revenue, including:
>2.4 million square feet in our Defense/IT Portfolio segment, a high proportion of which we expect to 92.9% asrenew; and
>161,000 square feet in our Other segment, most of December 31, 2019) and Same Properties occupancy was 92.1% (comparedwhich we do not expect to 91.1% as of December 31, 2019). Our wholesale data center was 86.7% leased as of year end (compared to 76.9% as of December 31, 2019). renew.
Please refer to the section below entitled “Occupancy and Leasing” for additional related disclosure.
The higher occupancy and leased percentagesOn January 10, 2023, we raised $190.2 million in our office and data center shell portfolio were attributable primarily to our placing into service an annual record 1.8 million square feet in 11 newly-developed properties, expansions of three fully-operational properties and one redeveloped property that were 99.5% leased as of December 31, 2020. These properties were predominantly Defense/IT Locations in our data center shells or Redstone Arsenal sub-segments. Other noteworthy 2020 leasing activity in our operating portfolio included:
•renewal leasing of 2.2 million square feet, resulting in a portfolio-wide tenant retention rate of 80.6% (81.6% for our Defense/IT Locations), one of our highest annual rates on record. This leasing included the effect of large early renewals of leases previously scheduled to expire in 2021. Strong tenant retention is key to our asset management strategy in order to maximize revenue (by avoiding downtime) and minimize leasing capital; and
•vacant space leasing of 416,000 square feet, which fell short of our beginning of 2020 expectations due to the impact of restrictive measures and the economic uncertainty caused by the pandemic.
As of December 31, 2020, our scheduled lease expirations in 2021, representing 7.5% of our total occupied square feet, included a high concentration of space in what we believe to be mission-critical Defense/IT Locations. This space included only two leases of 100,000 square feet or more that are with the USG and expected to be renewed.
We had 1.0 million square feet of development leasing in 2020, representing our fourth highest annual volume. Nearly half of this leasing was for data center shells, and we also leased new property space in four of our five other Defense/IT Locations sub-segments. We ended the year with 1.5 million square feet in properties under development that were 84% leased in aggregate, which included new properties in each of our named office and data center shell segments and sub-segments. Most of these properties were 100% leased and all but one were more than half leased (the one being a property built on a speculative basis in Redstone Arsenal in order to keep pace with what we believe to be very strong demand, illustrated by that sub-segment’s 99.4% year-end occupancy rate). For further disclosure regarding our development underway as of year end, please refer to Item 2 of this Annual Report on Form 10-K.
We believe that our 2020 leasing greatly benefited from a continued:
•healthy defense spending environment, with bipartisan support for funding our national defense. We believe that successive increases in defense spending since 2016, including, most recently, in the National Defense Authorization Act for Fiscal Year 2021, have enhanced the USG and defense contractor tenants’ ability to invest in facility planning. This environment has helped fuel leasing demand, as has continued prioritization of spending allocations towards technology and innovation programs benefiting our Defense/IT Locations, including cyber, space, unmanned systems and artificial intelligence; and
•demand for data center shells. Our leasing included two new data center shells in Northern Virginia, the largest data center market in the world, and represented further expansion of our relationship with an existing customer. As of year end, we held land that would accommodate an additional 1.2 million square feet in future data center shell development.
With respect to financing activities, we:
•amended an existing term loan facility to increase the loan amount by $150.0 million and reduce the LIBOR interest rate spread on the facility. We used the resulting loan proceeds to repay borrowings under our Revolving Credit Facility that funded development costs;
•refinanced unsecured senior notes due to mature in June 2021 with a new note issuance on September 17, 2020 by:
•issuing $400.0 million of 2.25% Notes at an initial offering price of 99.416% of their face value. The proceeds from this issuance, after deducting underwriting discounts but before other offering expenses, were approximately $395.3 million; and
•purchased or redeemed $300.0 million of 3.70% Notes for $306.9 million plus accrued interest.
We used the remaining proceeds from the 2.25% Notes issuance to repay borrowings under our Revolving Credit Facility and for general corporate purposes, which included the cash settlement of three forward-starting interest rate swaps and accrued interest thereon for $53.1 million;
•raised equity by selling interests in single tenant data center shells in Northern Virginia, including proceeds of approximately:
•$81 million on October 30, 2020capital from our sale of a 90% interest in twothree data center shell properties basedin Northern Virginia, resulting in a gain on an aggregate property valuesale of $89.7$49.4 million. We retained a 10% interest in the properties through B RE COPT DC JV II LLC (“B RE COPT”), a newly-formed joint venture. We recognizedused substantially all of the proceeds from this sale to pay down our Revolving Credit Facility to create additional borrowing capacity available to fund future development.
On September 12, 2023, we issued $345.0 million aggregate principal amount of 5.25% Exchangeable Senior Notes due 2028 (the “5.25% Notes”) in a gain on saleprivate placement to persons reasonably believed to be qualified institutional buyers pursuant to Rule 144A under the Securities Act of $30.0 million;1933, as amended (the "Securities Act"). While we were previously anticipating issuing debt through the capital markets in late-2024, due to what we considered to be a potentially challenging capital environment, we opportunistically completed this issuance to remove future execution and
•$60 million on December 22, 2020 from debt-pricing risk, while pre-funding and creating capacity under our sale, through a series of transactions, of 80% ofRevolving Credit Facility for the expected borrowings needed to fund our 50% interests in LLCs holding six properties and associated mortgage debt that we owned through GI-COPT DC Partnership LLC, an unconsolidated joint venture. We retained a 10% interest in the LLCs through B RE COPT, and recognized a gain of $29.4 million on the sale of interests.
We usedforecasted development activities for most of these salethe next three years. The proceeds to repayfrom this issuance, after deducting the initial purchasers’ commissions, but before other offering expenses, were $336.4 million. The net proceeds from the notes were primarily used for general corporate purposes, including repayment of borrowings under our Revolving Credit Facility;Facility and pre-funding of future development investments, which resulted in a portion of the net proceeds being invested in short-term interest-bearing money market accounts pending such use.
•
As of December 31, 2023, we ended the year, with:
>redeemed COPLP’s Series I Preferred Units fromno significant debt maturing until 2026;
>$525.0 million in available borrowing capacity under our Revolving Credit Facility;
>no variable-rate debt exposure expected until late-2024, including the third party unitholder at the units’ aggregate liquidation preferenceeffect of $8.8interest rate swaps;
>only 4.1% of our outstanding debt encumbered by properties; and
>$167.8 million ($25.00 per unit), plus accrued and unpaid distributions of return thereon up to the date of redemption.in cash on hand.
These activitiesIn 2023, the United States economy experienced inflationary conditions, increased interest rates, higher volatility in the debt and equity capital markets and certain supply-chain related shortages that, coupled with increased prevalence of remote- and flexible-work arrangements in recent years, adversely affected the United States office real estate industry. For us:
>the above conditions have not significantly affected our ability to achieve expected leasing in our Defense/IT Portfolio, although the properties in our Other segment continue to experience a challenging leasing environment that has not improved;
>inflationary conditions have contributed to increased costs for certain property operating expenses and building equipment and materials, which affects our development of new properties and improvements for existing properties. For:
>property operating expenses, most of our leases obligate tenants to pay either their full share of a building’s operating expenses or their share to the extent such expenses exceed amounts established in their leases. These lease arrangements reduce our exposure to increases in property operating expenses;
>new property development and tenant improvements associated with new leasing in our Defense/IT Portfolio, increased costs have not significantly affected our ability to achieve targeted yields due to continued strong demand for space, which has generally enabled us to fund $344.4 millionincrease rents to maintain such yields. However, continued cost increases could adversely affect our ability to continue to achieve targeted yields on future new property development and future new leasing of our existing properties to the extent increases in development costsmarket rental rates do not keep pace; this could also reduce our willingness to develop, or our tenants’ willingness to commit to leasing, new properties; and
>other capital improvements, the increasing cost environment could affect our willingness, or timeline, for completing such improvements;
>we observed uncertainty in 2020, while ending the year with: no debt maturingmarkets in 2021; no remaining preferred equity;2023 both in terms of availability and $657.0 million in borrowingpricing, particularly for commercial real estate. Due to this uncertainty, we chose to issue our 5.25% Notes to remove future execution and debt-pricing risk by pre-funding and creating capacity available to us under our Revolving Credit Facility.Facility for the expected borrowings needed to fund forecasted future development activities;
>the effects of increased interest rates were limited to a certain extent since our debt is predominantly fixed rate and in the form of long-term unsecured notes that we issued prior to 2022. Notable effects include the following:
>for variable-rate loans, we use interest rate swaps to hedge the effect of interest rate changes. We had interest rate swaps for a $200.0 million notional amount that fixed the one-month LIBOR interest rate in 2022 at 1.9% through December 1, 2022; and, effective February 1, 2023, fixed the one-month SOFR interest rate at 3.7% for a three-year term;
>for the 5.25% Notes issuance, the interest rate was higher than our previous senior notes issuance in November 2021; and
>for net proceeds resulting from the 5.25% Notes issuance that we invested in short-term money market accounts pending use for future development activities, elevated U.S. Treasury Rates in 2023 enabled us to realize interest income at rates slightly in excess of the debt issuance rate; and
>both our operating and development activities experienced supply-chain related shortages in 2023 that, due in large part to our anticipatory efforts, did not significantly affect our ability to execute such activities.
NetIn addition, we owned eight office properties in our Other segment as of December 31, 2023 that we do not consider strategic holdings since they do not align with our Defense/IT strategy. We intend to sell these properties when we believe that market conditions and opportunities position us to optimize our return on investment. However, we did not initiate plans for sales of these properties in 2023 due in part to the anticipated effects of increased interest rates and debt availability on potential buyers.
For our 2023 results of operations:
>our diluted earnings per share decreased from $1.53 per share in 2022 to a loss per share of $(0.67) in 2023, and our net income decreased from $178.8 million in 2020 was $97.12022 to a loss of $(74.3) million lower than in 20192023 due primarily to a: $53.2$252.8 million loss on interest rate derivatives in 2020impairment losses that we recognized whenin 2023. We recognized these impairment losses on: six operating properties in our Other segment after shortening their expected holding periods; and a parcel of other land that we consummated the 2.25% Notes issuance; and $45.6 million decrease in gains from sales of real estate interests due to lower sales volume in 2020. Netcontrolled;
>net operating income (“NOI”) from real estate operations, our segment performance measure, discussed further below, increased $6.8$21.8 million, from 2019or 6.0%, relative to 2020, due2022. This change was comprised primarily to: of:
>a $20.5$26.4 million increase from newly-developed properties newly placed intoin service; and
>a $10.5 million increase from our Same Properties, which included the effect of increased occupancy in our Defense/IT Portfolio; offset in part by
>a $15.1 million decrease from property dispositions; and
>diluted funds from operations per share, as adjusted for comparability increased 2.5% and the numerator for that measure increased $6.9 million, or 2.6%, relative to 2022, due primarily to increased NOI from real estate operations in 2023, offset in part by a net decrease of $9.7 million from dispositions due to our sales of property interests in 2019 and 2020. NOI from our Same Properties only changed marginally, increasing $0.8 million, or 0.3%. higher interest expense.
Additional disclosure comparing our 20202023 and 20192022 results of operations is provided below.
We discuss significant factors contributing to changes in our net income between 20202023 and 20192022 in the section below entitled “Results of Operations.” The results of operations discussion is combined for COPT and COPLP because there are no material differences in the results of operations between the two reporting entities.
In addition, the section below entitled “Liquidity and Capital Resources” includes discussions of, among other things:
•>how we expect to generate and obtain cash for short and long-term capital needs; and
•>our commitmentsmaterial cash requirements for known contractual and contingencies.other obligations.
We refer to the measuremeasures “annualized rental revenue” and “tenant retention rate” in various sections of the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this Annual Report on Form 10-K. Annualized rental revenue is a measure that we use to evaluate the source of our rental revenue as of a point in time. It is computed by multiplying by 12 the sum of monthly contractual base rents and estimated monthly expense reimbursements under active leases as of a point in time (ignoring free rent then in effect)effect and rent associated with tenant funded landlord assets). Our computation of annualized rental revenue excludes the effect of lease incentives, although the effect of this exclusion is not material.incentives. We consider annualized rental revenue to be a useful measure for analyzing revenue sources because, since it is point-in-time based, it does not contain increases and decreases in revenue associated with periods in which lease terms were not in effect; historical revenue under generally accepted accounting principles in the United States of America (“GAAP”) does contain such fluctuations. We find the measure particularly useful for leasing, tenant, segment and industry analysis. Tenant retention rate is a measure we use that represents the percentage of square feet renewed in a period relative to the total square feet scheduled to expire in that period; we include the effect of early renewals in this measure.
We also refer to the measures “cash rents”, “straight-line rents”, and “committed costs” in the “Occupancy and Leasing” section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this Annual Report on Form 10-K. Cash rents include monthly contractual base rent (ignoring rent abatements and rent associated with tenant funded landlord assets) multiplied by 12, plus estimated annualized expense reimbursements (average for first 12 months of term for new or renewed leases or as of lease expiration for expiring leases). Straight-line rents include annual minimum base rents, net of abatements and lease incentives and excluding rent associated with tenant funded landlord assets, on a straight-line basis over the term of the lease, and estimated annual expense reimbursements (as of lease commencement for new or renewed leases or as of lease expiration for expiring leases). We believe that cash rents and straight-line rents are useful measures for evaluating the rental rates of our leasing activity, including changes in such rates relative to rates that may have been previously in place, with cash rents serving as a measure to evaluate rents at the time rent payments commence, and straight-line rents serving as a measure to evaluate rents over the related lease terms. Committed costs includes tenant improvement allowances (excluding tenant funded landlord assets), leasing commissions and estimated turn key costs and excludes lease incentives; we believe this is a useful measure for evaluating our costs associated with obtaining new leases.
With regard to our operating portfolio square footage, occupancy and leasing statistics included below and elsewhere in this Annual Report on Form 10-K, amounts disclosed include total information pertaining to properties owned through unconsolidated real estate joint ventures except for amounts reported for annualized rental revenue, which represent the portion attributable to our ownership interest.
Effects of COVID-19
Pandemic Overview
Since first being declared a pandemic by the World Health Organization in early March 2020, the coronavirus, or COVID-19, has spread worldwide. In an effort to control its spread, governments and other authorities imposed restrictive measures affecting freedom of movement and business operations, such as shelter-in-place orders and business closures. Strong restrictive measures were put into place in much of the United States beginning in March 2020, bringing many businesses to a halt while forcing others to change the way in which they conduct their operations, with much of the workforce working from their homes to the extent they were able. States and local governments began easing these measures to varying extents in late April 2020, with some lifting restrictive measures entirely, while others chose a more gradual, extended easing approach. While the easing of these measures enabled many businesses to gradually resume normal operations, most businesses continue to be hindered to varying extents by either measures still in effect, operational challenges resulting from social distancing requirements/expectations and/or a reluctance by much of the population to engage in certain activities while the pandemic is still active. As of the date of this filing, COVID-19 spread continues world- and nation-wide, and is expected to continue until vaccinations have been administered to much of the population, which is not expected to occur in the United States until at least mid- to late 2021. As a result, there continues to be significant uncertainty regarding the duration and extent of this pandemic. The outbreak has significantly disrupted financial and economic markets worldwide, as well as in the United States at a national, regional and local level. These conditions could continue or further deteriorate as businesses feel the prolonged effects of stalled or reduced operations and uncertainty regarding the pandemic continues.
Effect on Real Estate Industry
COVID-19 has significantly affected the operations of much of the commercial real estate industry as certain tenants’ operations, including the ability to use space and run businesses, have been disrupted. This has adversely affected tenants’ ability to sustain their businesses, including their ability, or willingness, to fulfill their lease obligations. The industry has also been significantly impacted by the economic disruption that COVID-19 has triggered, which has affected the ability to lease space in many property types to new and existing tenants at favorable terms. Key demand drivers for office space, such as employment levels, business confidence and corporate profits, have been adversely affected. In addition, after months of businesses operating in significant part through remote work arrangements out of necessity, the pace of such arrangements becoming more prevalent long-term could accelerate, adversely affecting office space demand, although that effect may be offset by a slowing in the trend toward adoption of shared office and open workplace structures due to greater social distancing concerns. As a result, the commercial real estate industry, including office real estate, has suffered adverse impacts in its operations, financial conditions and cash flows due to the COVID-19 pandemic and faces the potential for future effects.
Effect on the Company
Our office and data center shell portfolio is significantly concentrated in Defense/IT Locations, representing 171 of the portfolio’s 181 properties, or 87.1% of our annualized rental revenue as of December 31, 2020. These properties are primarily occupied by the USG and contractor tenants engaged in what we believe are high-priority security, defense and IT missions. As a result, most of these properties were designated as “essential businesses,” and therefore exempt from many of the restrictions that otherwise have affected much of the commercial real estate industry. Furthermore, since the tenants in these properties are mostly the USG, or contractors of the USG who continue to be compensated by the USG for their services, we believe that their ability, and willingness, to fulfill their lease obligations have not been disrupted. Our Defense/IT Locations do include tenants serving as amenities to business parks housing our properties (such as restaurant, retail and personal service providers); while these tenants’ operations have been significantly disrupted by COVID-19, our annualized rental revenue from these tenants is not significant.
As of December 31, 2020, we owned eight Regional Office properties, representing 12.5% of our office and data center shell portfolio’s annualized rental revenue. These properties were comprised of: three high-rise Baltimore City properties proximate to the city’s waterfront; four Northern Virginia properties; and a newly-developed property in Washington, D.C.’s central business district. While these properties include tenants in the financial services, health care and public health sectors, which, as “essential businesses,” have been exempt from restrictions on operations, they also include a number of non-essential business tenants. These properties are more subject to traditional office fundamentals than our Defense/IT Locations and therefore face much of the enhanced risk in adverse impacts from COVID-19 described above.
The pandemic has affected the manner in which we conduct our operations in the following ways:
•for the operations of our properties:
•we consulted with medical experts in developing an approach to safely operate our properties during the pandemic;
•we use manufacturer recommended heating and air conditioning filters to ensure appropriate outside air distribution;
•we proactively engaged our tenants to help them through unknowns as pandemic concerns heightened and restrictive measures were being instituted, and maintained that engagement to ensure communication regarding steps we were taking in our business operations, any changes in tenant operations (such as office closures or revised work schedules) and the existence of any actual or presumed COVID-19 cases in properties;
•our on-site property operations staff have been required to use personal protective equipment, such as masks, gloves and hand sanitizer, and implement other procedural changes to enhance separation and minimize spread;
•we instituted enhanced cleaning measures, particularly for high touch areas and flat surfaces, and conducted special deep cleanings in properties potentially affected by actual or presumed COVID-19 cases;
•we provided signage promoting proper social distancing practices and hand sanitizer stations for property common area lobbies; and
•for properties that were not being used by tenants due to office closures or work from home arrangements, we locked down public (non-tenant) access to the properties for security purposes and instituted other measures aimed at managing costs;
•for our employees:
•our staff deemed to be essential, including our executives, select other members of our leadership team and most of our property management team, have continued to report to their normal work locations; and
•most of our other staff worked from home from mid-March until the end of May, when most began reporting to their normal work locations on a bi-weekly rotational basis; and
•for our leasing activities:
•we continued active engagement for lease transactions already in progress while business closures were in place;
•during periods of time in which we were unable to physically show space to prospective tenants (from mid-March until late May to mid-June), we showed space to new prospective tenants using a combination of virtual technology and pre-recorded video tours; and
•we implemented new advertising strategies to promote space availability.
As of the date of this filing, we believe that COVID-19 has not significantly affected our results of operations. Our:
•same property NOI from real estate operations increased 0.3% for the year ended December 31, 2020 relative to 2019. Included in this increase were offsets associated with a $2.8 million increase in provisions for collectability losses and a $1.9 million decrease in parking revenue for the year ended December 31, 2020 relative to 2019. Substantially all of the increase in collectability losses was attributable to tenants whose operations were significantly disrupted by the pandemic (including primarily tenants serving as amenities to Defense/IT Location properties);
•other lease revenue collections were not significantly affected by the pandemic. However, we have agreed to deferred payment arrangements for approximately $2.6 million in lease receivables to be repaid in most cases by 2021 with primarily Regional Office tenants and tenants serving as amenities to Defense/IT Location properties whose operations were significantly disrupted;
•office and data center shell portfolio was 94.1% occupied (compared to 92.9% at December 31, 2019) and 94.8% leased (compared to 94.4% at December 31, 2019) and our Same Properties portfolio was 92.1% occupied (compared to 91.1% at December 31, 2019) and 93.1% leased (compared to 93.0% at December 31, 2019);
•operating expenses included the effect of higher cleaning and maintenance related costs, which were partially offset by higher tenant expense reimbursements; and
•leadership team concluded that the economic disruption resulting from COVID-19 constituted a significant adverse change in the business climate that could affect the value of our Regional Office properties, which are dependent on commercial office tenants and could suffer increased vacancy as a result. Accordingly, we concluded that these circumstances constituted an indicator of impairment. We performed recovery analyses for each Regional Office property’s asset group and concluded that the carrying value of each asset group was recoverable from the respective estimated undiscounted future cash flows. As a result, no impairment loss was recognized.
While we do not currently expect that COVID-19 will significantly affect our future results of operations, financial condition or cash flows, we believe that the impact of the pandemic will be dependent on future developments, including the duration of the pandemic, the prevalence, strength and duration of restrictive measures and the resulting effects on our tenants, potential future tenants, the commercial real estate industry and the broader economy, all of which are uncertain and difficult to predict.
Nevertheless, we believe at this time that there is more inherent risk associated with the operations of our Regional Office properties than our Defense/IT Locations.
We believe that COVID-19 led to several leases being executed later than we previously expected, and the inability for us to physically show space to prospective tenants for a period of time due to restrictive measures served as an impediment to initiating new and progressing active leasing transactions. While we do not believe that our development leasing and ability to renew leases scheduled to expire have been significantly affected by the pandemic, we do believe that the impact of the restrictive measures and the economic uncertainty caused by the pandemic has impacted our timing and volume of vacant space leasing, and may continue to do so in the future.
For our development activity, we have delivered space in ten newly-developed properties and expansions of three fully-operational properties on schedule since March 2020, and the 11 properties that were under development as of December 31, 2020 face minimal operational risk as they were 84% leased as of the date of this filing. COVID-19 enhances the risk of us being able to stay on pace to complete development and begin operations on schedule due to the potential for delays from: jurisdictional permitting and inspections; factories’ ability to provide materials; and possible labor quarantines. These types of issues have not significantly affected us to date but could in the future, depending on COVID-19 related developments.
We do not expect that we will be required to incur significant additional capital expenditures on existing properties as a result of COVID-19.
In March 2020, due to the potential for financial market instability from the pandemic, we borrowed under our Revolving Credit Facility in order to pre-fund our short-term capital needs. As the capital markets remained stable in the second quarter of 2020, we repaid much of these borrowings in June 2020. We subsequently completed an issuance of $400.0 million in unsecured senior notes in September 2020, which enabled us to refinance $300.0 million in notes maturing in 2021, and we have no other significant debt maturities until 2022.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP, which require us to make certain estimates and assumptions. A summary of our significant accounting policies is provided in Note 2 to our consolidated financial statements. The following section is a summary of certain aspects of those accounting policies involving estimates andor assumptions that (1) require our most difficult, subjective or complex judgments in accounting for uncertain matters or matters that are susceptible to changeinvolve a significant level of estimation uncertainty and (2) materially affecthave had or are reasonably likely to have a material impact on our reported operating performancefinancial condition or financial condition.results of operations. It is possible that the use of different reasonable estimates or assumptions in making these judgments could result in materially different amounts being reported in our consolidated financial statements. While reviewing this section, refer to Note 2 to our consolidated financial statements, including terms defined therein.
Assessment of Lease Term as Lessor
As discussed above, a significant portion of our portfolio is leased to the USG, and the majority of those leases consist ofprovide for one-year terms, with a series of one-year renewal options (with defined rent escalations upon renewal), and/or provide for early termination rights. In addition, certain other leases in our portfolio provide early termination rights to tenants. Applicable accounting guidance requires us to recognize minimum rental payments on operating leases, net of rent abatements, on a straight-line basis over the term of each lease. TheWe estimate a tenant’s lease term of a lease includes the noncancellable periods ofat the lease along with periods covered by: (1) a tenant option to extendcommencement date and do not subsequently reassess such term unless the lease if the tenant is reasonably certain to exercise that option; (2)modified. When estimating a tenant option to terminate thetenant’s lease if the tenant is reasonably certain not to exercise that option; and (3) an option to extend (or not to terminate) the lease in which exercise of the option is controlled by us as the lessor. When assessing the expected lease end date,term, we use judgment in contemplating the significance of: any penalties a tenant may incur should it choose not to exercise any existing options to extend the lease or exercise any existing options to terminate the lease; and economic incentives forto the tenant based on any existing contract, asset, entity or market-based factors inassociated with the lease. Factors we consider in making this assessment include the uniqueness of the purpose or location of the property, the availability of a comparable replacement property, the relative importance or significance of the property to the continuation of the lessee’s line of business and the existence of tenant leasehold improvements or other assets whose value would be impaired by the lesseetenant vacating or discontinuing use of the leased property. For most of our leases with the USG, we have determined, based on the factors above, our estimates of lease term conclude
that exercise of existing renewal options, or continuation of such leases without exercising early termination rights, is reasonably certain as it relates to the expected lease end date. Changes inAs a result, our recognition of minimum rents on these leases includes the effect of annual rent escalations over our estimate of the lease term assessments(including on one-year renewal options) and our depreciation and amortization of costs incurred on these leases is recognized over the lease term. An over-estimate of the term of these leases by us could result in the write-off of any recorded assets associated with straight-line rental revenue and acceleration of depreciation and amortization expense associated with costs we incurred related to these leases.
32 We had no significant USG leases with lease terms determined to have been over-estimated during the reporting periods included herein.
ImpairmentLease Expirations
The following table provides a summary schedule of Long-Lived Assetslease expirations for leases in place at our operating properties as of December 31, 2023 based on the non-cancelable term of tenant leases determined in accordance with generally accepted accounting principles (dollars and square feet in thousands, except per square foot amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year of Lease Expiration | | | | Square Footage of Leases Expiring | | Annualized Rental Revenue of Expiring Leases (1) | | Percentage of Total Annualized Rental Revenue Expiring (1) | | Total Annualized Rental Revenue of Expiring Leases Per Occupied Square Foot (1) |
| | | | | | | | | | |
| 2024 | | | | 2,576 | | | $ | 82,599 | | | 12.8 | % | | $ | 35.92 | |
| 2025 | | | | 3,645 | | | 145,662 | | | 22.5 | % | | $ | 39.51 | |
| 2026 | | | | 1,959 | | | 61,398 | | | 9.5 | % | | $ | 39.41 | |
| 2027 | | | | 1,714 | | | 49,383 | | | 7.6 | % | | $ | 35.59 | |
| 2028 | | | | 2,418 | | | 64,392 | | | 10.0 | % | | $ | 32.92 | |
| 2029 | | | | 2,321 | | | 52,455 | | | 8.1 | % | | $ | 30.72 | |
| 2030 | | | | 1,320 | | | 29,624 | | | 4.6 | % | | $ | 28.51 | |
| 2031 | | | | 959 | | | 16,649 | | | 2.6 | % | | $ | 29.19 | |
| 2032 | | | | 230 | | | 7,209 | | | 1.1 | % | | $ | 31.30 | |
| 2033 | | | | 646 | | | 22,836 | | | 3.5 | % | | $ | 35.37 | |
| 2034 | | | | 1,438 | | | 32,661 | | | 5.1 | % | | $ | 29.46 | |
| 2035 | | | | 1,080 | | | 33,217 | | | 5.1 | % | | $ | 30.75 | |
| 2036 | | | | 1,010 | | | 9,908 | | | 1.5 | % | | $ | 29.44 | |
| 2037 | | | | 102 | | | 9,573 | | | 1.5 | % | | $ | 92.86 | |
| 2038 | | | | 569 | | | 14,207 | | | 2.2 | % | | $ | 24.96 | |
| 2039 | | | | 483 | | | 9,786 | | | 1.5 | % | | $ | 20.25 | |
| 2041 (2) | | | | — | | | 4,841 | | | 0.8 | % | | N/A |
| | | | | | | | | | |
| 2063 (2) | | | | — | | | 135 | | | — | % | | N/A |
| 2072 (2) | | | | — | | | 125 | | | — | % | | N/A |
| Total | | | | 22,470 | | | $ | 646,660 | | | 100.0 | % | | $ | 34.14 | |
| | | | | | | | | | |
(1)Refer to definition provided on first page of Item 2 of this Annual Report on Form 10-K.
(2)Includes only ground leases.
With regard to the leases reported above as expiring in 2024, we believe that the weighted average annualized rental revenue per occupied square foot for such leases as of December 31, 2023, on average, approximated estimated current market rents for the related space, with specific results varying by market.
Item 3. Legal Proceedings
We assessare not currently involved in any material litigation nor, to our knowledge, is any material litigation currently threatened against us (other than routine litigation arising in the asset groups associated with eachordinary course of our properties, including operating properties, properties in development, land held for future development, related intangible assets, right-of-use assets, deferred rents receivable and lease liabilities, for indicatorsbusiness, substantially all of impairment quarterly or when circumstances indicate that an asset group may be impaired. If our analyses indicate that the carrying values of certain properties’ asset groups may be impaired, we perform a recovery analysis for such asset groups. For properties to be held and used, we analyze recoverability based on the estimated undiscounted future cash flowswhich is expected to be generated from the operations and eventual disposition of the properties over, in most cases, a ten-year holding period. If we believe it is more likely than not that we will dispose of the properties earlier, we analyze recoverability using a probability weighted analysis of the estimated undiscounted future cash flows expected to be generated from the operations and eventual disposition of the properties over the various possible holding periods. If the analysis indicates that the carrying value of a tested property’s asset group is not recoverable from its estimated future cash flows, the property’s asset group is written down to the property’s estimated fair value and an impairment loss is recognized. If and when our plans change, we revise our recoverability analyses of such property’s asset group to use the cash flows expected from the operations and eventual disposition of such property using holding periods that are consistent with our revised plans.covered by liability insurance).
Property fair values are estimated based on contract prices, indicative bids, discounted cash flow analyses or comparable sales analyses. Estimated cash flows used in our impairment analyses are based on our plans for the property and our views of market and economic conditions. The estimates consider items such as current and future market rental and occupancy rates, estimated operating and capital expenditures and recent sales data for comparable properties; most of these items are influenced by market data obtained from real estate leasing and brokerage firms and our direct experience with the properties and their markets. Determining the appropriate capitalization or discount rate also requires significant judgment and is typically based on many factors, including the prevailing rate for the market or submarket, as well as the quality and location of the property. Changes in the estimated future cash flows due to changes in our plans for a property (especially our expected holding period), views of market and economic conditions and/or our ability to obtain development rights could result in recognition of impairment losses which could be substantial.
Item 4. Mine Safety Disclosures
Asset groups associated with properties held for sale are carried at the lower of their carrying values (i.e., cost less accumulated depreciation and any impairment loss recognized, where applicable) or estimated fair values less costs to sell. Accordingly, decisions to sell certain properties will result in impairment losses if the carrying values of the specific properties’ asset groups classified as held for sale exceed such properties’ estimated fair values less costs to sell. The estimates of fair value consider matters such as recent sales data for comparable properties and, where applicable, contracts or the results of negotiations with prospective purchasers. These estimates are subject to revision as market conditions, and our assessment of such conditions, change.Not applicable.
Revenue Recognition on Tenant Improvements
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Most(a) In September 2023, the ticker symbol under which our common shares are publicly traded on the New York Stock Exchange (“NYSE”) changed from “OFC” to “CDP”. The number of holders of record of our leases provide for some formcommon shares was 439 as of improvements to leased space. When we are required to provide improvements underFebruary 7, 2024.This number does not include shareholders whose shares were held of record by a brokerage house or clearing agency, but does include any such brokerage house or clearing agency as one record holder.
Common Shares Performance Graph
The graph and the termstable set forth below assume $100 was invested on December 31, 2018 in our common shares. The graph and the table compare the cumulative return (assuming reinvestment of dividends) of this investment with a lease, we need to determine whether$100 investment at that time in the improvements constitute landlord assets or tenant assets. IfS&P 500 Index, the improvements are landlord assets, we capitalize the costFTSE All Equity REITs Index of the improvementsNational Association of Real Estate Investment Trusts (“Nareit”) (the “All Equity REITs Index”) and recognize depreciation expense over the shorterOffice Property Sector of the useful lifeFTSE All Equity REITs Index of the assets or the term of the lease and recognize any payments from the tenant as rental revenue over the term of the lease. If the improvements are tenant assets, we defer the cost of improvements funded by us as a lease incentive asset and amortize it as a reduction of rental revenue over the term of the lease. Our determination of whether improvements are landlord assets or tenant assets also may affect when we commence revenue recognition in connection with a lease.Nareit (the “Office Sector Index”):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Period Ended |
| Index | | 12/31/18 | | 12/31/19 | | 12/31/20 | | 12/31/21 | | 12/31/22 | | 12/31/23 |
| COPT Defense Properties | | $ | 100.00 | | | $ | 145.23 | | | $ | 134.90 | | | $ | 150.59 | | | $ | 145.69 | | | $ | 150.89 | |
| S&P 500 Index | | $ | 100.00 | | | $ | 131.49 | | | $ | 155.68 | | | $ | 200.37 | | | $ | 164.08 | | | $ | 207.21 | |
| Office Property Sector of FTSE Nareit All Equity REITs Index | | $ | 100.00 | | | $ | 131.42 | | | $ | 107.19 | | | $ | 130.77 | | | $ | 81.58 | | | $ | 83.23 | |
| FTSE Nareit All Equity REITs Index | | $ | 100.00 | | | $ | 128.66 | | | $ | 122.07 | | | $ | 172.49 | | | $ | 129.45 | | | $ | 144.16 | |
In determining whether improvements constitute landlord or tenant assets,our 2022 Annual Report on Form 10-K, we consider numerous factors that may require subjective or complex judgments, including, whetherused the economic substanceAll Equity REITs Index for purposes of comparing the lease terms is properly reflected and whetherperformance of our shares to an industry index of our peers. Effective for our 2023 Annual Report on Form 10-K, we changed the improvements: have value to us as real estate; are uniqueindustry index of our peers to the tenant or reusable by other tenants; mayOffice Sector Index as we believe it to be altered or removed bya closer representation of our business model than the tenant withoutbroader index we previously used. Since 2023 is the initial year for our consent or without compensating us for any lost fair value;change in the industry index of our peers, we are owned,presenting both of these indexes in the graph and remain, with us or the tenant at the end of the lease term.table included above.
Shares Authorized for Issuance Under Equity Compensation Plans
For the information required by Item 5 (a) related to shares authorized for issuance under equity compensation plan, you should refer to our definitive proxy statement relating to the 2024 Annual Meeting of our Shareholders to be filed with the
ConcentrationSecurities and Exchange Commission no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
(b) Not applicable
(c) None
Item 6. [Reserved]
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Customer Concentration of Property OperationsYou should refer to our consolidated financial statements and the notes thereto as you read this section.
The table below sets forthThis section contains “forward-looking” statements, as defined in the 20 largestPrivate Securities Litigation Reform Act of 1995, that are based on our current expectations, estimates and projections about future events and financial trends affecting the financial condition and operations of our business. Forward-looking statements can be identified by the use of words such as “may,” “will,” “should,” “could,” “believe,” “anticipate,” “expect,” “estimate,” “plan” or other comparable terminology. Forward-looking statements are inherently subject to risks and uncertainties, many of which we cannot predict with accuracy and some of which we might not even anticipate. Although we believe that the expectations, estimates and projections reflected in such forward-looking statements are based on reasonable assumptions at the time made, we can give no assurance that these expectations, estimates and projections will be achieved. Future events and actual results may differ materially from those discussed in the forward-looking statements. Important factors that may affect these expectations, estimates and projections include, but are not limited to:
>general economic and business conditions, which will, among other things, affect office property and data center demand and rents, tenant creditworthiness, interest rates, financing availability, property operating and construction costs, and property values;
>adverse changes in the real estate markets, including, among other things, increased competition with other companies;
>our ability to borrow on favorable terms;
>risks of property acquisition and development activities, including, among other things, risks that development projects may not be completed on schedule, that tenants may not take occupancy or pay rent or that development or operating costs may be greater than anticipated;
>risks of investing through joint venture structures, including risks that our joint venture partners may not fulfill their financial obligations as investors or may take actions that are inconsistent with our objectives;
>changes in our portfolioplans for properties or views of market economic conditions or failure to obtain development rights, either of which could result in recognition of significant impairment losses;
>potential impact of a prolonged government shutdowns or budgetary reductions or impasses, such as a reduction of rental revenues, non-renewal of leases and/or reduced or delayed demand for additional space by existing or new tenants;
>potential additional costs, such as capital improvements, fees and penalties, associated with environmental laws or regulations;
>adverse changes resulting from other government actions and initiatives, such as changes in taxation, zoning laws or other regulations.
>our ability to satisfy and operate effectively under federal income tax rules relating to real estate investment trusts and partnerships;
>the dilutive effects of issuing additional common shares; and
>security breaches relating to cyber attacks, cyber intrusions or other factors, and other significant disruptions of our information technology networks and related systems.
We undertake no obligation to publicly update or supplement forward-looking statements.
Overview
In 2023, we:
>experienced continued strong demand across our Defense/IT Portfolio segments that drove:
>strengthened occupancy of our operating properties, (including our officewith year-end occupancy and leased rates at near-record levels; and
>near-record tenant retention rates, at increased rent levels;
>continued growth through substantially pre-leased development, with space placed in service during the year that was virtually full and a pipeline of substantially pre-leased properties under development at year end;
>raised capital from a sale of interests in data center shell properties, and wholesale data center) based on percentage of annualized rental revenue:
| | | | | | | | | | | | | | | | | | | | |
| | Percentage of Annualized Rental
Revenue of Operating Properties
for 20 Largest Tenants as of December 31, |
| Tenant | | 2020 | | 2019 | | 2018 |
| USG | | 34.1 | % | | 34.6 | % | | 32.7 | % |
| Fortune 100 Company | | 9.1 | % | | 7.9 | % | | 8.9 | % |
| General Dynamics Corporation (1) | | 5.6 | % | | 4.9 | % | | 4.7 | % |
| The Boeing Company (1) | | 3.0 | % | | 3.2 | % | | 3.8 | % |
| CACI International Inc | | 2.4 | % | | 2.5 | % | | 2.4 | % |
| Northrop Grumman Corporation (1) | | 2.3 | % | | 2.2 | % | | 2.3 | % |
| CareFirst Inc. | | 2.0 | % | | 2.1 | % | | 2.2 | % |
| Booz Allen Hamilton, Inc. | | 2.0 | % | | 2.1 | % | | 2.0 | % |
| Wells Fargo & Company (1) | | 1.2 | % | | 1.3 | % | | 1.3 | % |
| AT&T Corporation (1) | | 1.1 | % | | 1.3 | % | | 0.7 | % |
| Miles and Stockbridge, PC | | 1.0 | % | | 1.1 | % | | 1.1 | % |
| Morrison & Foerster, LLP | | 1.0 | % | | N/A | | N/A |
| Raytheon Technologies Corporation (1) | | 1.0 | % | | 1.0 | % | | 1.1 | % |
| Yulista Holding, LLC | | 1.0 | % | | N/A | | N/A |
| Science Applications International Corp. (1) | | 0.9 | % | | 1.0 | % | | 1.3 | % |
| Jacobs Engineering Group Inc | | 0.9 | % | | 1.0 | % | | N/A |
| Transamerica Life Insurance Company | | 0.9 | % | | 0.9 | % | | 0.9 | % |
| University of Maryland | | 0.9 | % | | 1.2 | % | | 1.4 | % |
| The MITRE Corporation | | 0.8 | % | | 0.7 | % | | 0.8 | % |
| Mantech International Corp. | | 0.8 | % | | 0.7 | % | | N/A |
| Peraton Inc. | | N/A | | 0.9 | % | | N/A |
| Kratos Defense and Security Solutions (1) | | N/A | | 1.0 | % | | 1.0 | % |
| KEYW Corporation | | N/A | | N/A | | 1.0 | % |
| International Business Machines Corp. | | N/A | | N/A | | 0.7 | % |
| Accenture Federal Services, LLC | | N/A | | N/A | | 0.7 | % |
| Subtotal of 20 largest tenants | | 72.0 | % | | 71.6 | % | | 71.0 | % |
| All remaining tenants | | 28.0 | % | | 28.4 | % | | 29.0 | % |
| Total | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Total annualized rental revenue | | $ | 571,035 | | | $ | 525,338 | | | $ | 522,898 | |
(1)>Includes affiliated organizations.opportunistically issued debt through a private placement to pre-fund the expected borrowings needed to fund our forecasted development activities for most of the next three years; and
>ended the year with no significant debt maturing until 2026, most of our Revolving Credit Facility’s borrowing capacity available and significant cash balances on hand.
The USG’s concentration decreasedStrong demand from 2019 to 2020 due primarily to new properties placedour Defense/IT Portfolio drove increased property occupancy that more than offset the continuing effects of lagging demand in serviceour Other segment. Our strengthened operating property occupancy in which it is not a tenant.2023 included increases in:
>total portfolio year-end occupancy rate from 92.7% to 94.2%, with a year-end leased rate of 95.3%;
>Defense/IT Portfolio year-end occupancy rate from 94.1% to 96.2%, with a year-end leased rate of 97.2%;
Concentration>Same Property year-end occupancy rate from 92.0% to 93.4%, with a year-end leased rate of Office94.7% for our Same Properties in total and Data Center Shell Properties by Segment96.8% for the Defense/IT Portfolio component; and
>average Same Property occupancy from 91.6% to 92.7%, and from 92.9% to 94.7% for the Defense/IT Portfolio component.
The table below sets forthWe also in 2023 achieved a tenant retention rate of 79.7% for the portfolio, and 85.7% for our Defense/IT Portfolio segment, allocationwhich were near record levels. Our increased occupancy and leased rates were attributable primarily to our strong tenant retention coupled with the effects of our vacant space leasing efforts.
Defense/IT Portfolio demand also continued to feed growth in our portfolio through property development. In 2023, our Defense/IT Portfolio:
>placed into service 848,000 square feet in six properties that were 98% leased, mostly in our Data Center Shells, Redstone Arsenal and Fort Meade/BW Corridor sub-segments; and
>ended the year with 817,000 square feet under development in an additional five properties that were 91% leased, three of which were scheduled to be placed in service in 2024. Our properties under development included three data center shells and two properties in Redstone Arsenal.
We believe that our Defense/IT Portfolio has strongly benefited from continued:
>defense budget appropriation increases, with bipartisan support, and without extended delays in appropriations in recent years. As global threats to our national security and that of our allies continue to evolve and, in some cases, escalate, we believe that defense spending for the critical missions that our portfolio supports, such as intelligence, surveillance and cyber, will continue to be considered vital for the foreseeable future. However, future leasing demand could be delayed or diminish if this bipartisan support does not continue or if appropriations legislation to fund approved defense budgets faces extended delays (including the USG’s 2024 fiscal year defense budget, which was authorized but was awaiting appropriations as of the date of this filing); and
>demand for data center shells in Northern Virginia, one of the largest data center markets in the world. We believe that our properties in operations and undergoing development in this sub-segment will continue to benefit from strong demand through high tenant retention, with renewals at increased rental rates. However, as of December 31, 2023, we did not have additional land under control in Northern Virginia for the future development of data center shells. As a result, our ability to continue to develop data center shells, as we have for the past decade, may be limited.
As of December 31, 2023, we had scheduled lease expirations for 2.6 million square feet in 2024, representing 11.5% of our total occupied square feet and 12.8% of our total annualized rental revenue, including:
>2.4 million square feet in our Defense/IT Portfolio segment, a high proportion of officewhich we expect to renew; and
>161,000 square feet in our Other segment, most of which we do not expect to renew.
Please refer to the section below entitled “Occupancy and Leasing” for additional related disclosure.
On January 10, 2023, we raised $190.2 million in capital from our sale of a 90% interest in three data center shell properties asin Northern Virginia, resulting in a gain on sale of $49.4 million. We retained a 10% interest in the properties through a newly-formed joint venture. We used substantially all of the end of the last three calendar years:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Percentage of Annualized Rental Revenue of Office and Data Center Shell Properties as of December 31, | | Number of Properties as of December 31, |
| Region | | 2020 | | 2019 | | 2018 | | 2020 | | 2019 | | 2018 |
| Defense/IT Locations: | | | | | | | | | | | | |
| Fort Meade/BW Corridor | | 47.5 | % | | 51.3 | % | | 49.5 | % | | 89 | | | 88 | | | 87 | |
| Northern Virginia Defense/IT | | 11.2 | % | | 10.9 | % | | 12.0 | % | | 13 | | | 13 | | | 13 | |
| Lackland Air Force Base | | 9.8 | % | | 10.5 | % | | 10.3 | % | | 7 | | | 7 | | | 7 | |
| Navy Support Locations | | 6.3 | % | | 6.5 | % | | 6.3 | % | | 21 | | | 21 | | | 21 | |
| Redstone Arsenal | | 5.6 | % | | 3.5 | % | | 2.8 | % | | 15 | | | 10 | | | 8 | |
| Data Center Shells | | 6.6 | % | | 5.3 | % | | 7.0 | % | | 26 | | | 22 | | | 18 | |
| Total Defense/IT Locations | | 87.0 | % | | 87.9 | % | | 87.9 | % | | 171 | | | 161 | | | 154 | |
| Regional Office | | 12.5 | % | | 11.5 | % | | 11.5 | % | | 8 | | | 7 | | | 7 | |
| Other | | 0.5 | % | | 0.6 | % | | 0.6 | % | | 2 | | | 2 | | | 2 | |
| | 100.0 | % | | 100.0 | % | | 100.0 | % | | 181 | | | 170 | | | 163 | |
ForOn September 12, 2023, we issued $345.0 million aggregate principal amount of 5.25% Exchangeable Senior Notes due 2028 (the “5.25% Notes”) in a private placement to persons reasonably believed to be qualified institutional buyers pursuant to Rule 144A under the changesSecurities Act of 1933, as amended (the "Securities Act"). While we were previously anticipating issuing debt through the capital markets in revenue concentration reflected above between year end 2019 and 2020, the increase in Redstone Arsenal, Data Center Shells and Regional Office waslate-2024, due to new, fully-occupied propertieswhat we considered to be a potentially challenging capital environment, we opportunistically completed this issuance to remove future execution and debt-pricing risk, while pre-funding and creating capacity under our Revolving Credit Facility for the expected borrowings needed to fund our forecasted development activities for most of the next three years. The proceeds from this issuance, after deducting the initial purchasers’ commissions, but before other offering expenses, were $336.4 million. The net proceeds from the notes were primarily used for general corporate purposes, including repayment of borrowings under our Revolving Credit Facility and pre-funding of future development investments, which resulted in a portion of the net proceeds being placedinvested in service, while the decrease in Fort Meade/BW Corridor was due to the effect of increases in other segments coupled with a decrease in that segment’s occupancy.short-term interest-bearing money market accounts pending such use.
Occupancy and Leasing
Office and Data Center Shell Portfolio
The tables below set forth occupancy information pertaining to our portfolioAs of office and data center shell properties:
| | | | | | | | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 | | 2018 |
| Occupancy rates at period end | | | | | |
| Total | 94.1 | % | | 92.9 | % | | 93.0 | % |
| Defense/IT Locations: | | | | | |
| Fort Meade/BW Corridor | 91.0 | % | | 92.4 | % | | 91.1 | % |
| Northern Virginia Defense/IT | 88.1 | % | | 82.4 | % | | 91.3 | % |
| Lackland Air Force Base | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Navy Support Locations | 97.2 | % | | 92.5 | % | | 90.5 | % |
| Redstone Arsenal | 99.4 | % | | 99.3 | % | | 99.0 | % |
| Data Center Shells | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Total Defense/IT Locations | 94.5 | % | | 93.7 | % | | 93.6 | % |
| Regional Office | 92.5 | % | | 88.1 | % | | 89.2 | % |
| Other | 68.4 | % | | 73.0 | % | | 77.2 | % |
| Average contractual annualized rental rate per square foot at year end (1) | $ | 31.50 | | | $ | 31.28 | | | $ | 30.41 | |
(1)>Includes estimated expense reimbursements.no significant debt maturing until 2026;
>$525.0 million in available borrowing capacity under our Revolving Credit Facility;
>no variable-rate debt exposure expected until late-2024, including the effect of interest rate swaps;
>only 4.1% of our outstanding debt encumbered by properties; and
| | | | | | | | | | | |
| Rentable
Square Feet | | Occupied
Square Feet |
| | (in thousands) |
| December 31, 2019 | 19,173 | | | 17,816 | |
| Vacated upon lease expiration (1) | — | | | (463) | |
| Occupancy for new leases | — | | | 567 | |
| Developed or redeveloped | 1,823 | | | 1,802 | |
| | | |
| | | |
| Other changes | (37) | | | — | |
| December 31, 2020 | 20,959 | | | 19,722 | |
(1)>Includes lease terminations and space reductions occurring$167.8 million in connection with lease renewals.
With regard to changes in occupancy from December 31, 2019 to December 31, 2020:
•Total: Increase was due primarily to placing into service 1.8 million square feet in space that was 99.5% leased as of December 31, 2020;
•Fort Meade/BW Corridor: Decrease was due primarily to vacated space, resulting in a 70.8% retention rate in 2020;
•Northern Virginia Defense/IT, Navy Support Locations and Regional Office: Increases each due to vacant space leasing; and
•Other: Included two properties totaling 157,000 square feet in Aberdeen, Maryland.cash on hand.
In 2020, we leased 3.6 million square feet, including 1.0 million square feet2023, the United States economy experienced inflationary conditions, increased interest rates, higher volatility in the debt and equity capital markets and certain supply-chain related shortages that, coupled with increased prevalence of remote- and flexible-work arrangements in recent years, adversely affected the United States office real estate industry. For us:
>the above conditions have not significantly affected our ability to achieve expected leasing in our Defense/IT Portfolio, although the properties in our Other segment continue to experience a challenging leasing environment that has not improved;
>inflationary conditions have contributed to increased costs for certain property operating expenses and building equipment and materials, which affects our development of new properties and improvements for existing properties. For:
>property operating expenses, most of our leases obligate tenants to pay either their full share of a building’s operating expenses or their share to the extent such expenses exceed amounts established in their leases. These lease arrangements reduce our exposure to increases in property operating expenses;
>new property development and redevelopmenttenant improvements associated with new leasing in our Defense/IT Portfolio, increased costs have not significantly affected our ability to achieve targeted yields due to continued strong demand for space, discussedwhich has generally enabled us to increase rents to maintain such yields. However, continued cost increases could adversely affect our ability to continue to achieve targeted yields on future new property development and future new leasing of our existing properties to the extent increases in further detail above.market rental rates do not keep pace; this could also reduce our willingness to develop, or our tenants’ willingness to commit to leasing, new properties; and
>other capital improvements, the increasing cost environment could affect our willingness, or timeline, for completing such improvements;
>we observed uncertainty in the debt markets in 2023 both in terms of availability and pricing, particularly for commercial real estate. Due to this uncertainty, we chose to issue our 5.25% Notes to remove future execution and debt-pricing risk by pre-funding and creating capacity under our Revolving Credit Facility for the expected borrowings needed to fund forecasted future development activities;
>the effects of increased interest rates were limited to a certain extent since our debt is predominantly fixed rate and in the form of long-term unsecured notes that we issued prior to 2022. Notable effects include the following:
>for variable-rate loans, we use interest rate swaps to hedge the effect of interest rate changes. We had interest rate swaps for a $200.0 million notional amount that fixed the one-month LIBOR interest rate in 2022 at 1.9% through December 1, 2022; and, effective February 1, 2023, fixed the one-month SOFR interest rate at 3.7% for a three-year term;
>for the 5.25% Notes issuance, the interest rate was higher than our previous senior notes issuance in November 2021; and
>for net proceeds resulting from the 5.25% Notes issuance that we invested in short-term money market accounts pending use for future development activities, elevated U.S. Treasury Rates in 2023 enabled us to realize interest income at rates slightly in excess of the debt issuance rate; and
>both our operating and development activities experienced supply-chain related shortages in 2023 that, due in large part to our anticipatory efforts, did not significantly affect our ability to execute such activities.
In 2020,addition, we renewed leases on 2.2 million square feet, representing 80.6% of the square footage ofowned eight office properties in our lease expirations (including the effect of early renewals). The annualized rents of these renewals (totaling $28.35 per square foot) decreased on average by approximately 2.1% and the GAAP rents (totaling $28.45 per square foot) increased on average by approximately 6.5% relative to the leases previously in place for the space. The renewed leases had a weighted average lease term of approximately 4.2 years, with average rent escalations per year of 2.4%, and the per annum average estimated tenant improvements and lease costs associated with completing the leasing was approximately $2.03 per square foot. The decrease in average rents on renewals was attributable primarily to per annum rent escalation terms of the previous leases that increased rents over the lease terms by amounts exceeding the increases in the applicable market rental rates.
In 2020, we also completed leasing on 416,000 square feet of vacant space. The annualized rents of this leasing totaled $31.32 per square foot and the GAAP rents totaled $32.36 per square foot; these leases had a weighted average lease term of approximately 6.2 years, with average rent escalations per year of 2.8%, and the per annum average estimated tenant improvements and lease costs associated with completing this leasing was approximately $7.33 per square foot.
Wholesale Data Center
Our 19.25 megawatt wholesale data center was 86.7% leasedOther segment as of December 31, 20202023 that we do not consider strategic holdings since they do not align with our Defense/IT strategy. We intend to sell these properties when we believe that market conditions and 76.9% leased asopportunities position us to optimize our return on investment. However, we did not initiate plans for sales of December 31, 2019, reflecting anthese properties in 2023 due in part to the anticipated effects of increased interest rates and debt availability on potential buyers.
For our 2023 results of operations:
>our diluted earnings per share decreased from $1.53 per share in 2022 to a loss per share of $(0.67) in 2023, and our net income decreased from $178.8 million in 2022 to a loss of $(74.3) million in 2023 due primarily to $252.8 million in impairment losses that we recognized in 2023. We recognized these impairment losses on: six operating properties in our Other segment after shortening their expected holding periods; and a parcel of other land that we controlled;
>net operating income (“NOI”) from real estate operations, our segment performance measure, increased $21.8 million, or 6.0%, relative to 2022. This change was comprised primarily of:
>a $26.4 million increase from newly-developed properties placed in service; and
>a $10.5 million increase from our leasingSame Properties, which included the effect of 3.1 megawattsincreased occupancy in April 2020. We have our Defense/IT Portfolio; offset in part by
>a lease$15.1 million decrease from property dispositions; and
>diluted funds from operations per share, as adjusted for 11.25 megawatts perpetually renewingcomparability increased 2.5% and the numerator for that may be terminatedmeasure increased $6.9 million, or 2.6%, relative to 2022, due primarily to increased NOI from real estate operations in 2023, offset in part by either party with six months’ notice.higher interest expense.
Additional disclosure comparing our 2023 and 2022 results of operations is provided below.
We discuss significant factors contributing to changes in our net income between 2023 and 2022 in the section below entitled “Results of Operations.” In addition, the section below entitled “Liquidity and Capital Resources” includes discussions of, among other things:
>how we expect to generate and obtain cash for short and long-term capital needs; and
>material cash requirements for known contractual and other obligations.
We refer to the measures “annualized rental revenue” and “tenant retention rate” in various sections of the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this Annual Report on Form 10-K. Annualized rental revenue is a measure that we use to evaluate the source of our rental revenue as of a point in time. It is computed by multiplying by 12 the sum of monthly contractual base rents and estimated monthly expense reimbursements under active leases as of a point in time (ignoring free rent then in effect and rent associated with tenant funded landlord assets). Our computation of annualized rental revenue excludes the effect of lease incentives. We consider annualized rental revenue to be a useful measure for analyzing revenue sources because, since it is point-in-time based, it does not contain increases and decreases in revenue associated with periods in which lease terms were not in effect; historical revenue under generally accepted accounting principles in the United States of America (“GAAP”) does contain such fluctuations. We find the measure particularly useful for leasing, tenant, segment and industry analysis. Tenant retention rate is a measure we use that represents the percentage of square feet renewed in a period relative to the total square feet scheduled to expire in that period; we include the effect of early renewals in this measure.
We also refer to the measures “cash rents”, “straight-line rents”, and “committed costs” in the “Occupancy and Leasing” section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this Annual Report on Form 10-K. Cash rents include monthly contractual base rent (ignoring rent abatements and rent associated with tenant funded landlord assets) multiplied by 12, plus estimated annualized expense reimbursements (average for first 12 months of term for new or renewed leases or as of lease expiration for expiring leases). Straight-line rents include annual minimum base rents, net of abatements and lease incentives and excluding rent associated with tenant funded landlord assets, on a straight-line basis over the term of the lease, and estimated annual expense reimbursements (as of lease commencement for new or renewed leases or as of lease expiration for expiring leases). We believe that cash rents and straight-line rents are useful measures for evaluating the rental rates of our leasing activity, including changes in such rates relative to rates that may have been previously in place, with cash rents serving as a measure to evaluate rents at the time rent payments commence, and straight-line rents serving as a measure to evaluate rents over the related lease terms. Committed costs includes tenant improvement allowances (excluding tenant funded landlord assets), leasing commissions and estimated turn key costs and excludes lease incentives; we believe this is a useful measure for evaluating our costs associated with obtaining new leases.
With regard to our operating portfolio square footage, occupancy and leasing statistics included below and elsewhere in this Annual Report on Form 10-K, amounts disclosed include total information pertaining to properties owned through unconsolidated real estate joint ventures except for amounts reported for annualized rental revenue, which represent the portion attributable to our ownership interest.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with GAAP, which require us to make certain estimates and assumptions. A summary of our significant accounting policies is provided in Note 2 to our consolidated financial statements. The following section is a summary of certain aspects of those accounting policies involving estimates or assumptions that (1) involve a significant level of estimation uncertainty and (2) have had or are reasonably likely to have a material impact on our financial condition or results of operations. It is possible that the use of different reasonable estimates or assumptions could result in materially different amounts being reported in our consolidated financial statements. While reviewing this section, refer to Note 2 to our consolidated financial statements, including terms defined therein.
Assessment of Lease Term as Lessor
As discussed above, a significant portion of our portfolio is leased to the USG, and the majority of those leases provide for one-year terms, with a series of one-year renewal options (with defined rent escalations upon renewal), and/or provide for early termination rights. Applicable accounting guidance requires us to recognize minimum rental payments on operating leases, net of rent abatements, on a straight-line basis over the term of each lease. We estimate a tenant’s lease term at the lease commencement date and do not subsequently reassess such term unless the lease is modified. When estimating a tenant’s lease term, we use judgment in contemplating the significance of: any penalties a tenant may incur should it choose not to exercise any existing options to extend the lease or exercise any existing options to terminate the lease; and economic incentives to the tenant based on any existing contract, asset, entity or market-based factors associated with the lease. Factors we consider in making this assessment include the uniqueness of the purpose or location of the property, the availability of a comparable replacement property, the relative importance or significance of the property to the continuation of the lessee’s line of business and the existence of tenant leasehold improvements or other assets whose value would be impaired by the tenant vacating or discontinuing use of the leased property. For most of our leases with the USG, our estimates of lease term conclude
that exercise of existing renewal options, or continuation of such leases without exercising early termination rights, is reasonably certain as it relates to the expected lease end date. As a result, our recognition of minimum rents on these leases includes the effect of annual rent escalations over our estimate of the lease term (including on one-year renewal options) and our depreciation and amortization of costs incurred on these leases is recognized over the lease term. An over-estimate of the term of these leases by us could result in the write-off of any recorded assets associated with straight-line rental revenue and acceleration of depreciation and amortization expense associated with costs we incurred related to these leases. We had no significant USG leases with lease terms determined to have been over-estimated during the reporting periods included herein.
Lease Expirations
The following table provides a summary schedule of lease expirations for leases in place at our operating properties as of December 31, 2023 based on the non-cancelable term of tenant leases determined in accordance with generally accepted accounting principles (dollars and square feet in thousands, except per square foot amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year of Lease Expiration | | | | Square Footage of Leases Expiring | | Annualized Rental Revenue of Expiring Leases (1) | | Percentage of Total Annualized Rental Revenue Expiring (1) | | Total Annualized Rental Revenue of Expiring Leases Per Occupied Square Foot (1) |
| | | | | | | | | | |
| 2024 | | | | 2,576 | | | $ | 82,599 | | | 12.8 | % | | $ | 35.92 | |
| 2025 | | | | 3,645 | | | 145,662 | | | 22.5 | % | | $ | 39.51 | |
| 2026 | | | | 1,959 | | | 61,398 | | | 9.5 | % | | $ | 39.41 | |
| 2027 | | | | 1,714 | | | 49,383 | | | 7.6 | % | | $ | 35.59 | |
| 2028 | | | | 2,418 | | | 64,392 | | | 10.0 | % | | $ | 32.92 | |
| 2029 | | | | 2,321 | | | 52,455 | | | 8.1 | % | | $ | 30.72 | |
| 2030 | | | | 1,320 | | | 29,624 | | | 4.6 | % | | $ | 28.51 | |
| 2031 | | | | 959 | | | 16,649 | | | 2.6 | % | | $ | 29.19 | |
| 2032 | | | | 230 | | | 7,209 | | | 1.1 | % | | $ | 31.30 | |
| 2033 | | | | 646 | | | 22,836 | | | 3.5 | % | | $ | 35.37 | |
| 2034 | | | | 1,438 | | | 32,661 | | | 5.1 | % | | $ | 29.46 | |
| 2035 | | | | 1,080 | | | 33,217 | | | 5.1 | % | | $ | 30.75 | |
| 2036 | | | | 1,010 | | | 9,908 | | | 1.5 | % | | $ | 29.44 | |
| 2037 | | | | 102 | | | 9,573 | | | 1.5 | % | | $ | 92.86 | |
| 2038 | | | | 569 | | | 14,207 | | | 2.2 | % | | $ | 24.96 | |
| 2039 | | | | 483 | | | 9,786 | | | 1.5 | % | | $ | 20.25 | |
| 2041 (2) | | | | — | | | 4,841 | | | 0.8 | % | | N/A |
| | | | | | | | | | |
| 2063 (2) | | | | — | | | 135 | | | — | % | | N/A |
| 2072 (2) | | | | — | | | 125 | | | — | % | | N/A |
| Total | | | | 22,470 | | | $ | 646,660 | | | 100.0 | % | | $ | 34.14 | |
| | | | | | | | | | |
(1)Refer to definition provided on first page of Item 2 of this Annual Report on Form 10-K.
(2)Includes only ground leases.
With regard to the leases reported above as expiring in 2024, we believe that the weighted average annualized rental revenue per occupied square foot for such leases as of December 31, 2023, on average, approximated estimated current market rents for the related space, with specific results varying by market.
Item 3. Legal Proceedings
We are not currently involved in any material litigation nor, to our knowledge, is any material litigation currently threatened against us (other than routine litigation arising in the ordinary course of business, substantially all of which is expected to be covered by liability insurance).
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
(a) In September 2023, the ticker symbol under which our common shares are publicly traded on the New York Stock Exchange (“NYSE”) changed from “OFC” to “CDP”. The number of holders of record of our common shares was 439 as of February 7, 2024.This number does not include shareholders whose shares were held of record by a brokerage house or clearing agency, but does include any such brokerage house or clearing agency as one record holder.
Common Shares Performance Graph
The graph and the table set forth below assume $100 was invested on December 31, 2018 in our common shares. The graph and the table compare the cumulative return (assuming reinvestment of dividends) of this investment with a $100 investment at that time in the S&P 500 Index, the FTSE All Equity REITs Index of the National Association of Real Estate Investment Trusts (“Nareit”) (the “All Equity REITs Index”) and the Office Property Sector of the FTSE All Equity REITs Index of Nareit (the “Office Sector Index”):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Period Ended |
| Index | | 12/31/18 | | 12/31/19 | | 12/31/20 | | 12/31/21 | | 12/31/22 | | 12/31/23 |
| COPT Defense Properties | | $ | 100.00 | | | $ | 145.23 | | | $ | 134.90 | | | $ | 150.59 | | | $ | 145.69 | | | $ | 150.89 | |
| S&P 500 Index | | $ | 100.00 | | | $ | 131.49 | | | $ | 155.68 | | | $ | 200.37 | | | $ | 164.08 | | | $ | 207.21 | |
| Office Property Sector of FTSE Nareit All Equity REITs Index | | $ | 100.00 | | | $ | 131.42 | | | $ | 107.19 | | | $ | 130.77 | | | $ | 81.58 | | | $ | 83.23 | |
| FTSE Nareit All Equity REITs Index | | $ | 100.00 | | | $ | 128.66 | | | $ | 122.07 | | | $ | 172.49 | | | $ | 129.45 | | | $ | 144.16 | |
In our 2022 Annual Report on Form 10-K, we used the All Equity REITs Index for purposes of comparing the performance of our shares to an industry index of our peers. Effective for our 2023 Annual Report on Form 10-K, we changed the industry index of our peers to the Office Sector Index as we believe it to be a closer representation of our business model than the broader index we previously used. Since 2023 is the initial year for our change in the industry index of our peers, we are presenting both of these indexes in the graph and table included above.
Shares Authorized for Issuance Under Equity Compensation Plans
For the information required by Item 5 (a) related to shares authorized for issuance under equity compensation plan, you should refer to our definitive proxy statement relating to the 2024 Annual Meeting of our Shareholders to be filed with the
Securities and Exchange Commission no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
(b) Not applicable
(c) None
Item 6. [Reserved]
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
You should refer to our consolidated financial statements and the notes thereto as you read this section.
This section contains “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995, that are based on our current expectations, estimates and projections about future events and financial trends affecting the financial condition and operations of our business. Forward-looking statements can be identified by the use of words such as “may,” “will,” “should,” “could,” “believe,” “anticipate,” “expect,” “estimate,” “plan” or other comparable terminology. Forward-looking statements are inherently subject to risks and uncertainties, many of which we cannot predict with accuracy and some of which we might not even anticipate. Although we believe that the expectations, estimates and projections reflected in such forward-looking statements are based on reasonable assumptions at the time made, we can give no assurance that these expectations, estimates and projections will be achieved. Future events and actual results may differ materially from those discussed in the forward-looking statements. Important factors that may affect these expectations, estimates and projections include, but are not limited to:
>general economic and business conditions, which will, among other things, affect office property and data center demand and rents, tenant creditworthiness, interest rates, financing availability, property operating and construction costs, and property values;
>adverse changes in the real estate markets, including, among other things, increased competition with other companies;
>our ability to borrow on favorable terms;
>risks of property acquisition and development activities, including, among other things, risks that development projects may not be completed on schedule, that tenants may not take occupancy or pay rent or that development or operating costs may be greater than anticipated;
>risks of investing through joint venture structures, including risks that our joint venture partners may not fulfill their financial obligations as investors or may take actions that are inconsistent with our objectives;
>changes in our plans for properties or views of market economic conditions or failure to obtain development rights, either of which could result in recognition of significant impairment losses;
>potential impact of a prolonged government shutdowns or budgetary reductions or impasses, such as a reduction of rental revenues, non-renewal of leases and/or reduced or delayed demand for additional space by existing or new tenants;
>potential additional costs, such as capital improvements, fees and penalties, associated with environmental laws or regulations;
>adverse changes resulting from other government actions and initiatives, such as changes in taxation, zoning laws or other regulations.
>our ability to satisfy and operate effectively under federal income tax rules relating to real estate investment trusts and partnerships;
>the dilutive effects of issuing additional common shares; and
>security breaches relating to cyber attacks, cyber intrusions or other factors, and other significant disruptions of our information technology networks and related systems.
We undertake no obligation to publicly update or supplement forward-looking statements.
Overview
In 2023, we:
>experienced continued strong demand across our Defense/IT Portfolio segments that drove:
>strengthened occupancy of our operating properties, with year-end occupancy and leased rates at near-record levels; and
>near-record tenant retention rates, at increased rent levels;
>continued growth through substantially pre-leased development, with space placed in service during the year that was virtually full and a pipeline of substantially pre-leased properties under development at year end;
>raised capital from a sale of interests in data center shell properties, using the proceeds to create borrowing capacity to fund future development activities;
>opportunistically issued debt through a private placement to pre-fund the expected borrowings needed to fund our forecasted development activities for most of the next three years; and
>ended the year with no significant debt maturing until 2026, most of our Revolving Credit Facility’s borrowing capacity available and significant cash balances on hand.
Strong demand from our Defense/IT Portfolio drove increased property occupancy that more than offset the continuing effects of lagging demand in our Other segment. Our strengthened operating property occupancy in 2023 included increases in:
>total portfolio year-end occupancy rate from 92.7% to 94.2%, with a year-end leased rate of 95.3%;
>Defense/IT Portfolio year-end occupancy rate from 94.1% to 96.2%, with a year-end leased rate of 97.2%;
>Same Property year-end occupancy rate from 92.0% to 93.4%, with a year-end leased rate of 94.7% for our Same Properties in total and 96.8% for the Defense/IT Portfolio component; and
>average Same Property occupancy from 91.6% to 92.7%, and from 92.9% to 94.7% for the Defense/IT Portfolio component.
We also in 2023 achieved a tenant retention rate of 79.7% for the portfolio, and 85.7% for our Defense/IT Portfolio segment, which were near record levels. Our increased occupancy and leased rates were attributable primarily to our strong tenant retention coupled with the effects of our vacant space leasing efforts.
Defense/IT Portfolio demand also continued to feed growth in our portfolio through property development. In 2023, our Defense/IT Portfolio:
>placed into service 848,000 square feet in six properties that were 98% leased, mostly in our Data Center Shells, Redstone Arsenal and Fort Meade/BW Corridor sub-segments; and
>ended the year with 817,000 square feet under development in an additional five properties that were 91% leased, three of which were scheduled to be placed in service in 2024. Our properties under development included three data center shells and two properties in Redstone Arsenal.
We believe that our Defense/IT Portfolio has strongly benefited from continued:
>defense budget appropriation increases, with bipartisan support, and without extended delays in appropriations in recent years. As global threats to our national security and that of our allies continue to evolve and, in some cases, escalate, we believe that defense spending for the critical missions that our portfolio supports, such as intelligence, surveillance and cyber, will continue to be considered vital for the foreseeable future. However, future leasing demand could be delayed or diminish if this bipartisan support does not continue or if appropriations legislation to fund approved defense budgets faces extended delays (including the USG’s 2024 fiscal year defense budget, which was authorized but was awaiting appropriations as of the date of this filing); and
>demand for data center shells in Northern Virginia, one of the largest data center markets in the world. We believe that our properties in operations and undergoing development in this sub-segment will continue to benefit from strong demand through high tenant retention, with renewals at increased rental rates. However, as of December 31, 2023, we did not have additional land under control in Northern Virginia for the future development of data center shells. As a result, our ability to continue to develop data center shells, as we have for the past decade, may be limited.
As of December 31, 2023, we had scheduled lease expirations for 2.6 million square feet in 2024, representing 11.5% of our total occupied square feet and 12.8% of our total annualized rental revenue, including:
>2.4 million square feet in our Defense/IT Portfolio segment, a high proportion of which we expect to renew; and
>161,000 square feet in our Other segment, most of which we do not expect to renew.
Please refer to the section below entitled “Occupancy and Leasing” for additional related disclosure.
On January 10, 2023, we raised $190.2 million in capital from our sale of a 90% interest in three data center shell properties in Northern Virginia, resulting in a gain on sale of $49.4 million. We retained a 10% interest in the properties through a newly-formed joint venture. We used substantially all of the proceeds from this sale to pay down our Revolving Credit Facility to create additional borrowing capacity available to fund future development.
On September 12, 2023, we issued $345.0 million aggregate principal amount of 5.25% Exchangeable Senior Notes due 2028 (the “5.25% Notes”) in a private placement to persons reasonably believed to be qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"). While we were previously anticipating issuing debt through the capital markets in late-2024, due to what we considered to be a potentially challenging capital environment, we opportunistically completed this issuance to remove future execution and debt-pricing risk, while pre-funding and creating capacity under our Revolving Credit Facility for the expected borrowings needed to fund our forecasted development activities for most of the next three years. The proceeds from this issuance, after deducting the initial purchasers’ commissions, but before other offering expenses, were $336.4 million. The net proceeds from the notes were primarily used for general corporate purposes, including repayment of borrowings under our Revolving Credit Facility and pre-funding of future development investments, which resulted in a portion of the net proceeds being invested in short-term interest-bearing money market accounts pending such use.
As of December 31, 2023, we ended the year, with:
>no significant debt maturing until 2026;
>$525.0 million in available borrowing capacity under our Revolving Credit Facility;
>no variable-rate debt exposure expected until late-2024, including the effect of interest rate swaps;
>only 4.1% of our outstanding debt encumbered by properties; and
>$167.8 million in cash on hand.
In 2023, the United States economy experienced inflationary conditions, increased interest rates, higher volatility in the debt and equity capital markets and certain supply-chain related shortages that, coupled with increased prevalence of remote- and flexible-work arrangements in recent years, adversely affected the United States office real estate industry. For us:
>the above conditions have not significantly affected our ability to achieve expected leasing in our Defense/IT Portfolio, although the properties in our Other segment continue to experience a challenging leasing environment that has not improved;
>inflationary conditions have contributed to increased costs for certain property operating expenses and building equipment and materials, which affects our development of new properties and improvements for existing properties. For:
>property operating expenses, most of our leases obligate tenants to pay either their full share of a building’s operating expenses or their share to the extent such expenses exceed amounts established in their leases. These lease arrangements reduce our exposure to increases in property operating expenses;
>new property development and tenant improvements associated with new leasing in our Defense/IT Portfolio, increased costs have not significantly affected our ability to achieve targeted yields due to continued strong demand for space, which has generally enabled us to increase rents to maintain such yields. However, continued cost increases could adversely affect our ability to continue to achieve targeted yields on future new property development and future new leasing of our existing properties to the extent increases in market rental rates do not keep pace; this could also reduce our willingness to develop, or our tenants’ willingness to commit to leasing, new properties; and
>other capital improvements, the increasing cost environment could affect our willingness, or timeline, for completing such improvements;
>we observed uncertainty in the debt markets in 2023 both in terms of availability and pricing, particularly for commercial real estate. Due to this uncertainty, we chose to issue our 5.25% Notes to remove future execution and debt-pricing risk by pre-funding and creating capacity under our Revolving Credit Facility for the expected borrowings needed to fund forecasted future development activities;
>the effects of increased interest rates were limited to a certain extent since our debt is predominantly fixed rate and in the form of long-term unsecured notes that we issued prior to 2022. Notable effects include the following:
>for variable-rate loans, we use interest rate swaps to hedge the effect of interest rate changes. We had interest rate swaps for a $200.0 million notional amount that fixed the one-month LIBOR interest rate in 2022 at 1.9% through December 1, 2022; and, effective February 1, 2023, fixed the one-month SOFR interest rate at 3.7% for a three-year term;
>for the 5.25% Notes issuance, the interest rate was higher than our previous senior notes issuance in November 2021; and
>for net proceeds resulting from the 5.25% Notes issuance that we invested in short-term money market accounts pending use for future development activities, elevated U.S. Treasury Rates in 2023 enabled us to realize interest income at rates slightly in excess of the debt issuance rate; and
>both our operating and development activities experienced supply-chain related shortages in 2023 that, due in large part to our anticipatory efforts, did not significantly affect our ability to execute such activities.
In addition, we owned eight office properties in our Other segment as of December 31, 2023 that we do not consider strategic holdings since they do not align with our Defense/IT strategy. We intend to sell these properties when we believe that market conditions and opportunities position us to optimize our return on investment. However, we did not initiate plans for sales of these properties in 2023 due in part to the anticipated effects of increased interest rates and debt availability on potential buyers.
For our 2023 results of operations:
>our diluted earnings per share decreased from $1.53 per share in 2022 to a loss per share of $(0.67) in 2023, and our net income decreased from $178.8 million in 2022 to a loss of $(74.3) million in 2023 due primarily to $252.8 million in impairment losses that we recognized in 2023. We recognized these impairment losses on: six operating properties in our Other segment after shortening their expected holding periods; and a parcel of other land that we controlled;
>net operating income (“NOI”) from real estate operations, our segment performance measure, increased $21.8 million, or 6.0%, relative to 2022. This change was comprised primarily of:
>a $26.4 million increase from newly-developed properties placed in service; and
>a $10.5 million increase from our Same Properties, which included the effect of increased occupancy in our Defense/IT Portfolio; offset in part by
>a $15.1 million decrease from property dispositions; and
>diluted funds from operations per share, as adjusted for comparability increased 2.5% and the numerator for that measure increased $6.9 million, or 2.6%, relative to 2022, due primarily to increased NOI from real estate operations in 2023, offset in part by higher interest expense.
Additional disclosure comparing our 2023 and 2022 results of operations is provided below.
We discuss significant factors contributing to changes in our net income between 2023 and 2022 in the section below entitled “Results of Operations.” In addition, the section below entitled “Liquidity and Capital Resources” includes discussions of, among other things:
>how we expect to generate and obtain cash for short and long-term capital needs; and
>material cash requirements for known contractual and other obligations.
We refer to the measures “annualized rental revenue” and “tenant retention rate” in various sections of the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this Annual Report on Form 10-K. Annualized rental revenue is a measure that we use to evaluate the source of our rental revenue as of a point in time. It is computed by multiplying by 12 the sum of monthly contractual base rents and estimated monthly expense reimbursements under active leases as of a point in time (ignoring free rent then in effect and rent associated with tenant funded landlord assets). Our computation of annualized rental revenue excludes the effect of lease incentives. We consider annualized rental revenue to be a useful measure for analyzing revenue sources because, since it is point-in-time based, it does not contain increases and decreases in revenue associated with periods in which lease terms were not in effect; historical revenue under generally accepted accounting principles in the United States of America (“GAAP”) does contain such fluctuations. We find the measure particularly useful for leasing, tenant, segment and industry analysis. Tenant retention rate is a measure we use that represents the percentage of square feet renewed in a period relative to the total square feet scheduled to expire in that period; we include the effect of early renewals in this measure.
We also refer to the measures “cash rents”, “straight-line rents”, and “committed costs” in the “Occupancy and Leasing” section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this Annual Report on Form 10-K. Cash rents include monthly contractual base rent (ignoring rent abatements and rent associated with tenant funded landlord assets) multiplied by 12, plus estimated annualized expense reimbursements (average for first 12 months of term for new or renewed leases or as of lease expiration for expiring leases). Straight-line rents include annual minimum base rents, net of abatements and lease incentives and excluding rent associated with tenant funded landlord assets, on a straight-line basis over the term of the lease, and estimated annual expense reimbursements (as of lease commencement for new or renewed leases or as of lease expiration for expiring leases). We believe that cash rents and straight-line rents are useful measures for evaluating the rental rates of our leasing activity, including changes in such rates relative to rates that may have been previously in place, with cash rents serving as a measure to evaluate rents at the time rent payments commence, and straight-line rents serving as a measure to evaluate rents over the related lease terms. Committed costs includes tenant improvement allowances (excluding tenant funded landlord assets), leasing commissions and estimated turn key costs and excludes lease incentives; we believe this is a useful measure for evaluating our costs associated with obtaining new leases.
With regard to our operating portfolio square footage, occupancy and leasing statistics included below and elsewhere in this Annual Report on Form 10-K, amounts disclosed include total information pertaining to properties owned through unconsolidated real estate joint ventures except for amounts reported for annualized rental revenue, which represent the portion attributable to our ownership interest.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with GAAP, which require us to make certain estimates and assumptions. A summary of our significant accounting policies is provided in Note 2 to our consolidated financial statements. The following section is a summary of certain aspects of those accounting policies involving estimates or assumptions that (1) involve a significant level of estimation uncertainty and (2) have had or are reasonably likely to have a material impact on our financial condition or results of operations. It is possible that the use of different reasonable estimates or assumptions could result in materially different amounts being reported in our consolidated financial statements. While reviewing this section, refer to Note 2 to our consolidated financial statements, including terms defined therein.
Assessment of Lease Term as Lessor
As discussed above, a significant portion of our portfolio is leased to the USG, and the majority of those leases provide for one-year terms, with a series of one-year renewal options (with defined rent escalations upon renewal), and/or provide for early termination rights. Applicable accounting guidance requires us to recognize minimum rental payments on operating leases, net of rent abatements, on a straight-line basis over the term of each lease. We estimate a tenant’s lease term at the lease commencement date and do not subsequently reassess such term unless the lease is modified. When estimating a tenant’s lease term, we use judgment in contemplating the significance of: any penalties a tenant may incur should it choose not to exercise any existing options to extend the lease or exercise any existing options to terminate the lease; and economic incentives to the tenant based on any existing contract, asset, entity or market-based factors associated with the lease. Factors we consider in making this assessment include the uniqueness of the purpose or location of the property, the availability of a comparable replacement property, the relative importance or significance of the property to the continuation of the lessee’s line of business and the existence of tenant leasehold improvements or other assets whose value would be impaired by the tenant vacating or discontinuing use of the leased property. For most of our leases with the USG, our estimates of lease term conclude
that exercise of existing renewal options, or continuation of such leases without exercising early termination rights, is reasonably certain as it relates to the expected lease end date. As a result, our recognition of minimum rents on these leases includes the effect of annual rent escalations over our estimate of the lease term (including on one-year renewal options) and our depreciation and amortization of costs incurred on these leases is recognized over the lease term. An over-estimate of the term of these leases by us could result in the write-off of any recorded assets associated with straight-line rental revenue and acceleration of depreciation and amortization expense associated with costs we incurred related to these leases. We had no significant USG leases with lease terms determined to have been over-estimated during the reporting periods included herein.
Impairment of Long-Lived Assets
We assess the asset groups associated with each of our properties for indicators of impairment quarterly or when circumstances indicate that an asset group may be impaired. If our analyses indicate that the carrying values of certain properties’ asset groups may be impaired, we perform a recoverability analysis for such asset groups. If and when our plans change for a property, we revise our recoverability analyses to use the cash flows expected from the operations and eventual disposition of such property using holding periods that are consistent with our revised plans. In our accounting for impairment of long-lived assets, we estimate property fair values based on contract prices, indicative bids, discounted cash flow analyses or comparable sales analyses. We estimate cash flows used in performing impairment analyses based on our plans for the property and our views of market and economic conditions. Our estimates consider items such as current and future market rental and occupancy rates, estimated operating and capital expenditures, leasing commissions, absorption and hold periods and recent sales data for comparable properties; most of these items are influenced by market data obtained from real estate leasing and brokerage firms and our direct experience with the properties and their markets. Our determination of appropriate capitalization or discount rates for use in estimating property fair values also requires significant judgment and is typically based on many factors, including the prevailing rate for the market or submarket, as well as the quality, location and other unique attributes of the property.
Since asset groups associated with properties held for sale are carried at the lower of their carrying values (i.e., cost less accumulated depreciation and any impairment loss recognized, where applicable) or estimated fair values less costs to sell, decisions by us to sell certain properties will result in impairment losses if the carrying values of the specific properties’ asset groups classified as held for sale exceed such properties’ estimated fair values less costs to sell. Our estimates of fair value consider matters such as recent sales data for comparable properties and, where applicable, contracts or the results of negotiations with prospective purchasers. These estimates are subject to revision as market conditions, and our assessment of such conditions, change.
Historically, future market rental and occupancy rates have tended to be the most variable assumption in our impairment analyses of properties to be held and used; while changes in these assumptions can significantly affect our estimates of property undiscounted future cash flows in our recoverability analyses, such changes historically have not usually resulted in impairment losses since the resulting recoverability analyses still have tended to exceed the carrying value of the property asset groups. Historically, our recognition of impairment losses has most often occurred due to changes in our estimates of future cash flows resulting from a change in our plans for a property, such as a decision by us to sell or shorten our expected holding period for a property or to not develop a property. Changes in the estimated future cash flows due to changes in our plans for a property or significant changes in our views regarding property market and economic conditions and/or our ability to obtain development rights could result in recognition of impairment losses that could be substantial.
Concentration of Operations
Customer Concentration of Property Operations
The table below sets forth the 20 largest tenants in our portfolio of operating properties based on percentage of annualized rental revenue:
| | | | | | | | | | | | | | | | | | | | | |
| | Percentage of Annualized Rental
Revenue of Operating Properties
for 20 Largest Tenants as of December 31, | |
| Tenant (1) | | 2023 | | 2022 | | 2021 | |
| USG | | 35.9 | % | | 35.5 | % | | 35.6 | % | |
| Fortune 100 Company | | 8.7 | % | | 8.4 | % | | 9.2 | % | |
| General Dynamics Corporation | | 5.0 | % | | 5.1 | % | | 5.6 | % | |
| CACI International Inc | | 2.3 | % | | 2.4 | % | | 2.4 | % | |
| Northrop Grumman Corporation | | 2.3 | % | | 2.4 | % | | 1.4 | % | |
| The Boeing Company | | 2.3 | % | | 2.4 | % | | 2.5 | % | |
| Peraton Corp. | | 2.0 | % | | 2.1 | % | | 2.1 | % | |
| Booz Allen Hamilton, Inc. | | 1.8 | % | | 1.9 | % | | 1.9 | % | |
| Fortune 100 Company | | 1.8 | % | | 1.9 | % | | N/A | |
| Morrison & Foerster, LLP | | 1.5 | % | | 1.4 | % | | 1.0 | % | |
| CareFirst Inc. | | 1.4 | % | | 1.5 | % | | 1.7 | % | |
| KBR, Inc. | | 1.2 | % | | 1.2 | % | | N/A | |
| Yulista Holding, LLC | | 1.1 | % | | 1.1 | % | | 1.1 | % | |
| RTX Corporation | | 1.1 | % | | 1.1 | % | | 1.1 | % | |
| Miles and Stockbridge, PC | | 1.0 | % | | 1.1 | % | | 1.0 | % | |
| AT&T Corporation | | 1.0 | % | | 1.1 | % | | 1.1 | % | |
| Mantech International Corp. | | 1.0 | % | | 1.0 | % | | 1.0 | % | |
| Jacobs Engineering Group Inc. | | 1.0 | % | | 1.0 | % | | 1.0 | % | |
| Wells Fargo & Company | | 1.0 | % | | 1.1 | % | | 1.1 | % | |
| University System of Maryland | | 0.9 | % | | N/A | | 0.8 | % | |
| The MITRE Corporation | | N/A | | 0.8 | % | | 0.8 | % | |
| Transamerica Life Insurance Company | | N/A | | N/A | | 0.9 | % | |
| Subtotal of 20 largest tenants | | 74.3 | % | | 74.5 | % | | 73.3 | % | |
| All remaining tenants | | 25.7 | % | | 25.5 | % | | 26.7 | % | |
| Total | | 100.0 | % | | 100.0 | % | | 100.0 | % | |
| Total annualized rental revenue | | $ | 646,660 | | | $ | 609,700 | | | $ | 589,425 | | |
(1)Includes affiliated organizations where applicable.
Concentration of Properties by Segment
The table below sets forth the segment allocation of our annualized rental revenue (excluding our Wholesale Data Center that we sold on January 25, 2022) as of the end of the last three calendar years:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Percentage of Annualized Rental Revenue as of December 31, | | Number of Properties as of
December 31, |
| Region | | 2023 | | 2022 | | 2021 | | 2023 | | 2022 | | 2021 |
| Defense/IT Portfolio: | | | | | | | | | | | | |
| Fort Meade/BW Corridor | | 47.7 | % | | 46.8 | % | | 47.0 | % | | 92 | | | 91 | | | 90 | |
| NoVA Defense/IT | | 12.8 | % | | 13.3 | % | | 13.9 | % | | 16 | | | 16 | | | 16 | |
| Lackland Air Force Base | | 9.5 | % | | 9.9 | % | | 10.6 | % | | 8 | | | 8 | | | 8 | |
| Navy Support | | 5.2 | % | | 5.4 | % | | 5.9 | % | | 22 | | | 22 | | | 21 | |
| Redstone Arsenal | | 8.8 | % | | 7.6 | % | | 5.4 | % | | 22 | | | 21 | | | 17 | |
| Data Center Shells | | 5.8 | % | | 6.7 | % | | 5.3 | % | | 30 | | | 28 | | | 26 | |
| Total Defense/IT Portfolio | | 89.8 | % | | 89.7 | % | | 88.1 | % | | 190 | | | 186 | | | 178 | |
| Other | | 10.2 | % | | 10.3 | % | | 11.9 | % | | 8 | | | 8 | | | 8 | |
| | 100.0 | % | | 100.0 | % | | 100.0 | % | | 198 | | | 194 | | | 186 | |
The changes in revenue concentration reflected above between year-end 2022 and 2023 were attributable primarily to the: increasing effects in 2023 of occupied properties placed in service (most notably for Fort Meade/BW Corridor, Redstone Arsenal and Data Center Shells) and occupancy from vacant space leasing for Fort Meade/BW Corridor and Redstone Arsenal; offset in part by the decreasing effect from our sale of interests in Data Center Shells in 2023.
Occupancy and Leasing
The tables below set forth occupancy information (excluding our Wholesale Data Center that we sold on January 25, 2022):
| | | | | | | | | | | | | | | | | |
| December 31, |
| 2023 | | 2022 | | 2021 |
| Occupancy rates at period end | | | | | |
| Total | 94.2 | % | | 92.7 | % | | 92.4 | % |
| Defense/IT Portfolio: | | | | | |
| Fort Meade/BW Corridor | 96.4 | % | | 92.7 | % | | 90.0 | % |
| NoVA Defense/IT | 88.9 | % | | 90.0 | % | | 88.3 | % |
| Lackland Air Force Base | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Navy Support | 87.4 | % | | 89.8 | % | | 93.9 | % |
| Redstone Arsenal | 97.5 | % | | 89.9 | % | | 90.8 | % |
| Data Center Shells | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Total Defense/IT Portfolio | 96.2 | % | | 94.1 | % | | 93.0 | % |
| Other | 73.2 | % | | 78.8 | % | | 87.0 | % |
| Annualized rental revenue per occupied square foot at year end | $ | 34.14 | | | $ | 33.16 | | | $ | 32.47 | |
| | | | | | | | | | | |
| Rentable
Square Feet | | Occupied
Square Feet |
| | (in thousands) |
| December 31, 2022 | 23,006 | | | 21,327 | |
| Vacated upon lease expiration (1) | — | | | (504) | |
| Occupancy for new leases | — | | | 818 | |
| Development placed in service | 848 | | | 827 | |
| | | |
| | | |
| Other changes | 5 | | | 2 | |
| December 31, 2023 | 23,859 | | | 22,470 | |
(1)Includes lease terminations and space reductions occurring in connection with lease renewals.
With regard to changes in occupancy from December 31, 2022 to December 31, 2023:
>Fort Meade/BW Corridor: Increase was due primarily to the commencement of occupancy from vacant space leasing in a number of properties in this sub-segment;
>Navy Support: Decreased despite an 80.5% tenant retention rate in 2023 due to minimal commencement of occupancy from vacant space leasing. As of December 31, 2023 we had scheduled lease expirations in 2024 for 352,000 square feet, or 32%, of this sub-segment’s occupied square feet, most of which we expect to renew;
>Redstone Arsenal: Increase was due primarily to the commencement of occupancy from vacant space leasing in a number of properties in this sub-segment; and
>Other: Decreased due to vacated space resulting from its 25.3% tenant retention rate and minimal vacant space leasing.
In 2023, we leased 2.9 million square feet, including 747,000 square feet of development space in our Defense/IT Portfolio, with weighted average lease terms of 14.4 years.
In 2023, we renewed leases on 1.7 million square feet, representing a tenant retention rate of 79.7%. Most of these lease renewals were for our Defense/IT Portfolio, which had a retention rate of 85.7%, while our Other segment had a retention rate of 25.3%. The cash rents for our renewals (totaling $34.69 per square foot) increased on average by approximately 1.5% and the straight-line rents (totaling $34.69 per square foot) increased on average by approximately 9.3% relative to the leases previously in place for the space. The renewed leases had a weighted average lease term of approximately 4.8 years, with average escalations per year of 2.6%, and the per annum average committed costs associated with completing the leasing was approximately $3.16 per square foot.
In 2023, we also completed leasing on 452,000 square feet of vacant space, predominantly for our Defense/IT Portfolio. The cash rents of this leasing totaled $34.87 per square foot and the straight-line rents totaled $35.10 per square foot; these leases had a weighted average lease term of approximately 8.2 years, with average escalations per year of 2.5%, and the per annum average committed costs associated with completing this leasing was approximately $9.41 per square foot.
Lease Expirations
The table below sets forth as of December 31, 20202023 our scheduled lease expirations based on the non-cancelable term of tenant leases determined in accordance with generally accepted accounting principles for our operating properties by segment/sub-segment in terms of percentage of annualized rental revenue:
| | Expiration of Annualized Rental Revenue of Operating Properties |
| 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Thereafter | | Total |
| Defense/IT Locations | | | | | | | | | | | | | | |
| | Expiration of Annualized Rental Revenue of Operating Properties | | | | Expiration of Annualized Rental Revenue of Operating Properties |
| | 2024 | | | | 2024 | | 2025 | | 2026 | | 2027 | | 2028 | | Thereafter | | Total |
| Defense/IT Portfolio: | |
| Fort Meade/BW Corridor | Fort Meade/BW Corridor | | 4.4 | % | | 6.5 | % | | 8.4 | % | | 7.5 | % | | 8.7 | % | | 10.1 | % | | 45.6 | % |
| Northern Virginia Defense/IT | | 0.4 | % | | 0.8 | % | | 1.0 | % | | 2.4 | % | | 1.8 | % | | 4.2 | % | | 10.6 | % |
| Fort Meade/BW Corridor | |
| Fort Meade/BW Corridor | | | 8.4 | % | | 11.1 | % | | 5.1 | % | | 4.0 | % | | 7.1 | % | | 11.9 | % | | 47.7 | % |
| NoVA Defense/IT | | NoVA Defense/IT | | 1.5 | % | | 1.8 | % | | 0.3 | % | | 1.0 | % | | 1.1 | % | | 7.0 | % | | 12.8 | % |
| Lackland Air Force Base | Lackland Air Force Base | | 2.1 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % | | 6.9 | % | | 0.4 | % | | 9.4 | % | Lackland Air Force Base | | 0.0 | % | | 6.2 | % | | 1.9 | % | | 0.0 | % | | 0.0 | % | | 1.4 | % | | 9.5 | % |
| Navy Support Locations | | 1.5 | % | | 0.9 | % | | 1.1 | % | | 1.0 | % | | 0.2 | % | | 1.5 | % | | 6.2 | % |
| Navy Support | | Navy Support | | 1.6 | % | | 0.7 | % | | 0.9 | % | | 1.2 | % | | 0.2 | % | | 0.5 | % | | 5.2 | % |
| Redstone Arsenal | Redstone Arsenal | | 0.0 | % | | 1.6 | % | | 0.1 | % | | 0.3 | % | | 0.9 | % | | 2.4 | % | | 5.3 | % | Redstone Arsenal | | 0.5 | % | | 1.1 | % | | 0.1 | % | | 0.7 | % | | 0.0 | % | | 6.4 | % | | 8.8 | % |
| Data Center Shells | Data Center Shells | | 0.0 | % | | 0.0 | % | | 0.0 | % | | 0.1 | % | | 0.0 | % | | 6.2 | % | | 6.3 | % | Data Center Shells | | 0.1 | % | | 0.0 | % | | 0.1 | % | | 0.1 | % | | 0.1 | % | | 5.4 | % | | 5.8 | % |
| Regional Office | | 0.5 | % | | 3.1 | % | | 0.8 | % | | 0.4 | % | | 0.7 | % | | 6.5 | % | | 12.0 | % |
| Other | Other | | 0.1 | % | | 0.1 | % | | 0.0 | % | | 0.0 | % | | 0.2 | % | | 0.0 | % | | 0.4 | % | Other | | 0.7 | % | | 1.6 | % | | 0.9 | % | | 0.7 | % | | 1.4 | % | | 5.0 | % | | 10.2 | % |
| Wholesale Data Center | | 2.6 | % | | 0.4 | % | | 0.3 | % | | 0.0 | % | | 0.9 | % | | 0.0 | % | | 4.2 | % |
| Total | Total | | 11.6 | % | | 13.4 | % | | 11.7 | % | | 11.7 | % | | 20.3 | % | | 31.3 | % | | 100.0 | % | Total | | 12.8 | % | | 22.5 | % | | 9.5 | % | | 7.6 | % | | 10.0 | % | | 37.6 | % | | 100.0 | % |
For our office and data center shell properties, ourThe weighted average lease term as of December 31, 20202023 was approximately sixfive years. We believe that the weighted average annualized rental revenue per occupied square foot for our office and data center shell leases expiring in 2021 was,2024, on average, approximately 1.5% to 3.5% higher thanapproximated estimated current market rents for the related space, with specific results varying by segment. Our wholesale data center had scheduled lease expirations in 2021 for 61% of its annualized rental revenue, which included a lease for 11.25 megawatts perpetually renewing that may be terminated by either party with six months’ notice.segment/sub-segment.
Results of Operations
For a discussion of our results of operations comparison for 20192022 and 2018,2021, refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 20192022 filed on February 19, 2020.24, 2023.
We evaluate the operating performance of our properties using NOI from real estate operations, our segment performance measure, which includes: real estate revenues and property operating expenses;expenses from continuing and discontinued operations; and the net of revenues and property operating expenses of real estate operations owned through unconsolidated real estate
joint ventures (“UJVs”) that is allocable to COPT’sour ownership interest (“UJV NOI allocable to COPT”COPT Defense”). The table below reconciles NOI from real estate operations to net (loss) income, the most directly comparable GAAP measure:
| | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2023 | | 2022 | | |
| (in thousands) |
| Net (loss) income | $ | (74,347) | | | $ | 178,822 | | | |
| Construction contract and other service revenues | (60,179) | | | (154,632) | | | |
| Depreciation and other amortization associated with real estate operations | 148,950 | | | 141,230 | | | |
| Construction contract and other service expenses | 57,416 | | | 149,963 | | | |
| Impairment losses | 252,797 | | | — | | | |
| General, administrative, leasing and other expenses | 42,769 | | | 38,991 | | | |
| Interest expense | 71,142 | | | 61,174 | | | |
| Interest and other income, net | (12,587) | | | (9,070) | | | |
| Gain on sales of real estate from continuing operations | (49,392) | | | (19,250) | | | |
| Loss on early extinguishment of debt | — | | | 609 | | | |
| Equity in loss (income) of unconsolidated entities | 261 | | | (1,743) | | | |
| UJV NOI allocable to COPT Defense included in equity in (loss) income of unconsolidated entities | 6,659 | | | 4,327 | | | |
| Income tax expense | 588 | | | 447 | | | |
| Discontinued operations | — | | | (29,573) | | | |
| Revenues from real estate operations from discontinued operations | — | | | 1,980 | | | |
| Property operating expenses from discontinued operations | — | | | (971) | | | |
| NOI from real estate operations | $ | 384,077 | | | $ | 362,304 | | | |
We view our changes in NOI from real estate operations as comprisingbeing comprised of the following primary categories:
•>office and data center shell properties:
•Same Property, which we define as properties stably owned and 100% operational throughout the two years being compared. We define these as changes from “Same Properties.” For further discussion of the concept of “operational,” refer to the Properties section of Note 2 of the consolidated financial statements entitled “Properties”;statements;
•>developed or redeveloped andproperties placed into service that were not 100% operational throughout the two years being compared; and
•>disposed; and
•our wholesale data center.disposed properties.
In addition to owning properties, we provide construction management and other services. The primary manner in which we evaluate the operating performance of our construction management and other service activities is through a measure we define as NOI from service operations, which is based on the net of the revenues and expenses from these activities. The revenues and expenses from these activities consist primarily of subcontracted costs that are reimbursed to us by customers along with a management fee. The operating margins from these activities are small relative to the revenue. We believe NOI from service operations is a useful measure in assessing both our level of activity and our profitability in conducting such operations.
Since both of the measures discussed above exclude certain items includable in net income or loss, reliance on these measures has limitations; management compensates for these limitations by using the measures simply as supplemental measures that are considered alongside other GAAP and non-GAAP measures. A reconciliation of NOI from real estate operations and NOI from service operations to net(loss) income from continuing operations reported on the consolidated statements of operations of COPT and subsidiaries is provided in Note 1713 to our consolidated financial statements.
Comparison of Statements of Operations for the Years Ended December 31, 20202023 and 20192022
| | | | For the Years Ended December 31, | | For the Years Ended December 31, |
| | | 2020 | | 2019 | | Variance | | 2023 | | 2022 | | Variance |
| | | (in thousands) | | (in thousands) |
| Revenues | Revenues | | | | | | Revenues | | | |
| Revenues from real estate operations | Revenues from real estate operations | $ | 538,725 | | | $ | 527,463 | | | $ | 11,262 | |
| Construction contract and other service revenues | Construction contract and other service revenues | 70,640 | | | 113,763 | | | (43,123) | |
| Total revenues | Total revenues | 609,365 | | | 641,226 | | | (31,861) | |
| Operating expenses | Operating expenses | | | | | | Operating expenses | | | |
| Property operating expenses | Property operating expenses | 203,840 | | | 198,143 | | | 5,697 | |
| Depreciation and amortization associated with real estate operations | Depreciation and amortization associated with real estate operations | 138,193 | | | 137,069 | | | 1,124 | |
| Construction contract and other service expenses | Construction contract and other service expenses | 67,615 | | | 109,962 | | | (42,347) | |
| Impairment losses | Impairment losses | 1,530 | | | 329 | | | 1,201 | |
| General, administrative and leasing expenses | 33,001 | | | 35,402 | | | (2,401) | |
| Business development expenses and land carry costs | 4,473 | | | 4,239 | | | 234 | |
| General, administrative, leasing and other expenses | |
| Total operating expenses | Total operating expenses | 448,652 | | | 485,144 | | | (36,492) | |
| Interest expense | |
| Interest and other income, net | |
| Gain on sales of real estate | |
| | Interest expense | (67,937) | | | (71,052) | | | 3,115 | |
| Interest and other income | 8,574 | | | 7,894 | | | 680 | |
| Credit loss recoveries | 933 | | | — | | | 933 | |
| Gain on sales of real estate | 30,209 | | | 105,230 | | | (75,021) | |
| Gain on sale of investment in unconsolidated real estate joint venture | 29,416 | | | — | | | 29,416 | |
| Loss on early extinguishment of debt | Loss on early extinguishment of debt | (7,306) | | | — | | | (7,306) | |
| Loss on interest rate derivatives | (53,196) | | | — | | | (53,196) | |
| Equity in income of unconsolidated entities | 1,825 | | | 1,633 | | | 192 | |
| Income tax (expense) benefit | (353) | | | 217 | | | (570) | |
| Net income | $ | 102,878 | | | $ | 200,004 | | | $ | (97,126) | |
| Loss on early extinguishment of debt | |
| Loss on early extinguishment of debt | |
| | Equity in (loss) income of unconsolidated entities | |
| Equity in (loss) income of unconsolidated entities | |
| Equity in (loss) income of unconsolidated entities | |
| Income tax expense | |
| (Loss) income from continuing operations | |
| Discontinued operations | |
| Net (loss) income | |
|
NOI from Real Estate Operations
| | | | | | | | | | | | | | | | | | | | |
| | | For the Years Ended December 31, |
| | | 2020 | | 2019 | | Variance |
| | | (Dollars in thousands, except per square foot data) |
| Revenues | | | | | | |
| Same Properties revenues | | | | | | |
| Lease revenue, excluding lease termination revenue and provision for collectability losses | | $ | 472,207 | | | $ | 464,619 | | | $ | 7,588 | |
| Lease termination revenue | | 1,451 | | | 2,046 | | | (595) | |
| Provision for collectability losses included in lease revenue | | (3,923) | | | (1,149) | | | (2,774) | |
| Other property revenue | | 2,372 | | | 4,764 | | | (2,392) | |
| Same Properties total revenues | | 472,107 | | | 470,280 | | | 1,827 | |
| Developed and redeveloped properties placed in service | | 34,491 | | | 9,186 | | | 25,305 | |
| Wholesale data center | | 27,788 | | | 29,405 | | | (1,617) | |
| | | | | | |
| Dispositions | | 4,325 | | | 16,334 | | | (12,009) | |
| Other | | 14 | | | 2,258 | | | (2,244) | |
| | | 538,725 | | | 527,463 | | | 11,262 | |
| Property operating expenses | | | | | | |
| Same Properties | | (182,812) | | | (181,803) | | | (1,009) | |
| Developed and redeveloped properties placed in service | | (6,413) | | | (1,594) | | | (4,819) | |
| Wholesale data center | | (14,171) | | | (13,213) | | | (958) | |
| | | | | | |
| Dispositions | | (429) | | | (1,457) | | | 1,028 | |
| Other | | (15) | | | (76) | | | 61 | |
| | | (203,840) | | | (198,143) | | | (5,697) | |
| | | | | | |
| UJV NOI allocable to COPT | | | | | | |
| Dispositions | | 4,818 | | | 4,851 | | | (33) | |
| Retained interests in newly-formed UJVs | | 2,133 | | | 854 | | | 1,279 | |
| | 6,951 | | | 5,705 | | | 1,246 | |
| | | | | | |
| NOI from real estate operations | | | | | | |
| Same Properties | | 289,295 | | | 288,477 | | | 818 | |
| Developed and redeveloped properties placed in service | | 28,078 | | | 7,592 | | | 20,486 | |
| Wholesale data center | | 13,617 | | | 16,192 | | | (2,575) | |
| | | | | | |
| Dispositions, net of retained interests in newly-formed UJVs | | 10,847 | | | 20,582 | | | (9,735) | |
| Other | | (1) | | | 2,182 | | | (2,183) | |
| | | $ | 341,836 | | | $ | 335,025 | | | $ | 6,811 | |
| | | | | | |
| Same Properties NOI from real estate operations by segment | | | | | | |
| Defense/IT Locations | | $ | 256,432 | | | $ | 257,048 | | | $ | (616) | |
| Regional Office | | 31,220 | | | 29,928 | | | 1,292 | |
| Other | | 1,643 | | | 1,501 | | | 142 | |
| | $ | 289,295 | | | $ | 288,477 | | | $ | 818 | |
| | | | | | |
| Same Properties rent statistics | | | | | | |
| Average occupancy rate | | 91.8 | % | | 91.0 | % | | 0.8 | % |
| Average straight-line rent per occupied square foot (1) | | $ | 26.31 | | | $ | 26.39 | | | $ | (0.08) | |
| | | | | | | | | | | | | | | | | | | | |
| | | For the Years Ended December 31, |
| | | 2023 | | 2022 | | Variance |
| | | (Dollars in thousands, except per square foot data) |
| Revenues | | | | | | |
| Same Property revenues | | | | | | |
| Lease revenue, excluding lease termination revenue and collectability loss provisions | | $ | 567,320 | | | $ | 544,312 | | | $ | 23,008 | |
| Lease termination revenue, net | | 3,745 | | | 2,237 | | | 1,508 | |
| Collectability loss provisions included in lease revenue | | (1,313) | | | (745) | | | (568) | |
| Other property revenue | | 4,832 | | | 4,077 | | | 755 | |
| Same Property total revenues | | 574,584 | | | 549,881 | | | 24,703 | |
| Developed and redeveloped properties placed in service | | 42,156 | | | 10,515 | | | 31,641 | |
| | | | | | |
| Dispositions, net of retained interest in newly-formed UJVs | | 400 | | | 21,404 | | | (21,004) | |
| Other | | 7,663 | | | 4,578 | | | 3,085 | |
| | | 624,803 | | | 586,378 | | | 38,425 | |
| Property operating expenses | | | | | | |
| Same Property | | (234,052) | | | (219,876) | | | (14,176) | |
| Developed and redeveloped properties placed in service | | (6,421) | | | (1,177) | | | (5,244) | |
| | | | | | |
| Dispositions, net of retained interest in newly-formed UJVs | | (56) | | | (3,665) | | | 3,609 | |
| Other | | (6,856) | | | (3,683) | | | (3,173) | |
| | | (247,385) | | | (228,401) | | | (18,984) | |
| | | | | | |
| UJV NOI allocable to COPT Defense | | | | | | |
| Same Property | | 4,301 | | | 4,308 | | | (7) | |
| Retained interests in newly-formed UJVs | | 2,358 | | | 19 | | | 2,339 | |
| | | | | | |
| | 6,659 | | | 4,327 | | | 2,332 | |
| | | | | | |
| NOI from real estate operations | | | | | | |
| Same Property | | 344,833 | | | 334,313 | | | 10,520 | |
| Developed and redeveloped properties placed in service | | 35,735 | | | 9,338 | | | 26,397 | |
| | | | | | |
| Dispositions, net of retained interest in newly-formed UJVs | | 2,702 | | | 17,758 | | | (15,056) | |
| Other | | 807 | | | 895 | | | (88) | |
| | | $ | 384,077 | | | $ | 362,304 | | | $ | 21,773 | |
| | | | | | |
| Same Property NOI from real estate operations by segment | | | | | | |
| Defense/IT Portfolio | | $ | 316,701 | | | $ | 305,377 | | | $ | 11,324 | |
| Other | | 28,132 | | | 28,936 | | | (804) | |
| | $ | 344,833 | | | $ | 334,313 | | | $ | 10,520 | |
| | | | | | |
| Same Property rent statistics | | | | | | |
| Average occupancy rate | | 92.7 | % | | 91.6 | % | | 1.1 | % |
| Average straight-line rent per occupied square foot (1) | | $ | 27.13 | | | $ | 26.94 | | | $ | 0.19 | |
(1)Includes minimum base rents, net of abatements and lease incentives and excluding lease termination revenue, on a straight-line basis for the years set forth above.
Our Same PropertiesProperty pool consisted of 144180 properties, comprising 73.0%86.4% of our office and data center shell portfolio’s square footage as of December 31, 2020.2023. This pool of properties changed from the pool used for purposes of comparing 20192022 and 20182021 in our 20192022 Annual Report on Form 10-K due to: theto the: addition of fiveseven properties placed in service and 100% operational on or before January 1, 20192022 and thetwo properties owned through a UJV that was formed in 2021; and removal of eightthree properties in which we sold a 90% interest.interest in 2023.
Regarding the changes in NOI from real estate operations reported above:
•>the increase for our Same PropertiesProperty pool reflects a net increasewas due primarily to: increasedin large part to additional revenue in 2023 resulting from higher occupancy and higherthe commencement of tenant expense reimbursements from tenants, partially offset by higher provisions for collectability losses and lower parking revenue (both of which were attributable to the effects of COVID-19);on certain recently commenced leases;
•>developed and redeveloped properties placed in service reflects the effect of 2013 properties placed in service in 20192023 and 2020;2022; and
•our wholesale data center decreased due primarily to lease termination revenue recognized in the prior year that did not recur in the current year;
•>dispositions, net of retained interestsinterest in newly-formed UJVs reflects the effect of our decreasesale of 90% of our interests in ownership of eightthree data center shells in 20202023 and ninetwo in 2022, as well as the sale of our wholesale data center shells in 2019; and
•Other reflects primarily the effect of previously operational properties that we removed from service in mid-2019.on January 25, 2022.
NOI from Service Operations
| | For the Years Ended December 31, |
| 2020 | | 2019 | | Variance |
| (in thousands) |
| | For the Years Ended December 31, | | | | For the Years Ended December 31, |
| | 2023 | | | | 2023 | | 2022 | | Variance |
| | (in thousands) | | | | (in thousands) |
| Construction contract and other service revenues | Construction contract and other service revenues | | $ | 70,640 | | | $ | 113,763 | | | $ | (43,123) | |
| Construction contract and other service expenses | Construction contract and other service expenses | | (67,615) | | | (109,962) | | | 42,347 | |
| NOI from service operations | NOI from service operations | | $ | 3,025 | | | $ | 3,801 | | | $ | (776) | |
Construction contract and other service revenuerevenues and expenses decreased in 2023 due primarily to a lower volume of construction activity in connection with severalfor one of our tenants. Construction contract activity is inherently subject to significant variability depending on the volume and nature of projects undertaken by us primarily on behalf of tenants. Service operations are an ancillary component of our overall operations that typically contribute an insignificant amount of income relative to our real estate operations.
Impairment Losses
As part of our closing process for the three months ended September 30, 2023, we conducted our quarterly review of our portfolio of long-lived assets to be held and used for indicators of impairment. As a result of this process, we shortened the expected holding periods for six operating properties in our Other segment and a parcel of land located in Baltimore, Maryland, Northern Virginia and Washington, D.C. We determined that the carrying amount of the properties would not likely be recovered from the undiscounted cash flows from the operations and sales of the properties over the shortened holding periods. Accordingly, we recognized impairment losses of $252.8 million on these properties during 2023.
General, Administrative, Leasing and LeasingOther Expenses
General,Our general, administrative, leasing and leasingother expenses decreased in large part due to lower professional fees and compensation related expenses in the current period.
We capitalizeare net of amounts capitalized for compensation and indirect costs associated with properties, or portions thereof, undergoing development or redevelopment activities. Our capitalized compensation and indirect costs totaled $9.4$9.5 million in 20202023 and $10.1$10.7 million in 2019.2022.
Interest Expense
The table below sets forth components of our interest expense:
| | For the Years Ended December 31, |
| 2020 | | 2019 | | Variance |
| (in thousands) |
| Interest on Unsecured Senior Notes | | $ | 53,534 | | | $ | 53,321 | | | $ | 213 | |
| | For the Years Ended December 31, | | | | For the Years Ended December 31, |
| | 2023 | | | | 2023 | | 2022 | | Variance |
| | (in thousands) | | | | (in thousands) |
| Interest on unsecured senior notes | |
| Interest on mortgage and other secured debt | Interest on mortgage and other secured debt | | 8,658 | | | 7,908 | | | 750 | |
| Interest on unsecured term debt | Interest on unsecured term debt | | 5,909 | | | 8,908 | | | (2,999) | |
| Interest on Revolving Credit Facility | |
| Interest expense (offsets) additions from interest rate swaps | |
| Amortization of deferred financing costs | Amortization of deferred financing costs | | 2,538 | | | 2,136 | | | 402 | |
| Interest expense recognized on interest rate swaps | | 3,726 | | | (1,415) | | | 5,141 | |
| Interest on Revolving Credit Facility | | 3,239 | | | 8,613 | | | (5,374) | |
| Other interest | Other interest | | 2,393 | | | 2,367 | | | 26 | |
| Capitalized interest | Capitalized interest | | (12,060) | | | (10,786) | | | (1,274) | |
| Interest expense | Interest expense | | $ | 67,937 | | | $ | 71,052 | | | $ | (3,115) | |
The increaseRegarding the changes in interest expense recognized oncomponents reported above: the increase for unsecured senior notes was attributable to the 5.25% Notes issued in September 2023; and the increases for the unsecured term debt and Revolving Credit Facility were attributable to higher variable interest rates, the effect of which was mostly offset by interest rate swaps was attributable to a decrease in applicable LIBOR rates, while these decreased ratesplace during the respective periods. While our debt is predominantly fixed rate and lower borrowings on our Revolving Credit Facility resulted in the decrease inform of long-term unsecured notes, for variable-rate loans, we used interest on our Revolving Credit Facility.rate swaps to hedge the effect of interest rate changes, including swaps for a $200.0 million
notional amount that: fixed the one-month LIBOR interest rate in 2022 at 1.9% through December 1, 2022; and, effective February 1, 2023, fixed the one-month SOFR interest rate at 3.7% for a three-year term.
Our average outstanding debt was $2.1$2.3 billion in 20202023 and $1.9 billion 2019,2022, and our weighted average effective interest rate on debt was approximately 3.6%3.0% in 20202023 and 4.1%2.8% in 2019.2022.
Interest and Other Income, Net
Gain on sales
Interest and other income, net increased in 2023 due in large part to interest income earned from a portion of real estatethe net proceeds from the 5.25% Notes issuance being invested in short-term interest-bearing money market accounts.
Gain on salesSales of real estate included gains from sales of 90% interests in data center shell properties, including two properties in 2020 and nine properties in 2019. We retained 10% interests in these properties through unconsolidated real estate joint ventures.
Gain on sale of investment in unconsolidated real estate joint ventureReal Estate
The gain on sales of real estate recognized in 2023 was due to our sale of investment in unconsolidated real estate joint venture recognized in 2020 was attributable to our decrease in ownershipa 90% interest in sixthree data center shell properties resulting from theproperties. Gain on sales of real estate in 2022 was due to our sale of properties from GI-COPT to B RE COPT and subsequent dissolution of GI-COPT described above.a 90% interest in two data center shell properties.
Loss on extinguishment of debtDiscontinued Operations
The lossDiscontinued operations includes our wholesale data center, including $28.6 million in gain from its sale on early extinguishment of debt recognized in 2020 was attributable to our purchase and redemption of 3.70% Senior Notes due 2021.January 25, 2022.
Loss on interest rate derivatives
In 2020, we recognized a loss on interest rate swaps previously designated as cash flow hedges of interest expense on forecasted future borrowings following our determination that such borrowings would probably not occur.
Funds from Operations
Funds from operations (“FFO”) is defined as net income or loss computed using GAAP, excluding gains on sales and impairment losses of real estate and investments in UJVs (net of associated income tax) and real estate-related depreciation and amortization. FFO also includes adjustments to net income or loss for the effects of the items noted above pertaining to UJVs that were allocable to our ownership interest in the UJVs. We believe that we use the Nareit definition of FFO, although others may interpret the definition differently and, accordingly, our presentation of FFO may differ from those of other REITs. We believe that FFO is useful to management and investors as a supplemental measure of operating performance because, by excluding gains on sales and impairment losses of real estate and investments in unconsolidated real estate joint ventures (net of associated income tax), and real estate-related depreciation and amortization, FFO can help one compare our operating performance between periods. In addition, since most equity REITs provide FFO information to the investment community, we believe that FFO is useful to investors as a supplemental measure for comparing our results to those of other equity REITs. We believe that net income or loss is the most directly comparable GAAP measure to FFO.
Since FFO excludes certain items includable in net income or loss, reliance on the measure has limitations; management compensates for these limitations by using the measure simply as a supplemental measure that is weighed in balance with other GAAP and non-GAAP measures. FFO is not necessarily an indication of our cash flow available to fund cash needs. Additionally, it should not be used as an alternative to net income or loss when evaluating our financial performance or to cash flow from operating, investing and financing activities when evaluating our liquidity or ability to make cash distributions or pay debt service.
Basic FFO available to common share and common unit holders (“Basic FFO”) is FFO adjusted to subtract (1) preferred share dividends, (2) income attributable to noncontrolling interests through ownership of preferred units in the Operating Partnership or interests in other consolidated entities not owned by us, (3) depreciation and amortization allocable to noncontrolling interests in other consolidated entities and (4) Basic FFO allocable to share-based compensation awards and (5) issuance costs associated with redeemed preferred shares.awards. With these adjustments, Basic FFO represents FFO available to common shareholders and common unitholders. Common units in the Operating Partnership are substantially similar to our common shares and are exchangeable into common shares, subject to certain conditions. We believe that Basic FFO is useful to investors due to the close correlation of common units to common shares. We believe that net income or loss is the most directly comparable GAAP measure to Basic FFO. Basic FFO has essentially the same limitations as FFO; management compensates for these limitations in essentially the same manner as described above for FFO.
Diluted FFO available to common share and common unit holders (“Diluted FFO”) is Basic FFO adjusted to add back any changes in Basic FFO that would result from the assumed conversion of securities that are convertible or exchangeable into common shares. We believe that Diluted FFO is useful to investors because it is the numerator used to compute Diluted FFO per share, discussed below. We believe that net income or loss is the most directly comparable GAAP measure to Diluted FFO. Since Diluted FFO excludes certain items includable in the numerator to diluted EPS, reliance on the measure has limitations; management compensates for these limitations by using the measure simply as a supplemental measure that is weighed in the balance with other GAAP and non-GAAP measures. Diluted FFO (which includes discontinued operations) is not necessarily an indication of our cash flow available to fund cash needs. Additionally, it should not be used as an alternative to net income or loss when evaluating our financial performance or to cash flow from operating, investing and financing activities when evaluating our liquidity or ability to make cash distributions or pay debt service.
Diluted FFO available to common share and common unit holders, as adjusted for comparability is defined as Diluted FFO adjusted to excludeexclude: operating property acquisition costs; gain or loss on early extinguishment of debt; FFO associated with properties securingthat secured non-recourse debt on which we have defaulted and, which we havesubsequently, extinguished or expect to extinguish, via conveyance of such properties including(including property NOI, interest expense and gains on debt extinguishment (discussed further below)extinguishment); loss on interest rate derivatives; executive transition costs associated with named executive officers; and, for periods prior to October 1, 2022, demolition costs on redevelopment and nonrecurring improvements;improvements and executive transition costs; issuance costs associated with redeemed preferred shares; allocations of FFO to holders on noncontrolling interests resulting from capital events; and certain other expenses that we believe are not closely correlated with our operating performance.senior management team members. This measure also includes adjustments for the effects of the items noted above pertaining to UJVs that were allocable to our ownership interest in the UJVs. We believe this to be a useful supplemental measure alongside Diluted FFO as it excludes gains and losses from certain investing and financing activities and certain other items that we believe are not closely correlated to (or associated with) our operating performance. We believe that net income or loss is the most directly comparable GAAP measure to this non-GAAP measure. This measure has essentially the same limitations as Diluted FFO, as well as the further limitation of not reflecting the effects of the excluded items; we compensate for these limitations in essentially the same manner as described above for Diluted FFO.
Diluted FFO per share is (1) Diluted FFO divided by (2) the sum of the (a) weighted average common shares outstanding during a period, (b) weighted average common units outstanding during a period and (c) weighted average number of potential additional common shares that would have been outstanding during a period if other securities that are convertible or exchangeable into common shares were converted or exchanged. We believe that Diluted FFO per share is useful to investors because it provides investors with a further context for evaluating our FFO results in the same manner that investors use earnings per share (“EPS”) in evaluating net income or loss available to common shareholders. In addition, since most equity REITs provide Diluted FFO per share information to the investment community, we believe that Diluted FFO per share is a useful supplemental measure for comparing us to other equity REITs. We believe that diluted EPS is the most directly comparable GAAP measure to Diluted FFO per share. Diluted FFO per share has most of the same limitations as Diluted FFO (described above); management compensates for these limitations in essentially the same manner as described above for Diluted FFO.
Diluted FFO per share, as adjusted for comparability is (1) Diluted FFO, as adjusted for comparability divided by (2) the sum of the (a) weighted average common shares outstanding during a period, (b) weighted average common units outstanding during a period and (c) weighted average number of potential additional common shares that would have been outstanding during a period if other securities that are convertible or exchangeable into common shares were converted or exchanged. We believe that this measure is useful to investors because it provides investors with a further context for evaluating our FFO results. We believe this to be a useful supplemental measure alongside Diluted FFO per share as it excludes gains and losses from certain investing and financing activities and certain other items that we believe are not closely correlated to (or associated with) our operating performance. We believe that diluted EPS is the most directly comparable GAAP measure to this per share measure. This measure has most of the same limitations as Diluted FFO (described above) as well as the further limitation of not reflecting the effects of the excluded items; we compensate for these limitations in essentially the same manner as described above for Diluted FFO.
The computations for all of the above measures on a diluted basis assume the conversion of common units in COPLPCDPLP but do not assume the conversion of other securities that are convertible into common shares if the conversion of those securities would increase per share measures in a given period.
We use measures called payout ratios as supplemental measures of our ability to make distributions to investors based on each of the following: FFO; Diluted FFO; and Diluted FFO, adjusted for comparability. These measures are defined as (1) the sum of (a) dividends on unrestricted common and deferred shares and (b) distributions to holders of interests in COPLP (excluding unvestedCDPLP, to the extent they are dilutive for purposes of calculating the respective related non-GAAP per share measures, divided by (2) the respective non-GAAP measures.
share-based compensation awards) and dividends on convertible preferred shares when such distributions and dividends are included in Diluted FFO divided by either (2) FFO, Diluted FFO or Diluted FFO, adjusted for comparability.
The table below sets forth the computation of the above stated measures for 20202023 and 20192022 and provides reconciliations to the GAAP measures of COPT and subsidiaries associated with such measures:
| | For the Years Ended December 31, | | | For the Years Ended December 31, |
| | | | | | | | | | | | | 2023 | | 2022 |
| | For the Years Ended December 31, | | (Dollars and shares in thousands, except per share data) |
| Net (loss) income | |
| Real estate-related depreciation and amortization | |
| Impairment losses on real estate | |
| Gain on sales of real estate | |
| Depreciation and amortization on UJVs allocable to COPT Defense | |
| | | 2020 | | 2019 | |
| | | (Dollars and shares in thousands, except per share data) |
| Net income | $ | 102,878 | | | $ | 200,004 | | |
| Real estate-related depreciation and amortization | 138,193 | | | 137,069 | | |
| Depreciation and amortization on UJV allocable to COPT | 3,329 | | | 2,703 | | |
| Impairment losses on real estate | 1,530 | | | 329 | | |
| Gain on sales of real estate | (30,209) | | | (105,230) | | |
| Gain on sale of investment in unconsolidated real estate JV | (29,416) | | | — | | |
| FFO | |
| | FFO | FFO | 186,305 | | | 234,875 | | |
| Noncontrolling interests-preferred units in the Operating Partnership | (300) | | | (564) | | |
| | FFO | |
| FFO allocable to other noncontrolling interests | FFO allocable to other noncontrolling interests | (15,705) | | | (5,024) | | |
| | Basic FFO allocable to share-based compensation awards | Basic FFO allocable to share-based compensation awards | (719) | | | (905) | | |
| Basic FFO available to common shares and common unit holders | 169,581 | | | 228,382 | | |
| | Basic FFO allocable to share-based compensation awards | |
| | Basic FFO allocable to share-based compensation awards | |
| | Basic FFO available to common share and common unit holders | |
| Basic FFO available to common share and common unit holders | |
| Basic FFO available to common share and common unit holders | |
| Redeemable noncontrolling interests | Redeemable noncontrolling interests | 147 | | | 132 | | |
| Diluted FFO available to common shares and common unit holders | 169,728 | | | 228,514 | | |
| Diluted FFO adjustments allocable to share-based compensation awards | |
| Diluted FFO available to common share and common unit holders | |
| Loss on early extinguishment of debt | Loss on early extinguishment of debt | 7,306 | | | — | | |
| Loss on interest rate derivatives | 53,196 | | | — | | |
| | Demolition costs on redevelopment and nonrecurring improvements | 63 | | | 148 | | |
| | Executive transition costs | Executive transition costs | — | | | 4 | | |
| Non-comparable professional and legal expenses | — | | | 681 | | |
| Dilutive preferred units in the Operating Partnership | 300 | | | — | | |
| FFO allocation to other noncontrolling interests resulting from capital event | 11,090 | | | — | | |
| | Executive transition costs | |
| | Executive transition costs | |
| Gain on early extinguishment of debt on unconsolidated real estate JVs | |
| | | Diluted FFO comparability adjustments allocable to share-based compensation awards | Diluted FFO comparability adjustments allocable to share-based compensation awards | (327) | | | (3) | | |
| | Diluted FFO comparability adjustments allocable to share-based compensation awards | |
| | Diluted FFO comparability adjustments allocable to share-based compensation awards | |
| | Diluted FFO available to common share and common unit holders, as adjusted for comparability | Diluted FFO available to common share and common unit holders, as adjusted for comparability | $ | 241,356 | | | $ | 229,344 | | |
| | | Diluted FFO available to common share and common unit holders, as adjusted for comparability | |
| | Diluted FFO available to common share and common unit holders, as adjusted for comparability | |
| | Weighted average common shares | |
| Weighted average common shares | |
| Weighted average common shares | Weighted average common shares | 111,788 | | | 111,196 | | |
| Conversion of weighted average common units | Conversion of weighted average common units | 1,236 | | | 1,299 | | |
| Weighted average common shares/units - Basic FFO per share | Weighted average common shares/units - Basic FFO per share | 113,024 | | | 112,495 | | |
| Dilutive effect of share-based compensation awards | Dilutive effect of share-based compensation awards | 288 | | | 308 | | |
| | Redeemable noncontrolling interests | Redeemable noncontrolling interests | 123 | | | 119 | | |
| Weighted average common shares/units - Diluted FFO per share | 113,435 | | | 112,922 | | |
| Dilutive convertible preferred units | 171 | | | — | | |
| Redeemable noncontrolling interests | |
| Redeemable noncontrolling interests | |
| | Weighted average common shares/units - Diluted FFO per share, as adjusted for comparability | 113,606 | | | 112,922 | | |
| | | Weighted average common shares/units - Diluted FFO per share and as adjusted for comparability | |
| | Weighted average common shares/units - Diluted FFO per share and as adjusted for comparability | |
| | Weighted average common shares/units - Diluted FFO per share and as adjusted for comparability | |
| | Diluted EPS | |
| Diluted EPS | |
| Diluted EPS | |
| Diluted FFO per share | Diluted FFO per share | $ | 1.50 | | | $ | 2.02 | | |
| Diluted FFO per share, as adjusted for comparability | Diluted FFO per share, as adjusted for comparability | $ | 2.12 | | | $ | 2.03 | | |
| | Denominator for diluted EPS | Denominator for diluted EPS | 112,076 | | | 111,623 | | |
| Denominator for diluted EPS | |
| Denominator for diluted EPS | |
| Weighted average common units | Weighted average common units | 1,236 | | | 1,299 | | |
| Redeemable noncontrolling interests | |
| Dilutive effect of additional share-based compensation awards | |
| | Redeemable noncontrolling interests | 123 | | | — | | |
| Denominator for diluted FFO per share | 113,435 | | | 112,922 | | |
| Dilutive convertible preferred units | 171 | | | — | | |
| | Denominator for diluted FFO per share, as adjusted for comparability | 113,606 | | | 112,922 | | |
| | Common share dividends - unrestricted shares and deferred shares | $ | 123,042 | | | $ | 122,823 | | |
| Common unit distributions - unrestricted units | 1,362 | | | 1,405 | | |
| Dividends and distributions for FFO and diluted FFO payout ratios | 124,404 | | | 124,228 | | |
| Distributions on dilutive preferred units | 300 | | | — | | |
| Dividends and distributions for other payout ratio | $ | 124,704 | | | $ | 124,228 | | |
| Denominator for diluted FFO per share and as adjusted for comparability | |
| | | Denominator for diluted FFO per share and as adjusted for comparability | |
| | Denominator for diluted FFO per share and as adjusted for comparability | |
| | Dividends on unrestricted common and deferred shares | |
| Dividends on unrestricted common and deferred shares | |
| Dividends on unrestricted common and deferred shares | |
| Dividends and distributions on restricted shares and units | |
| Distributions on unrestricted common units | |
| Dividends and distributions for net income payout ratio | |
| | Dividends on unrestricted common and deferred shares | |
| Dividends on unrestricted common and deferred shares | |
| Dividends on unrestricted common and deferred shares | |
| Distributions on unrestricted common units | |
| Dividends and distributions for FFO payout ratio | |
| Dividends and distributions adjustments for dilution | |
| Dividends and distributions for diluted non-GAAP payout ratios | |
| | Net income payout ratio | |
| Net income payout ratio | |
| Net income payout ratio | | N/A | | 70.2 | % |
| FFO payout ratio | FFO payout ratio | 66.8 | % | | 52.9 | % | | FFO payout ratio | 46.1 | % | | 45.6 | % |
| Diluted FFO payout ratio | Diluted FFO payout ratio | 73.3 | % | | 54.4 | % | | Diluted FFO payout ratio | 47.1 | % | | 46.6 | % |
| Diluted FFO payout ratio, as adjusted for comparability | Diluted FFO payout ratio, as adjusted for comparability | 51.7 | % | | 54.2 | % | | Diluted FFO payout ratio, as adjusted for comparability | 47.0 | % | | 46.5 | % |
Property Additions
The table below sets forth the major components of our additions to properties for 20202023 and 2019:2022:
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2020 | | 2019 | | Variance |
| (in thousands) |
| Development and redevelopment | $ | 345,818 | | | $ | 427,526 | | | $ | (81,708) | |
| | | | | |
| Tenant improvements on operating properties (1) | 26,071 | | | 26,294 | | (223) | |
| Capital improvements on operating properties | 34,060 | | | 26,598 | | 7,462 | |
| | $ | 405,949 | | | $ | 480,418 | | | $ | (74,469) | |
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2023 | | 2022 | | Variance |
| (in thousands) |
| Development | $ | 248,790 | | | $ | 266,680 | | | $ | (17,890) | |
| | | | | |
| Tenant improvements on operating properties (1) | 58,315 | | | 54,494 | | | 3,821 | |
| Capital improvements on operating properties | 25,976 | | | 29,528 | | | (3,552) | |
| | $ | 333,081 | | | $ | 350,702 | | | $ | (17,621) | |
(1)Tenant improvement costs incurred on newly-developed properties are classified in this table as development and redevelopment.development.
Cash Flows
Net cash flow from operating activities increased $9.9$10.4 million, or 4.3%3.9%, from 20192022 to 2020 due primarily to2023, which included the timingeffects of increased cash outlaysflow from real estate operations resulting from the growth of our operating portfolio, offset in part by higher payments for construction contractlease incentives and sales-type lease costs relative toand lower interest income received on investing receivables from the cash receipts from customers associated with such costs.City of Huntsville in 2023.
Net cash flow used in investing activities increased $187.8$86.2 million from 20192022 to 20202023 due primarilyin large part to lower proceeds from properties sold in 2023, which included our sale of a 90% interest in three data center shells, relative to 2022, which included sales of real estate interests of $143.0 millionour wholesale data center and a 90% interest in the current period compared to $309.6 million in the prior period, partially offset by the effect of $53.1 million paid to cash settle interest rate swaps in the current period.two data center shells.
Net cash flow provided by financing activities in 20202023 was $91.3$46.3 million, and included primarily the following:
•>net proceeds fromof debt borrowings during the period of $252.0$181.4 million, which included $150.0 million in borrowings under a term loan facility and the net increase fromeffect of our issuance of the 2.25%5.25% Notes and a net paydown of borrowings under our Revolving Credit Facility using proceeds from the purchasenotes issuance and redemption of the 3.70% Notes; offset in part by
•dividends and/or distributions to equity holders of $125.2 million;
•distributions paid to redeemable noncontrolling interests of $14.4 million;from property sales; and
•>our redemptiondividends to common shareholders of the Series I Preferred Units for $8.8$127.2 million.
Net cash flow used in financing activities in 20192022 was $84.4$183.2 million, and included primarily the following:
•>dividends and/or distributions to equity holderscommon shareholders of $124.8$123.6 million; offset in part byand
•>net repayments of debt borrowings during the period of $43.3 million, which included the net effect of: repayments of our Revolving Credit Facility and term loan facility primarily using property sale proceeds; proceeds from our Revolving Credit Facility used primarily to fund property development; and the issuancerefinancing of common shares (or units) of $46.4 million.our existing Revolving Credit Facility and term loan facility using proceeds from new facilities.
Supplemental Guarantor Information
Liquidity
As of December 31, 2023, CDPLP had several series of unsecured senior notes outstanding that were issued in transactions registered with the SEC under the Securities Act. These notes are CDPLP’s direct, senior unsecured and Capital Resourcesunsubordinated obligations and rank equally in right of COPT
COPLP is the entity through which COPT, the sole general partner of COPLP, conducts almostpayment with all of its operationsCDPLP’s existing and owns almostfuture senior unsecured and unsubordinated indebtedness. However, these notes are effectively subordinated in right of payment to CDPLP’s existing and future secured indebtedness. The notes are also effectively subordinated in right of payment to all existing and future liabilities and other indebtedness, whether secured or unsecured, of its assets.CDPLP's subsidiaries. COPT occasionally issues public equity but does not otherwise generate any capital itselfDefense fully and unconditionally guarantees CDPLP’s obligations under these notes. COPT Defense’s guarantees of these notes are senior unsecured obligations that rank equally in right of payment with other senior unsecured obligations of, or conduct any business itself, other than incurring certain expenses in operating as a public company which are fully reimbursedguarantees by, COPLP. COPT Defense. COPT Defense itself does not hold any indebtedness, and its only material asset is its ownershipinvestment in CDPLP.
As permitted under Rule 13-01(a)(4)(vi), we do not provide summarized financial information for the Operating Partnership since: the assets, liabilities, and results of partnership interestsoperations of COPLP. COPT’s principal funding requirement is the paymentCompany and the Operating Partnership are not materially different than the corresponding amounts presented in the consolidated financial statements of dividends on its commonthe Company; and preferred shares. COPT’s principal sourcewe believe that inclusion of funding for its dividend payments is distributions it receives from COPLP.such summarized financial information would be repetitive and not provide incremental value to investors.
Liquidity and Capital Resources
As of December 31, 2020, COPT owned 98.6% of the outstanding common units in COPLP and there were no preferred units outstanding. As the sole general partner of COPLP, COPT has the full, exclusive and complete responsibility for COPLP’s day-to-day management and control.
The liquidity of COPT is dependent on COPLP’s ability to make sufficient distributions to COPT. The primary cash requirement of COPT is its payment of dividends to its shareholders. COPT also guarantees some of the Operating Partnership’s debt, as discussed further in Note 10 of the notes to consolidated financial statements included herein. If the Operating Partnership fails to fulfill certain of its debt requirements, which trigger COPT’s guarantee obligations, then COPT will be required to fulfill its cash payment commitments under such guarantees. However, COPT’s only significant asset is its investment in COPLP.
As discussed further below,2023, we believe that the Operating Partnership’s sources of working capital, specifically its cash flow from operations, and borrowings available under its Revolving Credit Facility, are adequate for it to make its distribution payments to COPT and, in turn, for COPT to make its dividend payments to its shareholders.
COPT’s short-term liquidity requirements consist primarily of funds to pay for future dividends expected to be paid to its shareholders. COPT periodically accesses the public equity markets to raise capital by issuing common and/or preferred shares.
For COPT to maintain its qualification as a REIT, it must pay dividends to its shareholders aggregating annually to at least 90% of its ordinary taxable income. As a result of this distribution requirement, it cannot rely on retained earnings to fund its ongoing operations to the same extent that some other companies can. COPT may need to continue to raise capital in the equity markets to fund COPLP’s development activities and acquisitions.
Liquidity and Capital Resources of COPLP
COPLP’s primary cash requirements are for operating expenses, debt service, development of new properties and improvements to existing properties. We expect COPLP to continue to use cash flow provided by operations as the primary source to meet its short-term capital needs, including property operating expenses, general and administrative expenses, interest expense, scheduled principal amortization of debt, distributions to its security holders and improvements to existing properties. As of December 31, 2020, COPLP had $18.4$167.8 million in cash and cash equivalents. We were carrying a significant amount of cash and cash equivalents as of the end of the period due to our use of a portion of the net proceeds from our issuance of the 5.25% Notes to pre-fund future development investments, which resulted in a portion of the net proceeds being invested in short-term interest-bearing money market accounts pending such use.
COPLP’sWe have a Revolving Credit Facility with a maximum borrowing capacity of $600.0 million. We use this facility to initially fund most of the cash requirements from our investing activities, including property development/redevelopment costs, as well as certain debt balloon payments due upon maturity. We then subsequently pay down the facility using cash available from operations and proceeds from financing and/or investing activities, such as long-term borrowings, equity issuances and sales of interests in properties. The facility matures in October 2026 and may be extended by two six-month periods at our option, provided that there is no default under the facility and we pay an extension fee of 0.0625% of the total availability under the facility for each extension period. Our available borrowing capacity under the facility totaled $525.0 million as of December 31, 2023.
Our senior unsecured debt is currently rated investment grade, with stable outlooks, by the three major rating agencies. We aim to maintain an investment grade rating to enable COPLPus to use debt comprised of unsecured, primarily fixed-rate debt (including the effect of interest rate swaps) from public markets and banks. COPLPWe also usesuse secured nonrecourse debt from institutional lenders and banks primarily for joint venture financings. In addition, COPLPwe periodically raisesraise equity from COPT when COPT accesseswe access the public equity markets by issuing common and/orshares and, to a lesser extent, preferred shares.
COPLP uses its Revolving Credit Facility to initially finance much of its investing activities. COPLP subsequently pays down the facility using cash available from operations and proceeds from long-term borrowings (net of any related hedging costs), equity issuances and sales of interests in properties. The lenders’ aggregate commitment under the facility is $800.0 million, with the ability for COPLP to increase the lenders’ aggregate commitment to $1.25 billion, provided that there is no default under the facility and subject to the approval of the lenders. The facility matures in March 2023, and may be extended by two six-month periods at COPLP’s option, provided that there is no default under the facility and COPLP pays an extension fee of 0.075% of the total availability under the facility for each extension period. As of December 31, 2020, the maximum borrowing capacity under this facility totaled $800.0 million, of which $657.0 million was available.
COPT hasWe have a program in place under which itwe may offer and sell common shares in at-the-market stock offerings having an aggregate gross sales price of up to $300 million. Under this program, COPTwe may also, at itsour discretion, sell common shares under forward equity sales agreements. The use of a forward equity sales agreement would enable us to lock in a price on a sale of common shares when the agreement is executed but defer issuing the shares and receiving the sale proceeds from the sale until a later date.
We believe that COPLP’sour liquidity and capital resources are adequate for itsour near-term and longer-term requirements without necessitating property sales. However, we may dispose of interests in properties opportunistically or when capital marketsmarket conditions otherwise warrant. We believe that we have the ability to raise additional equity by selling interests in data center shells through joint ventures.
Our material cash requirements, including contractual and other obligations, as of December 31, 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ending December 31, | | |
| | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Thereafter | | Total |
| Contractual obligations (1) | | | | | | | | | | | | | |
| Debt (2) | | | | | | | | | | | | | |
| Balloon payments due upon maturity | $ | — | | | $ | 482,882 | | | $ | 556,578 | | | $ | 277,649 | | | $ | 322,100 | | | $ | 445,623 | | | $ | 2,084,832 | |
| Scheduled principal payments (3) | 3,955 | | | 4,498 | | | 3,552 | | | 2,334 | | | 1,617 | | | 677 | | | 16,633 | |
| Interest on debt (3)(4) | 64,643 | | | 63,576 | | | 45,913 | | | 27,625 | | | 18,176 | | | 2,543 | | | 222,476 | |
| Development and redevelopment obligations (5)(6) | 100,139 | | | 7,302 | | | 388 | | | — | | | — | | | — | | | 107,829 | |
| Third-party construction obligations (6)(7) | 18,823 | | | — | | | — | | | — | | | — | | | — | | | 18,823 | |
| Tenant and other building improvements (3)(6) | 26,624 | | | 24,740 | | | 7,992 | | | — | | | — | | | — | | | 59,356 | |
| Property finance leases (principal and interest) (3) | 14 | | | 14 | | | — | | | — | | | — | | | — | | | 28 | |
| Property operating leases (3) | 3,211 | | | 3,332 | | | 3,382 | | | 3,434 | | | 1,780 | | | 126,350 | | | 141,489 | |
| Total contractual cash obligations | $ | 217,409 | | | $ | 586,344 | | | $ | 617,805 | | | $ | 311,042 | | | $ | 343,673 | | | $ | 575,193 | | | $ | 2,651,466 | |
(1)>The contractualproperty operating expenses, including future lease obligations set forth in this table exclude contracts for property operations and certain other contracts entered into in the normal course of business. Also excluded are accruals and payables incurred and interest rate derivative liabilities, which are reflected in our reported liabilities (although debt and lease liabilities are included on the table).from us as a lessee;
(2)>Represents scheduled principal amortization paymentsconstruction contract expenses;
>general, administrative, leasing and maturities onlyother expenses;
>debt service, including interest expense;
>property development costs;
>tenant and therefore excludes net debt discountscapital improvements and deferred financingleasing costs of $14.5 million. As of December 31, 2020, maturities included $143.0for operating properties (expected to total approximately $85 million in 2023 that may be extended to 2024, subject to certain conditions.2024);
(3)>We expect to pay these items using cash flow from operations.debt balloon payments due upon maturity; and
(4)>Represents interest costs fordividends to our outstanding debt as of December 31, 2020 for the terms of such debt. For variable rate debt, the amounts reflected above used December 31, 2020 interest rates on variable rate debt in computing interest costs for the terms of such debt. We expect to pay these items using cash flow from operations.
(5)Represents contractual obligations pertaining to new development and redevelopment activities.
(6)Due to the long-term nature of certain development and construction contracts and leases included in these lines, the amounts reported in the table represent our estimate of the timing for the related obligations being payable.
(7)Represents contractual obligations pertaining to projects for which we are acting as construction manager on behalf of unrelated parties who are our clients. We expect to be reimbursed in full for these costs by our clients.shareholders.
We expect to use cash flow from operations in 2024 and annually thereafter for the foreseeable future to fund all of these cash requirements except for debt balloon payments due upon maturity and a portion of property development costs, the fundings for which are discussed below.
In 2024, we expect to spend $275$240 million to $300$280 million on development costs, most of which was contractually obligated as of December 31, 2023, and approximately $85had $27.6 million on improvements and leasing costs for operating properties (including the commitments set forth in the table above)debt balloon payments maturing in 2021.2024. We expect to fund these cash requirements using, in part, remaining cash flow from operations and any remaining excess available cash and cash equivalents, with the development costs initiallybalance funded using primarily borrowings under our Revolving Credit Facility. WeFacility, at least initially.
Beyond 2024, we expect to continue to actively develop and redevelop properties and fund improvements to existing operating properties using, in part, remaining cash flow from operating activities.operations, with the balance, at least initially, funded primarily using borrowings under our Revolving Credit Facility.
We provide disclosure in our consolidated financial statements on our future lessee obligations (expected to be funded primarily by cash flow from operations) in Note 5 and future debt obligations (expected to be refinanced by new debt borrowings or funded by future equity issuances and/or sales of interests in properties) in Note 8.
Certain of our debt instruments require that we comply with a number of restrictive financial covenants, including maximum leverage ratio, unencumbered leverage ratio, minimum net worth, minimum fixed charge coverage, minimum unencumbered interest coverage ratio, minimum debt service and maximum secured indebtedness ratio. As of December 31, 2020,2023, we were compliant with these covenants.
Off-Balance Sheet Arrangements40
We had no material off-balance sheet arrangements during 2020.
Inflation
Most of our tenants are obligated to pay their share of a property’s operating expenses to the extent such expenses exceed amounts established in their leases, which are based on historical expense levels. Some of our tenants are obligated to pay their full share of a building’s operating expenses. These arrangements somewhat reduce our exposure to increases in such costs resulting from inflation.
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements for information regarding recent accounting pronouncements.
Item 7A.Quantitative and Qualitative Disclosures about Market Risk
We are exposed to certain market risks, one of the most predominant of which is a change in interest rates. Increases in interest rates can result in increased interest expense under our Revolving Credit Facility and other variablevariable-rate debt to the extent we do not have interest rate debt.swaps in place to hedge the effect of such rate increases. Increases in interest rates can also result in increased interest expense when our fixed ratefixed-rate debt matures and needs to be refinanced.
The following table sets forth as of December 31, 20202023 our debt obligations and weighted average interest rates on debt maturing each year (dollars in thousands):
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| | For the Years Ending December 31, | | |
| | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Thereafter | | Total |
| Debt: | | | | | | | | | | | | | |
| Fixed rate debt (1) | $ | 3,875 | | | $ | 4,033 | | | $ | 416,590 | | | $ | 279,443 | | | $ | 301,302 | | | $ | 436,140 | | | $ | 1,441,383 | |
| Weighted average interest rate | 3.97 | % | | 3.98 | % | | 3.70 | % | | 5.16 | % | | 4.99 | % | | 2.38 | % | | 3.86 | % |
| Variable rate debt (2) | $ | 80 | | | $ | 483,347 | | | $ | 143,540 | | | $ | 540 | | | $ | 22,415 | | | $ | 10,160 | | | $ | 660,082 | |
| Weighted average interest rate (3) | 1.60 | % | | 1.39 | % | | 1.20 | % | | 1.66 | % | | 1.70 | % | | 1.60 | % | | 1.37 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ending December 31, | | |
| | 2024 | | 2025 | | 2026 | | 2027 | | 2028 | | Thereafter | | Total |
| Debt: | | | | | | | | | | | | | |
| Fixed-rate debt (1) | $ | 29,443 | | | $ | 1,302 | | | $ | 436,140 | | | $ | — | | | $ | 345,000 | | | $ | 1,400,000 | | | $ | 2,211,885 | |
| Weighted average interest rate | 4.42% | | 3.23% | | 2.38% | | —% | | 5.25% | | 2.58% | | 2.98% |
| Variable-rate debt (2) | $ | 540 | | | $ | 22,415 | | | $ | 210,160 | | | $ | — | | | $ | — | | | $ | — | | | $ | 233,115 | |
| Weighted average interest rate (3) | 6.93% | | 6.97% | | 6.66% | | —% | | —% | | —% | | 6.69% |
(1)Represents principal maturities only and therefore excludes net discounts and deferred financing costs of $14.5$28.7 million.
(2)As of December 31, 2020,2023, maturities in 2026 included $143.0$75.0 million in 2023 that may be extended to 2024,2027 and $125.0 million that may be extended to 2028, both subject to certain conditions.
(3)The amounts reflected above used interest rates as of December 31, 20202023 for variable ratevariable-rate debt.
The fair value of our debt was $2.1$2.2 billion as of December 31, 20202023 and $1.9 billion as of December 31, 2019.2022. If interest rates had been 1% lower, the fair value of our fixed-rate debt would have increased by approximately $52$82 million as of December 31, 20202023 and $45$88 million as of December 31, 2019.2022.
See Note 119 to our consolidated financial statements for information pertaining to interest rate swap contracts in place as of December 31, 20202023 and 20192022 and their respective fair values.
Based on our variable-rate debt balances, including the effect of interest rate swap contracts, our interest expense would have increased by $2.2$764,000 in 2023 and $1.5 million in 2020 and $2.0 million in 20192022 if the applicable LIBORvariable index rate was 1% higher. Interest expense in 20202023 was moreless sensitive to a change in interest rates than 20192022 due primarily to our having a higherlower average variable-rate debt balance in 20202023, including the effect of interest rate derivatives in place.swaps.
Item 8.Financial Statements and Supplementary Data
This item is included in a separate section at the end of this report beginning on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
I.Internal Control Over Financial Reporting
COPT
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of COPT’sour disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of December 31, 2020.2023. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that COPT’sour disclosure controls and procedures as of December 31, 20202023 were functioning effectively to provide reasonable assurance that the information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and
communicated to itsour management, including itsour principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
(a) Management’s Report on Internal Control Over Financial Reporting
Management’s Report on Internal Control Over Financial Reporting is included in a separate section at the end of this report on page F-2.
(b) Report of Independent Registered Public Accounting Firm
The Report of Independent Registered Public Accounting Firm is included in a separate section at the end of this report on pages F-4 andF-3 through F-5.
(c) Change in Internal Control over Financial Reporting
No change in COPT’sour internal control over financial reporting occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, itsour internal control over financial reporting.
COPLP
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of COPLP’s disclosure controls and procedures (as defined in Rule 15d-15(e) under the Exchange Act) as of December 31, 2020. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that COPLP’s disclosure controls and procedures as of December 31, 2020 were functioning effectively to provide reasonable assurance that the information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to its management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
(a) Management’s Report on Internal Control Over Financial Reporting
Management’s Report on Internal Control Over Financial Reporting is included in a separate section at the end of this report on page F-3.
(b) Report of Independent Registered Public Accounting Firm
The Report of Independent Registered Public Accounting Firm is included in a separate section at the end of this report on pages F-6 and F-7.
(c) Change in Internal Control over Financial Reporting
No change in COPLP’s internal control over financial reporting occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
Item 9B. Other Information
None.
48(a) Not applicable
(b) Rule 10b5-1 Trading Plans
During the quarter ended December 31, 2023, none of our directors or executive officers entered into, modified, terminated or had in place contracts, instructions or written plans for the sale or purchase of our securities that were intended to satisfy the affirmative defense conditions of Rule 10b5-1.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
(a) Not applicable
(b) Not applicable
PART III
Items 10, 11, 12, 13 & 14. Directors, Executive Officers and Corporate Governance; Executive Compensation; Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters; Certain Relationships and Related Transactions, and Director Independence; and Principal Accountant Fees and Services
For the information required by Item 10, Item 11, Item 12, Item 13 and Item 14, you should refer to COPT’sour definitive proxy statement relating to the 20212024 Annual Meeting of COPT’sour Shareholders to be filed with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
PART IV
Item 15. ExhibitsExhibit and Financial Statement Schedules
(a)The following documents are filed as exhibits to this Form 10-K:
1.Financial Statements. See “Index to consolidated financial statements” on page F-1 of this Annual Report on Form 10-K.
2.Financial Statement Schedules. See “Index to consolidated financial statements” on page F-1 of this Annual Report on Form 10-K.
3.See section below entitled “Exhibits.”
(b) Exhibits. Refer to the Exhibit Index that follows. Unless otherwise noted, the file number of all documents incorporated by reference is 1-14023.
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EXHIBIT
NO. | | DESCRIPTION |
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| | Letter Agreement, dated May 12, 2016,June 22, 2021, between Corporate Office Properties Trust, Corporate Office Properties, L.P., and Stephen E. Budorick (filed with the Company’s CurrentQuarterly Report on Form 8-K dated May 17, 201610-Q for the quarter ended June 30, 2021 and incorporated herein by reference). | |
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| | LetterConfidential Post-Resignation Consulting Agreement dated November 1, 2016,and Release between Corporate Office Properties, Trust, Corporate Office Properties, L.P., and Gregory J. ThorTodd W. Hartman, dated March 1, 2023 (filed with the Company’s AnnualCurrent Report on Form 10-K for the year ended December 31, 20178-K dated March 1, 2023 and incorporated herein by reference). | |
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| | Indenture, dated as of May 6, 2013, among Corporate Office Properties, L.P., as issuer, Corporate Office Properties Trust, as guarantor, and U.S. Bank National Association, as trustee (filed with the Company’s Current Report on Form 8-K dated May 7, 2013 and incorporated herein by reference). |
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| | Indenture, dated as of September 16, 2013, by and among Corporate Office Properties, L.P., as issuer, Corporate Office Properties Trust, as guarantor, and U.S. Bank National Association, as trustee (filed with the Company’s Current Report on Form 8-K dated September 19, 2013 and incorporated herein by reference). |
| | First Supplemental Indenture, dated as of September 16, 2013, by and among Corporate Office Properties, L.P., as issuer, Corporate Office Properties Trust, as guarantor, and U.S. Bank National Association, as trustee (filed with the Company’s Current Report on Form 8-K dated September 19, 2013 and incorporated herein by reference). |
| | Third Supplemental Indenture, dated as of June 29, 2015, among Corporate Office Properties, L.P., as issuer, Corporate Office Properties Trust, as guarantor, and U.S. Bank National Association, as trustee (filed with the Company’s Current Report on Form 8-K dated July 1, 2015 and incorporated herein by reference). |
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EXHIBIT
NO. | | DESCRIPTION | |
| | First Supplemental Indenture, dated as of September 17, 2020, by and among Corporate Office Properties, L.P., as issuer, Corporate Office Properties Trust, as guarantor, and U.S. Bank National Association, as trustee (filed with the Company’s Current Report on Form 8-K dated September 17, 2020 and incorporated herein by reference). | |
| | Amended and Restated Term Loan Agreement, dated as of March 6, 2020,Second Supplemental Indenture, by and among Corporate Office Properties, L.P., as issuer, Corporate Office Properties Trust, Capital One, National Association, PNC Capital Markets LLCas guarantor, and Regions Capital Markets, a division of Regions Bank, PNCU.S. Bank National Association, and Regions Bankas trustee (filed with the Company’s QuarterlyCurrent Report on Form 10-Q for the quarter ended8-K dated March 31, 202011, 2021 and incorporated herein by reference). |
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EXHIBIT
NO. | | DESCRIPTION |
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| | Credit Agreement, dated as of October 10, 2018,26, 2022, by and among Corporate Office Properties, L.P.; Corporate Office Properties Trust; KeyBank National Association; KeyBanc Capital Markets, Inc.; JPMorgan Chase Bank, N.A.; Citibank, N.A.; Wells FargoPNC Capital Markets LLC; TD Bank National Association; BarclaysM&T Bank, PLC; Merrill Lynch, Pierce, Fenner & Smith Incorporated;a New York Banking Corporation; and PNC Bank of America, N.A.National Association (filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 and incorporated herein by reference). | |
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| 101.INS | | XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document (filed herewith). | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document (filed herewith). | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith). | |
| 101.LAB | | XBRL Extension Labels Linkbase (filed herewith). | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith). | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document (filed herewith). | |
| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |
* - Indicates a compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K.
(c) Not applicable.
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrantregistrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | |
| | | | CORPORATE OFFICECOPT DEFENSE PROPERTIES TRUST |
| | | | |
| Date: | February 12, 202122, 2024 | By: | /s/ Stephen E. Budorick |
| | | | Stephen E. Budorick |
| | | | President and Chief Executive Officer |
| | | | |
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| Date: | February 12, 202122, 2024 | By: | /s/ Anthony Mifsud |
| | | | Anthony Mifsud |
| | | | Executive Vice President and Chief Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrantregistrant and in the capacities and on the dates indicated:indicated.
| | | | | | | | | | | |
| Signatures | | Title | Date |
| /s/ Stephen E. Budorick | | President and Chief Executive Officer and Trustee | February 12, 202122, 2024 |
| (Stephen E. Budorick) | | | |
| /s/ Anthony Mifsud | | Executive Vice President and Chief Financial | February 12, 202122, 2024 |
| (Anthony Mifsud) | | Officer (Principal Financial Officer) | |
/s/ Gregory J. ThorMatthew T. Myers | | Senior Vice President, Controller and Chief Accounting Officer | February 12, 202122, 2024 |
(Gregory J. Thor)Matthew T. Myers) | | Accounting Officerand Controller (Principal Accounting Officer) | |
/s/ Thomas F. Brady/s/ Robert L. Denton, Sr. | | Chairman of the Board and Trustee | February 12, 202122, 2024 |
| (Robert L. Denton, Sr.) | | | |
| /s/ Thomas F. Brady | | Trustee | February 22, 2024 |
| (Thomas F. Brady) | | | |
/s/ Robert L. Denton, Sr. | | Trustee | February 12, 2021 |
( Robert L. Denton, Sr.) | | | |
| /s/ Philip L. Hawkins | | Trustee | February 12, 202122, 2024 |
| (Philip L. Hawkins) | | | |
/s/ David M. Jacobstein | | Trustee | February 12, 2021 |
(David M. Jacobstein) | | | |
| /s/ Steven D. Kesler | | Trustee | February 12, 202122, 2024 |
| (Steven D. Kesler) | | | |
| /s/ Letitia A. Long | | Trustee | February 12, 202122, 2024 |
| (Letitia A. Long) | | | |
| /s/ Essye B. Miller | | Trustee | February 22, 2024 |
| (Essye B. Miller) | | | |
| /s/ Raymond L. Owens | | Trustee | February 22, 2024 |
| (Raymond L. Owens) | | | |
| /s/ C. Taylor Pickett | | Trustee | February 12, 202122, 2024 |
| (C. Taylor Pickett) | | | |
| /s/ Lisa G. Trimberger | | Trustee | February 12, 202122, 2024 |
| (Lisa G. Trimberger) | | | |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | | CORPORATE OFFICE PROPERTIES, L.P. |
| | | By: Corporate Office Properties Trust, |
| | | its General Partner |
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Date: | February 12, 2021 | By: | /s/ Stephen E. Budorick |
| | | Stephen E. Budorick |
| | | President and Chief Executive Officer |
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Date: | February 12, 2021 | By: | /s/ Anthony Mifsud |
| | | Anthony Mifsud |
| | | Executive Vice President and Chief Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
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Signatures | | Title | Date |
/s/ Stephen E. Budorick | | President and Chief Executive Officer and Trustee | February 12, 2021 |
(Stephen E. Budorick) | | | |
/s/ Anthony Mifsud | | Executive Vice President and Chief Financial | February 12, 2021 |
(Anthony Mifsud) | | Officer (Principal Financial Officer) | |
/s/ Gregory J. Thor | | Senior Vice President, Controller and Chief | February 12, 2021 |
(Gregory J. Thor) | | Accounting Officer (Principal Accounting Officer) | |
/s/ Thomas F. Brady | | Chairman of the Board and Trustee | February 12, 2021 |
(Thomas F. Brady) | | | |
/s/ Robert L. Denton, Sr. | | Trustee | February 12, 2021 |
( Robert L. Denton, Sr.) | | | |
/s/ Philip L. Hawkins | | Trustee | February 12, 2021 |
(Philip L. Hawkins) | | | |
/s/ David M. Jacobstein | | Trustee | February 12, 2021 |
(David M. Jacobstein) | | | |
/s/ Steven D. Kesler | | Trustee | February 12, 2021 |
(Steven D. Kesler) | | | |
/s/ Letitia A. Long | | Trustee | February 12, 2021 |
(Letitia A. Long) | | | |
/s/ C. Taylor Pickett | | Trustee | February 12, 2021 |
(C. Taylor Pickett) | | | |
/s/ Lisa G. Trimberger | | Trustee | February 12, 2021 |
(Lisa G. Trimberger) | | | |
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
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ReportsReport of Independent Registered Public Accounting Firm | |
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Consolidated Financial Statements of Corporate Office Properties Trust | |
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Consolidated Financial Statements of Corporate Office Properties, L.P. | |
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Corporate Office Properties Trust Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2020.2023. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and trustees; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management performed an assessment of the effectiveness of our internal control over financial reporting as of December 31, 20202023 based upon criteria in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our assessment, management determined that our internal control over financial reporting was effective as of December 31, 20202023 based on the criteria in Internal Control - Integrated Framework (2013) issued by the COSO.
The effectiveness of our internal control over financial reporting as of December 31, 20202023 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Corporate Office Properties, L.P. Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2020. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and trustees; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management performed an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2020 based upon criteria in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our assessment, management determined that our internal control over financial reporting was effective as of December 31, 2020 based on the criteria in Internal Control - Integrated Framework (2013) issued by the COSO.
The effectiveness of our internal control over financial reporting as of December 31, 2020 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of Corporate Office Properties TrustCOPT Defense Properties:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Corporate OfficeCOPT Defense Properties Trust and its subsidiaries (the “Company”) as of December 31, 20202023 and 2019,2022, and the related consolidated statements of operations, of comprehensive income, of equity and of cash flows for each of the three years in the period ended December 31, 2020,2023, including the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2020,2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20202023 and 2019,2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20202023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020,2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and the board of trustees of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit mattermatters communicated belowis a matter are matters arising from the current period audit of the consolidated financial statements that waswere communicated or required to be communicated to the audit committee and that (i) relatesrelate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit mattermatters below, providing a separate opinionopinions on the critical audit mattermatters or on the accounts or disclosures to which it relates.they relate.
Determination of the Expected Lease End Date for United States Government Leases with One-yearOne-Year Renewal Options and/or Early Termination Rights
As described in Notes 2 and 5 to the consolidated financial statements, total lease revenue from continuing operations for the year ended December 31, 20202023 was $536.1$619.8 million and a significant portion of the Company’s leases are with the United States Government, which represented 25%27% of the fixed lease revenues for the year ended December 31, 2020.2023. The majority of United States Government leases contain one-year renewal options and/or provide for early termination rights. The Company recognizes minimum rental payments on a straight-line basis over the terms of each lease. The lease term of a lease includes the noncancellable periods of the lease along with periods covered by: (1) a tenant option to extend the lease if the tenant is reasonably certain to exercise that option; (2) a tenant option to terminate the lease if the tenant is reasonably certain not to exercise that option; and (3) an option to extend (or not to terminate) the lease in which exercise of the option is controlled by the Company as the lessor. When assessing the expected lease end date, management uses judgment in contemplating the significance of any penalties a tenant may incur should it choose not to exercise any existing options to extend the lease or exercise any existing options to terminate the lease; and economic incentives for the tenant based on any existing contract, asset, entity or market-based factors in the lease.
The principal considerations for our determination that performing procedures relating to the determination of the expected lease end date for United States Government leases with one-year renewal options and/or early termination rights is a critical audit matter are (i) the significant judgmentsjudgment by management when determining the expected lease end date for the United States Government leases with one-year renewal options and/or early termination rights which in turn led toand (ii) a high degree of auditor judgment, subjectivity, and audit effort in performing procedures and evaluating audit evidence relating to the determination of such expected lease end dates.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition for leases, including controls over the determination of the expected lease end datesdate for United States Government leases with one-year renewal options and/or early termination rights. These procedures also included, among others, testing management’s process for determining the expected lease end date for a sample of United States Government leases with one-year renewal options and/or early termination rights, including evaluating the reasonableness of significant assumptions utilizedused by management related to the significance of any penalties a tenant may incur should it choose not to exercise any existing options to extend the lease or exercise any existing options to terminate the lease;lease and economic incentives for the tenant based on any existing contract, asset, entity or market-based factors in the lease. Evaluating themanagement’s assumptions includedinvolved evaluating whether the assumptions used were reasonable considering past experience with the tenant and the rental property and whether the assumptions were consistent with evidence obtained in other areas of the audit.
/s/ PricewaterhouseCoopers LLP
Baltimore, Maryland
February 12, 2021
We have served as the Company’s auditor since 1997.
ReportImpairment Assessment of Independent Registered Public Accounting Firm
To the BoardProperties – Fair Value Analysis of Trustees and Unitholders of Corporate OfficeImpaired Properties L.P.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Corporate Office Properties, L.P. and its subsidiaries (the “Operating Partnership”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, of comprehensive income, of equity and of cash flows for each of the three years in the period ended December 31, 2020, including the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We also have audited the Operating Partnership’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Operating Partnership as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Operating Partnership maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Operating Partnership’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Operating Partnership’s consolidated financial statements and on the Operating Partnership’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Operating Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and trustees of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated belowis a matterarising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to theconsolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidatedfinancial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Determination of Expected Lease End Date for United States Government Leases with One-year Renewal Options and/or Early Termination RightsOther Reportable Segment
As described in Notes 2 and 54 to the consolidated financial statements, management assesses the asset groups associated with each of the Company’s properties for indicators of impairment quarterly or when circumstances indicate that an asset group may be impaired. As of December 31, 2023, the carrying value of the Company’s total lease revenue forproperties, net of accumulated depreciation was $3.5 billion, of which a portion relates to the Other reportable segment. For the year ended December 31, 2020 was $536.1 million2023, the Company recorded an impairment loss of $252.8 million. If management’s analysis indicates the carrying values of certain properties’ asset groups may be impaired, management performs a recoverability analysis for such asset groups. If and when plans change for a property, management revises the recoverability analyses to use the cash flows expected from the operations and eventual disposition of such property using holding periods that are consistent with revised plans. In accounting for the impairment of long-lived assets, management estimates property fair values based on contract prices, indicative bids, discounted cash flow analyses or comparable sales analyses. Management estimates cash flows used in performing impairment analyses based on plans for the property and views of market and economic conditions. The estimates consider items such as current and future market rental and occupancy rates, estimated operating and capital expenditures, leasing commissions, absorption and hold periods, and recent sales data for comparable properties. As disclosed by management, the determination of appropriate capitalization or discount rates for use in estimating property fair values also requires significant portionjudgment and is typically based on many factors, including the prevailing rate for the market or submarket, as well as the quality, location and other unique attributes of the Operating Partnership’s leases are with the United States Government, which represented 25% of the fixed lease revenues for the year ended December 31, 2020. The majority of United States Government leases contain one-year renewal options and/or provide for early termination rights. The Operating Partnership recognizes minimum rental payments on a straight-line basis over the terms of each lease. The lease term of a lease includes the noncancellable periods of the lease along with periods covered by: (1) a tenant option to extend the lease if the tenant is reasonably certain to exercise that option; (2) a tenant option to terminate the lease if the tenant is reasonably certain not to exercise that option; and (3) an option to extend (or not to terminate) the lease in which exercise of the option is controlled by the Operating Partnership as the lessor. When assessing the expected lease end date, management uses judgment in contemplating the significance of any penalties a tenant may incur should it choose not to exercise any existing options to extend the lease or exercise any existing options to terminate the lease; and economic incentives for the tenant based on any existing contract, asset, entity or market-based factors in the lease. property.
The principal considerations for our determination that performing procedures relating to the determinationfair value analysis of impaired properties in the expected lease end date for United States Government leases with one-year renewal options and/or early termination rightsOther reportable segment is a critical audit matter are (i) the significant judgmentsjudgment by management when determiningin developing the expected lease end date forfair value estimate of the United States Government leases with one-year renewal options and/or early termination rights, whichproperties in turn led tothe Other reportable segment based on the discounted cash flow and comparable sales analyses; (ii) a high degree of auditor judgment, subjectivity, and audit effort in performing procedures and evaluating audit evidence relatingmanagement’s significant assumptions related to the determinationcurrent and future market rental and occupancy rates, estimated operating and capital expenditures, leasing commissions, absorption and hold periods, capitalization rates and discount rates used in the discounted cash flow analyses and recent sales data for comparable properties used in the comparable sales analyses (collectively referred to as the “significant assumptions”); and (iii) the audit effort involved the use of such expected lease end dates.professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition for leases,fair value analysis of impaired properties, including controls over management’s development of the fair value estimate of the properties based on the discounted cash flow and comparable sale analyses and determination of the expected lease end dates for United States Government leases with one-year renewal options and/or early termination rights.significant assumptions used in the discounted cash flow and comparable sales analyses. These procedures also included, among others (i) testing management’s process for determiningdeveloping the expected lease end date for a samplefair value estimate of United States Government leases with one-year renewal options and/or early termination rights, includingthe properties in the Other reportable segment based on the discounted cash flow and comparable sales analyses; (ii) evaluating the appropriateness of the discounted cash flow and comparable sales analyses; (iii) testing the completeness and accuracy of the underlying data used in the discounted cash flow and comparable sales analyses; and (iv) evaluating the reasonableness of the significant assumptions utilizedused by management related to the significance of any penalties a tenant may incur should it choose not to exercise any existing options to extend the lease or exercise any existing options to terminate the lease; and economic incentives for the tenant based on any existing contract, asset, entity or market-based factors in the lease.discounted cash flow and comparable sales analyses. Evaluating themanagement’s assumptions includedinvolved evaluating whether the assumptions used were reasonable consideringby (i) comparing the current and future market rental and occupancy rates, estimated operating expenditures, leasing commissions, absorption periods, capitalization rates, discount rates and recent sales data to observable market data; (ii) comparing the estimated operating and capital expenditures and hold periods to the past experience withperformance of the tenantrelevant properties held by the Company; and the rental property and(iii) considering whether the assumptionscurrent and future market rental rates and estimated operating and capital expenditures were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating, on a test basis, the appropriateness of the discounted cash flow analyses and the reasonableness of the significant assumptions used in the discounted cash flow analyses.
/s/ PricewaterhouseCoopers LLP
Baltimore, Maryland
February 12, 202122, 2024
We have served as the Operating Partnership’sCompany’s auditor since 2013.1997.
Corporate OfficeCOPT Defense Properties Trust and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
| | December 31, |
| 2020 | | 2019 |
| December 31, | | | December 31, |
| 2023 | | | 2023 | | 2022 |
| Assets | Assets | | | | Assets | | | |
| Properties, net: | Properties, net: | | | | Properties, net: | | | |
| Operating properties, net | Operating properties, net | $ | 3,115,280 | | | $ | 2,772,647 | |
| Projects in development or held for future development | Projects in development or held for future development | 447,269 | | | 568,239 | |
| Total properties, net | Total properties, net | 3,562,549 | | | 3,340,886 | |
| Property - operating right-of-use assets | Property - operating right-of-use assets | 40,570 | | | 27,864 | |
| Property - finance right-of-use assets | 40,425 | | | 40,458 | |
| | Assets held for sale, net | |
| Assets held for sale, net | |
| Assets held for sale, net | |
| Cash and cash equivalents | Cash and cash equivalents | 18,369 | | | 14,733 | |
| Investment in unconsolidated real estate joint ventures | Investment in unconsolidated real estate joint ventures | 29,303 | | | 51,949 | |
| Accounts receivable, net | Accounts receivable, net | 41,637 | | | 35,444 | |
| Deferred rent receivable | Deferred rent receivable | 92,876 | | | 87,736 | |
| Intangible assets on real estate acquisitions, net | 19,344 | | | 27,392 | |
| Deferred leasing costs (net of accumulated amortization of $30,375 and $33,782, respectively) | 58,613 | | | 58,392 | |
| Investing receivables (net of allowance for credit losses of $2,851 at December 31, 2020) | 68,754 | | | 73,523 | |
| Lease incentives, net | |
| Deferred leasing costs (net of accumulated amortization of $41,448 and $35,270, respectively) | |
| Investing receivables (net of allowance for credit losses of $2,377 and $2,794, respectively) | |
| | Prepaid expenses and other assets, net | |
| | Prepaid expenses and other assets, net | |
| | Prepaid expenses and other assets, net | Prepaid expenses and other assets, net | 104,583 | | | 96,076 | |
| Total assets | Total assets | $ | 4,077,023 | | | $ | 3,854,453 | |
| Liabilities and equity | Liabilities and equity | | | | Liabilities and equity | | | |
| Liabilities: | Liabilities: | | | | Liabilities: | | | |
| Debt, net | Debt, net | $ | 2,086,918 | | | $ | 1,831,139 | |
| Accounts payable and accrued expenses | Accounts payable and accrued expenses | 142,717 | | | 148,746 | |
| Rents received in advance and security deposits | Rents received in advance and security deposits | 33,425 | | | 33,620 | |
| Dividends and distributions payable | Dividends and distributions payable | 31,231 | | | 31,263 | |
| Deferred revenue associated with operating leases | Deferred revenue associated with operating leases | 10,832 | | | 7,361 | |
| Property - operating lease liabilities | Property - operating lease liabilities | 30,746 | | | 17,317 | |
| Interest rate derivatives | 9,522 | | | 25,682 | |
| | Other liabilities | |
| | Other liabilities | |
| | Other liabilities | Other liabilities | 12,490 | | | 10,649 | |
| Total liabilities | Total liabilities | 2,357,881 | | | 2,105,777 | |
| Commitments and contingencies (Note 20) | 0 | | 0 |
| Commitments and contingencies (Note 17) | | Commitments and contingencies (Note 17) | | | |
| Redeemable noncontrolling interests | Redeemable noncontrolling interests | 25,430 | | | 29,431 | |
| Equity: | Equity: | | | | Equity: | | | |
| Corporate Office Properties Trust’s shareholders’ equity: | | | |
| Shareholders’ equity: | | Shareholders’ equity: | | | |
| | Common Shares of beneficial interest ($0.01 par value; 150,000,000 shares authorized; shares issued and outstanding of 112,181,759 at December 31, 2020 and 112,068,705 at December 31, 2019) | 1,122 | | | 1,121 | |
| Common Shares of beneficial interest ($0.01 par value; 150,000,000 shares authorized; shares issued and outstanding of 112,555,352 at December 31, 2023 and 112,423,893 at December 31, 2022) | |
| Common Shares of beneficial interest ($0.01 par value; 150,000,000 shares authorized; shares issued and outstanding of 112,555,352 at December 31, 2023 and 112,423,893 at December 31, 2022) | |
| Common Shares of beneficial interest ($0.01 par value; 150,000,000 shares authorized; shares issued and outstanding of 112,555,352 at December 31, 2023 and 112,423,893 at December 31, 2022) | |
| Additional paid-in capital | Additional paid-in capital | 2,478,906 | | | 2,481,558 | |
| Cumulative distributions in excess of net income | Cumulative distributions in excess of net income | (809,836) | | | (778,275) | |
| Accumulated other comprehensive loss | (9,157) | | | (25,444) | |
| Total Corporate Office Properties Trust’s shareholders’ equity | 1,661,035 | | | 1,678,960 | |
| Accumulated other comprehensive income | |
| Total shareholders’ equity | |
| Noncontrolling interests in subsidiaries: | Noncontrolling interests in subsidiaries: | | | | Noncontrolling interests in subsidiaries: | | | |
| Common units in COPLP | 20,465 | | | 19,597 | |
| Preferred units in COPLP | 0 | | | 8,800 | |
| Common units in COPT Defense Properties, L.P. (“CDPLP”) | |
| | Other consolidated entities | |
| Other consolidated entities | |
| Other consolidated entities | Other consolidated entities | 12,212 | | | 11,888 | |
| Noncontrolling interests in subsidiaries | Noncontrolling interests in subsidiaries | 32,677 | | | 40,285 | |
| Total equity | Total equity | 1,693,712 | | | 1,719,245 | |
| Total liabilities, redeemable noncontrolling interests and equity | Total liabilities, redeemable noncontrolling interests and equity | $ | 4,077,023 | | | $ | 3,854,453 | |
See accompanying notes to consolidated financial statements.
Corporate OfficeCOPT Defense Properties Trust and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| Revenues | | | | | |
| Lease revenue | $ | 536,127 | | | $ | 522,472 | | | $ | 512,327 | |
| Other property revenue | 2,598 | | | 4,991 | | | 4,926 | |
| Construction contract and other service revenues | 70,640 | | | 113,763 | | | 60,859 | |
| Total revenues | 609,365 | | | 641,226 | | | 578,112 | |
| Operating expenses | | | | | |
| Property operating expenses | 203,840 | | | 198,143 | | | 201,035 | |
| Depreciation and amortization associated with real estate operations | 138,193 | | | 137,069 | | | 137,116 | |
| Construction contract and other service expenses | 67,615 | | | 109,962 | | | 58,326 | |
| Impairment losses | 1,530 | | | 329 | | | 2,367 | |
| General, administrative and leasing expenses | 33,001 | | | 35,402 | | | 28,900 | |
| Business development expenses and land carry costs | 4,473 | | | 4,239 | | | 5,840 | |
| Total operating expenses | 448,652 | | | 485,144 | | | 433,584 | |
| Interest expense | (67,937) | | | (71,052) | | | (75,385) | |
| Interest and other income | 8,574 | | | 7,894 | | | 4,358 | |
| Credit loss recoveries | 933 | | | 0 | | | 0 | |
| Gain on sales of real estate | 30,209 | | | 105,230 | | | 2,340 | |
| Gain on sale of investment in unconsolidated real estate joint venture | 29,416 | | | 0 | | | 0 | |
| Loss on early extinguishment of debt | (7,306) | | | 0 | | | (258) | |
| Loss on interest rate derivatives | (53,196) | | | 0 | | | 0 | |
| Income before equity in income of unconsolidated entities and income taxes | 101,406 | | | 198,154 | | | 75,583 | |
| Equity in income of unconsolidated entities | 1,825 | | | 1,633 | | | 2,697 | |
| Income tax (expense) benefit | (353) | | | 217 | | | 363 | |
| Net income | 102,878 | | | 200,004 | | | 78,643 | |
| Net income attributable to noncontrolling interests: | | | | | |
| Common units in COPLP | (1,180) | | | (2,363) | | | (1,742) | |
| Preferred units in COPLP | (300) | | | (564) | | | (660) | |
| Other consolidated entities | (4,024) | | | (5,385) | | | (3,940) | |
| | | | | |
| | | | | |
| | | | | |
| Net income attributable to COPT common shareholders | $ | 97,374 | | | $ | 191,692 | | | $ | 72,301 | |
| | | | | |
| Earnings per common share: (1) | | | | | |
| Net income attributable to COPT common shareholders - basic | $ | 0.87 | | | $ | 1.72 | | | $ | 0.69 | |
| Net income attributable to COPT common shareholders - diluted | $ | 0.87 | | | $ | 1.71 | | | $ | 0.69 | |
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| Revenues | | | | | |
| Lease revenue | $ | 619,847 | | | $ | 580,169 | | | $ | 553,668 | |
| Other property revenue | 4,956 | | | 4,229 | | | 2,902 | |
| Construction contract and other service revenues | 60,179 | | | 154,632 | | | 107,876 | |
| Total revenues | 684,982 | | | 739,030 | | | 664,446 | |
| Operating expenses | | | | | |
| Property operating expenses | 247,385 | | | 227,430 | | | 213,377 | |
| Depreciation and amortization associated with real estate operations | 148,950 | | | 141,230 | | | 137,543 | |
| Construction contract and other service expenses | 57,416 | | | 149,963 | | | 104,053 | |
| Impairment losses | 252,797 | | | — | | | — | |
| General, administrative, leasing and other expenses | 42,769 | | | 38,991 | | | 40,774 | |
| Total operating expenses | 749,317 | | | 557,614 | | | 495,747 | |
| Interest expense | (71,142) | | | (61,174) | | | (65,398) | |
| Interest and other income, net | 12,587 | | | 9,070 | | | 9,007 | |
| Gain on sales of real estate | 49,392 | | | 19,250 | | | 65,590 | |
| | | | | |
| Loss on early extinguishment of debt | — | | | (609) | | | (100,626) | |
| | | | | |
| (Loss) income from continuing operations before equity in (loss) income of unconsolidated entities and income taxes | (73,498) | | | 147,953 | | | 77,272 | |
| Equity in (loss) income of unconsolidated entities | (261) | | | 1,743 | | | 1,093 | |
| Income tax expense | (588) | | | (447) | | | (145) | |
| (Loss) income from continuing operations | (74,347) | | | 149,249 | | | 78,220 | |
| Discontinued operations | — | | | 29,573 | | | 3,358 | |
| Net (loss) income | (74,347) | | | 178,822 | | | 81,578 | |
| Net loss (income) attributable to noncontrolling interests: | | | | | |
| Common units in CDPLP | 1,306 | | | (2,603) | | | (1,012) | |
| | | | | |
| Other consolidated entities | (428) | | | (3,190) | | | (4,025) | |
| | | | | |
| | | | | |
| | | | | |
| Net (loss) income attributable to common shareholders | $ | (73,469) | | | $ | 173,029 | | | $ | 76,541 | |
| | | | | |
| Basic earnings per common share: (1) | | | | | |
| (Loss) income from continuing operations | $ | (0.67) | | | $ | 1.28 | | | $ | 0.65 | |
| Discontinued operations | — | | | 0.26 | | | 0.03 | |
| Net (loss) income attributable to common shareholders | $ | (0.67) | | | $ | 1.54 | | | $ | 0.68 | |
| Diluted earnings per common share: (1) | | | | | |
| (Loss) income from continuing operations | $ | (0.67) | | | $ | 1.27 | | | $ | 0.65 | |
| Discontinued operations | — | | | 0.26 | | | 0.03 | |
| Net (loss) income attributable to common shareholders | $ | (0.67) | | | $ | 1.53 | | | $ | 0.68 | |
(1) Basic and diluted earnings per common share are calculated based on amounts attributable to common shareholdersshareholders.
See accompanying notes to consolidated financial statements.
COPT Defense Properties and Subsidiaries
Consolidated Statements of Corporate OfficeComprehensive Income
(in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | | 2023 | | 2022 | | 2021 |
| Net (loss) income | | $ | (74,347) | | | $ | 178,822 | | | $ | 81,578 | |
| Other comprehensive (loss) income | | | | | | |
| Unrealized income on interest rate derivatives | | 3,827 | | | 4,730 | | | 1,379 | |
| Reclassification adjustments on interest rate derivatives recognized in interest expense | | (3,900) | | | 996 | | | 5,048 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Total other comprehensive (loss) income | | (73) | | | 5,726 | | | 6,427 | |
| Comprehensive (loss) income | | (74,420) | | | 184,548 | | | 88,005 | |
| Comprehensive loss (income) attributable to noncontrolling interests | | 995 | | | (6,389) | | | (5,366) | |
| Comprehensive (loss) income attributable to common shareholders | | $ | (73,425) | | | $ | 178,159 | | | $ | 82,639 | |
See accompanying notes to consolidated financial statements.
COPT Defense Properties Trust.and Subsidiaries
Consolidated Statements of Equity
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Common Shares | | Additional Paid-in Capital | | Cumulative Distributions in Excess of Net Income | | Accumulated Other Comprehensive (Loss) Income | | Noncontrolling Interests | | Total |
| Balance at December 31, 2020 (112,181,759 common shares outstanding) | | | $ | 1,122 | | | $ | 2,478,906 | | | $ | (809,836) | | | $ | (9,157) | | | $ | 32,677 | | | $ | 1,693,712 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Conversion of common units to common shares (8,054 shares) | | | — | | | 121 | | | — | | | — | | | (121) | | | — | |
| Redemption of common units | | | — | | | — | | | — | | | — | | | (339) | | | (339) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Share-based compensation (137,720 shares issued, net of redemptions) | | | 1 | | | 4,301 | | | — | | | — | | | 4,179 | | | 8,481 | |
| Redemption of vested equity awards | | | — | | | (2,492) | | | — | | | — | | | — | | | (2,492) | |
| Adjustments to noncontrolling interests resulting from changes in ownership of CDPLP | | | — | | | 2,318 | | | — | | | — | | | (2,318) | | | — | |
| Comprehensive income | | | — | | | — | | | 76,541 | | | 6,098 | | | 2,206 | | | 84,845 | |
| Dividends | | | — | | | — | | | (123,568) | | | — | | | — | | | (123,568) | |
| Distributions to owners of common units in CDPLP | | | — | | | — | | | — | | | — | | | (1,595) | | | (1,595) | |
| | | | | | | | | | | | | |
| Distributions to noncontrolling interest in other consolidated entities | | | — | | | — | | | — | | | — | | | (30) | | | (30) | |
| | | | | | | | | | | | | |
| Adjustments for changes in fair value of redeemable noncontrolling interests | | | — | | | (1,615) | | | — | | | — | | | — | | | (1,615) | |
| Other | | | — | | | — | | | — | | | — | | | (324) | | | (324) | |
| Balance at December 31, 2021 (112,327,533 common shares outstanding) | | | 1,123 | | | 2,481,539 | | | (856,863) | | | (3,059) | | | 34,335 | | | 1,657,075 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Redemption of common units | | | — | | | — | | | — | | | — | | | (513) | | | (513) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Share-based compensation (96,360 shares issued, net of redemptions) | | | 1 | | | 4,098 | | | — | | | — | | | 5,435 | | | 9,534 | |
| Redemption of vested equity awards | | | — | | | (1,230) | | | — | | | — | | | — | | | (1,230) | |
| Adjustments to noncontrolling interests resulting from changes in ownership of CDPLP | | | — | | | 1,273 | | | — | | | — | | | (1,273) | | | — | |
| Comprehensive income | | | — | | | — | | | 173,029 | | | 5,130 | | | 3,582 | | | 181,741 | |
| Dividends | | | — | | | — | | | (123,674) | | | — | | | — | | | (123,674) | |
| Distributions to owners of common units in CDPLP | | | — | | | — | | | — | | | — | | | (1,883) | | | (1,883) | |
| | | | | | | | | | | | | |
| Distributions to noncontrolling interests in other consolidated entities | | | — | | | — | | | — | | | — | | | (31) | | | (31) | |
| Adjustments for changes in fair value of redeemable noncontrolling interests | | | — | | | 436 | | | — | | | — | | | — | | | 436 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Balance at December 31, 2022 (112,423,893 common shares outstanding) | | | 1,124 | | | 2,486,116 | | | (807,508) | | | 2,071 | | | 39,652 | | | 1,721,455 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Redemption of common units | | | — | | | — | | | — | | | — | | | (731) | | | (731) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Share-based compensation (131,459 shares issued, net of redemptions) | | | 2 | | | 4,157 | | | — | | | — | | | 4,961 | | | 9,120 | |
| Redemption of vested equity awards | | | — | | | (1,251) | | | — | | | — | | | — | | | (1,251) | |
| Adjustments to noncontrolling interests resulting from changes in ownership of CDPLP | | | — | | | 1,039 | | | — | | | — | | | (1,039) | | | — | |
| Comprehensive (loss) income | | | — | | | — | | | (73,469) | | | 44 | | | (3,449) | | | (76,874) | |
| Dividends | | | — | | | — | | | (128,341) | | | — | | | — | | | (128,341) | |
| Distributions to owners of common units in CDPLP | | | — | | | — | | | — | | | — | | | (2,190) | | | (2,190) | |
| | | | | | | | | | | | | |
| Distributions to noncontrolling interests in other consolidated entities | | | — | | | — | | | — | | | — | | | (31) | | | (31) | |
| Adjustments for changes in fair value of redeemable noncontrolling interests | | | — | | | (72) | | | — | | | — | | | — | | | (72) | |
| Reclassification of redeemable noncontrolling interests to equity | | | — | | | — | | | — | | | — | | | 2,670 | | | 2,670 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Balance at December 31, 2023 (112,555,352 common shares outstanding) | | | $ | 1,126 | | | $ | 2,489,989 | | | $ | (1,009,318) | | | $ | 2,115 | | | $ | 39,843 | | | $ | 1,523,755 | |
See accompanying notes to consolidated financial statements.
Corporate OfficeCOPT Defense Properties Trust and Subsidiaries
Consolidated Statements of Comprehensive IncomeCash Flows
(in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | | 2020 | | 2019 | | 2018 |
| Net income | | $ | 102,878 | | | $ | 200,004 | | | $ | 78,643 | |
| Other comprehensive income (loss) | | | | | | |
| Unrealized loss on interest rate derivatives | | (39,454) | | | (24,321) | | | (2,373) | |
| Reclassification adjustments on interest rate derivatives recognized in interest expense | | 3,725 | | | (1,415) | | | (407) | |
| Reclassification adjustments on interest rate derivatives recognized in loss on interest rate derivatives | | 51,865 | | | 0 | | | 0 | |
| | | | | | |
| Equity in other comprehensive income of equity method investee | | 0 | | | 199 | | | 210 | |
| | | | | | |
| Total other comprehensive income (loss) | | 16,136 | | | (25,537) | | | (2,570) | |
| Comprehensive income | | 119,014 | | | 174,467 | | | 76,073 | |
| Comprehensive income attributable to noncontrolling interests | | (5,353) | | | (7,981) | | | (6,453) | |
| Comprehensive income attributable to COPT | | $ | 113,661 | | | $ | 166,486 | | | $ | 69,620 | |
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| Cash flows from operating activities | | | | | |
| Revenues from real estate operations received | $ | 638,177 | | | $ | 581,139 | | | $ | 571,092 | |
| Construction contract and other service revenues received | 66,027 | | | 155,108 | | | 100,222 | |
| Property operating expenses paid | (243,209) | | | (231,422) | | | (223,254) | |
| Construction contract and other service expenses paid | (65,335) | | | (160,497) | | | (86,602) | |
| General, administrative, leasing and other expenses paid | (33,283) | | | (32,852) | | | (29,072) | |
| Interest expense paid | (59,807) | | | (56,061) | | | (65,184) | |
| | | | | |
| Lease incentives paid | (25,566) | | | (10,374) | | | (18,127) | |
| Interest and other income received | 5,491 | | | 19,327 | | | 1,099 | |
| Sales-type lease costs paid | (7,409) | | | — | | | (2,065) | |
| Income taxes paid | (37) | | | — | | | (60) | |
| Other | 1,225 | | | 1,457 | | | 1,099 | |
| Net cash provided by operating activities | 276,274 | | | 265,825 | | | 249,148 | |
| Cash flows from investing activities | | | | | |
| Development and redevelopment of properties | (264,834) | | | (283,147) | | | (267,905) | |
| | | | | |
| Tenant improvements on operating properties | (67,113) | | | (43,606) | | | (21,488) | |
| Other capital improvements on operating properties | (20,500) | | | (36,377) | | | (30,026) | |
| | | | | |
| Proceeds from sale of properties | 189,506 | | | 281,071 | | | 143,116 | |
| | | | | |
| | | | | |
| Non-operating distributions from unconsolidated real estate joint venture | 1,088 | | | 26,627 | | | 1,287 | |
| Investing receivables funded | (1,087) | | | (19,712) | | | (5,880) | |
| Investing receivables payments received | 11,000 | | | 6,000 | | | — | |
| Leasing costs paid | (16,328) | | | (13,591) | | | (21,913) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Other | (1,355) | | | (722) | | | (160) | |
| Net cash used in investing activities | (169,623) | | | (83,457) | | | (202,969) | |
| Cash flows from financing activities | | | | | |
| Proceeds from debt | | | | | |
| Revolving Credit Facility | 291,000 | | | 852,000 | | | 597,000 | |
| Unsecured senior notes | 336,375 | | | — | | | 1,382,614 | |
| Term loan facility | — | | | 125,000 | | | — | |
| Other debt proceeds | — | | | — | | | 4,630 | |
| Repayments of debt | | | | | |
| Revolving Credit Facility | (427,000) | | | (717,000) | | | (664,000) | |
| Unsecured senior notes | — | | | — | | | (900,000) | |
| Term loan facilities | — | | | (300,000) | | | (100,000) | |
| Scheduled principal amortization | (3,052) | | | (3,333) | | | (3,860) | |
| Other debt repayments | (15,902) | | | — | | | (138,397) | |
| Deferred financing costs paid | (1,030) | | | (6,506) | | | (3,620) | |
| | | | | |
| Payments in connection with early extinguishment of debt | — | | | (6) | | | (95,180) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Common share dividends paid | (127,178) | | | (123,645) | | | (123,527) | |
| | | | | |
| | | | | |
| | | | | |
| Distributions paid to redeemable noncontrolling interests | (2,686) | | | (3,396) | | | (2,273) | |
| | | | | |
| | | | | |
| Other | (4,263) | | | (6,289) | | | (4,283) | |
| Net cash provided by (used in) financing activities | 46,264 | | | (183,175) | | | (50,896) | |
| Net increase (decrease) in cash and cash equivalents and restricted cash | 152,915 | | | (807) | | | (4,717) | |
| Cash and cash equivalents and restricted cash | | | | | |
| Beginning of year | 16,509 | | | 17,316 | | | 22,033 | |
| End of year | $ | 169,424 | | | $ | 16,509 | | | $ | 17,316 | |
See accompanying notes to consolidated financial statements.
Corporate OfficeCOPT Defense Properties Trust and Subsidiaries
Consolidated Statements of EquityCash Flows (continued)
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Common
Shares | | Additional
Paid-in
Capital | | Cumulative
Distributions in
Excess of Net
Income | | Accumulated
Other
Comprehensive
Income (Loss) | | Noncontrolling
Interests | | Total |
| Balance at December 31, 2017 (101,292,299 common shares outstanding) | | | $ | 1,013 | | | $ | 2,201,047 | | | $ | (802,085) | | | $ | 2,167 | | | $ | 66,165 | | | $ | 1,468,307 | |
| Cumulative effect of accounting change for adoption of hedge accounting guidance | | | — | | | — | | | (276) | | | 276 | | | — | | | 0 | |
| Balance at December 31, 2017, as adjusted | | | 1,013 | | | 2,201,047 | | | (802,361) | | | 2,443 | | | 66,165 | | | 1,468,307 | |
| Conversion of common units to common shares (1,904,615 shares) | | | 19 | | | 27,394 | | | — | | | — | | | (27,413) | | | 0 | |
| Redemption of common units | | | — | | | — | | | — | | | — | | | (339) | | | (339) | |
| Common shares issued under forward equity sale agreements (5,907,000 shares) | | | 59 | | | 172,235 | | | — | | | — | | | — | | | 172,294 | |
| Common shares issued under at-the-market program (991,664 shares) | | | 10 | | | 29,722 | | | — | | | — | | | — | | | 29,732 | |
| Share-based compensation (146,290 shares issued, net of redemptions) | | | 1 | | | 6,962 | | | — | | | — | | | — | | | 6,963 | |
| Redemption of vested equity awards | | | — | | | (1,702) | | | — | | | — | | | — | | | (1,702) | |
| Adjustments to noncontrolling interests resulting from changes in ownership of COPLP | | | — | | | (2,466) | | | — | | | — | | | 2,466 | | | 0 | |
| Comprehensive income | | | — | | | — | | | 72,301 | | | (2,681) | | | 3,930 | | | 73,550 | |
| Dividends | | | — | | | — | | | (116,748) | | | — | | | — | | | (116,748) | |
| Distributions to owners of common and preferred units in COPLP | | | — | | | — | | | — | | | — | | | (3,157) | | | (3,157) | |
| | | | | | | | | | | | | |
| Distributions to noncontrolling interest in other consolidated entities | | | — | | | — | | | — | | | — | | | (15) | | | (15) | |
| | | | | | | | | | | | | |
| Adjustment to arrive at fair value of redeemable noncontrolling interests | | | — | | | (1,837) | | | — | | | — | | | — | | | (1,837) | |
| Balance at December 31, 2018 (110,241,868 common shares outstanding) | | | 1,102 | | | 2,431,355 | | | (846,808) | | | (238) | | | 41,637 | | | 1,627,048 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Conversion of common units to common shares (105,039 shares) | | | 1 | | | 1,585 | | | — | | | — | | | (1,586) | | | 0 | |
| Redemption of common units | | | — | | | — | | | — | | | — | | | (25) | | | (25) | |
| Common shares issued to the public (1,000 shares) | | | — | | | 29 | | | — | | | — | | | — | | | 29 | |
| Common shares issued under forward equity sale agreements (1,614,087 shares) | | | 16 | | | 46,438 | | | — | | | — | | | — | | | 46,454 | |
| Share-based compensation (106,711 shares issued, net of redemptions) | | | 2 | | | 6,131 | | | — | | | — | | | 1,323 | | | 7,456 | |
| Redemption of vested equity awards | | | — | | | (2,064) | | | — | | | — | | | — | | | (2,064) | |
| Adjustments to noncontrolling interests resulting from changes in ownership of COPLP | | | — | | | (167) | | | — | | | — | | | 167 | | | 0 | |
| Comprehensive income | | | — | | | — | | | 191,692 | | | (25,206) | | | 4,146 | | | 170,632 | |
| Dividends | | | — | | | — | | | (123,159) | | | — | | | — | | | (123,159) | |
| Distributions to owners of common and preferred units in COPLP | | | — | | | — | | | — | | | — | | | (2,057) | | | (2,057) | |
| Contributions from noncontrolling interests in other consolidated entities | | | — | | | — | | | — | | | — | | | 2,570 | | | 2,570 | |
| Distributions to noncontrolling interests in other consolidated entities | | | — | | | — | | | — | | | — | | | (5,890) | | | (5,890) | |
| Adjustment to arrive at fair value of redeemable noncontrolling interests | | | — | | | (1,749) | | | — | | | — | | | — | | | (1,749) | |
| | | | | | | | | | | | | |
| Balance at December 31, 2019 (112,068,705 common shares outstanding) | | | 1,121 | | | 2,481,558 | | | (778,275) | | | (25,444) | | | 40,285 | | | 1,719,245 | |
| Cumulative effect of accounting change for adoption of credit loss guidance | | | — | | | — | | | (5,541) | | | — | | | — | | | (5,541) | |
| Balance at December 31, 2019, as adjusted | | | 1,121 | | | 2,481,558 | | | (783,816) | | | (25,444) | | | 40,285 | | | 1,713,704 | |
| Conversion of common units to common shares (14,009 shares) | | | — | | | 211 | | | — | | | — | | | (211) | | | 0 | |
| Redemption of preferred units | | | — | | | — | | | — | | | — | | | (8,800) | | | (8,800) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Share-based compensation (99,045 shares issued, net of redemptions) | | | 1 | | | 4,676 | | | — | | | — | | | 1,907 | | | 6,584 | |
| Redemption of vested equity awards | | | — | | | (1,699) | | | — | | | — | | | — | | | (1,699) | |
| Adjustments to noncontrolling interests resulting from changes in ownership of COPLP | | | — | | | 767 | | | — | | | — | | | (767) | | | 0 | |
| Comprehensive income | | | — | | | — | | | 97,374 | | | 16,287 | | | 1,927 | | | 115,588 | |
| Dividends | | | — | | | — | | | (123,394) | | | — | | | — | | | (123,394) | |
| Distributions to owners of common and preferred units in COPLP | | | — | | | — | | | — | | | — | | | (1,746) | | | (1,746) | |
| Contributions from noncontrolling interests in other consolidated entities | | | — | | | — | | | — | | | — | | | 112 | | | 112 | |
| Distributions to noncontrolling interests in other consolidated entities | | | — | | | — | | | — | | | — | | | (30) | | | (30) | |
| Adjustment to arrive at fair value of redeemable noncontrolling interests | | | — | | | (6,607) | | | — | | | — | | | — | | | (6,607) | |
| | | | | | | | | | | | | |
| Balance at December 31, 2020 (112,181,759 common shares outstanding) | | | $ | 1,122 | | | $ | 2,478,906 | | | $ | (809,836) | | | $ | (9,157) | | | $ | 32,677 | | | $ | 1,693,712 | |
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| Reconciliation of net (loss) income to net cash provided by operating activities: | | | | | |
| Net (loss) income | $ | (74,347) | | | $ | 178,822 | | | $ | 81,578 | |
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | | |
| Depreciation and other amortization | 151,395 | | | 143,593 | | | 150,644 | |
| Impairment losses | 252,797 | | | — | | | — | |
| | | | | |
| | | | | |
| Amortization of deferred financing costs and net debt discounts | 5,574 | | | 4,737 | | | 5,224 | |
| Change in net deferred rent receivable and liability | (5,495) | | | (19,288) | | | (19,090) | |
| Gain on sales of real estate | (49,392) | | | (47,814) | | | (65,590) | |
| | | | | |
| | | | | |
| Share-based compensation | 8,544 | | | 8,789 | | | 7,979 | |
| Loss on early extinguishment of debt | — | | | 609 | | | 100,626 | |
| | | | | |
| Other | (4,826) | | | 10,073 | | | (5,047) | |
| Changes in operating assets and liabilities: | | | | | |
| Increase in accounts receivable | (5,618) | | | (2,436) | | | (662) | |
| (Increase) decrease in lease incentives and prepaid expenses and other assets, net | (4,851) | | | 2,130 | | | (27,355) | |
| (Decrease) increase in accounts payable, accrued expenses and other liabilities | (2,900) | | | (11,144) | | | 22,004 | |
| Increase (decrease) in rents received in advance and security deposits | 5,393 | | | (2,246) | | | (1,163) | |
| | | | | |
| Net cash provided by operating activities | $ | 276,274 | | | $ | 265,825 | | | $ | 249,148 | |
| Reconciliation of cash and cash equivalents and restricted cash: | | | | | |
| Cash and cash equivalents at beginning of year | $ | 12,337 | | | $ | 13,262 | | | $ | 18,369 | |
| Restricted cash at beginning of year | 4,172 | | | 4,054 | | | 3,664 | |
| Cash and cash equivalents and restricted cash at beginning of year | $ | 16,509 | | | $ | 17,316 | | | $ | 22,033 | |
| | | | | |
| Cash and cash equivalents at end of year | $ | 167,820 | | | $ | 12,337 | | | $ | 13,262 | |
| Restricted cash at end of year | 1,604 | | | 4,172 | | | 4,054 | |
| Cash and cash equivalents and restricted cash at end of year | $ | 169,424 | | | $ | 16,509 | | | $ | 17,316 | |
| Supplemental schedule of non-cash investing and financing activities: | | | | | |
| (Decrease) increase in accrued capital improvements, leasing and other investing activity costs | $ | (22,700) | | | $ | (11,453) | | | $ | 20,667 | |
| Reclassification of finance right-of-use asset to operating properties, net in connection with exercise of bargain purchase option | $ | — | | | $ | — | | | $ | 37,831 | |
| | | | | |
| Recognition of operating right-of-use assets and related lease liabilities | $ | 8,718 | | | $ | 683 | | | $ | 328 | |
| Recognition of finance right-of-use assets and related lease liabilities | $ | 434 | | | $ | — | | | $ | — | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Investment in unconsolidated real estate joint ventures retained in property disposition | $ | 21,121 | | | $ | 6,738 | | | $ | 11,842 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| (Decrease) increase in fair value of derivatives applied to accumulated other comprehensive income and noncontrolling interests | $ | (73) | | | $ | 5,236 | | | $ | 6,233 | |
| | | | | |
| | | | | |
| Dividends/distributions payable | $ | 32,644 | | | $ | 31,400 | | | $ | 31,299 | |
| | | | | |
| Decrease in noncontrolling interests and increase in shareholders’ equity in connection with the conversion of common units into common shares | $ | — | | | $ | — | | | $ | 121 | |
| Adjustments to noncontrolling interests resulting from changes in CDPLP ownership | $ | (1,039) | | | $ | (1,273) | | | $ | (2,318) | |
| Increase (decrease) in redeemable noncontrolling interests and decrease (increase) in equity to adjust for changes in fair value of redeemable noncontrolling interests | $ | 72 | | | $ | (436) | | | $ | 1,615 | |
| Reclassification of redeemable noncontrolling interests to equity | $ | 2,670 | | | $ | — | | | $ | — | |
See accompanying notes to consolidated financial statements.
Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| Cash flows from operating activities | | | | | |
| Revenues from real estate operations received | $ | 542,727 | | | $ | 530,280 | | | $ | 528,066 | |
| Construction contract and other service revenues received | 78,470 | | | 94,677 | | | 33,579 | |
| Property operating expenses paid | (202,660) | | | (196,611) | | | (197,647) | |
| Construction contract and other service expenses paid | (67,760) | | | (96,789) | | | (79,386) | |
| General, administrative, leasing, business development and land carry costs paid | (31,406) | | | (29,347) | | | (27,006) | |
| Interest expense paid | (61,471) | | | (67,475) | | | (72,460) | |
| | | | | |
| | | | | |
| Lease incentives paid | (11,925) | | | (9,482) | | | (7,679) | |
| Sales-type lease costs paid | (10,747) | | | 0 | | | 0 | |
| Income taxes paid | (4) | | | 0 | | | (21) | |
| Other | 3,200 | | | 3,305 | | | 3,036 | |
| Net cash provided by operating activities | 238,424 | | | 228,558 | | | 180,482 | |
| Cash flows from investing activities | | | | | |
| Development and redevelopment of properties | (344,401) | | | (394,444) | | | (159,994) | |
| | | | | |
| Tenant improvements on operating properties | (28,754) | | | (23,809) | | | (35,098) | |
| Other capital improvements on operating properties | (32,756) | | | (24,659) | | | (24,223) | |
| Proceeds from property dispositions | | | | | |
| Distribution from unconsolidated real estate joint venture following contribution of properties | 0 | | | 201,499 | | | 0 | |
| Sale of properties | 83,165 | | | 108,128 | | | 0 | |
| Proceeds from sale of investment in unconsolidated real estate joint venture | 59,841 | | | 0 | | | 0 | |
| Non-operating distributions from unconsolidated real estate joint venture | 3,695 | | | 22,426 | | | 1,942 | |
| Investing receivables funded | (272) | | | (11,180) | | | (97) | |
| Investing receivables payments received | 8,000 | | | 0 | | | 4,455 | |
| Leasing costs paid | (16,938) | | | (16,825) | | | (10,926) | |
| Settlement of interest rate derivatives | (53,130) | | | 0 | | | 0 | |
| | | | | |
| | | | | |
| | | | | |
| Other | (4,242) | | | 849 | | | (8,977) | |
| Net cash used in investing activities | (325,792) | | | (138,015) | | | (232,918) | |
| Cash flows from financing activities | | | | | |
| Proceeds from debt | | | | | |
| Revolving Credit Facility | 664,000 | | | 409,000 | | | 381,000 | |
| Unsecured senior notes | 395,264 | | | 0 | | | 0 | |
| Other debt proceeds | 206,931 | | | 43,615 | | | 13,406 | |
| Repayments of debt | | | | | |
| Revolving Credit Facility | (698,000) | | | (445,000) | | | (294,000) | |
| Unsecured senior notes | (300,000) | | | 0 | | | 0 | |
| Scheduled principal amortization | (4,125) | | | (4,310) | | | (4,240) | |
| Other debt repayments | (12,031) | | | (77) | | | (100,000) | |
| Deferred financing costs paid | (2,400) | | | (448) | | | (8,292) | |
| | | | | |
| Payments on finance lease liabilities | (854) | | | (223) | | | (15,379) | |
| Net proceeds from issuance of common shares | 0 | | | 46,415 | | | 202,065 | |
| | | | | |
| | | | | |
| Common share dividends paid | (123,367) | | | (122,657) | | | (114,286) | |
| | | | | |
| Distributions paid to noncontrolling interests in COPLP | (1,825) | | | (2,166) | | | (3,699) | |
| Distributions paid to noncontrolling interests in other consolidated entities | (30) | | | (5,890) | | | (16) | |
| Distributions paid to redeemable noncontrolling interests | (14,357) | | | (1,659) | | | (1,382) | |
| | | | | |
| Redemption of preferred units | (8,800) | | | 0 | | | 0 | |
| Payments in connection with early extinguishment of debt | (7,029) | | | 0 | | | 0 | |
| Other | (2,106) | | | (963) | | | (5,622) | |
| Net cash provided by (used in) financing activities | 91,271 | | | (84,363) | | | 49,555 | |
| Net increase (decrease) in cash and cash equivalents and restricted cash | 3,903 | | | 6,180 | | | (2,881) | |
| Cash and cash equivalents and restricted cash | | | | | |
| Beginning of year | 18,130 | | | 11,950 | | | 14,831 | |
| End of year | $ | 22,033 | | | $ | 18,130 | | | $ | 11,950 | |
See accompanying notes to consolidated financial statements.
Corporate OfficeCOPT Defense Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(in thousands)
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| Reconciliation of net income to net cash provided by operating activities: | | | | | |
| Net income | $ | 102,878 | | | $ | 200,004 | | | $ | 78,643 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation and other amortization | 140,031 | | | 138,903 | | | 139,063 | |
| Impairment losses | 1,530 | | | 329 | | | 2,367 | |
| | | | | |
| | | | | |
| Amortization of deferred financing costs and net debt discounts | 4,272 | | | 3,639 | | | 3,393 | |
| Increase in deferred rent receivable | (2,168) | | | (4,091) | | | (4,621) | |
| Gain on sales of real estate | (30,209) | | | (105,230) | | | (2,340) | |
| | | | | |
| Gain on sale of investment in unconsolidated real estate joint venture | (29,416) | | | 0 | | | 0 | |
| Share-based compensation | 6,503 | | | 6,714 | | | 6,376 | |
| Loss on early extinguishment of debt | 7,306 | | | 0 | | | 258 | |
| Loss on interest rate derivatives | 53,196 | | | 0 | | | 0 | |
| Other | (7,855) | | | (6,022) | | | (2,991) | |
| Changes in operating assets and liabilities: | | | | | |
| (Increase) decrease in accounts receivable | (6,377) | | | (7,141) | | | 5,673 | |
| Increase in prepaid expenses and other assets, net | (7,626) | | | (22,457) | | | (987) | |
| Increase (decrease) in accounts payable, accrued expenses and other liabilities | 6,554 | | | 20,369 | | | (49,179) | |
| (Decrease) increase in rents received in advance and security deposits | (195) | | | 3,541 | | | 4,827 | |
| | | | | |
| Net cash provided by operating activities | $ | 238,424 | | | $ | 228,558 | | | $ | 180,482 | |
| Reconciliation of cash and cash equivalents and restricted cash: | | | | | |
| Cash and cash equivalents at beginning of period | $ | 14,733 | | | $ | 8,066 | | | $ | 12,261 | |
| Restricted cash at beginning of period | 3,397 | | | 3,884 | | | 2,570 | |
| Cash and cash equivalents and restricted cash at beginning of period | $ | 18,130 | | | $ | 11,950 | | | $ | 14,831 | |
| | | | | |
| Cash and cash equivalents at end of period | $ | 18,369 | | | $ | 14,733 | | | $ | 8,066 | |
| Restricted cash at end of period | 3,664 | | | 3,397 | | | 3,884 | |
| Cash and cash equivalents and restricted cash at end of period | $ | 22,033 | | | $ | 18,130 | | | $ | 11,950 | |
| Supplemental schedule of non-cash investing and financing activities: | | | | | |
| (Decrease) increase in accrued capital improvements, leasing and other investing activity costs | $ | (9,421) | | | $ | 35,913 | | | $ | 6,570 | |
| Finance right-of-use asset contributed by noncontrolling interest in joint venture | $ | 0 | | | $ | 2,570 | | | $ | 0 | |
| Recognition of operating right-of-use assets and related lease liabilities | $ | 13,340 | | | $ | 840 | | | $ | 0 | |
| | | | | |
| | | | | |
| | | | | |
| Non-cash changes from property dispositions: | | | | | |
| Contribution of properties to unconsolidated real estate joint venture | $ | 0 | | | $ | 158,542 | | | $ | 0 | |
| Investment in unconsolidated real estate joint ventures retained in disposition | $ | 11,474 | | | $ | 34,506 | | | $ | 0 | |
| Non-cash changes from recognition of property sale previously accounted for as financing arrangement: | | | | | |
| Decrease in assets held for sale, net | $ | 0 | | | $ | 0 | | | $ | (42,226) | |
| Decrease in deferred property sale | $ | 0 | | | $ | 0 | | | $ | 43,377 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| (Decrease) increase in fair value of derivatives applied to accumulated other comprehensive income and noncontrolling interests | $ | (35,728) | | | $ | (25,817) | | | $ | 2,915 | |
| | | | | |
| Equity in other comprehensive income of an equity method investee | $ | 0 | | | $ | 199 | | | $ | 210 | |
| Dividends/distributions payable | $ | 31,231 | | | $ | 31,263 | | | $ | 30,856 | |
| | | | | |
| Decrease in noncontrolling interests and increase in shareholders’ equity in connection with the conversion of common units into common shares | $ | 211 | | | $ | 1,586 | | | $ | 27,413 | |
| Adjustments to noncontrolling interests resulting from changes in COPLP ownership | $ | (767) | | | $ | 167 | | | $ | 2,466 | |
| Increase in redeemable noncontrolling interests and decrease in equity to carry redeemable noncontrolling interests at fair value | $ | 6,607 | | | $ | 1,749 | | | $ | 1,837 | |
See accompanying notes to consolidated financial statements.
Corporate Office Properties, L.P. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except unit data)
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
| Assets | | | |
| Properties, net: | | | |
| Operating properties, net | $ | 3,115,280 | | | $ | 2,772,647 | |
| Projects in development or held for future development | 447,269 | | | 568,239 | |
| Total properties, net | 3,562,549 | | | 3,340,886 | |
| Property - operating right-of-use assets | 40,570 | | | 27,864 | |
| Property - finance right-of-use assets | 40,425 | | | 40,458 | |
| | | |
| Cash and cash equivalents | 18,369 | | | 14,733 | |
| Investment in unconsolidated real estate joint ventures | 29,303 | | | 51,949 | |
| Accounts receivable, net | 41,637 | | | 35,444 | |
| Deferred rent receivable | 92,876 | | | 87,736 | |
| Intangible assets on real estate acquisitions, net | 19,344 | | | 27,392 | |
| Deferred leasing costs (net of accumulated amortization of $30,375 and $33,782, respectively) | 58,613 | | | 58,392 | |
| Investing receivables (net of allowance for credit losses of $2,851 at December 31, 2020) | 68,754 | | | 73,523 | |
| | | |
| Prepaid expenses and other assets, net | 101,556 | | | 93,016 | |
| Total assets | $ | 4,073,996 | | | $ | 3,851,393 | |
| Liabilities and equity | | | |
| Liabilities: | | | |
| Debt, net | $ | 2,086,918 | | | $ | 1,831,139 | |
| Accounts payable and accrued expenses | 142,717 | | | 148,746 | |
| Rents received in advance and security deposits | 33,425 | | | 33,620 | |
| Distributions payable | 31,231 | | | 31,263 | |
| Deferred revenue associated with operating leases | 10,832 | | | 7,361 | |
| Property - operating lease liabilities | 30,746 | | | 17,317 | |
| Interest rate derivatives | 9,522 | | | 25,682 | |
| | | |
| | | |
| Other liabilities | 9,463 | | | 7,589 | |
| Total liabilities | 2,354,854 | | | 2,102,717 | |
| Commitments and contingencies (Note 20) | 0 | | 0 |
| Redeemable noncontrolling interests | 25,430 | | | 29,431 | |
| Equity: | | | |
| Corporate Office Properties, L.P.’s equity: | | | |
| Preferred units held by limited partner, 352,000 preferred units outstanding at December 31, 2019 | 0 | | | 8,800 | |
| Common units, 112,181,759 and 112,068,705 held by the general partner and 1,352,430 and 1,482,425 held by limited partners at December 31, 2020 and 2019, respectively | 1,690,610 | | | 1,724,159 | |
| Accumulated other comprehensive loss | (9,155) | | | (25,648) | |
| Total Corporate Office Properties, L.P.’s equity | 1,681,455 | | | 1,707,311 | |
| Noncontrolling interests in subsidiaries | 12,257 | | | 11,934 | |
| Total equity | 1,693,712 | | | 1,719,245 | |
| Total liabilities, redeemable noncontrolling interests and equity | $ | 4,073,996 | | | $ | 3,851,393 | |
See accompanying notes to consolidated financial statements.
Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per unit data)
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| Revenues | | | | | |
| Lease revenue | $ | 536,127 | | | $ | 522,472 | | | $ | 512,327 | |
| Other property revenue | 2,598 | | | 4,991 | | | 4,926 | |
| Construction contract and other service revenues | 70,640 | | | 113,763 | | | 60,859 | |
| Total revenues | 609,365 | | | 641,226 | | | 578,112 | |
| Operating expenses | | | | | |
| Property operating expenses | 203,840 | | | 198,143 | | | 201,035 | |
| Depreciation and amortization associated with real estate operations | 138,193 | | | 137,069 | | | 137,116 | |
| Construction contract and other service expenses | 67,615 | | | 109,962 | | | 58,326 | |
| Impairment losses | 1,530 | | | 329 | | | 2,367 | |
| General, administrative and leasing expenses | 33,001 | | | 35,402 | | | 28,900 | |
| Business development expenses and land carry costs | 4,473 | | | 4,239 | | | 5,840 | |
| Total operating expenses | 448,652 | | | 485,144 | | | 433,584 | |
| Interest expense | (67,937) | | | (71,052) | | | (75,385) | |
| Interest and other income | 8,574 | | | 7,894 | | | 4,358 | |
| Credit loss recoveries | 933 | | | 0 | | | 0 | |
| Gain on sales of real estate | 30,209 | | | 105,230 | | | 2,340 | |
| Gain on sale of investment in unconsolidated real estate joint venture | 29,416 | | | 0 | | | 0 | |
| Loss on early extinguishment of debt | (7,306) | | | 0 | | | (258) | |
| Loss on interest rate derivatives | (53,196) | | | 0 | | | 0 | |
| Income before equity in income of unconsolidated entities and income taxes | 101,406 | | | 198,154 | | | 75,583 | |
| Equity in income of unconsolidated entities | 1,825 | | | 1,633 | | | 2,697 | |
| Income tax (expense) benefit | (353) | | | 217 | | | 363 | |
| Net income | 102,878 | | | 200,004 | | | 78,643 | |
| Net income attributable to noncontrolling interests in consolidated entities | (4,024) | | | (5,385) | | | (3,940) | |
| Net income attributable to COPLP | 98,854 | | | 194,619 | | | 74,703 | |
| Preferred unit distributions | (300) | | | (564) | | | (660) | |
| | | | | |
| Net income attributable to COPLP common unitholders | $ | 98,554 | | | $ | 194,055 | | | $ | 74,043 | |
| | | | | |
| Earnings per common unit: (1) | | | | | |
| Net income attributable to COPLP common unitholders - basic | $ | 0.87 | | | $ | 1.72 | | | $ | 0.69 | |
| Net income attributable to COPLP common unitholders - diluted | $ | 0.87 | | | $ | 1.71 | | | $ | 0.69 | |
(1) Basic and diluted earnings per common unit are calculated based on amounts attributable to common unitholders of Corporate Office Properties, L.P.
See accompanying notes to consolidated financial statements.
Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Comprehensive Income
(in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | | 2020 | | 2019 | | 2018 |
| Net income | | $ | 102,878 | | | $ | 200,004 | | | $ | 78,643 | |
| Other comprehensive income (loss) | | | | | | |
| Unrealized loss on interest rate derivatives | | (39,454) | | | (24,321) | | | (2,373) | |
| Reclassification adjustments on interest rate derivatives recognized in interest expense | | 3,725 | | | (1,415) | | | (407) | |
| | | | | | |
| Reclassification adjustments on interest rate derivatives recognized in loss on interest rate derivatives | | 51,865 | | | 0 | | | 0 | |
| Equity in other comprehensive income of equity method investee | | 0 | | | 199 | | | 210 | |
| | | | | | |
| Total other comprehensive income (loss) | | 16,136 | | | (25,537) | | | (2,570) | |
| Comprehensive income | | 119,014 | | | 174,467 | | | 76,073 | |
| Comprehensive income attributable to noncontrolling interests | | (3,667) | | | (5,375) | | | (3,940) | |
| Comprehensive income attributable to COPLP | | $ | 115,347 | | | $ | 169,092 | | | $ | 72,133 | |
See accompanying notes to consolidated financial statements.
Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Equity
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Limited Partner Preferred Units | | Common Units | | Accumulated Other Comprehensive Income (Loss) | | Noncontrolling Interests in Subsidiaries | | Total Equity |
| | Units | | Amount | | Units | | Amount | | | |
| Balance at December 31, 2017 | 352,000 | | | $ | 8,800 | | | 104,543,177 | | | $ | 1,445,022 | | | $ | 2,173 | | | $ | 12,312 | | | $ | 1,468,307 | |
| Cumulative effect of accounting change for adoption of hedge accounting guidance | — | | | — | | | — | | | (276) | | | 276 | | | — | | | 0 | |
| Balance at December 31, 2017 as adjusted | 352,000 | | | 8,800 | | | 104,543,177 | | | 1,444,746 | | | 2,449 | | | 12,312 | | | 1,468,307 | |
| Redemption of common units | — | | | — | | | (13,377) | | | (339) | | | — | | | — | | | (339) | |
| Issuance of common units resulting from common shares issued under COPT forward equity sale agreements | — | | | — | | | 5,907,000 | | | 172,294 | | | — | | | — | | | 172,294 | |
| Issuance of common units resulting from common shares issued under COPT at-the-market program | — | | | — | | | 991,664 | | | 29,732 | | | — | | | — | | | 29,732 | |
| Share-based compensation (units net of redemption) | — | | | — | | | 146,290 | | | 6,963 | | | — | | | — | | | 6,963 | |
| Redemptions of vested equity awards | — | | | — | | | — | | | (1,702) | | | — | | | — | | | (1,702) | |
| Comprehensive income | — | | | 660 | | | — | | | 74,043 | | | (2,570) | | | 1,417 | | | 73,550 | |
| Distributions to owners of common and preferred units | — | | | (660) | | | — | | | (119,245) | | | — | | | — | | | (119,905) | |
| | | | | | | | | | | | | |
| Distributions to noncontrolling interests in subsidiaries | — | | | — | | | — | | | — | | | — | | | (15) | | | (15) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Adjustment to arrive at fair value of redeemable noncontrolling interests | — | | | — | | | — | | | (1,837) | | | — | | | — | | | (1,837) | |
| Balance at December 31, 2018 | 352,000 | | | 8,800 | | | 111,574,754 | | | 1,604,655 | | | (121) | | | 13,714 | | | 1,627,048 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Redemption of common units | — | | | — | | | (924) | | | (25) | | | — | | | — | | | (25) | |
| Issuance of common units resulting from public issuance of common shares | — | | | — | | | 1,000 | | | 29 | | | — | | | — | | | 29 | |
| Issuance of common units resulting from common shares issued under COPT forward equity sale agreements | — | | | — | | | 1,614,087 | | | 46,454 | | | — | | | — | | | 46,454 | |
| Share-based compensation (units net of redemption) | — | | | — | | | 362,213 | | | 7,456 | | | — | | | — | | | 7,456 | |
| Redemptions of vested equity awards | — | | | — | | | — | | | (2,064) | | | — | | | — | | | (2,064) | |
| Comprehensive income | — | | | 564 | | | — | | | 194,055 | | | (25,527) | | | 1,540 | | | 170,632 | |
| Distributions to owners of common and preferred units | — | | | (564) | | | — | | | (124,652) | | | — | | | — | | | (125,216) | |
| Contributions from noncontrolling interests in subsidiaries | — | | | — | | | — | | | — | | | — | | | 2,570 | | | 2,570 | |
| Distributions to noncontrolling interests in subsidiaries | — | | | — | | | — | | | — | | | — | | | (5,890) | | | (5,890) | |
| | | | | | | | | | | | | |
| Adjustment to arrive at fair value of redeemable noncontrolling interests | — | | | — | | | — | | | (1,749) | | | — | | | — | | | (1,749) | |
| | | | | | | | | | | | | |
| Balance at December 31, 2019 | 352,000 | | | 8,800 | | | 113,551,130 | | | 1,724,159 | | | (25,648) | | | 11,934 | | | 1,719,245 | |
| Cumulative effect of accounting change for adoption of credit loss guidance | — | | | — | | | — | | | (5,541) | | | — | | | — | | | (5,541) | |
| Balance at December 31, 2019, as adjusted | 352,000 | | | 8,800 | | | 113,551,130 | | | 1,718,618 | | | (25,648) | | | 11,934 | | | 1,713,704 | |
| Redemption of preferred units | (352,000) | | | (8,800) | | | — | | | — | | | — | | | — | | | (8,800) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Share-based compensation (units net of redemption) | — | | | — | | | 280,315 | | | 6,584 | | | — | | | — | | | 6,584 | |
| Redemptions of vested equity awards | — | | | — | | | — | | | (1,699) | | | — | | | — | | | (1,699) | |
| Comprehensive income | — | | | 300 | | | — | | | 98,554 | | | 16,493 | | | 241 | | | 115,588 | |
| Distributions to owners of common and preferred units | — | | | (300) | | | — | | | (124,840) | | | — | | | — | | | (125,140) | |
| Contributions from noncontrolling interests in subsidiaries | — | | | — | | | — | | | — | | | — | | | 112 | | | 112 | |
| Distributions to noncontrolling interests in subsidiaries | — | | | — | | | — | | | — | | | — | | | (30) | | | (30) | |
| Adjustment to arrive at fair value of redeemable noncontrolling interests | — | | | — | | | — | | | (6,607) | | | — | | | — | | | (6,607) | |
| | | | | | | | | | | | | |
| Balance at December 31, 2020 | 0 | | | $ | 0 | | | 113,831,445 | | | $ | 1,690,610 | | | $ | (9,155) | | | $ | 12,257 | | | $ | 1,693,712 | |
See accompanying notes to consolidated financial statements.
Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| Cash flows from operating activities | | | | | |
| Revenues from real estate operations received | $ | 542,727 | | | $ | 530,280 | | | $ | 528,066 | |
| Construction contract and other service revenues received | 78,470 | | | 94,677 | | | 33,579 | |
| Property operating expenses paid | (202,660) | | | (196,611) | | | (197,647) | |
| Construction contract and other service expenses paid | (67,760) | | | (96,789) | | | (79,386) | |
| General, administrative, leasing, business development and land carry costs paid | (31,406) | | | (29,347) | | | (27,006) | |
| Interest expense paid | (61,471) | | | (67,475) | | | (72,460) | |
| | | | | |
| | | | | |
| Lease incentives paid | (11,925) | | | (9,482) | | | (7,679) | |
| Sales-type lease costs paid | (10,747) | | | 0 | | | 0 | |
| Income taxes paid | (4) | | | 0 | | | (21) | |
| Other | 3,200 | | | 3,305 | | | 3,036 | |
| Net cash provided by operating activities | 238,424 | | | 228,558 | | | 180,482 | |
| Cash flows from investing activities | | | | | |
| Development and redevelopment of properties | (344,401) | | | (394,444) | | | (159,994) | |
| | | | | |
| Tenant improvements on operating properties | (28,754) | | | (23,809) | | | (35,098) | |
| Other capital improvements on operating properties | (32,756) | | | (24,659) | | | (24,223) | |
| Proceeds from property dispositions | | | | | |
| Distribution from unconsolidated real estate joint venture following contribution of properties | 0 | | | 201,499 | | | 0 | |
| Sale of properties | 83,165 | | | 108,128 | | | 0 | |
| Proceeds from sale of investment in unconsolidated real estate joint venture | 59,841 | | | 0 | | | 0 | |
| Non-operating distributions from unconsolidated real estate joint venture | 3,695 | | | 22,426 | | | 1,942 | |
| Investing receivables funded | (272) | | | (11,180) | | | (97) | |
| Investing receivables payments received | 8,000 | | | 0 | | | 4,455 | |
| Leasing costs paid | (16,938) | | | (16,825) | | | (10,926) | |
| | | | | |
| | | | | |
| | | | | |
| Settlement of interest rate derivatives | (53,130) | | | 0 | | | 0 | |
| | | | | |
| Other | (4,242) | | | 849 | | | (8,977) | |
| Net cash used in investing activities | (325,792) | | | (138,015) | | | (232,918) | |
| Cash flows from financing activities | | | | | |
| Proceeds from debt | | | | | |
| Revolving Credit Facility | 664,000 | | | 409,000 | | | 381,000 | |
| Unsecured senior notes | 395,264 | | | 0 | | | 0 | |
| Other debt proceeds | 206,931 | | | 43,615 | | | 13,406 | |
| Repayments of debt | | | | | |
| Revolving Credit Facility | (698,000) | | | (445,000) | | | (294,000) | |
| Unsecured senior notes | (300,000) | | | 0 | | | 0 | |
| Scheduled principal amortization | (4,125) | | | (4,310) | | | (4,240) | |
| Other debt repayments | (12,031) | | | (77) | | | (100,000) | |
| Deferred financing costs paid | (2,400) | | | (448) | | | (8,292) | |
| | | | | |
| Payments on finance lease liabilities | (854) | | | (223) | | | (15,379) | |
| Net proceeds from issuance of common units | 0 | | | 46,415 | | | 202,065 | |
| Redemption of preferred units | (8,800) | | | 0 | | | 0 | |
| Common unit distributions paid | (124,815) | | | (124,171) | | | (117,325) | |
| Distributions paid to noncontrolling interests in other consolidated entities | (30) | | | (5,890) | | | (16) | |
| | | | | |
| Distributions paid to redeemable noncontrolling interests | (14,357) | | | (1,659) | | | (1,382) | |
| Payments in connection with early extinguishment of debt | (7,029) | | | 0 | | | 0 | |
| Other | (2,483) | | | (1,615) | | | (6,282) | |
| Net cash provided by (used in) financing activities | 91,271 | | | (84,363) | | | 49,555 | |
| Net increase (decrease) in cash and cash equivalents and restricted cash | 3,903 | | | 6,180 | | | (2,881) | |
| Cash and cash equivalents and restricted cash | | | | | |
| Beginning of year | 18,130 | | | 11,950 | | | 14,831 | |
| End of year | $ | 22,033 | | | $ | 18,130 | | | $ | 11,950 | |
See accompanying notes to consolidated financial statements.
Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(in thousands)
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| Reconciliation of net income to net cash provided by operating activities: | | | | | |
| Net income | $ | 102,878 | | | $ | 200,004 | | | $ | 78,643 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation and other amortization | 140,031 | | | 138,903 | | | 139,063 | |
| Impairment losses | 1,530 | | | 329 | | | 2,367 | |
| | | | | |
| | | | | |
| Amortization of deferred financing costs and net debt discounts | 4,272 | | | 3,639 | | | 3,393 | |
| Increase in deferred rent receivable | (2,168) | | | (4,091) | | | (4,621) | |
| Gain on sales of real estate | (30,209) | | | (105,230) | | | (2,340) | |
| | | | | |
| Gain on sale of investment in unconsolidated real estate joint venture | (29,416) | | | 0 | | | 0 | |
| Share-based compensation | 6,503 | | | 6,714 | | | 6,376 | |
| Loss on early extinguishment of debt | 7,306 | | | 0 | | | 258 | |
| Loss on interest rate derivatives | 53,196 | | | 0 | | | 0 | |
| Other | (7,855) | | | (6,022) | | | (2,991) | |
| Changes in operating assets and liabilities: | | | | | |
| (Increase) decrease in accounts receivable | (6,377) | | | (7,141) | | | 5,673 | |
| Increase in prepaid expenses and other assets, net | (7,659) | | | (23,255) | | | (1,735) | |
| Increase (decrease) in accounts payable, accrued expenses and other liabilities | 6,587 | | | 21,167 | | | (48,431) | |
| (Decrease) increase in rents received in advance and security deposits | (195) | | | 3,541 | | | 4,827 | |
| | | | | |
| Net cash provided by operating activities | $ | 238,424 | | | $ | 228,558 | | | $ | 180,482 | |
| Reconciliation of cash and cash equivalents and restricted cash: | | | | | |
| Cash and cash equivalents at beginning of period | $ | 14,733 | | | $ | 8,066 | | | $ | 12,261 | |
| Restricted cash at beginning of period | 3,397 | | | 3,884 | | | 2,570 | |
| Cash and cash equivalents and restricted cash at beginning of period | $ | 18,130 | | | $ | 11,950 | | | $ | 14,831 | |
| | | | | |
| Cash and cash equivalents at end of period | $ | 18,369 | | | $ | 14,733 | | | $ | 8,066 | |
| Restricted cash at end of period | 3,664 | | | 3,397 | | | 3,884 | |
| Cash and cash equivalents and restricted cash at end of period | $ | 22,033 | | | $ | 18,130 | | | $ | 11,950 | |
| Supplemental schedule of non-cash investing and financing activities: | | | | | |
| (Decrease) increase in accrued capital improvements, leasing and other investing activity costs | $ | (9,421) | | | $ | 35,913 | | | $ | 6,570 | |
| Finance right-of-use asset contributed by noncontrolling interest in joint venture | $ | 0 | | | $ | 2,570 | | | $ | 0 | |
| Recognition of operating right-of-use assets and related lease liabilities | $ | 13,340 | | | $ | 840 | | | $ | 0 | |
| | | | | |
| | | | | |
| Non-cash changes from property dispositions: | | | | | |
| Contribution of properties to unconsolidated real estate joint venture | $ | 0 | | | $ | 158,542 | | | $ | 0 | |
| Investment in unconsolidated real estate joint ventures retained in disposition | $ | 11,474 | | | $ | 34,506 | | | $ | 0 | |
| Non-cash changes from recognition of property sale previously accounted for as financing arrangement: | | | | | |
| Decrease in assets held for sale, net | $ | 0 | | | $ | 0 | | | $ | (42,226) | |
| Decrease in deferred property sale | $ | 0 | | | $ | 0 | | | $ | 43,377 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| (Decrease) increase in fair value of derivatives applied to accumulated other comprehensive income and noncontrolling interests | $ | (35,728) | | | $ | (25,817) | | | $ | 2,915 | |
| | | | | |
| Equity in other comprehensive income of an equity method investee | $ | 0 | | | $ | 199 | | | $ | 210 | |
| Distributions payable | $ | 31,231 | | | $ | 31,263 | | | $ | 30,856 | |
| | | | | |
| Increase in redeemable noncontrolling interests and decrease in equity to carry redeemable noncontrolling interests at fair value | $ | 6,607 | | | $ | 1,749 | | | $ | 1,837 | |
See accompanying notes to consolidated financial statements.
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements
1. Organization
Corporate OfficeCOPT Defense Properties Trust (“COPT”COPT Defense”) and subsidiaries (collectively, the “Company”, “we” or “us”) is a fully-integrated and self-managed real estate investment trust (“REIT”) focused on owning, operating and developing properties in locations proximate to, or sometimes containing, key U.S. Government (“USG”) defense installations and missions (which we refer to herein as our Defense/IT Portfolio). Our tenants include the USG and their defense contractors, who are primarily engaged in priority national security activities, and who generally require mission-critical and high security property enhancements. In September 2023, we changed our name from Corporate Office Properties L.P. (“COPLP”) and subsidiaries (collectively, the “Operating Partnership”) is the entity through whichTrust to COPT the sole general partner of COPLP, conducts almost all of its operations and owns almost all of its assets. Unless otherwise expressly stated or the context otherwise requires, “we”, “us” and “our” as used herein referDefense Properties to each of the Company and the Operating Partnership. We own, manage, lease, develop and selectively acquire office and data center properties. The majority ofbetter describe our portfolio is ininvestment strategy’s focus on locations that support the United States Government (“USG”) and its contractors, most of whom are engaged in national security,serving our country’s priority defense and information technology (“IT”) related activities servicing what we believe are growing, durable, priority missions (“Defense/IT Locations”). We also own a portfolio of office properties located in select urban/urban-like submarkets in the Greater Washington, DC/Baltimore region with durable Class-A office fundamentals and characteristics (“Regional Office”).activities. As of December 31, 2020,2023, our propertiesDefense/IT Portfolio included the following (all references to number of properties, square footage acres and megawattsacres are unaudited):
•>181190 operating properties totaling 21.021.7 million square feet comprised of 16.216.0 million square feet in 155160 office properties and 4.75.7 million square feet in 2630 single-tenant data center shell properties (“data center shells”).shells. We owned 1724 of these data center shells through unconsolidated real estate joint ventures;
•>a wholesale data center with a critical load of 19.25 megawatts;
•11five properties under development (9(two office properties and 2three data center shells), including 3 partially-operational properties, that we estimate will total approximately 1.5 million817,000 square feet upon completion; and
•>approximately 830660 acres of land controlled for future development that we believe could be developed into approximately 10.47.9 million square feet.
We also owned eight other operating properties totaling 2.1 million square feet and 43approximately 50 acres of other land.developable land in the Greater Washington, DC/Baltimore region as of December 31, 2023.
COPLPWe conduct almost all of our operations and own almost all of our assets through our operating partnership, COPT Defense Properties, L.P. (“CDPLP”) and subsidiaries (collectively, the “Operating Partnership”), of which COPT Defense is the sole general partner. CDPLP owns real estate directly and through subsidiary partnerships and limited liability companies (“LLCs”). In addition to owning real estate, COPLPCDPLP also owns subsidiaries that provide real estate services such as property management, development and construction services primarily for our properties but also for third parties. Some of these services are performed by a taxable REIT subsidiary (“TRS”). In September 2023, we changed CDPLP’s name from Corporate Office Properties, L.P. to COPT Defense Properties, L.P.
Equity interests in COPLPCDPLP are in the form of common and preferred units. As of December 31, 2020,2023, COPT Defense owned 98.6%97.8% of the outstanding COPLPCDPLP common units (“common units”) and there were 0no preferred units outstanding. Common units not owned by COPT Defense carry certain redemption rights. The number of common units owned by COPT Defense is equivalent to the number of outstanding common shares of beneficial interest (“common shares”) of COPT Defense, and the entitlement of common units to quarterly distributions and payments in liquidation is substantially the same as that of COPT Defense common shareholders.
COPT’sIn September 2023, the ticker symbol under which our common shares are publicly traded on the New York Stock Exchange (“NYSE”) under the ticker symbolchanged from “OFC”.
Because COPLP is managed by COPT, and COPT conducts substantially all of its operations through COPLP, we refer to COPT’s executive officers as COPLP’s executive officers; similarly, although COPLP does not have a board of trustees, we refer to COPT’s Board of Trustees as COPLP’s Board of Trustees.“CDP”.
2.Summary of Significant Accounting Policies
Basis of Presentation
The COPTThese consolidated financial statements include the accounts of COPT Defense, the Operating Partnership, their subsidiaries and other entities in which COPT has a majority voting interest and control. The COPLP consolidated financial statements include the accounts of COPLP, its subsidiaries and other entities in which COPLPDefense has a majority voting interest and control. We also consolidate certain entities when control of such entities can be achieved through means other than voting rights (“variable interest entities” or “VIEs”) if we are deemed to be the primary beneficiary of such entities. We eliminate all intercompany balances and transactions in consolidation.
We use the equity method of accounting when we own an interest in an entity and can exert significant influence over but cannot control the entity’s operations. We discontinue equity method accounting if our investment in an entity (and net advances) is reduced to zero unless we have guaranteed obligations of the entity or are otherwise committed to provide further financial support for the entity.
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
When we own an equity investment in an entity and cannot exert significant influence over its operations, we measure the investment at fair value, with changes recognized through net income. For an investment without a readily determinable fair value, we measure the investment at cost, less any impairments, plus or minus changes resulting from observable price changes for an identical or similar investment of the same issuer.
COPT Defense Properties and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Reclassifications
We reclassified certain amounts from prior periods to conform to the current period presentation of our consolidated financial statements with no effect on previously reported net income or equity.
Use of Estimates in the Preparation of Financial Statements
We make estimates and assumptions when preparing financial statements under generally accepted accounting principles (“GAAP”). These estimates and assumptions affect various matters, including:
•>the reported amounts of assets and liabilities in our consolidated balance sheets as of the dates of the financial statements;
•>the disclosure of contingent assets and liabilities as of the dates of the financial statements; and
•>the reported amounts of revenues and expenses in our consolidated statements of operations during the reporting periods.
Significant estimates are inherent in the presentation of our financial statements in a number of areas, including the evaluation of the collectability of accounts and deferred rent receivable, the determination of estimated useful lives of assets, the determination of lease terms, the evaluation of impairment of long-lived assets for impairment, the amount of impairment losses recognized, the allocation of property acquisition costs, the amount of revenue recognized relating to tenant improvements, the level of expense recognized in connection with share-based compensation and the determination of accounting method for investments. Actual results could differ from these and other estimates.
Properties
We report properties to be developed or held and used in operations at our depreciated cost, reduced for impairment losses.
We capitalize direct and indirect project costs (including related compensation and other indirect costs), interest expense and real estate taxes associated with properties, or portions thereof, undergoing development or redevelopment activities. In capitalizing interest expense, if there is a specific borrowingdebt for a property undergoing development or redevelopment activities, we apply the interest rate of that borrowingdebt to the average accumulated expenditures that do not exceed such borrowing;debt; for the portion of expenditures exceeding any such specific borrowing,debt, we apply our weighted average interest rate on other borrowingsdebt to the expenditures. We continue to capitalize costs while development or redevelopment activities are underway until a property becomes “operational,” which occurs when lease terms commence (generally when the tenant has control of the leased space and we have delivered the premises to the tenant as required under the terms of such lease), but no later than one year after the cessation of major construction activities. When leases commence on portions of a newly-developed or redeveloped property in the period prior to one year from the cessation of major construction activities, we consider that property to be “partially operational.” When a property is partially operational, we allocate the costs associated with the property between the portion that is operational and the portion under development. We start depreciating costs associated with newly-developed or redeveloped properties as they become operational. For newly-developed properties, we classify improvements provided under the terms of a lease that are deemed to be landlord assets (as discussed further below) as new building development costs.
Most of our leases provide for some form of improvements to leased space. When we are required to provide improvements under the terms of a lease, we determine whether the improvements constitute landlord assets or tenant assets. If the improvements are landlord assets, we capitalize the cost of the improvements and recognize depreciation expense over the shorter of theestimated useful lifelives of the assets or the term of the lease andas discussed below. We recognize any payments from the tenant for such assets as rentallease revenue over the term of the lease. If the improvements are tenant assets associated with an operating lease, we defer the cost of improvementscosts funded by us as a lease incentive asset and amortize it as a reduction of rental revenue over the term of the lease. In determining whether improvements constitute landlord or tenant assets, we consider numerous factors, including whether the economic substance of the lease terms is properly reflected and whether the improvements: have value to us as real estate; are unique to the tenant or reusable by other tenants; may be altered or removed by the tenant without our consent or without compensating us for any lost fair value; or are owned, and remain, with us or the tenant at the end of the lease term.
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
We depreciate our fixed assets using the straight-line method over their estimated useful lives as follows:
| | | | | | | | |
| | Estimated Useful Lives |
| Buildings and building improvements | | 10-40 years |
| Land improvements | | 10-20 years |
| Tenant improvements on operating properties | | Shorter of remaining useful lives of assets or related lease term |
| Equipment and personal property | | 3-10 years |
We report properties disposed or classified as held for sale as discontinued operations when the disposition represents a strategic shift having a major effect on our operations and financial results (such as a disposition of a reportable segment or sub-
COPT Defense Properties and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
segment or major line of business). For discontinued operations, we classify for all periods presented the associated: assets as held for sale on our consolidated balance sheets; and results of operations as discontinued operations on our consolidated statements of operations (including interest expense on debt specifically identifiable to such components).
For periods in which a property not reported as discontinued operations is classified as held for sale, we classify the assets of the property’s asset group as held for sale on our consolidated balance sheet for such periods.
When we dispose of, or classify as held for sale, a component (such as a reportable segment or sub-segment) or group of components that represents a strategic shift having a major effect on our operations and financial results (such as a major geographical area of operations or major line of business), we classify the associated results of operations as discontinued operations. We had no properties newly classified as discontinued operations in the last three years.sheets.
Sales of Properties
We recognize gains from sales of consolidated interests in properties to non-customer third parties when we have transferredtransfer control of such interests.
Impairment of Properties
We assess the asset groups associated with each of our properties, including operating properties, properties in development, land held for future development, related intangible assets and liabilities, deferred leasing costs, right-of-use assets, deferred rents receivable and lease liabilities, for indicators of impairment quarterly or when circumstances indicate that an asset group may be impaired. If our analyses indicate that the carrying values of certain properties’ asset groups may be impaired, we perform a recovery analysis for such asset groups. For properties to be held and used, we analyze recoverability based on the estimated undiscounted future cash flows expected to be generated from the operations and eventual disposition of the properties over, in most cases, a ten-year holding period. If we believe it is more likely than not that we will dispose of the properties earlier, we analyze recoverability using a probability weighted analysis of the estimated undiscounted future cash flows expected to be generated from the operations and eventual disposition of the properties over the various possible holding periods. If the analysis indicates that the carrying value of a tested property’s asset group is not recoverable from its estimated future cash flows, the property’s asset group is written down to the property’s estimated fair value and an impairment loss is recognized. If and when our plans change, we revise our recoverability analyses to use the cash flows expected from the operations and eventual disposition of such property using holding periods that are consistent with our revised plans. Changesplans; as a result, changes in holding periods may require us to recognize impairment losses.
Fair values are estimated based on contract prices, indicative bids, discounted cash flow analyses, yield analyses or comparable sales analyses. Estimated cash flows used in our impairment analyses are based on our plans for the property and our views of market and economic conditions. The estimates consider items such as current and future market rental and occupancy rates, estimated operating and capital expenditures, leasing commissions, absorption and hold periods and recent sales data for comparable properties; most of these items are influenced by market data obtained from real estate leasing and brokerage firms and our direct experience with the properties and their markets.
When we determine that a property is held for sale, we stop depreciating the property and estimate the property’s fair value, net of selling costs; if we then determine that the estimated fair value, net of selling costs, is less than the net bookcarrying value of the property’s asset group, we recognize an impairment loss equal to the difference and reduce the net bookcarrying value of the property’s asset group.
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Acquisition of Operating Properties
Upon completion of operating property acquisitions, we allocate the purchase price to tangible and intangible assets and liabilities associated with such acquisitions based on our estimates of their fair values. We determine these fair values by using market data and independent appraisals available to us and making numerous estimates and assumptions. We allocate operating property acquisitions to the following components:
•>properties based on a valuation performed under the assumption that the property is vacant upon acquisition (the “if-vacant value”). The if-vacant value is allocated based on the valuation performed between land and buildings or, in the case of properties under development, development in progress. We also allocate additional amounts to properties for in-place tenant improvements based on our estimate of improvements per square foot provided under market leases that would be attributable to the remaining non-cancelable terms of the respective leases;
•>above- and below-market lease intangible assets or liabilities based on the present value (using an estimated interest rate which reflectsreflective of the risks associated with the leases acquired) of the difference between: (1) the contractual amounts to be received pursuant to the in-place leases; and (2) our estimate of fair market lease rates for the corresponding space,spaces, measured over a period equal to the remaining non-cancelable termterms of the lease.respective leases. The capitalized above- and below-market lease values are amortized as adjustments to lease revenue over the remaining lease terms of the respective leases, and to renewal periods in the case of below-market leases;
•>in-place lease value based on our estimates of: (1) the present value of additional income to be realized as a result of leases being in place on the acquired properties; and (2) costs to execute similar leases. Our estimate of costs to execute similar leases includes leasing commissions, legal and other related costs;
•>tenant relationship value based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with that respective tenant. Characteristics we consider in determining these values include the nature and
COPT Defense Properties and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
extent of our existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals, among other factors; and
•>above- and below-market cost arrangements (such as real estate tax treaties or above- or below-market ground leases) based on the present value of the expected benefit from any such arrangements in place on the property at the time of acquisition.
Leased Assets, as a Lessee
Effective January 1, 2019, we adopted guidance requiring lessees to classify leases as either finance orWe recognize right-of-use assets and lease liabilities for land and other assets leased by us from third parties for terms of at least one year. We recognize lease expense over lease terms on a straight-line basis for operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. The resulting classification determines whether the lease expense is recognized basedand on an effective interest method or straight-line basis over the term of the lease. The guidance also requires us to recognize upon lease term commencement a right-of-use asset and lease liability for all leases with a term of greater than 12 months regardless of their classification. We adopted this guidance for leases on January 1, 2019 using a modified retrospective transition approach under which we elected to not adjust prior comparative reporting periods. We elected to apply a package of practical expedients that enabled us to carry forward upon adoption our historical assessments of: expired or existing leases regarding their lease classification; and whether any expired or existing contracts are, or contain,finance leases. We also elected a practical expedient that enabled us to avoid the need to assess whether expired or existing land easements not previously accounted for as leases are, or contain, a lease.
In determining right-of-use assets and lease liabilities, we estimate an appropriate incremental borrowing rate on a fully-collateralized basis for the terms of the leases. Since the terms under our groundland leases are usually significantly longer than the terms of borrowings available to us on a fully-collateralized basis, our estimateestimates of this rate requiresrates for such leases require significant judgment, and considersconsider factors such as estimated interest rates available to us on a fully-collateralized basis for shorter-termed debt and U.S. Treasury rates.
Cash and Cash Equivalents
Cash and cash equivalents include all cash and liquid investments that mature three months or less from when they are purchased. Cash equivalents are reported at cost, which approximates fair value. We maintain our cash in bank accounts in amounts that may exceed Federallyfederally insured limits at times. We have not experienced any losses inon these accounts in the past and believe that we are not exposed to significant credit risk because our accounts are deposited with major financial institutions.
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Investments in Marketable Securities
We classify marketable securities as trading securities when we have the intentintend to sell such securities in the near term, and classify other marketable securities as available-for-sale securities. We determine the appropriate classification of investments in marketable securities at the acquisition date and re-evaluate the classification at each balance sheet date. We report investments in marketable securities classified as trading securities at fair value (which is included in the line entitled “Prepaid“prepaid expenses and other assets, net” on our consolidated balance sheets), with unrealized gains and losses recognized through earnings; on our consolidated statements of cash flows, we classify cash flows from these securities as operating activities.
Receivables and Credit Losses
We evaluate ourwrite off receivables from customerswhen we believe the facts and borrowerscircumstances indicate that continued pursuit of collection is no longer warranted. When cash is received in connection with receivables for collectability and recognize estimatedwhich we have previously recognized credit losses, on these receivables. we recognize reductions in our credit losses.
Lease Revenue
We use judgment in estimating these lossesestimate the collectability of lease revenue and related accounts receivable using judgement based uponon the credit status and payment history of the entities associated withrelated tenants. If we deem that collectability of revenue under a lease is not probable, revenue recognized is limited to the individual receivables and payment history.lesser of revenue that would have been recognized if collectability was probable or lease payments collected.
Effective January 1, 2020, we adopted guidance issued by the Financial Accounting Standards Board (“FASB”) that changed how weAssets and Other Instruments
We measure credit losses forof most financial assets and certain other instruments not measured at fair value through net income from an incurred loss model tousing an expected loss approach. Our items within the scope of this guidance included the following:model, including for our:
•>investing receivables, as disclosed in Note 8;7;
•>tenant notes receivable;
•>net investmentinvestments in sales-type leases;
•>other assets comprised of non-lease revenue related accounts receivable (primarily from construction contract services) and contract assets from unbilled construction contract revenue; and
•>off-balance sheet credit exposures.
Under this guidance, weWe recognize an estimate of our expected credit losses on these items as an allowance as the guidance requires that financial assets be measured on an amortized cost basis and be presented at the net amount expected to be collected (oror as a separate liability in the case of off-balance sheet credit exposures).exposures. The allowance represents the portion of the amortized cost basis that we do not expect to collect (or loss we expect to incur in the case of off-balance sheet credit exposures) due to credit over the contractual life based on available information relevant to assessing the collectability of cash flows, which includes consideration of past events, current conditions and reasonable and supportable forecasts of future economic conditions (including consideration of asset- or borrower-specific
COPT Defense Properties and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
factors). The guidance requires the allowance for expected credit losses to reflectreflects the risk of loss, even when that risk is remote. An allowance for credit losses is measured and recorded upon the initial recognition of a financial asset (or off-balance sheet credit exposure), regardless of whether it is originated or purchased. Quarterly, theWe update our estimate of expected losses are re-estimated,quarterly, considering any cash receipts and changes in risks or assumptions, with resulting adjustments recognized as credit loss expense or recoveries on our consolidated statements of operations.
We estimate expectedExpected credit losses for in-scope itemsare estimated using historical loss rate information developed for varying classifications of credit risk and contractual lives. Due to our limited quantity of items withinfor which we use the scope of this guidanceexpected loss model and the unique risk characteristics of such items, we individually assign each in-scope item a credit risk classification. The credit risk classifications assigned by us are determined based on credit ratings assigned by ratings agencies (as available) or are internally-developed based on available financial information, historical payment experience, credit documentation, other publicly available information and current economic trends. In addition, for certain items infor which the risk of credit loss is affected by the economic performance of a real estate development project, we develop probability weighted scenario analyses for varying levels of performance in estimating our credit loss allowance (applicable to our notes receivable from the City of Huntsville disclosed in Note 8 and a tax incremental financing obligation disclosed in Note 20)7).
For lease revenue, if collectability is not probable, revenue recognized is limited to the lesser of revenue that would have been recognized if collectability was probable or lease payments collected. Losses on lease revenue receivables are presented on our consolidated statements of operation with property operating expenses for years prior to January 1, 2019, when we adopted new lease accounting guidance, and as reductions in lease revenue thereafter.
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Prior to our adoption of the credit loss guidance discussed above, we evaluated the collectability of both interest and principal of loans whenever events or changes in circumstances indicated such amounts may not be recoverable. A loan was impaired when it was probable that we would be unable to collect all amounts due according to the existing contractual terms. When a loan was impaired, the amount of the loss accrual was calculated by comparing the carrying amount of the investment to the present value of expected future cash flows discounted at the loan’s effective interest rate and the value of any collateral under such loan.
When we believe that collection of interest income on an investing or tenant note receivable is not probable, we place the receivable on nonaccrual status, meaning interest income is recognized when payments are received rather than on an accrual basis.
We write off receivables when we believe the facts and circumstances indicate that continued pursuit of collection is no longer warranted. When cash is received in connection with receivables for which we have previously recognized credit losses, we recognize reductions in our credit losses.
Intangible Assets and Deferred Revenue on Real Estate Acquisitions
We amortize the intangible assets and deferred revenue on real estate acquisitions discussed above as follows:
| | | | | | | | |
Asset Type | | Amortization Period |
Above- and below-market leases | | Related lease terms |
In-place lease value | | Related lease terms |
Tenant relationship value | | Estimated period of time that tenant will lease space in property |
Above- and below-market cost arrangements | | Term of arrangements |
We recognize the amortization of acquired above- and below-market leases as adjustments to rental revenue. We recognize the amortization of above- and below-market cost arrangements as adjustments to property operating expenses. We recognize the amortization of other intangible assets on property acquisitions as amortization expense.
Deferred Leasing Costs
We defer costs incurred to obtain new tenant leases or extend existing tenant leases; our deferral of costs included related non-incremental compensation costs until January 1, 2019, when we adopted new lease accounting guidance.leases. We amortize these costs evenly over the lease terms. We classify leasing costs paid as an investing activity on our statements of cash flows since such costs are necessary in order for us to generate long-term future cash flows from our properties. When tenant leases are terminated early, we expense any unamortized deferred leasing costs associated with those leases over the shortened termlease term.
Intangible Assets and Deferred Revenue on Property Acquisitions
We amortize intangible assets and deferred revenue on property acquisitions as follows:
| | | | | | | | | | | | | | |
| Asset Type | | Amortization Period | | Statement of Operations Location |
| Above- and below-market leases | | Related lease terms | | Lease revenue |
| In-place lease value | | Related lease terms | | Depreciation and amortization associated with real estate operations |
| Tenant relationship value | | Estimated period of time that tenant will lease space in property | | Depreciation and amortization associated with real estate operations |
| | | | |
On our consolidated balance sheets, we include intangible assets in the line entitled “prepaid expense and other assets, net” and deferred revenue in the line entitled “deferred revenue associated with operating leases.”
Intangible assets on property acquisitions consisted of the lease.following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2023 | | December 31, 2022 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net
Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net
Carrying Amount |
| In-place lease value | | $ | 124,884 | | | $ | 121,424 | | | $ | 3,460 | | | $ | 125,207 | | | $ | 120,178 | | | $ | 5,029 | |
| Tenant relationship value | | 53,953 | | | 50,987 | | | 2,966 | | | 57,210 | | | 52,803 | | | 4,407 | |
| Above-market leases | | 13,718 | | | 13,558 | | | 160 | | | 13,718 | | | 13,476 | | | 242 | |
| Other | | 1,333 | | | 1,067 | | | 266 | | | 1,333 | | | 1,052 | | | 281 | |
| | $ | 193,888 | | | $ | 187,036 | | | $ | 6,852 | | | $ | 197,468 | | | $ | 187,509 | | | $ | 9,959 | |
Deferred Financing Costs
We defer costs of financing arrangements and recognize these costs as interest expense over the related debt terms on a straight-line basis, which approximates the amortization that would occur under the effective interest method of amortization. We expense any unamortized loan costs when loans are retired early.early or significantly modified. We presentinclude deferred costs of financing arrangements as a direct deduction from the related debt liability, except for costs attributable to line-of-credit arrangements and interest rate derivatives, which we present in theinclude on our consolidated balance sheetsheets in the line entitled “prepaid expenses and other assets, net”.
Corporate OfficeCOPT Defense Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Interest Rate Derivatives
Our primary objectives in using interest rate derivatives are to add stability to interest expense and to manage exposure to interest rate movements. To accomplish this objective, we use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for our making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. We use interest rate swaps to hedge the cash flows associated with interest rates on variable-rate debt borrowings. We have also useused forward-starting interest rate swaps to hedge the cash flows associated with interest rates on forecasted fixed-rate borrowings. We recognize all derivatives as assets or liabilities on our consolidated balance sheetsheets at fair value.
We defer all changes in the fair value of designated cash flow hedges to accumulated other comprehensive income (“AOCI”) or loss (“AOCL”), reclassifying such deferrals to interest expense as interest expense is recognized on the hedged forecasted transactions.transactions, and recognize related cash flows as cash flows from operating activities. When an interest rate swap designated as a cash flow hedge no longer qualifies for hedge accounting and the hedged transactions are probable not to occur, we recognize changes in the fair value of the hedge previously deferred to AOCI or AOCL, along with any changes in fair value occurring thereafter, through earnings.earnings and, if applicable, related cash flows as cash flows from investing activities. We do not use interest rate derivatives for trading or speculative purposes. We manage counter-party risk by only entering into contracts with major financial institutions based upon their credit ratings and other risk factors.
We use standard market conventions and techniques such as discounted cash flow analysis, option pricing models, replacement cost and termination cost in computing the fair value of derivatives at each balance sheet date. We made an accounting policy election to use an exception provided for in the applicable accounting guidance with respect to measuring counterparty credit risk for derivative instruments; this election enables us to measure the fair value of groups of assets and liabilities associated with derivative instruments consistently with how market participants would price the net risk exposure as of the measurement date.
Noncontrolling Interests
COPT’sOur consolidated noncontrolling interests are comprised of interests in COPLPCDPLP not owned by COPT (discussed further in Note 14)Defense and interests in consolidated real estate joint ventures not owned by us (discussed further in Note 6). COPLP’s consolidated noncontrolling interests are comprised primarily of interests in our consolidated real estate joint ventures. We evaluate whether noncontrolling interests are subject to redemption features outside of our control. We classify noncontrolling interests that are currently redeemable for cash at the option of the holders or are probable of becoming redeemable as redeemable noncontrolling interests in the mezzanine section of our consolidated balance sheets; we adjust these interests each period to the greater of their fair value or carrying amount (initial amount as adjusted for allocations of income and losses and contributions and distributions), with a corresponding offset to additional paid-in capital on COPT’sour consolidated balance sheets or common units on COPLP’s balance sheet.sheets. Our other noncontrolling interests are reported in the equity section of our consolidated balance sheets.
Revenue Recognition
Lease and Other Property Revenue
We lease real estate properties, comprised primarily of office properties and data center shells, to third parties. These leases usually include options under which the tenant may renew its lease based on market rates at the time of renewal, which are then typically subject to further negotiation. These leases occasionally provide the tenant with an option to terminate its lease early usually for a defined termination fee.
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Most of our lease revenue is from fixed contractual payments defined under the lease that, in most cases, escalate annually over the term of the lease. Our lease revenue also includes variable lease payments predominantly for tenant reimbursements of property operating expenses and lease termination fees. Property operating expense reimbursement structures vary, with some tenants responsible for all of a property’s expenses, while others are responsible for their share of a property’s expenseexpenses only to the extent such expenses exceed amounts defined in the lease (which are derived from the property’s historical expense levels). Lease termination fees in most cases result from a tenant’s exercise of an existing right under a lease.
Upon lease commencement, we evaluate leases to determine if they meet criteria set forth in lease accounting guidance for classification as sales-type leases or direct financing leases; whenif a lease meets none of these criteria, we classify the lease as an operating lease. Upon commencement of sales-type leases, we derecognize the underlying asset, recognizing in its place a net investment in the lease equal to the sum of the lease receivable and the present value of any unguaranteed residual asset and recognize any selling profit or loss created as a result of the difference between those two amounts. Similarly, for direct financing leases, the lessor derecognizeswe would derecognize the underlying asset and recognizesrecognize a net investment in the lease, but, unlike in a sales-type lease, deferswould defer profit and amortizesamortize it as interest income over the lease term. Our leases of properties as lessor are predominantly classified as operating leases, for which the underlying asset remains on our balance sheet and is depreciated consistently with other owned assets, with income recognized as described further below.
We recognize minimum rents on operating leases, net of abatements, on a straight-line basis over the term of tenant leases. A lease term commences when: (1) the tenant has control of the leased space (legal right to use the property); and (2) we have delivered the premises to the tenant as required under the terms of suchthe lease. The term of a lease includes the
COPT Defense Properties and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
noncancellable periods of the lease along with periods covered by: (1) a tenant option to extend the lease if the tenant is reasonably certain to exercise that option; (2) a tenant option to terminate the lease if the tenant is reasonably certain not to exercise that option; and (3) an option to extend (or not to terminate) the lease in which exercise of the option is controlled by us as the lessor. When assessing the expected lease end date, we use judgment in contemplating the significance of: any penalties a tenant may incur should it choose not to exercise any existing options to extend the lease or exercise any existing options to terminate the lease; and economic incentives for the tenant based on any existing contract, asset, entity or market-based factors inassociated with the lease. While a significant portion of our portfolio is leased to the USG, and the majority of those leases consist of a series of one-year renewal options, and/or provide for early termination rights, we have concluded that exercise of existing renewal options, or continuation of such leases without exercising early termination rights, is reasonably certain for most of these leases.
We elected a practical expedient available under lease accounting guidance that enables us to combine non-lease components that otherwise would need to be accounted for under revenue accounting guidance (such as tenant reimbursements of property operating expenses) with the associated lease components for our accounting and reporting of operating lease revenue.
We report the amounton our consolidated balance sheets amounts by which our minimum rental revenue recognized on a straight-line basis under leases exceedsexceed the contractual rent billings associated with such leases as deferred rent receivable on our consolidated balance sheets. Amountsand amounts by which our minimum rental revenue recognized on a straight-line basis under leases are less than the contractual rent billings associated with such leases are reported in liabilities as deferred revenue associated with operating leases on our consolidated balance sheets.leases.
In connection with a tenant’s entry into, or modification of, a lease, if we make cash payments to, or on behalf of, the tenant for purposes other than funding the construction of landlord assets, we generally defer the amount of such payments as lease incentives. As discussed above, when we are required to provide improvements under the terms of a lease, we determine whether the improvements constitute landlord assets or tenant assets; if the improvements are tenant assets associated with an operating lease, we defer the cost of improvementscosts funded by us as a lease incentive asset. We amortize lease incentives as a reduction of rental revenue over the term of the lease.
If collectability under a lease is not probable, revenue recognized is limited to the lesser of revenue that would have been recognized if collectability was probable or lease payments collected.
We recognize lease revenue associated with tenant expense recoveries in the same periods in which we incur the related expenses, including tenant reimbursements of property taxes, utilities and other property operating expenses.
We recognize fees received for lease terminations as revenue and write off against such revenue any (1) deferred rents receivable, and (2) deferred revenue, lease incentives and intangible assets that are amortizable into rentallease revenue associated with thesuch leases; the resulting net amount is the net revenue from the early termination of the leases. When a tenant’s lease for space in a property is terminated early but the tenant continues to lease such space under a new or modified lease in the property, the net revenue from the early termination of the lease is recognized evenly over the remaining life of the new or modified lease in place on that property.
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Effective January 1, 2019, we adopted guidance issued by the FASB setting forth principles for the recognition, measurement, presentation and disclosure of leases, which required lessors of real estate to account for leases using an approach substantially equivalent to guidance previously in place for operating leases, direct financing leases and sales-type leases. We adopted this guidance for leases on January 1, 2019 using a modified retrospective transition approach under which we elected to not adjust prior comparative reporting periods (except for our presentation of lease revenue discussed below). We elected to apply a package of practical expedients that enabled us to carry forward upon adoption our historical assessments of: expired or existing leases regarding their lease classification and deferred recognition of non-incremental direct leasing costs; and whether any expired or existing contracts are, or contain, leases. We also elected a practical expedient that enabled us to avoid the need to assess whether expired or existing land easements not previously accounted for as leases are, or contain, a lease. In addition, we elected a practical expedient to avoid separating non-lease components that otherwise would need to be accounted for under revenue accounting guidance (such as tenant reimbursements of property operating expenses) from the associated lease component since (1) the non-lease components have the same timing and pattern of transfer as the associated lease component and (2) the lease component, if accounted for separately, would be classified as an operating lease; this enables us to account for the combination of the lease component and non-lease components as an operating lease since the lease component is the predominant component of the combined components.
Construction Contract and Other Service Revenues
We enter into construction contracts to complete various design and construction services primarily for our USG tenants. The revenues and expenses from these services consist primarily of subcontracted costs that are reimbursed to us by our customers along with a fee. These services are an ancillary component of our overall operations, with small operating margins relative to the revenue. We review each contract to determine the performance obligations and allocate the transaction price based on the standalone selling price, as discussed further below. We recognize revenue under these contracts as services are performed in an amount that reflects the consideration we expect to receive in exchange for those services. Our performance obligations are satisfied over time as work progresses. Revenue recognition is determined using the input method based on costs incurred as of a point in time relative to the total estimated costs at completion to measure progress towardtowards satisfying our performance obligations. We believe incurred costs of work performed best depicts the transfer of control of the services being transferred to the customer.
In determining whether the performance obligations of eachassociated with a construction contract should be accounted for separately versus together, we consider numerous factors that may require significant judgment, including: whether the components contracted are substantially the same with the same pattern of transfer; whether the customer could contract with another party to perform construction based on our design project; and whether the customer can elect not to move forward after the design phase of the contract. Most of our contracts have a single performance obligation as the promise to transfer the services is not separately identifiable from other obligations in the contracts and, therefore, are not distinct. Some contracts have multiple performance obligations, most commonly due to having distinct project phases for design and construction for whichthat our customer is making decisions and managing separately. In these cases, we allocate the transaction price between these performance obligations
COPT Defense Properties and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
based on the relative standalone selling prices, which we determine by evaluating: the relative costs of each performance obligation; the expected operating margins (which typically do not vary significantly between obligations); and amounts set forth in the contracts for each obligation. Contract modifications, such as change orders, are routine for our construction contracts and are generally determined to be additions to the existing performance obligations because they would have been part of the initial performance obligations if they were identified at the initial contract date.
We have three main types of compensation arrangements for our construction contracts: guaranteed maximum price (“GMP”); firm fixed price (“FFP”); and cost-plus fee.
•>GMP contracts provide for revenue equal to costs incurred plus a fee equal to a percentage of such costs, up to a maximum contract amount. We generally enter into GMP contracts for projects that are significant in nature based on the size of the project and total fees and for which the fullwith an undefined scope of the project has not been determined as of the contract date. GMP contracts are lower risk to us than FFP contracts since the costs and revenue move proportionately to one another.
•>FFP contracts provide for revenue equal to a fixed fee. These contracts are typically lower in value and scope relative to GMP contracts, and are generally entered into when the scope of the project is well defined. Typically, we assume more risk with FFP contracts than GMP contracts since the revenue is fixed and we could realize losses or less than expected profits if we incur more costs than originally estimated. However, these types of contracts offer the opportunity for additional profits when we complete the work for less than originally estimated.
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
•>Cost-plus fee contracts provide for revenue equal to costs incurred plus a fee equal to a percentage of such costs but, unlike GMP contracts, do not have a maximum contract amount. Similar to GMP contracts, cost-plus fee contracts are low risk to us since the costs and revenue move proportionately to one another.
Construction contract cost estimates are based primarily on contracts in place with subcontractors to complete most of the work, but may also include assumptions, such as performance of subcontractors and cost and availability of materials, to project the outcome of future events over the course of the project. We review and update these estimates regularly as a significant change could affect the profitability of our construction contracts. We recognize adjustments in estimated profit on contracts under the cumulative catch-up method as the modification does not create a new performance obligation. Under this method, the impact of thean adjustment onto profit recorded to date on a contract is recognized in the period the adjustment is identified. Revenue and profit in future periods are recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on thea contract, we recognize the total loss in the quarter it is identified.
Our timing of revenue recognition for construction contracts generally differs from the timing of invoicing to customers. We recognize suchconstruction contract revenue as we satisfy our performance obligations. Payment terms and conditions vary by contract type. Under most of our contracts, we bill customers monthly, as work progresses, in accordance with the contract terms, with payment due in 30 days, although customers occasionally pay in advance of services being provided. We have determined that our contracts generally do not include a significant financing component. The primary purpose of the timing of our customer invoicing is for convenience purposes, not to receive financing from our customersprovide or to provide customers withreceive financing. Additionally, the timing of transfer of theour services is often at the discretion of the customer.
Under most of our contracts, we bill customers one month subsequent to revenue recognition, resulting in contract assets representing unbilled construction revenue.
Our contract liabilities consist of advance payments from our customers or billings in excess of construction contract revenue recognized.
Expense Classification
We classify as property operating expenseexpenses costs incurred for property taxes, ground rents, utilities, property management, insurance, repairs and exterior and interior maintenance, as well as associated labor and indirect costs attributable to these costs.
We classify as general, administrative, leasing and leasingother expenses costs incurred for corporate-level management, public company administration, asset management, leasing, investor relations, marketing, and corporate-level insurance, (including generalleasing prospects and business development and director and officers) and leasing prospects,land carry costs, as well as associated labor and indirect costs attributable to these expenses.costs.
Share-Based Compensation
We issue 4four forms of share-based compensation: restricted COPT Defense common shares (“restricted shares”), profit interest units (“PIUs”) (time-based and performance-based), deferred share awards (also known as restricted share units), and performance share units (also known as performance share awards) (“PSUs”) and profit interest units (“PIUs”) (time-based and performance-based). We account for share-based compensation in accordance with authoritative guidance provided by the FASB that establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, focusing primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The guidance requires us to measure the cost of employee services received in exchange for an award of equity instruments based generally on the fair value of the awardawards on the grant date; such cost is then recognized over the period during which the employee is required to provide service in exchange for the award. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. The guidance also requires thatWe recognize share-based compensation be computed based onassociated with awards that are
COPT Defense Properties and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
ultimately expected to vest; as a result, future forfeitures of awards are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. If an award is voluntarily cancelled by an employee, we recognize the previously unrecognized cost associated with the original award on the date of such cancellation. We capitalize costs associated with share-based compensation attributable to employees engaged in development and redevelopment activities.
We compute the fair value of restricted shares, time-based PIUs (“TB-PIUs”) and deferred share awards based on the fair value of COPT Defense common shares on the grant date. We compute the fair value of PSUsperformance-based PIUs (“PB-PIUs”) and performance-based PIUsPSUs using a Monte Carlo
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
model. Significant assumptions used for that model include the following: the baseline common share value is the market value on the grant date; the risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant; and expected volatility is based on historical volatility of COPT’sCOPT Defense’s common shares.
Income Taxes
COPT Defense elected to be treated as a REIT under Sections 856 through 860 of the Internal Revenue Code. To qualify as a REIT, COPT Defense must meet a number of organizational and operational requirements, including a requirement that it distribute at least 90% of the Company’sits adjusted taxable income to its shareholders. As a REIT, COPT Defense generally will not be subject to Federalfederal income tax on taxable income that it distributes to its shareholders. If COPT Defense fails to qualify as a REIT in any tax year, it will be subject to Federalfederal income tax on its taxable income at regular corporate rates and may not be able to qualify as a REIT for four subsequent tax years.
COPLP is a limited partnership and is not subject toFor federal income tax. Its partners are required to report their respective share of the Operating Partnership’s taxable income on their respective tax returns. COPT’s share of the Operating Partnership’s taxable income is reported on COPT’s income tax return.
For Federal income tax purposes, dividends to shareholders may be characterized as ordinary income, capital gains or return of capital. The characterization of dividends paid on COPT’sCOPT Defense’s common shares during each of the last three years was as follows:
| | For the Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
| | For the Years Ended December 31, | | | | For the Years Ended December 31, |
| | 2023 | | | | 2023 | | 2022 | | 2021 |
| Ordinary income | Ordinary income | | 45.1 | % | | 54.4 | % | | 83.1 | % | Ordinary income | | 51.0 | % | | 68.2 | % | | 33.3 | % |
| Long-term capital gain | Long-term capital gain | | 54.9 | % | | 45.6 | % | | 0 | % | Long-term capital gain | | 49.0 | % | | 31.8 | % | | 57.3 | % |
| Return of capital | Return of capital | | 0 | % | | 0 | % | | 16.9 | % | Return of capital | | — | % | | — | % | | 9.4 | % |
The dividends allocated to each of the above years for Federalfederal income tax purposes included dividends paid on COPT’sCOPT Defense’s common shares during each of those years except for the dividends paid on January 18, 2024 (with a record date of December 29, 2023), which were allocated for federal income tax purposes to 2023 and dividends paid on January 15, 2021 and 2020 (with a record date of December 31, 2020 and 2019, respectively)2020), which were allocated for Federalfederal income tax purposes to 2020 and 2019, respectively.2020.
We distributed all of COPT’sCOPT Defense’s REIT taxable income in 2020, 20192023, 2022 and 20182021 and, as a result, did not incur Federalfederal income tax in those years.
The net basis of our consolidated assets and liabilities for tax reporting purposes was approximately $10$236 million higher than the amount reported on our consolidated balance sheet as of December 31, 2020.2023, which was primarily related to differences in basis for net properties, intangible assets on property acquisitions and deferred rent receivable.
We are subject to certain state and local income and franchise taxes. The expense associated with these state and local taxes is included in general, administrative, leasing and administrative expenseother expenses and property operating expenses on our consolidated statements of operations. We did not separately state these amounts on our consolidated statements of operations because they are insignificant.
Reclassifications
We reclassified certain amounts from prior periods to conform to the current period presentation of our consolidated financial statements with no effect on previously reported net income or equity.
Recent Accounting Pronouncements
As discussed above,In November 2023, the Financial Accounting Standard Board (“FASB”) issued guidance to improve reportable segment disclosure requirements. This guidance requires disclosure of incremental segment information on an annual and interim basis and is effective January 1, 2020, we adoptedfor us beginning after December 15, 2024. Early adoption is permitted. The guidance issued bywill be applied retrospectively to all periods presented unless it is impracticable to do so. We are currently assessing the impact of this guidance on our future related disclosures.
In December 2023, the FASB that changed how entities measure credit lossesissued guidance to improve income tax disclosures. This guidance requires enhanced annual disclosures primarily related to existing rate reconciliation and income taxes paid disclosure requirements and is effective for most financial assets and certain other instruments not measured at fair value through net income. The guidance replaced the current incurred loss model with an expected loss approach, resulting in a more timely recognition of such losses. The guidance appliesus for annual periods beginning after December 15, 2024. Early adoption is permitted. We expect to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables (excluding those arising from operating leases), loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit exposures. Underapply this guidance we recognize an estimateprospectively. We are currently assessing the application of this guidance but do not expect it to materially affect our expectedfuture related disclosures.
Corporate OfficeCOPT Defense Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
credit losses on these asset types as an allowance, as the guidance requires that financial assets be measured on an amortized cost basis and be presented at the net amount expected to be collected. We adopted this guidance using the modified retrospective transition method under which we recognized a $5.5 million allowance for credit losses by means of a cumulative-effect adjustment to cumulative distributions in excess of net income of the Company (or common units of the Operating Partnership), and did not adjust prior comparative reporting periods. Our consolidated statements of operations reflect adjustments for changes in our expected credit losses occurring subsequent to adoption of this guidance.
Effective January 1, 2020, we adopted guidance issued by the FASB that modifies disclosure requirements for fair value measurements. The resulting changes in disclosure did not have a material impact on our consolidated financial statements.
Effective January 1, 2020, we adopted guidance issued by the FASB that aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. FASB guidance did not previously address the accounting for such implementation costs. Our adoption of this guidance did not have a material impact on our consolidated financial statements.
In March 2020, the FASB issued guidance containing practical expedients for reference rate reform related activities pertaining to debt, leases, derivatives and other contracts. The guidance is optional and may be adopted over time as reference rate reform activities occur. During 2020, we elected to apply an expedient to treat any changes in loans resulting from reference rate reform as debt modifications (as opposed to extinguishments) and hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of the hedge accounting expedients preserves the presentation of derivatives consistent with past presentation. We will continue to evaluate the impact of this guidance and may apply other elections as applicable as additional changes in the market occur.
In April 2020, the FASB issued a Staff Q&A document that addressed the accounting for lease accounting guidance for lease concessions resulting from the COVID-19 pandemic. Under existing lease guidance, we would normally have to determine, on a lease-by-lease basis, if a lease concession was the result of a new arrangement reached with the tenant (treated as a lease modification) or if such a concession was implemented pursuant to enforceable rights and obligations within the existing lease agreement (and, therefore, not treated as a lease modification). The Staff Q&A document enabled us to bypass the lease-by-lease analysis for lease concessions resulting from the COVID-19 pandemic, and instead elect to either apply the lease modification accounting framework or not, with such elections applied consistently to leases with similar characteristics and similar circumstances. Entities may make the elections for any lessor-provided concessions related to the effects of the COVID-19 pandemic (such as deferrals of lease payments or reduced future lease payments) as long as the concession does not result in a substantial increase in the rights of the lessor or the obligations of the lessee. We chose to apply the elections available under the Staff Q&A to restructurings of lease payment terms granted by us to tenants, the effect of which did not have a material impact on our consolidated financial statements.
3.Fair Value Measurements
Accounting standards define fair value as the exit price, or the amount that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The standards also establish a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. The hierarchy of these inputs is broken down into three levels: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 inputs include (1) quoted prices for similar assets or liabilities in active markets, (2) quoted prices for identical or similar assets or liabilities in inactive markets and (3) inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly; and Level 3 inputs are unobservable inputs for the asset or liability. Categorization within the valuation hierarchy is based upon the lowest level of input that is most significant to the fair value measurement.
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Recurring Fair Value Measurements
COPT hasWe have a non-qualified elective deferred compensation plan for Trustees and certain members of our management team that, prior to December 31, 2019, permitted participants to defer up to 100% of their compensation on a pre-tax basis and receive a tax-deferred return on such deferrals. The Company froze additional entry into the plan effectiveEffective December 31, 2019.2019, no new investments of deferred compensation were eligible for the plan. The assets held in the plan (comprised primarily of mutual funds and equity securities)funds) and the corresponding liability to the participants are measured at fair value on a recurring basis on COPT’sour consolidated balance sheets using quoted market prices, as are other marketable securities that we hold.prices. The balance of the plan, which was fully funded and totaled $3.0$1.8 million as of December 31, 20202023 and $3.1 million as of December 31, 2019, and2022, is included in the line entitled “prepaid expenses and other assets, net” on COPT’sour consolidated balance sheets along with an insignificant amount of other marketable securities.sheets. The offsetting liability associated with the plan is adjusted to fair value at the end of each accounting period based on the fair value of the plan assets and reported in “other liabilities” on COPT’sour consolidated balance sheets. The assets of the plan are classified in Level 1 of the fair value hierarchy, while the offsetting liability is classified in Level 2 of the fair value hierarchy.
The fair values of our interest rate derivatives are determined using widely accepted valuation techniques, including a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate market data and implied volatilities in such interest rates. While we determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our interest rate derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default. However, as of December 31, 20202023 and 2019,2022, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivatives and determined that these adjustments arewere not significant. As a result, we determined that our interest rate derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
The carrying values of cash and cash equivalents, restricted cash, accounts receivable, other assets (excluding investing receivables) and accounts payable and accrued expenses are reasonable estimates of their fair values because of the short maturities of these instruments. The fair values of our investing receivables, as disclosed in Note 8,7, were based on the discounted estimated future cash flows of the loans (categorized within Level 3 of the fair value hierarchy); the discount rates used approximate current market rates for loans with similar maturities and credit quality, and the estimated cash payments include scheduled principal and interest payments. For our disclosure of debt fair values in Note 10,8, we estimated the fair value of our unsecured senior notes based on quoted market rates for publicly-traded debtour senior notes (categorized within Level 21 of the fair value hierarchy) and estimated the fair value of our other debt based on the discounted estimated future cash payments to be made on such debt (categorized within Level 3 of the fair value hierarchy); the discount rates used approximate current market rates for loans, or groups of loans, with similar maturities and credit quality, and the estimated future payments include scheduled principal and interest payments. Fair value estimates are made as of a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgment.
For additional fair value information, refer to Note 8 for investing receivables, Note 10 for debt and Note 11 for interest rate derivatives.
Corporate OfficeCOPT Defense Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
COPT and Subsidiaries
The tablestable below setsets forth our financial assets and liabilities of COPT and subsidiaries that are accounted for at fair value on a recurring basis as of December 31, 20202023 and 20192022 and the hierarchy level of inputs used in measuring their respective fair values under applicable accounting standards (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Description | | Quoted Prices in
Active Markets for
Identical Assets (Level 1) | | Significant Other
Observable Inputs(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Total |
| December 31, 2020: | | | | | | | | |
| Assets: | | | | | | | | |
| Marketable securities in deferred compensation plan (1) | | | | | | | | |
| Mutual funds | | $ | 3,008 | | | $ | 0 | | | $ | 0 | | | $ | 3,008 | |
| Other | | 19 | | | 0 | | | 0 | | | 19 | |
| Other marketable securities (1) | | 30 | | | 0 | | | 0 | | | 30 | |
| | | | | | | | |
| Total assets | | $ | 3,057 | | | $ | 0 | | | $ | 0 | | | $ | 3,057 | |
| Liabilities: | | | | | | | | |
| Deferred compensation plan liability (2) | | $ | 0 | | | $ | 3,027 | | | $ | 0 | | | $ | 3,027 | |
| Interest rate derivatives | | 0 | | | 9,522 | | | 0 | | | 9,522 | |
| Total liabilities | | $ | 0 | | | $ | 12,549 | | | $ | 0 | | | $ | 12,549 | |
| | | | | | | | |
| December 31, 2019: | | | | | | | | |
| Assets: | | | | | | | | |
| Marketable securities in deferred compensation plan (1) | | | | | | | | |
| Mutual funds | | $ | 3,035 | | | $ | 0 | | | $ | 0 | | | $ | 3,035 | |
| Other | | 25 | | | 0 | | | 0 | | | 25 | |
| Interest rate derivatives (1) | | 0 | | | 23 | | | 0 | | | 23 | |
| Total assets | | $ | 3,060 | | | $ | 23 | | | $ | 0 | | | $ | 3,083 | |
| Liabilities: | | | | | | | | |
| Deferred compensation plan liability (2) | | $ | 0 | | | $ | 3,060 | | | $ | 0 | | | $ | 3,060 | |
| Interest rate derivatives | | 0 | | | 25,682 | | | 0 | | | 25,682 | |
| Total liabilities | | $ | 0 | | | $ | 28,742 | | | $ | 0 | | | $ | 28,742 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Description | | Quoted Prices in
Active Markets for
Identical Assets (Level 1) | | Significant Other
Observable Inputs(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Total |
| December 31, 2023: | | | | | | | | |
| Assets: (1) | | | | | | | | |
| Marketable securities in deferred compensation plan | | $ | 1,842 | | | $ | — | | | $ | — | | | $ | 1,842 | |
| | | | | | | | |
| | | | | | | | |
| Interest rate derivatives | | — | | | 2,558 | | | — | | | 2,558 | |
| Total assets | | $ | 1,842 | | | $ | 2,558 | | | $ | — | | | $ | 4,400 | |
| Liabilities: (2) | | | | | | | | |
| Deferred compensation plan liability | | $ | — | | | $ | 1,842 | | | $ | — | | | $ | 1,842 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| December 31, 2022: | | | | | | | | |
| Assets: (1) | | | | | | | | |
| Marketable securities in deferred compensation plan | | $ | 1,831 | | | $ | — | | | $ | — | | | $ | 1,831 | |
| | | | | | | | |
| | | | | | | | |
| Interest rate derivatives | | — | | | 2,631 | | | — | | | 2,631 | |
| Total assets | | $ | 1,831 | | | $ | 2,631 | | | $ | — | | | $ | 4,462 | |
| Liabilities: (2) | | | | | | | | |
| Deferred compensation plan liability | | $ | — | | | $ | 1,831 | | | $ | — | | | $ | 1,831 | |
| | | | | | | | |
| | | | | | | | |
(1) Included in the line entitled “prepaid expenses and other assets, net” on COPT’sour consolidated balance sheet.sheets.
(2) Included in the line entitled “other liabilities” on COPT’sour consolidated balance sheet.sheets.
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
COPLP and Subsidiaries
The tables below set forth financial assets and liabilities of COPLP and subsidiaries that are accounted for at fair value on a recurring basis as of December 31, 2020 and 2019 and the hierarchy level of inputs used in measuring their respective fair values under applicable accounting standards (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Description | | Quoted Prices in
Active Markets for
Identical Assets (Level 1) | | Significant Other
Observable Inputs(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Total |
| December 31, 2020: | | | | | | | | |
| Assets: | | | | | | | | |
| | | | | | | | |
| Other marketable securities (1) | | $ | 30 | | | $ | 0 | | | $ | 0 | | | $ | 30 | |
| | | | | | | | |
| | | | | | | | |
| Liabilities: | | | | | | | | |
| Interest rate derivatives | | $ | 0 | | | $ | 9,522 | | | $ | 0 | | | $ | 9,522 | |
| | | | | | | | |
| December 31, 2019: | | | | | | | | |
| Assets: | | | | | | | | |
| | | | | | | | |
| Interest rate derivatives (1) | | $ | 0 | | | $ | 23 | | | $ | 0 | | | $ | 23 | |
| Liabilities: | | | | | | | | |
| Interest rate derivatives | | $ | 0 | | | $ | 25,682 | | | $ | 0 | | | $ | 25,682 | |
| | | | | | | | |
(1)Included in the line entitled “prepaid expenses and other assets, net” on COPLP’s consolidated balance sheet.
2019 Nonrecurring Fair Value Measurements
In the third quarter of 2019, we determined that the carrying amount of land held in Frederick, Maryland would not be recovered from its eventual disposition. As a result, we recognized an impairment loss of $327,000 in order to adjust the land to its estimated fair value. This land was sold in the fourth quarter of 2019.
4.Properties, Net
Operating properties, net consisted of the following (in thousands):
| | December 31, |
| 2020 | | 2019 |
| December 31, | | | December 31, |
| 2023 | | | 2023 | | 2022 |
| Land | Land | $ | 528,269 | | | $ | 472,976 | |
| Buildings and improvements | Buildings and improvements | 3,711,264 | | | 3,306,791 | |
| Less: Accumulated depreciation | Less: Accumulated depreciation | (1,124,253) | | | (1,007,120) | |
| Operating properties, net | Operating properties, net | $ | 3,115,280 | | | $ | 2,772,647 | |
20202023 Impairments
As part of our closing process for the three months ended September 30, 2023, we conducted our quarterly review of our portfolio of long-lived assets to be held and used for indicators of impairment. As a result of this process, we shortened the expected holding periods for six operating properties in our Other segment and a parcel of land located in Baltimore, Maryland, Northern Virginia and Washington, D.C. We determined that the carrying amount of the properties would not likely be recovered from the undiscounted cash flows from the operations and sales of the properties over the shortened holding periods. Accordingly, we recognized impairment losses of $252.8 million on these properties during the period.
2023 Dispositions
On October 30, 2020,January 10, 2023, we sold a 90% interest in 2three data center shell properties in Northern Virginia based on an aggregate property value of $89.7$211.3 million and retained a 10% interest in the properties through B RE COPT DCRedshift JV II LLC (“B RE COPT”Redshift”), a newly-formed joint venture. Our partner in the joint venture acquired the 90% interest from us for $80.7$190.2 million. We account for our interest in the joint venture using the equity method of accounting, as described further in Note 6. We recognized a gain on sale of $30.0$49.4 million. The table below sets forth the components of the properties’ assets, which were classified as held for sale on our consolidated balance sheet as of December 31, 2022 (in thousands):
| | | | | | | | | |
| | |
| Properties, net | | | $ | 156,691 | |
| Deferred rent receivable | | | 4,595 | |
| | | |
| | | |
| | | |
| Assets held for sale, net | | | $ | 161,286 | |
Corporate OfficeCOPT Defense Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
2020 Development Activities2022 Dispositions and Discontinued Operations
In 2020,On January 25, 2022, we placed into service 1.8sold 9651 Hornbaker Road in Manassas, Virginia, our sole wholesale data center investment, for $222.5 million, square feet in 11 newly-developed properties, 42,000 square feet in expansions of 3 fully-operational properties and 21,000 square feetresulting in a redeveloped property. Asgain on sale of December 31, 2020, we had 11 properties under development, including 3 partially-operational properties, that we estimate will total 1.5 million square feet upon completion.$28.6 million. This property, a separate reportable segment, is reported herein as discontinued operations. The table below sets forth the property’s results of operations included in discontinued operations on our consolidated statements of operations and its operating and investing cash flows included on our consolidated statements of cash flows (in thousands):
| | | | | | | | | | | | | |
| | | | For the Years Ended December 31, |
| | | | 2022 | | 2021 |
| Revenues from real estate operations | | | $ | 1,980 | | | $ | 30,490 | |
| Property operating expenses | | | (971) | | | (16,842) | |
| Depreciation and amortization associated with real estate operations | | | — | | | (10,290) | |
| | | | | |
| Gain on sale of real estate | | | 28,564 | | | — | |
| Discontinued operations | | | $ | 29,573 | | | $ | 3,358 | |
| | | | | |
| Cash flows from operating activities | | | $ | 5,757 | | | $ | 10,930 | |
| Cash flows from investing activities | | | $ | 220,565 | | | $ | (1,912) | |
In the third quarter of 2020,On December 14, 2022, we concluded that we no longer expected to develop a property in Baltimore, Maryland. As a result, we recognized an impairment loss on previously incurred pre-development costs of $1.5 million.
2019 Dispositions
In 2019, we sold through a series of transactions, a 90% interest in 9two data center shellsshell properties in Northern Virginia based on an aggregate property value of $345.1$67.0 million retainingand retained a 10% interest in the properties through BREIT COPT DCQuark JV LLC (“BREIT-COPT”Quark”), a newly-formed joint venture. The transactions for 7 of these properties were completed on June 20, 2019 and the remaining 2 properties on December 5, 2019. Our partner in the joint venture acquired the 90% interest from us for $310.6$60.3 million. We account for our interest in the joint venture using the equity method of accounting as described further in Note 6. We recognized a gain on sale of $105.2$19.2 million.
2019 Development Activities
In 2019, we placed into service 1.1 million square feet in 9 newly-developed properties and 85,000 square feet in 1 property under redevelopment.
20182021 Dispositions
In 2018,On June 2, 2021, we sold 11751 Meadowville Lane,a 90% interest in two data center shell properties in Northern Virginia based on an operatingaggregate property totaling 193,000 square feetvalue of $118.8 million and retained a 10% interest in Chester, Virginia (in our Data Center Shells sub-segment). We contractually closed on the sale of this property on October 27, 2017properties through B RE COPT DC JV III LLC (“BRE-COPT 3”), a newly-formed joint venture. Our partner in the joint venture acquired the 90% interest from us for $44.0$106.9 million. We provided a financial guaranty toaccount for our interest in the buyer under which we provided an indemnification for up to $20 millionjoint venture using the equity method of accounting as described further in losses it could incur related to a potential defined capital event occurring on the property; our financial guaranty to the buyer expired on October 1, 2018, resulting in no losses to us.Note 6. We accounted for this transaction as a financing arrangement. Accordingly, we did not recognize the sale of this property for accounting purposes until the expiration of the guaranty on October 1, 2018. In the fourth quarter of 2018, we recognized a gain on this sale of $1.5$40.2 million.
2018 Development Activities
In 2018,On December 30, 2021, we placed into service 666,000 square feet in 6 newly-developed properties, 22,000 square feet in 1 redeveloped property and land under a long-term contract.
In the fourth quarter of 2018, we abandoned plans to redevelopsold a property inthat was previously removed from service from our Fort Meade/BW Corridordata center shells sub-segment after we completed leasingfor $30.0 million and recognized a gain on the property that did not require any redevelopment. Accordingly, we recognized an impairment losssale of $2.4 million representing pre-development costs associated with the property.$25.9 million.
5. Leases
Lessor Arrangements
We lease real estate properties, comprised primarily of office properties and data center shells, to third parties. As of December 31, 2020, theseThese leases which may encompass all, or a portion, of a property, had remaining terms spanning from one month to 18 years and averaging approximately 5.4 years.
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
properties, with various expiration dates. Our lease revenue is comprised of: fixed leasefixed-lease revenue, including contractual rent billings under leases recognized on a straight-line basis over lease terms and amortization of lease incentives and above- and below- marketbelow-market lease intangibles; and variable leasevariable-lease revenue, including tenant expense recoveries, lease termination revenue and other revenue from tenants that is not fixed under the lease.leases. The table below sets forth our composition of lease revenue recognized between fixedfixed- and variable leasevariable-lease revenue (in thousands):
| | | For the Years Ended December 31, |
| Lease revenue | | | 2020 | | 2019 |
| | | | For the Years Ended December 31, | |
| | | | For the Years Ended December 31, | |
| | | | For the Years Ended December 31, | |
| Lease revenue (1) | | Lease revenue (1) | | | | 2023 | | 2022 | | 2021 |
| Fixed | Fixed | | | $ | 425,593 | | | $ | 412,342 | |
| Variable | Variable | | | 110,534 | | | 110,130 | |
| | $ | 536,127 | | | $ | 522,472 | |
| | | | $ | |
(1)Excludes lease revenue from discontinued operations of which $1.5 million and $22.3 million was fixed and $527,000 and $8.2 million was variable for 2022 and 2021, respectively.
A significant concentration of our lease revenue in 2020 and 2019 from continuing operationswas earned from our largest tenant, the USG, including 35%37% in 2023 and 34%2022 and 36% in 2021 of our total lease revenue, respectively, and 25%27% in 2023 and 2022 and 26% in 2021 of our fixed lease revenue in each of those years.fixed-lease revenue. Our lease revenue from the USG in 20202023, 2022 and 20192021 was earned primarily from properties in the Fort George G. Meade and the Baltimore/Washington Corridor (“Fort Meade/BW Corridor,Corridor”), Lackland Air Force Base and Northern Virginia Defense/IT (“NoVA Defense/IT”) reportable sub-segments (see Note 17)13).
COPT Defense Properties and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fixed contractual payments due under our property leases were as follows (in thousands):
| | As of December 31, 2020 | |
| | As of December 31, 2023 | | | | As of December 31, 2023 |
| Year Ending December 31, | Year Ending December 31, | | Operating leases | | Sales-type leases | | Year Ending December 31, | | Operating leases | | Sales-type leases |
| | 2021 | | $ | 424,585 | | | $ | 871 | | |
| 2022 | | 378,573 | | | 949 | | |
| 2023 | | 324,917 | | | 949 | | |
| 2024 | |
| 2024 | |
| 2024 | 2024 | | 276,488 | | | 949 | | |
| 2025 | 2025 | | 197,677 | | | 949 | | |
| 2026 | |
| 2027 | |
| 2028 | |
| Thereafter | Thereafter | | 745,303 | | | 4,464 | | |
| Total contractual payments | Total contractual payments | | $ | 2,347,543 | | | 9,131 | | |
| Less: Amount representing interest | Less: Amount representing interest | | | | (2,558) | | |
| Net investment in sales-type leases | | $ | 6,573 | | |
| Net investment in sales-type leases (1) | |
(1) Included in the line entitled “prepaid expenses and other assets, net” on our consolidated balance sheet.
Lessee Arrangements
As of December 31, 2020,2023, our balance sheet included $81.0$43.9 million in right-of-use assets associated primarily with land leased from third parties underlying certain properties that we are operating or developing.operating. The land leases have long durations with remaining terms ranging from 2825 to 77 years (excluding extension options) to 95 years.. As of December 31, 2020,2023, our right-of-use assets included:
•>$37.8 million for land on which we are developing an office property in Washington, D.C. through our Stevens Investors, LLC joint venture, virtually all of the rent on which was previously paid. This lease has a 95-year remaining term, and we possess a bargain purchase option that we expect to exercise in 2021;
•$11.314.5 million for land in a business park in Huntsville, Alabama under 1520 leases through our LW Redstone Company, LLC joint venture, with remaining terms ranging from 4239 to 5150 years and options to renew for an additional 25 years that were not included in the term used in determining the asset balance;
•>$10.19.5 million for land underlying operating office properties in Washington, D.C. under 2two leases with remaining terms of approximately 7976 years;
•>$6.66.4 million for land underlying a parking garage in Baltimore, Maryland under a lease with a remaining term of 25 years and an option to renew for an additional 49 years that was included in the term used in determining the asset balance;
>$5.9 million for land in a research park in College Park, Maryland under 4four leases through our M Square Associates, LLC joint venture, all of the rent on which was previously paid. These leases had remaining terms ranging from 6259 to 7370 years;
•>$6.5 million for land underlying a parking garage in Baltimore, Maryland under a lease with a remaining term of 28 years and an option to renew for an additional 49 years that was included in the term used in determining the asset balance;
•$6.55.1 million for data center space in Phoenix, Arizona with a remaining term of 4 yearsone year and an option to renew for an additional five years that were not included in the term used in determining the asset balance; and
•>$2.22.1 million for other land underlying operating properties in our Fort Meade/BW Corridor sub-segment under 2two leases with remaining terms of approximately 4744 years, all of the rent on which was previously paid.
The table below sets forth our property right-of-use assets and property lease liabilities on our consolidated balance sheets (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | | As of December 31, |
| Leases | | Balance Sheet Location | | 2023 | | 2022 |
| Right-of-use assets | | | | | | |
| Operating leases - Property | | Property - operating right-of-use assets | | $ | 41,296 | | | $ | 37,020 | |
| Finance leases - Property | | Prepaid expenses and other assets, net | | 2,565 | | | 2,207 | |
| Total right-of-use assets | | | | $ | 43,861 | | | $ | 39,227 | |
| Lease liabilities | | | | | | |
| Operating leases - Property | | Property - operating lease liabilities | | $ | 33,931 | | | $ | 28,759 | |
| Finance leases - Property | | Other liabilities | | 415 | | | — | |
| Total lease liabilities | | | | $ | 34,346 | | | $ | 28,759 | |
Corporate OfficeCOPT Defense Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Our property right-of-use assets consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | | As of December 31, |
| Leases | | Balance Sheet Location | | 2020 | | 2019 |
| Right-of-use assets | | | | | | |
| Operating leases - Property | | Property - operating right-of-use assets | | $ | 40,570 | | | $ | 27,864 | |
| | | | | | |
| | | | | | |
| Finance leases - Property | | Property - finance right-of-use assets | | 40,425 | | | 40,458 | |
| | | | | | |
| | | | | | |
| Total right-of-use assets | | | | $ | 80,995 | | | $ | 68,322 | |
Property lease liabilities consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | | As of December 31, |
| Leases | | Balance Sheet Location | | 2020 | | 2019 |
| Lease liabilities | | | | | | |
| Operating leases - Property | | Property - operating lease liabilities | | $ | 30,746 | | | $ | 17,317 | |
| | | | | | |
| | | | | | |
| Finance leases - Property | | Other liabilities | | 28 | | | 702 | |
| Total lease liabilities | | | | $ | 30,774 | | | $ | 18,019 | |
The table below sets forth the weighted average terms and discount rates of our property leases asAs of December 31, 2020:
| | | | | | | | |
Weighted average remaining lease term | | |
Operating leases | | 50 years |
Finance leases | | < 1 year |
Weighted average discount rate | | |
Operating leases | | 7.21 | % |
Finance leases | | 3.62 | % |
2023, our operating leases had a weighted average remaining lease term of 49 years and a weighted average discount rate of 7.31%, while our finance leases had a weighted average remaining lease term of nine years and a weighted average discount rate of 9.14%. The table below presents our total property lease cost (in thousands):
| | | For the Years Ended December 31, |
| | Statement of Operations Location | |
| | Statement of Operations Location | |
| | Statement of Operations Location | | | | | For the Years Ended December 31, |
| Lease cost | Lease cost | | Statement of Operations Location | | | 2020 | | 2019 | Lease cost | | | | | 2023 | | 2022 | | 2021 |
| Operating lease cost | Operating lease cost | | | | | | | |
| Property leases - fixed | |
| Property leases - fixed | |
| Property leases - fixed | Property leases - fixed | | Property operating expenses | | | $ | 2,413 | | | $ | 1,664 | |
| Property leases - variable | Property leases - variable | | Property operating expenses | | | 127 | | | 4 | |
| Finance lease cost | Finance lease cost | | | |
| | Amortization of property right-of-use assets | Amortization of property right-of-use assets | | Property operating expenses | | | 34 | | | 30 | |
| | Amortization of property right-of-use assets | |
| | | $ | 2,574 | | | $ | 1,698 | |
| Amortization of property right-of-use assets | |
| Interest on lease liabilities | |
| | | | | | $ | |
The table below presents the effect of property lease payments on our consolidated statements of cash flows (in thousands):
| | | | For the Years Ended December 31, |
| | | For the Years Ended December 31, | |
| | | For the Years Ended December 31, | |
| | | For the Years Ended December 31, | |
| Supplemental cash flow information | Supplemental cash flow information | | | 2020 | | 2019 | Supplemental cash flow information | | | 2023 | | 2022 | | 2021 |
| Cash paid for amounts included in the measurement of lease liabilities: | Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
| Operating cash flows for operating leases | Operating cash flows for operating leases | | | $ | 1,694 | | | $ | 1,004 | |
| | Operating cash flows for operating leases | |
| Operating cash flows for operating leases | |
| Operating cash flows for financing leases | |
| Financing cash flows for financing leases | Financing cash flows for financing leases | | | $ | 674 | | | $ | 14 | |
|
Payments on property leases were due as follows (in thousands):
| | | | | | | | | | | | | | |
| | December 31, 2023 |
| Year Ending December 31, | | Operating Leases | | Finance Leases |
| 2024 | | $ | 6,763 | | | $ | 61 | |
| 2025 | | 2,380 | | | 63 | |
| 2026 | | 1,791 | | | 65 | |
| 2027 | | 1,807 | | | 66 | |
| 2028 | | 1,823 | | | 69 | |
| Thereafter | | 138,189 | | | 297 | |
| Total lease payments | | 152,753 | | | 621 | |
| Less: Amount representing interest | | (118,822) | | | (206) | |
| Lease liability | | $ | 33,931 | | | $ | 415 | |
6. Real Estate Joint Ventures
Consolidated Real Estate Joint Ventures
The table below sets forth information as of December 31, 2023 pertaining to our investments in consolidated real estate joint ventures, which are each variable interest entities (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Nominal Ownership % | | | | December 31, 2023 |
| | Date Formed | | | | | Total
Assets | | Encumbered Assets | | Total Liabilities | | Mortgage Debt |
| Entity | | | | Location | | | | |
| LW Redstone Company, LLC (1) | | 3/23/2010 | | 85% | | Huntsville, Alabama | | $ | 718,522 | | | $ | 99,675 | | | $ | 102,397 | | | $ | 50,573 | |
| Stevens Investors, LLC | | 8/11/2015 | | 95% | | Washington, D.C. | | 128,857 | | | — | | | 2,060 | | | — | |
| M Square Associates, LLC | | 6/26/2007 | | 50% | | College Park, Maryland | | 98,117 | | | 57,249 | | | 49,720 | | | 48,635 | |
| | | | | | | | $ | 945,496 | | | $ | 156,924 | | | $ | 154,177 | | | $ | 99,208 | |
(1)As discussed below, we fund all capital requirements. Our partner receives distributions of $1.2 million of annual operating cash flows and we receive the remainder.
Corporate OfficeCOPT Defense Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Payments on property leases were due as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2020 | | As of December 31, 2019 |
| Year Ending December 31, | | Operating
leases | | Finance
leases | | Total | | Operating
leases | | Finance
leases | | Total |
| 2020 | | N/A | | N/A | | N/A | | $ | 1,092 | | | $ | 674 | | | $ | 1,766 | |
| 2021 | | $ | 3,211 | | | $ | 14 | | | $ | 3,225 | | | 1,138 | | | 14 | | | 1,152 | |
| 2022 | | 3,332 | | | 14 | | | 3,346 | | | 1,162 | | | 14 | | | 1,176 | |
| 2023 | | 3,382 | | | 0 | | | 3,382 | | | 1,167 | | | 0 | | | 1,167 | |
| 2024 | | 3,434 | | | 0 | | | 3,434 | | | 1,173 | | | 0 | | | 1,173 | |
| 2025 | | 1,780 | | | 0 | | | 1,780 | | | N/A | | N/A | | N/A |
| Thereafter | | 126,350 | | | 0 | | | 126,350 | | | 100,609 | | | 0 | | | 100,609 | |
| Total lease payments | | 141,489 | | | 28 | | | 141,517 | | | 106,341 | | | 702 | | | 107,043 | |
| Less: Amount representing interest | | (110,743) | | | 0 | | | (110,743) | | | (89,024) | | | 0 | | | (89,024) | |
| Lease liability | | $ | 30,746 | | | $ | 28 | | | $ | 30,774 | | | $ | 17,317 | | | $ | 702 | | | $ | 18,019 | |
6.Real Estate Joint Ventures
Consolidated Real Estate Joint Ventures
Each of these joint ventures are engaged in the development and operation of real estate. We consolidate the real estatethese joint ventures described below because of our: (1) power to direct the matters that most significantly impact their activities, including development, leasing and management of the properties developed by the VIEs;their properties; and (2) right to receive returns on our fundings and, in many cases, the obligation to fund the activities of the ventures to the extent that third-party financing is not obtained, both of which could be potentially significant to the VIEs.
The table below sets forth information pertaining to our investments in consolidated real estate joint ventures as of December 31, 2020 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Nominal Ownership % | | | | December 31, 2020 (1) |
| | Date Acquired | | | | | Total
Assets | | Encumbered Assets | | Total Liabilities |
| Entity | | | | Location | | | |
| LW Redstone Company, LLC | | 3/23/2010 | | 85% | | Huntsville, Alabama | | $ | 403,448 | | | $ | 92,590 | | | $ | 100,334 | |
| Stevens Investors, LLC | | 8/11/2015 | | 95% | | Washington, D.C. | | 161,735 | | | 158,286 | | | 88,028 | |
| M Square Associates, LLC | | 6/26/2007 | | 50% | | College Park, Maryland | | 100,258 | | | 62,446 | | | 55,227 | |
| | | | | | | | $ | 665,441 | | | $ | 313,322 | | | $ | 243,589 | |
(1)Excludes amounts eliminated in consolidation.
Each of these joint ventures are engaged in the development and operation of real estate.significant. With regard to these joint ventures:
•>for LW Redstone Company, LLC, we anticipate funding certain infrastructure costs (up to a maximum of $76.0 million excluding accrued interest thereon) due to be reimbursed by the City of Huntsville as discussed further in Note 8.7. We had advanced $61.0$72.2 million to the City through December 31, 20202023 to fund such costs. We also expect to fund additional development costs through equity contributions to the extent that third party financing is not obtained. Our partner was credited with a $9.0 million in invested capital upon formation and is not required to make, nor has it made, additional equity contributions. In March 2020, the LW Redstone Company, LLC joint venture agreement was amended to change the distribution terms to allow the venture to distribute financing proceeds to satisfy our partner’s cumulative preferred return and to provide our partner a priority preferred return on its invested capital. While net cash flow distributions to the partners vary depending on the source of the funds distributed, cashCash flows are generally distributed to the partners as follows: (1) debt service on member loans; (2) cumulative preferred returns of 13.5% on our partner’s invested capital; (2)(3) cumulative preferred returns of 13.5% on our invested capital; (3)(4) return of our invested capital; (4)(5) return of our partner’s invested capital; and (5)(6) any remaining residual 85% to us and 15% to our partner. Our partner has the right to require us to acquire its interest for fair value; accordingly, we classify the fair value of our partner’s interest as redeemable noncontrolling interests in the mezzanine section of our consolidated balance sheets. We have the right to acquire our partner’s interest at fair value upon the earlier of five years following the project’s achievement of a construction commencement threshold of 4.4 million square feet or March 2040; the project had achieved approximately 1.62.5 million square feet of construction commencement
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
through December 31, 2020.2023. Our partner has the right to receive some or all of the consideration for the acquisition of its interests in the form of common units in COPLP;CDPLP;
•>for Stevens Investors, LLC, net cash flows of this entity will beare distributed to the partners as follows: (1) member loans and accrued interest; (2) pro rata return of the partners’ capital; (3) pro rata return of the partners’ respective unpaid preferred returns; and (4) varying splits of 85% to 60% to us and the balance to our partners as we reach specified return hurdles. Our partners havehad the right to require us to acquire some or all of their interests for fair value for a defined period of time following the property’s development completion (expected to occur in 2021) and stabilization (as defined in the operating agreement) of the joint venture’s office property;until June 2023; accordingly, we classifyclassified the fair value of our partners’ interestinterests as redeemable noncontrolling interests in the mezzanine section of our consolidated balance sheets.sheets until such rights expired in June 2023. We and our partners each have the right to acquire each other’s interests at fair value upon the second anniversary of the property’s stabilization date (as definedbeginning in the operating agreement).December 2023. Our partners have the right to receive some or all of the consideration for the acquisition of their interests in the form of common units in COPLP;CDPLP; and
•>for M Square Associates, LLC, net cash flows of this entity are distributed to the partners as follows: (1) member loans and accrued interest; (2) our preferred return and capital contributions used to fund infrastructure costs; (3) the partners’ preferred returns and capital contributions used to fund all other costs including the base land value credit, in proportion to thetheir respective accrued returns and capital accounts; and (4) residual amounts distributed 50% to each member.
We disclose the activity of our redeemable noncontrolling interests in Note 12.10.
The ventures discussed above include only ones in which parties other than COPLP and COPT own interests.
Unconsolidated Real Estate Joint Ventures
The table below sets forth information pertaining to our investments in unconsolidated real estate joint ventures accounted for using the equity method of accounting (dollars in thousands):
| | | Date Formed | |
| | Date Formed | |
| | Date Formed | |
| Entity | |
| Entity | |
| Entity | |
| Redshift (2) | |
| Redshift (2) | |
| Redshift (2) | |
| BREIT COPT DC JV LLC | |
| BREIT COPT DC JV LLC | |
| BREIT COPT DC JV LLC | |
| Quark (2) | |
| Quark (2) | |
| Quark (2) | |
| BRE-COPT 3 (2) | |
| BRE-COPT 3 (2) | |
| BRE-COPT 3 (2) | |
| B RE COPT DC JV II LLC (3) | |
| B RE COPT DC JV II LLC (3) | |
| B RE COPT DC JV II LLC (3) | |
| | | | Date Acquired | | Nominal Ownership % | | Number of Properties | | Carrying Value of Investment (1) | |
| Entity | | December 31, 2020 | | December 31, 2019 | |
| B RE COPT DC JV II LLC (2) | | 10/30/2020 | | 10% | | 8 | | | $ | 15,988 | | | $ | 0 | | |
| BREIT COPT DC JV LLC | | 6/20/2019 | | 10% | | 9 | | | 13,315 | | | 14,133 | | |
| GI-COPT DC Partnership LLC | | 7/21/2016 | | 50% | | N/A | | 0 | | | 37,816 | | |
| | | 17 | | | $ | 29,303 | | | $ | 51,949 | | |
(1)Included $41.1 million and $21.5 million reported in the line entitled “investment in unconsolidated real estate joint ventures” and $2.8 million and $1.5 million for investments with deficit balances reported in “other liabilities” on our consolidated balance sheets.sheets as of December 31, 2023 and December 31, 2022, respectively.
(2)As of December 31, 2020, ourFormed in connection with transactions described further in Note 4.
(3)Our investment in B RE COPT DC JV II LLC was $7.4 million lower than our share of the joint venture’s equity by $6.8 million as of December 31, 2023 and $7.0 million as of December 31, 2022 due to a difference between our cost basis and our share of B RE COPT’sthe joint venture’s underlying equity in its net assets. We recognize adjustments to our share of the netjoint venture’s earnings and losses resulting from this basis difference in the underlying assets acquired from GI-COPT.of the joint venture.
These joint ventures operate triple-net leased, single-tenant data center shell properties in Northern Virginia. With regard to these joint ventures:
•B RE COPT was formed in 2020, when, as described further in Note 4, we sold a 90% interest in 2 properties and retained a 10% interest in the properties through B RE COPT;
•on December 22, 2020, we sold, through a series of transactions, 80% of our 50% interests in LLCs holding 6 properties and associated mortgage debt that we owned through GI-COPT DC Partnership LLC (“GI-COPT”). We received $60 million in proceeds and a 10% retained interest in the LLCs through B RE COPT, and recognized a gain of $29.4 million on the sale of these interests. GI-COPT was dissolved upon completion of these transactions; and
•BREIT-COPT was formed in 2019, when, as described further in Note 4, we sold a 90% interest in 9 properties and retained a 10% interest in the properties through the joint venture;
We concluded that B RE COPT and BREIT-COPTthese joint ventures are variable interest entities. Under the terms of the joint venture agreements, we and our partners receive returns in proportion to our investments, and our maximum exposure to losses is limited to our investments, subject to our share
COPT Defense Properties and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
of certain indemnification obligations with respect to nonrecourse debt secured by the properties. The nature of our involvement in the activities of the joint venture doesventures do not give us power over decisions that significantly affect itstheir economic performance.
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
7.Intangible Assets on Real Estate Acquisitions
Intangible assets on real estate acquisitions consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net
Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net
Carrying Amount |
| In-place lease value | | $ | 131,974 | | | $ | 123,291 | | | $ | 8,683 | | | $ | 131,975 | | | $ | 120,894 | | | $ | 11,081 | |
| Tenant relationship value | | 59,069 | | | 49,055 | | | 10,014 | | | 59,131 | | | 43,544 | | | 15,587 | |
| Above-market leases | | 13,718 | | | 13,380 | | | 338 | | | 13,718 | | | 13,318 | | | 400 | |
| Other | | 1,333 | | | 1,024 | | | 309 | | | 1,333 | | | 1,009 | | | 324 | |
| | $ | 206,094 | | | $ | 186,750 | | | $ | 19,344 | | | $ | 206,157 | | | $ | 178,765 | | | $ | 27,392 | |
Amortization of intangible assets on real estate acquisitions totaled $8.0 million in 2020, $8.7 million in 2019 and $15.6 million in 2018. The approximate weighted average amortization periods of the categories set forth above follow: in-place lease value: six years; tenant relationship value: eight years; above-market leases: eight years; and other: 22 years. The approximate weighted average amortization period for all of the categories combined is seven years. The estimated amortization (to amortization associated with real estate operations, rental revenue and property operating expenses) associated with the intangible asset categories set forth above for the next five years is: $4.7 million for 2021; $3.2 million for 2022; $2.8 million for 2023; $2.3 million for 2024; and $2.0 million for 2025.
8. Investing Receivables
Investing receivables consisted of the following (in thousands):
| | | | | | | | | | | | | | |
| | December 31, |
| | 2020 | | 2019 |
| Notes receivable from the City of Huntsville | | $ | 65,564 | | | $ | 59,427 | |
| Other investing loans receivable | | 6,041 | | | 14,096 | |
| Amortized cost basis | | 71,605 | | | 73,523 | |
| Allowance for credit losses | | (2,851) | | | 0 | |
| Investing receivables, net | | $ | 68,754 | | | $ | 73,523 | |
| | | | | | | | | | | | | | |
| | December 31, |
| | 2023 | | 2022 |
| Notes receivable from the City of Huntsville | | $ | 77,022 | | | $ | 69,703 | |
| Other investing loans receivable | | 6,867 | | | 17,712 | |
| Amortized cost basis | | 83,889 | | | 87,415 | |
| Allowance for credit losses | | (2,377) | | | (2,794) | |
| Investing receivables, net | | $ | 81,512 | | | $ | 84,621 | |
The balances above include accrued interest receivable, net of allowance for credit losses, of $4.8$6.0 million as of December 31, 20202023 and $4.7$2.9 million as of December 31, 2019.2022.
Our notes receivable from the City of Huntsville funded infrastructure costs in connection with our LW Redstone Company, LLC joint venture (see Note 6) and carry an interest rate of 9.95%. These notes and the accrued and unpaid interest thereon, which is compoundedcompounds annually on March 1, will be repaid using the real estate taxes generated by the properties developed by the joint venture. When these tax revenues are sufficient to cover the debt service on a certain increment of municipal bonds, the City of Huntsville will beis required to issue bonds to repay the notes and the accrued and unpaid interest thereon. Each note has a maturity date of the earlier of 30 years from the date issued or the expiration of the tax increment district comprising the developed properties in 2045.
Our other investing loansloan receivable carry anas of December 31, 2023 carries a stated interest rate of 8.0%12.0% and maturematures in 2021.2024.
The fair value of these receivables was approximately $73$84 million as of December 31, 20202023 and $74$87 million as of December 31, 2019.2022.
Corporate OfficeCOPT Defense Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
9. Prepaid Expenses and Other Assets, Net
Prepaid expenses and other assets, net consisted of the following (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
| Lease incentives, net | $ | 35,642 | | | $ | 28,433 | |
| Prepaid expenses | 19,690 | | | 18,835 | |
| Furniture, fixtures and equipment, net | 10,433 | | | 7,823 | |
| Construction contract costs in excess of billings, net | 10,343 | | | 17,223 | |
| Net investment in sales-type leases | 6,573 | | | 0 | |
| Non-real estate equity investments | 5,509 | | | 6,705 | |
| Restricted cash | 3,664 | | | 3,397 | |
| Deferred financing costs, net (1) | 2,439 | | | 3,633 | |
| Deferred tax asset, net | 1,989 | | | 2,328 | |
| | | |
| Other assets | 5,274 | | | 4,639 | |
| Total for COPLP and subsidiaries | 101,556 | | | 93,016 | |
| Marketable securities in deferred compensation plan | 3,027 | | | 3,060 | |
| Total for COPT and subsidiaries | $ | 104,583 | | | $ | 96,076 | |
(1)Represents deferred costs, net of accumulated amortization, attributable to our Revolving Credit Facility and interest rate derivatives.
Deferred tax asset, net reported above includes the following tax effects of temporary differences and carry forwards of our TRS (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
| Operating loss carry forward | $ | 2,087 | | | $ | 2,885 | |
| Property | 103 | | | (77) | |
| | | |
| | | |
| Valuation allowance | (201) | | | (480) | |
| Deferred tax asset, net | $ | 1,989 | | | $ | 2,328 | |
We recognize a valuation allowance on our deferred tax asset if we believe all or some portion of the asset may not be realized. An increase or decrease in the valuation allowance resulting from a change in circumstances that causes a change in our judgment about the realizability of our deferred tax asset is included in income. We believe it is more likely than not that the results of future operations in our TRS will generate sufficient taxable income to realize our December 31, 2020 net deferred tax asset.
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
10.8. Debt, Net
Debt Summary
Our debt consisted of the following (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | | Carrying Value (1) as of | | December 31, 2020 |
| | | December 31,
2020 | | December 31, 2019 | |
| | | | | Stated Interest Rates | | Scheduled Maturity |
| Mortgage and Other Secured Debt: | | | | | | | | |
| Fixed rate mortgage debt (2) | | $ | 139,991 | | | $ | 143,430 | | | 3.82% - 4.62% (3) | | 2023-2026 |
| Variable rate secured debt (4) | | 115,119 | | | 68,055 | | | LIBOR + 1.45% to 2.35% (5) | | 2022-2026 |
| Total mortgage and other secured debt | | 255,110 | | | 211,485 | | | | | |
| Revolving Credit Facility | | 143,000 | | | 177,000 | | | LIBOR + 0.775% to 1.45% (6) | | March 2023 (7) |
| Term Loan Facility | | 398,447 | | | 248,706 | | | LIBOR + 1.00% to 1.65% (8) | | 2022 |
| Unsecured Senior Notes (9) | | | | | | | | |
| 3.60%, $350,000 aggregate principal | | 348,888 | | | 348,431 | | | 3.60% (10) | | May 2023 |
| 5.25%, $250,000 aggregate principal | | 248,194 | | | 247,652 | | | 5.25% (11) | | February 2024 |
| 5.00%, $300,000 aggregate principal | | 297,915 | | | 297,503 | | | 5.00% (12) | | July 2025 |
| 2.25%, $400,000 aggregate principal | | 394,464 | | | 0 | | | 2.25% (13) | | March 2026 |
| 3.70%, $300,000 aggregate principal | | 0 | | | 299,324 | | | 3.70% (14) | | N/A (14) |
| Unsecured note payable | | 900 | | | 1,038 | | | 0% (15) | | May 2026 |
| Total debt, net | | $ | 2,086,918 | | | $ | 1,831,139 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | | Carrying Value (1) as of December 31, | | December 31, 2023 |
| | |
| | | 2023 | | 2022 | | Stated Interest Rates | | Scheduled Maturity |
| Mortgage and Other Secured Debt: | | | | | | | | |
| Fixed-rate mortgage debt | | $ | 66,314 | | | $ | 84,433 | | | 3.82% to 4.62% (2) | | 2024-2026 |
| Variable-rate secured debt | | 32,894 | | | 33,318 | | | SOFR + 0.10% + 1.45% to 1.55% (3) | | 2025-2026 |
| Total mortgage and other secured debt | | 99,208 | | | 117,751 | | | | | |
| Revolving Credit Facility (4) | | 75,000 | | | 211,000 | | | SOFR + 0.10% + 0.725% to 1.400% (5) | | October 2026 (4) |
| Term Loan Facility (4) | | 124,291 | | | 123,948 | | | SOFR + 0.10% + 0.850% to 1.700% (6) | | January 2026 (4) |
| Unsecured Senior Notes (4) | | | | | | | | |
| 2.25%, $400,000 aggregate principal | | 397,608 | | | 396,539 | | | 2.25% (7) | | March 2026 |
| 5.25%, $345,000 aggregate principal | | 335,802 | | | — | | | 5.25% (8) | | September 2028 |
| 2.00%, $400,000 aggregate principal | | 397,471 | | | 396,988 | | | 2.00% (9) | | January 2029 |
| 2.75%, $600,000 aggregate principal | | 591,212 | | | 590,123 | | | 2.75% (10) | | April 2031 |
| 2.90%, $400,000 aggregate principal | | 395,265 | | | 394,848 | | | 2.90% (11) | | December 2033 |
| Unsecured note payable | | 430 | | | 597 | | | 0% (12) | | May 2026 |
| Total debt, net | | $ | 2,416,287 | | | $ | 2,231,794 | | | | | |
(1)The carrying values of our debt other than the Revolving Credit Facility reflect net deferred financing costs of $5.9$5.3 million as of December 31, 20202023 and $5.8$5.4 million as of December 31, 2019.2022.
(2)Certain of the fixed rate mortgages carry interest rates that, upon assumption, were above or below market rates and therefore were recorded at their fair value based on applicable effective interest rates. The carrying values of these loans reflect net unamortized premiums totaling $155,000 as of December 31, 2020 and $217,000 as of December 31, 2019.
(3)The weighted average interest rate on our fixed ratefixed-rate mortgage debt was 4.16%4.10% as of December 31, 2020.2023.
(4)(3)Includes a construction loan with $29.1 million in remaining borrowing capacity asIncluding the effect of December 31, 2020.
(5)Theinterest rate swaps that hedge the risk of interest rate changes, the weighted average interest rate on our variable ratevariable-rate secured debt was 2.28% as of December 31, 2020.2023 was 2.45%; excluding the effect of these swaps, the weighted average interest rate on this debt as of December 31, 2023 was 6.94%.
(6)(4)Refer to the paragraphs below for further disclosure.
(5)The weighted average interest rate on the Revolving Credit Facility was 1.20%6.49% as of December 31, 2020.2023, excluding the effect of interest rate swaps that hedge the risk of interest rate changes (see Note 9).
(7)The facility matures in March 2023, with the ability for us to further extend such maturity by 2 six-month periods at our option, provided that there is no default under the facility and we pay an extension fee of 0.075% of the total availability under the facility for each extension period.
(8)(6)The interest rate on this loan was 1.15%6.74% as of December 31, 2020.2023, excluding the effect of interest rate swaps that hedge the risk of interest rate changes (see Note 9).
(9)(7)The carrying value of these notes reflects unamortized discounts and commissions totaling $1.9 million as of December 31, 2023 and $2.8 million as of December 31, 2022 The effective interest rate under the notes, including amortization of such costs, was 2.48%.
(8)The carrying value of these notes reflects unamortized commissions totaling $8.1 million as of December 31, 2023. The effective interest rate under the notes, including amortization of such costs, was 5.83%. Refer to the paragraphs below for further disclosure.
(9)The carrying value of these notes reflects unamortized discounts and commissions totaling $1.8 million as of December 31, 2023 and $2.1 million as of December 31, 2022. The effective interest rate under the notes, including amortization of such costs, was 2.09%.
(10)The carrying value of these notes reflects an unamortized discountdiscounts and commissions totaling $781,000 as of December 31, 2020 and $1.1$7.6 million as of December 31, 2019.2023 and $8.5 million as of December 31, 2022. The effective interest rate under the notes, including amortization of the issuancesuch costs, was 3.70%2.94%.
(11)The carrying value of these notes reflects an unamortized discountdiscounts and commissions totaling $1.6$3.9 million as of December 31, 20202023 and $2.1$4.2 million as of December 31, 2019.2022. The effective interest rate under the notes, including amortization of the issuancesuch costs, was 5.49%3.01%.
(12)The carrying value of these notes reflects an unamortized discount totaling $1.8 million as of December 31, 2020 and $2.1 million as of December 31, 2019. The effective interest rate under the notes, including amortization of the issuance costs, was 5.15%
(13)The carrying value of these notes reflects an unamortized discount totaling $4.5 million as of December 31, 2020.
(14)The carrying value of these notes reflects an unamortized discount totaling $534,000 as of December 31, 2019. The effective interest rate under the notes, including amortization of the issuance costs, was 3.85%.
(15)This note carries an interest rate that, upon assumption, was below market rates and it therefore was recorded at its fair value based on applicable effective interest rates. The carrying value of this note reflects an unamortized discount totaling $161,000$32,000 as of December 31, 20202023 and $223,000$65,000 as of December 31, 2019.2022.
All debt is owed by the Operating Partnership. While COPT Defense is not directly obligated by any debt, it has guaranteed COPLP’sCDPLP’s Revolving Credit Facility, Term Loan FacilitiesFacility and Unsecured Senior Notes. All of our mortgage and other secured debt as of December 31, 2023 was for consolidated real estate joint ventures (see Note 6).
Certain of our debt instruments require that we comply with a number of restrictive financial covenants, including maximum leverage ratio, unencumbered leverage ratio, minimum fixed charge coverage ratio, minimum unencumbered interest coverage ratio, minimum debt service and maximum secured indebtedness ratio. In addition, the terms of some of COPLP’sCDPLP’s debt may limit its ability to make certain types of payments and other distributions to COPT Defense in the event of default or when such payments or distributions may prompt failure of debt covenants, unless such distributions are required to maintain COPT Defense’s qualification as a REIT. As of December 31, 2023, we were compliant with these financial covenants.
Corporate OfficeCOPT Defense Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
such payments or distributions may prompt failure of debt covenants. As of December 31, 2020, we were compliant with these financial covenants.
Our debt matures on the following schedule (in thousands):
| | Year Ending December 31, | Year Ending December 31, | December 31, 2020 | |
| 2021 | $ | 3,955 | | |
| 2022 | 487,380 | | |
| 2023 | 560,130 | | |
| 2024 | |
| 2024 | |
| 2024 | 2024 | 279,983 | | |
| 2025 | 2025 | 323,717 | | |
| 2025 | |
| 2025 | |
| 2026 | |
| 2026 | |
| 2026 | |
| 2027 | |
| 2027 | |
| 2027 | |
| 2028 | |
| 2028 | |
| 2028 | |
| Thereafter | |
| Thereafter | |
| Thereafter | Thereafter | 446,300 | | |
| Total | Total | $ | 2,101,465 | | (1) |
| Total | |
| Total | | | $ | 2,445,000 | | (1) |
(1)Represents scheduled principal amortization and maturities only and therefore excludes net discounts and deferred financing costs of $14.5$28.7 million.
We capitalized interest costs of $12.1$4.5 million in 2020, $10.82023, $6.7 million in 20192022 and $5.9$6.5 million in 2018.2021.
The following table sets forth information pertaining to the fair value of our debt (in thousands):
| | | | December 31, 2020 | | December 31, 2019 | | December 31, 2023 | | December 31, 2022 |
| | | Carrying
Amount | | Estimated
Fair Value | | Carrying
Amount | | Estimated
Fair Value | | Carrying
Amount | | Estimated
Fair Value | | Carrying
Amount | | Estimated
Fair Value |
| Fixed-rate debt | Fixed-rate debt | | | | | | | | Fixed-rate debt | | | |
| Unsecured Senior Notes | Unsecured Senior Notes | $ | 1,289,461 | | | $ | 1,334,342 | | | $ | 1,192,910 | | | $ | 1,227,441 | |
| Other fixed-rate debt | Other fixed-rate debt | 140,891 | | | 142,838 | | | 144,468 | | | 149,907 | |
| Variable-rate debt | Variable-rate debt | 656,566 | | | 654,102 | | | 493,761 | | | 495,962 | |
| | | $ | 2,086,918 | | | $ | 2,131,282 | | | $ | 1,831,139 | | | $ | 1,873,310 | |
Revolving Credit Facility
On October 10, 2018,26, 2022, we entered into a credit agreement with a group of lenders to replace our existingfor an unsecured revolving credit facility with a newlender commitment of $600.0 million that replaced our existing unsecured revolving credit facility (the prior facility and new facility are referred to collectively herein as our “Revolving Credit Facility”). The lenders’ aggregate commitment under the facility is $800.0 million,matures on October 26, 2026, with the ability for us to increase the lenders’ aggregate commitment to $1.25 billion, provided that there is no default under the facility and subject to the approval of the lenders. The facility matures on March 10, 2023, with the ability for us to further extend such maturity by 2two six-month periods at our option, provided that there is no default under the facility and we pay an extension fee of 0.075%0.0625% of the total availability under the facility for each extension period. The interest rate on the facility is based on LIBORthe Secured Overnight Financing Rate (“SOFR”) plus 0.775%a SOFR index adjustment of 0.10% plus 0.725% to 1.450%1.400%, as determined by the credit ratings assigned to COPLPCDPLP by Standard & Poor’sS&P Global Ratings, Services, Moody’s Investors Service, Inc. or Fitch Ratings, Ltd.Inc. (collectively, the “Ratings Agencies”). The facility also carries a quarterly fee that is based on the lenders’ aggregate commitment under the facility multiplied by a per annum rate of 0.125% to 0.300%, as determined by the credit ratings assigned to COPLPCDPLP by the Ratings Agencies. As of December 31, 2020,2023, the maximum borrowing capacity under this facility totaled $800.0$600.0 million, of which $657.0$525.0 million was available.
Weighted average borrowings under our Revolving Credit Facility totaled $204.9$133.3 million in 20202023 and $255.6$202.8 million in 2019.2022. The weighted average interest rate on our Revolving Credit Facility was 1.55%6.17% in 20202023 and 3.32%3.31% in 2019.2022, excluding the effect of interest rate swaps that hedge the risk of interest rate changes.
Term Loan Facilities
AsThe credit agreement with a group of December 31, 2020, we had anlenders entered into on October 26, 2022 discussed above provided for a $125.0 million unsecured term loan facility that we amended in 2020 to increase the loan amount by $150.0 million and change the interest terms. The loan carries a variablewith an interest rate based on the LIBOR rate (customarily the 30-day rate)SOFR plus 1.00%a SOFR index adjustment of 0.10% plus 0.850% to 1.65%1.700%, as determined by: a ratio of our debt to our assets; andby the credit ratings assigned to COPLPCDPLP by the Ratings Agencies. This term loan facility matures on January 30, 2026, with the ability for us to extend such maturity by two 12-month periods at our option, provided that there is no default under the facility and we pay an extension fee of 0.125% of the outstanding loan balance for each extension period.
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
In addition to the term loan discussed above, we also had a term loan that we amended in 2020 to increase the loan amount by $150.0 million for which wea balance outstanding of $400.0 million. We repaid $100.0 million of this loan in 2021 and the remaining balance of $100.0$300.0 million in 2018.2022.
In connection with our Revolving Credit Facility discussed above, we have the ability
COPT Defense Properties and Subsidiaries
Notes to borrow up to $500.0 million under new term loans from the facility’s lender group provided that there is no default under the facility and subject to the approval of the lenders.Consolidated Financial Statements (Continued)
Unsecured Senior Notes
On September 17, 2020,From 2021 through 2023, we issued $400.0the following unsecured senior notes:
>$600.0 million of 2.75% Senior Notes due 2031 (the “2.75% Notes”) at an initial offering price of 98.95% of their face value on March 11, 2021, resulting in proceeds, after deducting underwriting discounts and commissions, but before other offering expenses, of $589.8 million. The notes mature on April 15, 2031;
>$400.0 million of 2.00% Senior Notes due 2029 (the “2.00% Notes”) at an initial offering price of 99.97% of their face value on August 11, 2021, resulting in proceeds, after deducting underwriting discounts and commissions, but before other offering expenses, of $397.4 million. The notes mature on January 15, 2029;
>$400.0 million of 2.90% Senior Notes due 2033 (the “2.90% Notes”) at an initial offering price of 99.53% of their face value on November 17, 2021, resulting in proceeds, after deducting underwriting discounts and commissions, but before other offering expenses, of $395.4 million. The notes mature on December 1, 2033; and
>$345.0 million of 5.25% Exchangeable Senior Notes due 2028 (the “5.25% Notes”) in a private placement to persons reasonably believed to be qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended, on September 12, 2023, resulting in proceeds, after deducting the initial purchasers’ commissions, but before other offering expenses, of $336.4 million. The notes mature on September 15, 2028.
We may redeem our 2.25% Senior Notes due 2026 (the “2.25% Notes”) at an initial offering price of 99.416% of their face value. The proceeds from this issuance, after deducting underwriting discounts, but before other offering expenses, were $395.3 million. The notes mature on March 15, 2026. The effective interest rate underand the notes, including amortization of discount2.75% Notes, 2.00% Notes and issuance costs, was 2.48%.
With regard to our 3.70% Senior2.90% Notes we:
•purchased $122.9 million of our 3.70% Senior Notes due 2021 (the “3.70% Notes”) on September 17, 2020 for $126.0 million, plus accrued interest, pursuant to a tender offer; and
•redeemed the remaining $177.1 million of the 3.70% Notes on October 19, 2020 for $180.9 million plus accrued interest.
In connection with this purchase and redemption, we recognized a loss on early extinguishment of debt of $7.3 million in 2020.
We may redeem our unsecured senior notes, in whole at any time or in part from time to time, at our option, at a redemption price equal to the greater of (1) the aggregate principal amount of the notes being redeemed or (2) the sum of the present values of the remaining scheduled payments of principal and interest thereon (not including any portion of such payments of interest accrued as of the date of redemption) discounted to its present value, on a semi-annual basis at an adjusted treasury rate plus a spread (30 basis points for the 3.60% Senior Notes, 40 basis points for the 5.25% Senior Notes, 45 basis points for the 5.00% Senior Notes and 35(35 basis points for the 2.25% SeniorNotes, 25 basis points for the 2.75% Notes, 20 basis points for the 2.00% Notes and 25 basis points for the 2.90% Notes), plus, in each case, accrued and unpaid interest thereon to the date of redemption. However, in each case, if this redemption occurs on or after a defined period of time prior to the maturity date (one month(February 15, 2026 for the 2.25% Notes, or three monthsJanuary 15, 2031 for the other notes)2.75% Notes, November 15, 2028 for the 2.00% Notes and September 1, 2033 for the 2.90% Notes), the redemption price will be equal to 100% of the principal amount of the notes being redeemed, plus accrued and unpaid interest thereon to, but not including, the applicable redemption date. These notes are unconditionally guaranteed by COPT.COPT Defense.
With regard to the 5.25% Notes:
>prior to the close of business on the business day immediately preceding June 15, 2028, the notes will be exchangeable at the option of the noteholders only in the event of certain circumstances and during certain periods defined under the terms of the notes. On or after June 15, 2028, the notes will be exchangeable at the option of the holders at any time prior to the close of business on the business day immediately preceding the maturity date. Upon exchange, the principal amount of notes is payable in cash. The remainder of the exchange obligation, if any, as determined based on the exchange price per common share at the time of settlement, is payable in cash, common shares or a combination thereof at our election. The exchange rate of the notes initially equaled 33.3739 of our common shares per $1,000 principal amount of notes (equivalent to an initial exchange price of approximately $29.96 per common share). The exchange rate is subject to adjustment upon the occurrence of some events, but will not be adjusted for any accrued and unpaid interest;
>we may redeem the notes at our option, in whole or in part, on any business day on or after September 21, 2026, and prior to the 51st scheduled trading day immediately preceding the maturity date, if the last reported sale price of our common shares has been at least 130% of the exchange price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption. The redemption price will be equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date;
>the notes are unconditionally guaranteed by COPT Defense; and
>the table below sets forth interest expense recognized on the notes in 2023 (in thousands):
| | | | | | | | |
| Interest expense at stated interest rate | | $ | 5,484 | |
| Interest expense associated with amortization of debt discount and issuance costs | | 500 | |
| Total | | $ | 5,984 | |
In 2021, we purchased or redeemed the following unsecured senior notes:
>purchased pursuant to tender offers $184.4 million of 3.60% Senior Notes due 2023 for $196.7 million and $145.6 million of 5.25% Senior Notes due 2024 for $164.7 million, plus accrued interest effective March 11, 2021; and on April 12, 2021, redeemed the remaining $165.6 million of 3.60% Senior Notes due 2023 for $176.3 million and $104.4 million of 5.25% Senior Notes due 2024 for $117.7 million, plus accrued interest. In connection with these purchases and redemptions, we recognized a loss on early extinguishment of debt of $58.4 million in 2021; and
>redeemed $300.0 million of 5.00% Senior Notes due 2025 on November 18, 2021 for $336.4 million plus accrued interest. We recognized a loss on early extinguishment of debt of $38.2 million for this redemption in 2021.
COPT Defense Properties and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
11.9. Interest Rate Derivatives
The following table sets forth the key terms and fair values of our interest rate swap derivatives each of which was designated as a cash flow hedge of interest rate risk (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Notional Amount | | | | | | Effective Date | | Expiration Date | | Fair Value at December 31, |
| | Fixed Rate | | Floating Rate Index | | | | 2020 | | 2019 |
| $ | 100,000 | | | 1.901 | % | | One-Month LIBOR | | 9/1/2016 | | 12/1/2022 | | $ | (3,394) | | | $ | (1,028) | |
| 100,000 | | | 1.905 | % | | One-Month LIBOR | | 9/1/2016 | | 12/1/2022 | | (3,401) | | | (1,037) | |
| 50,000 | | | 1.908 | % | | One-Month LIBOR | | 9/1/2016 | | 12/1/2022 | | (1,704) | | | (524) | |
| 11,200 | | (1) | 1.678 | % | | One-Month LIBOR | | 8/1/2019 | | 8/1/2026 | | (733) | | | (20) | |
| 23,000 | | (2) | 0.573 | % | | One-Month LIBOR | | 4/1/2020 | | 3/26/2025 | | (290) | | | 0 | |
| 75,000 | | (3) | 3.176 | % | | Three-Month LIBOR | | 6/30/2020 | | N/A | | 0 | | | (8,640) | |
| 75,000 | | (3) | 3.192 | % | | Three-Month LIBOR | | 6/30/2020 | | N/A | | 0 | | | (8,749) | |
| 75,000 | | (3) | 2.744 | % | | Three-Month LIBOR | | 6/30/2020 | | N/A | | 0 | | | (5,684) | |
| 0 | | | 1.390 | % | | One-Month LIBOR | | 10/13/2015 | | 10/1/2020 | | 0 | | | 23 | |
| | | | | | | | | | | $ | (9,522) | | | $ | (25,659) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Notional Amount | | | | | | Effective Date | | Expiration Date | | Fair Value at December 31, |
| | Fixed Rate | | Floating Rate Index | | | | 2023 | | 2022 |
| $ | 10,640 | | (1) | 1.678 | % | | SOFR + 0.10% | | 8/1/2019 | | 8/1/2026 | | $ | 571 | | | $ | 806 | |
| $ | 22,475 | | (2) | 0.573 | % | | SOFR + 0.10% | | 4/1/2020 | | 3/26/2025 | | 1,084 | | | 1,825 | |
| $ | 150,000 | | | 3.742 | % | | One-Month SOFR | | 2/1/2023 | | 2/2/2026 | | 681 | | | — | |
| $ | 50,000 | | | 3.747 | % | | One-Month SOFR | | 2/1/2023 | | 2/2/2026 | | 222 | | | — | |
| | | | | | | | | | | $ | 2,558 | | | $ | 2,631 | |
(1)The notional amount of this instrument is scheduled to amortize to $10.0 million.
(2)The notional amount of this instrument is scheduled to amortize to $22.1 million.
(3)
As discussed below,
Each of these instruments wereswaps was designated as a cash settled in September 2020.flow hedge of interest rate risk.
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The table below sets forth the fair value of our interest rate derivatives as well as their classification on our consolidated balance sheets (in thousands):
| | | | | Fair Value at December 31, | | | | | | Fair Value at December 31, |
| Derivatives | | Derivatives | | Balance Sheet Location | | 2023 | | 2022 |
| Interest rate swaps designated as cash flow hedges | |
| | | Fair Value at December 31, |
| Derivatives | | Balance Sheet Location | | 2020 | | 2019 |
| Interest rate swaps designated as cash flow hedges | | Prepaid expenses and other assets, net | | $ | 0 | | | $ | 23 | |
| Interest rate swaps designated as cash flow hedges | | Interest rate derivatives (liabilities) | | $ | (9,522) | | | $ | (25,682) | |
The tablestable below presents the effect of our interest rate derivatives on our consolidated statements of operations and comprehensive income (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amount of Loss Recognized in AOCL on Derivatives | | Amount of (Loss) Gain Reclassified from AOCL into Interest Expense on Statement of Operations |
| | For the Years Ended December 31, | | For the Years Ended December 31, |
| Derivatives in Hedging Relationships | | 2020 | | 2019 | | 2018 | | 2020 | | 2019 | | 2018 |
| Interest rate derivatives | | $ | (39,454) | | | $ | (24,321) | | | $ | (2,373) | | | $ | (3,725) | | | $ | 1,415 | | | $ | 407 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amount of Loss Reclassified from AOCL into Loss on Interest Rate Derivatives on Statement of Operations | | Amount of Loss Recognized on Undesignated Swaps in Loss on Interest Rate Derivatives on Statement of Operations |
| | For the Years Ended December 31, | | For the Years Ended December 31, |
| Derivatives in Hedging Relationships | | 2020 | | 2019 | | 2018 | | 2020 | | 2019 | | 2018 |
| Interest rate derivatives | | $ | (51,865) | | | $ | 0 | | | 0 | | | $ | (1,265) | | | $ | 0 | | | 0 | |
As described further in Note 10, in September 2020, we completed our issuance of the 2.25% Notes. In August 2020, in anticipation of pursuing such an issuance, we determined that the forecasted transactions hedged by our 3 interest rate swaps with an effective date of June 30, 2020 and an aggregate notional amount of $225.0 million were no longer probable of occurring, resulting in our discontinuance of hedge accounting on these swaps. When we consummated the note issuance in September 2020, we determined that it was probable that the forecasted transactions would not occur, resulting in our reclassification of $51.9 million in losses from AOCL to loss on interest rate derivatives on our statements of operations. On September 22, 2020, we cash settled these swaps and accrued interest thereon for an aggregate amount of $53.1 million. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amount of Income Recognized in AOCI on Derivatives | | Amount of Income (Loss) Reclassified from AOCI into Interest Expense on Statement of Operations |
| | For the Years Ended December 31, | | For the Years Ended December 31, |
| Derivatives in Hedging Relationships | | 2023 | | 2022 | | 2021 | | 2023 | | 2022 | | 2021 |
| Interest rate derivatives | | $ | 3,827 | | | $ | 4,730 | | | $ | 1,379 | | | $ | 3,900 | | | $ | (996) | | | $ | (5,048) | |
| | | | | | | | | | | | |
| | | | |
| | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Based on the fair value of our derivatives as of December 31, 2020,2023, we estimate that approximately $4.8$3.0 million of lossesgains will be reclassified from AOCLAOCI as an increasea decrease to interest expense over the next 12 months.
We have agreements with each of our interest rate derivative counterparties that contain provisions under which, if we default or are capable of being declared in default on defined levels of our indebtedness, we could also be declared in default on our derivative obligations. Failure to comply with the loan covenant provisions could result in our being declared in default on any derivative instrument obligations covered by the agreements. As of December 31, 2020,2023, we were not in default with any of these provisions. As of December 31, 2020, the fair value of interest rate2023, we did not have any derivatives in a liability position related to these agreements was $9.6 million, excluding the effects of accrued interest and credit valuation adjustments. As of December 31, 2020, we had not posted any collateral related to these agreements. If we breach any of these provisions, we could be required to settle our obligations under the agreements at their termination value, which was $10.0 million as of December 31, 2020.positions.
12.10. Redeemable Noncontrolling Interests
As discussed further in Note 6, redeemable noncontrolling interests on our consolidated balance sheets include the ownership interests of our partners in 2 real estate joint ventures, LW Redstone Company, LLC and Stevens Investors, LLC havedue to the rightpartners’ rights to require us to acquire their respectiveinterests. Effective in June 2023, these rights expired for our Stevens Investors, LLC partners, which resulted in our reclassification of their interests at fair value; accordingly, we classifyfrom redeemable noncontrolling interests to the fairnoncontrolling interests in subsidiaries section of equity. The table below sets forth the activity for redeemable noncontrolling interests (in thousands): | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| Beginning balance | | $ | 26,293 | | | $ | 26,898 | | | $ | 25,430 | |
| | | | | | |
| Distributions to noncontrolling interests | | (2,569) | | | (2,976) | | | (3,307) | |
| Net income attributable to noncontrolling interests | | 2,454 | | | 2,807 | | | 3,160 | |
| Adjustment for changes in fair value of interests | | 72 | | | (436) | | | 1,615 | |
| Reclassification of Stevens Investors, LLC interests to equity | | (2,670) | | | — | | | — | |
| Ending balance | | $ | 23,580 | | | $ | 26,293 | | | $ | 26,898 | |
Corporate OfficeCOPT Defense Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
value of our partners’ interests as redeemable noncontrolling interests in the mezzanine section of our consolidated balance sheets. The table below sets forth the activity for these redeemable noncontrolling interests (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| Beginning balance | | $ | 29,431 | | | $ | 26,260 | | | $ | 23,125 | |
| Contributions from noncontrolling interests | | 0 | | | 0 | | | 186 | |
| Distributions to noncontrolling interests | | (14,034) | | | (2,413) | | | (1,411) | |
| Net income attributable to noncontrolling interests | | 3,426 | | | 3,835 | | | 2,523 | |
| Adjustment to arrive at fair value of interests | | 6,607 | | | 1,749 | | | 1,837 | |
| Ending balance | | $ | 25,430 | | | $ | 29,431 | | | $ | 26,260 | |
We determine the fair value of the interests based on unobservable inputs after considering the assumptions that market participants would make in pricing the interest. We apply a discount rate to the estimated future cash flows allocable to our partners from the properties underlying the respective joint ventures. Estimated cash flows used in such analyses are based on our plans for the properties and our views of market and economic conditions, and consider items such as current and future rental rates, occupancy projections and estimated operating and development expenditures.
13.11. Equity - COPT and Subsidiaries
Preferred Shares
As of December 31, 2020, COPT2023, we had 25.0 million preferred shares authorized and unissued at $0.01 par value per share.
Common Shares
In November 2018, COPT establishedMay 2022, we entered into an at-the-market (“ATM”) stock offering program (the “2022 ATM Program”) that replaced a similar program established in 2018 (the “2018 ATM Program”) because we replaced the registration statement under which itthe 2018 ATM Program was registered with a new registration statement. Under the 2022 ATM Program, we may offer and sell common shares in at-the-market stock offerings having an aggregate gross sales price of up to $300.0$300 million (the “2018 ATM Program”). Under the 2018 ATM Program, COPTand may also, at itsour discretion, sell common shares under forward equity sales agreements. As of December 31, 2020, COPT2023, we had 0tnot issued any shares under the 20182022 ATM Program.
From 2018 to 2020, COPT completed the following share issuances under stock programs no longer in effect:
•1.6 million shares in 2019 for net proceeds of $46.5 million, and 5.9 million shares in 2018 for net proceeds of $172.5 million, under forward equity sale agreements originating on November 2, 2017 to issue shares at an initial gross offering price of $31.00 per share, before underwriting discounts, commissions and offering expenses. The forward sale price received upon physical settlement of the agreements was subject to adjustment on a daily basis based on a floating interest rate factor equal to the overnight bank funding rate less a spread, and was decreased on each of certain dates specified in the agreements during the term of the agreements; and
•992,000 common shares in 2018 at a weighted average price of $30.46 per share under an ATM program established in 2016. Net proceeds from the shares issued totaled $29.8 million, after payment of $0.5 million in commissions to sales agents.
COPT contributed the net proceeds from these issuances to COPLP in exchange for an equal number of units in COPLP.
Certain holders of COPLPCDPLP common units converted an aggregate of 8,054 of their units into COPT common shares in 2021 on the basis of 1one common share for each common unitunit. No CDPLP common units were converted in the amount of 14,009 in 2020, 105,039 in 2019 and 1.9 million in 2018.2023 or 2022.
COPTWe declared dividends per common share of $1.14 in 2023 and $1.10 in 2020, 20192022 and 2018.2021.
COPT paysWe pay dividends at the discretion of itsour Board of Trustees. COPT’sOur ability to pay cash dividends will be dependent upon: (1) the cash flow generated from our operations; (2) cash generated or used by our financing and investing activities; and (3) the annual distribution requirements under the REIT provisions of the Code described in Note 2 and such other factors as the Board of Trustees deems relevant. COPT’sOur ability to make cash dividends will also be limited by the terms of COPLP’sCDPLP’s Partnership Agreement, as well as by limitations imposed by state law. In addition, COPT iswe are prohibited from paying cash dividends in excess of the amount necessary for itus to qualify for taxation as a REIT if a default or event of default exists
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
pursuant to the terms of the credit agreement underlying our Revolving Credit Facility;Facility and unsecured term loan; this restriction does not currently limit COPT’sour ability to pay dividends, and COPT doeswe do not believe that this restriction is reasonably likely to limit itsour ability to pay future dividends because it expectswe expect to comply with the terms of our Revolving Credit Facility.this agreement.
See Note 1512 for disclosure of common share activity pertaining to our share-based compensation plans.
14. Equity - COPLP and Subsidiaries
Limited Partner Preferred Units
On December 21, 2020, COPLP redeemed its 352,000 Series I Preferred Units from the third party unitholder at the units’ aggregate liquidation preference of $8.8 million ($25.00 per unit), plus accrued and unpaid distributions of return thereon up to the date of redemption. The owner of these units earned a priority annual cumulative return on the units equal to: 3.5% of their liquidation preference from September 23, 2019 up to the redemption date; and 7.5% of their liquidation preference prior to September 23, 2019. These units were convertible into common units on the basis of 0.5 common units for each Series I Preferred Unit, with the resulting common units being exchangeable for COPT common shares in accordance with the terms of COPLP’s agreement of limited partnership.
Common Units
COPT owned 98.6% of COPLP’s common units as of December 31, 2020 and 98.7% as of December 31, 2019.
From 2018 to 2020, COPT acquired additional common units through the following common share issuances under stock programs no longer in effect:
•1.6 million shares in 2019 for net proceeds of $46.5 million, and 5.9 million shares in 2018 for net proceeds of $172.5 million, under forward equity sale agreements originating on November 2, 2017; and
•992,000 shares in 2018 at a weighted average price of $30.46 per share under an ATM program established in 2016. Net proceeds from the shares issued totaled $29.8 million, after payment of $0.5 million in commissions to sales agents.
Limited partners in COPLP holding common units have the right to require COPLP to redeem all or a portion of their common units. COPLP (or COPT as the general partner) has the right, in its sole discretion, to deliver to such redeeming limited partners for each partnership unit either one COPT common share (subject to anti-dilution adjustment) or a cash payment equal to the then fair market value of such share (so adjusted) (based on the formula for determining such value set forth in the partnership agreement). Certain limited partners holding common units redeemed their units into common shares on the basis of 1 common share for each common unit in the amount of 14,009 in 2020, 105,039 in 2019 and 1.9 million in 2018. In addition, we redeemed 924 common units in 2019 for $25,000 and 13,377 in 2018 for $339,000.
COPLP declared distributions per common unit of $1.10 in 2020, 2019 and 2018.
15.12. Share-Based Compensation and Other Compensation Matters
Share-Based Compensation Plans
In May 2017, COPTwe adopted the 2017 Omnibus Equity and Incentive Plan (the “2017 Plan”) following the approval of such plan by our common shareholders. COPTshareholders, and we amended the plan in November 2018 (as amended, the “2017 Plan”). We may issue equity-based awards under this plan to officers, employees, non-employee trustees and any other key persons of us and our subsidiaries, as defined in the plan. The plan provides for a maximum of 3.4 million of our common shares in COPT to be issued in the form of options, share appreciation rights, restricted share unit awards, restricted share awards, unrestricted share awards, PIUs, dividend equivalent rights and other equity-based awards and for the granting of cash-based awards. In November 2018, we amended the 2017 Plan to provide for the future grant of awards in the form of PIUs; PIUs are a special class of common unit structured to qualify as “profit interests” for tax purposes which are similar to restricted shares and PSUs, except that upon vesting recipients will receive common units in COPLP. This plan expires on May 11, 2027. Shares for the 2017 Plan are issued under a registration statement on Form S-8 that became effective upon filing with the Securities and Exchange Commission. In connection with awards of common shares granted by COPT under the 2017 Plan, COPLP issues to COPT an equal number of equity instruments with identical terms.
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The table below sets forth our reporting for share based compensation cost (in thousands):
| | For the Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
| General, administrative and leasing expenses | | $ | 5,385 | | | $ | 5,748 | | | $ | 5,415 | |
| | For the Years Ended December 31, | | | | For the Years Ended December 31, |
| | 2023 | | | | 2023 | | 2022 | | 2021 |
| General, administrative, leasing and other expenses | |
| Property operating expenses | Property operating expenses | | 1,119 | | | 966 | | | 961 | |
| Capitalized to development activities | Capitalized to development activities | | 556 | | | 742 | | | 587 | |
| Share-based compensation cost | Share-based compensation cost | | $ | 7,060 | | | $ | 7,456 | | | $ | 6,963 | |
COPT Defense Properties and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The amounts included in our consolidated statements of operations for share-based compensation reflected an estimate of pre-vesting forfeitures of 0% for PSUs, PIUsawards to our executives and deferred sharenon-employee Trustees and 8% to 9% for awards and 0% to 8% for restricted shares.all other employees.
As of December 31, 2020,2023, unrecognized compensation costs related to unvested awards included:
•>$5.65.4 million on restricted shares expected to be recognized over a weighted average period of approximately two years;
•>$2.23.4 million on performance-based PIUs (“PB-PIUs”)PB-PIUs expected to be recognized over a weighted average performance period of approximately two years;
•>$2.13.1 million on time-based PIUs (“TB-PIUs”)TB-PIUs expected to be recognized over a weighted average period of approximately threetwo years; and
•>$121,00077,000 on deferred share awards expected to be recognized through October 2021.May 2024.
Restricted Shares
The following table summarizes restricted shares activity under theour share-based compensation plansplan for 2018, 20192021, 2022 and 2020:
| | | | | | | | | | | | | | |
| | Shares | | Weighted Average Grant Date Fair Value |
| Unvested as of December 31, 2017 | | 425,626 | | | $ | 30.37 | |
| Granted | | 219,716 | | | 25.62 | |
| Forfeited | | (25,419) | | | 30.02 | |
| Vested | | (181,238) | | | 29.49 | |
| Unvested as of December 31, 2018 | | 438,685 | | | 28.38 | |
| Granted | | 195,520 | | | 26.56 | |
| Forfeited | | (56,341) | | | 29.44 | |
| Vested | | (185,001) | | | 28.01 | |
| Unvested as of December 31, 2019 | | 392,863 | | | 27.49 | |
| Granted | | 166,918 | | | 25.22 | |
| Forfeited | | (25,773) | | (1) | 27.12 | |
| Vested | | (173,191) | | | 28.14 | |
| Unvested as of December 31, 2020 | | 360,817 | | | $ | 26.16 | |
| Unvested shares as of December 31, 2020 that are expected to vest | | 330,605 | | | $ | 26.14 | |
(1)Includes 9,064 restricted shares previously awarded to our former Executive Vice President and Chief Operating Officer that were forfeited upon his resignation. | | | | | | | | | | | | | | |
| | Shares | | Weighted Average Grant Date Fair Value |
| Unvested as of December 31, 2020 | | 360,817 | | | $ | 26.16 | |
| Granted | | 177,995 | | | $ | 26.17 | |
| Forfeited | | (39,664) | | | $ | 26.62 | |
| Vested | | (164,575) | | | $ | 25.95 | |
| Unvested as of December 31, 2021 | | 334,573 | | | $ | 26.22 | |
| Granted | | 186,515 | | | $ | 26.50 | |
| Forfeited | | (43,420) | | | $ | 26.47 | |
| Vested | | (152,585) | | | $ | 26.39 | |
| Unvested as of December 31, 2022 | | 325,083 | | | $ | 26.27 | |
| Granted | | 220,336 | | | $ | 25.38 | |
| Forfeited | | (39,474) | | | $ | 26.03 | |
| Vested | | (152,490) | | | $ | 26.09 | |
| Unvested as of December 31, 2023 | | 353,455 | | | $ | 25.82 | |
| Unvested shares as of December 31, 2023 that are expected to vest | | 317,075 | | | $ | 25.83 | |
Restricted shares granted to employees vest based on increments and over periods of time set forth under the terms of the respective awards provided that the employee remains employed by us. Restricted shares granted to non-employee Trustees vest on the first anniversary of the grant date, provided that the Trustee remains in his or her position.
The aggregate intrinsic value of restricted shares that vested was $4.4$3.8 million in 2020, $4.92023, $4.0 million in 20192022 and $4.6$4.3 million in 2018.2021.
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
PIUs
Commencing in 2019, we offered our executives and Trustees the opportunity to select PIUs as a form of long-term compensation in lieu of, or in combination with, other forms of share-based compensation awards (restricted shares, deferred share awards and PSUs). Our executives and certain of our Trustees selected PIUs as their form of share-based compensation for their 2019 and 2020 grants. We granted 2two forms of PIUs: TB-PIUs; and PB-PIUs. TB-PIUs are subject to forfeiture restrictions until the end of the requisite service period, at which time the TB-PIUs automatically convert into vested PIUs. PB-PIUs are subject to a market condition in that the number of earned awards are determined at the end of the performance period (as described further below) and then settled in vested PIUs. Vested PIUs automatically convert into common units in CDPLP if, or when, a book-up event (as defined under federal income tax regulations) has occurred and carry substantially the same rights to redemption and distributions as non-PIU common units.
COPT Defense Properties and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
TB-PIUs
TB-PIUs granted to executivessenior management team members vest based on increments and over periods of time set forth under the terms of the respective awards provided that the employee remains employed by us. TB-PIUs granted to non-employee Trustees vest on the first anniversary of the grant date, provided that the Trustee remains in his or her position. Prior to vesting, TB-PIUs carry substantially the same rights to distributions as non-PIU common units but carry no redemption rights. The following table summarizes TB-PIUs activity under theour share-based compensation plan for 20192021, 2022 and2020 2023:
| | | | | | | | | | | | | | |
| | Number of TB-PIUs | | Weighted Average Grant Date Fair Value |
| Unvested as of December 31, 2018 | | 0 | | | N/A |
| Granted | | 61,820 | | | $ | 26.01 | |
| Unvested as of December 31, 2019 | | 61,820 | | | 26.01 | |
| Granted | | 98,318 | | | 25.47 | |
| Forfeited | | (20,622) | | (1) | 25.50 | |
| Vested | | (25,182) | | | 26.30 | |
| Unvested as of December 31, 2020 | | 114,334 | | | $ | 25.57 | |
| Unvested TB-PIUs as of December 31, 2020 that are expected to vest | | 114,334 | | | $ | 25.57 | |
(1)Represents TB-PIUs previously awarded to our former Executive Vice President and Chief Operating Officer that were forfeited upon his resignation. | | | | | | | | | | | | | | |
| | Number of TB-PIUs | | Weighted Average Grant Date Fair Value |
| Unvested as of December 31, 2020 | | 114,334 | | | $ | 25.57 | |
| Granted | | 93,983 | | | $ | 26.16 | |
| | | | |
| Vested | | (45,244) | | | $ | 25.28 | |
| Unvested as of December 31, 2021 | | 163,073 | | | $ | 25.99 | |
| Granted | | 101,966 | | | $ | 26.39 | |
| | | | |
| Vested | | (77,709) | | | $ | 26.04 | |
| Unvested as of December 31, 2022 | | 187,330 | | | $ | 26.19 | |
| Granted | | 123,900 | | | $ | 25.40 | |
| Forfeited | | (27,182) | | | $ | 26.46 | |
| Vested | | (89,633) | | | $ | 25.95 | |
| Unvested as of December 31, 2023 | | 194,415 | | | $ | 25.76 | |
| Unvested TB-PIUs as of December 31, 2023 that are expected to vest | | 193,131 | | | $ | 25.76 | |
The aggregate intrinsic value of TB-PIUs that vested was $640,000$2.3 million in 2020.2023, $2.0 million in 2022 and $1.2 million in 2021.
PB-PIUs
We made the following grants of PB-PIUs to executives insenior management team members from 2019 through 2023 and 2020: (dollars(dollars in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Grant Date | | Number of PB-PIUs Granted | | Performance Period Commencement Date | | Performance Period End Date | | Grant Date Fair Value | | Number of PB-PIUs Outstanding as of December 31, 2020 (1) |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| 1/1/2019 | | 193,682 | | | 1/1/2019 | | 12/31/2021 | | $ | 2,415 | | | 156,104 | |
| 1/1/2020 | | 176,758 | | | 1/1/2020 | | 12/31/2022 | | $ | 2,891 | | | 141,152 | |
(1)Excludes 73,184 PB-PIUs previously awarded to our former Executive Vice President and Chief Operating Officer that were forfeited upon his resignation. | | | | | | | | | | | | | | | | | | | | | | | | |
| Grant Date | | Number of PB-PIUs Granted | | | | | | Grant Date Fair Value | | Number of PB-PIUs Outstanding as of December 31, 2023 |
| 1/1/2019 | | 193,682 | | | | | | | $ | 2,415 | | | — | |
| 1/1/2020 | | 176,758 | | | | | | | $ | 2,891 | | | — | |
| 1/1/2021 | | 227,544 | | | | | | | $ | 3,417 | | | 189,308 | |
| 1/1/2022 | | 231,838 | | | | | | | $ | 3,810 | | | 192,996 | |
| 1/1/2023 | | 275,402 | | | | | | | $ | 4,343 | | | 225,590 | |
The PB-PIUs each have a three-year performance period concluding on the earlier of the respective performance period end dates, or the date of: (1) termination by us without cause, death or disability of the executiveemployee or constructive discharge of the executiveemployee (collectively, “qualified termination”); or (2) a sale event. The number of earned awards at the end of the
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
performance period will be determined based on the percentile rank of COPT’sCOPT Defense’s total shareholder return (“TSR”) relative to a peer group of companies, as set forth in the following schedule:
| | | | | | | | |
| Percentile Rank | | Earned Awards Payout % |
| 75th or greater | | 100% of PB-PIUs granted |
| 50th (target) | | 50% of PB-PIUs granted |
| 25th | | 25% of PB-PIUs granted |
| Below 25th | | 0% of PB-PIUs granted |
If the percentile rank exceeds the 25th percentile and is between 2two of the percentile ranks set forth in the table above, then the percentage of the earned awards will be interpolated between the ranges set forth in the table above to reflect any performance between the listed percentiles. If COPT’sCOPT Defense’s TSR during the measurement period is negative, the maximum number of earned awards will be limited to the target level payout percentage. During the performance period, PB-PIUs carry rights to
COPT Defense Properties and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
distributions equal to 10% of the distribution rights of non-PIU common units but carry no redemption rights.
At the end of the performance period, we will settle the award by issuing vested PIUs equal to the number of earned awards in settlement of the award plan and either:
>for awards granted January 1, 2019 and 2020, paying cash equal to the excess, if any, of: the aggregate distributions that would have been paid with respect to vested PIUs issued in settlement of the earned awards through the date of settlement had such vested PIUs been issued on the grant date; over the aggregate distributions made on the PB-PIUs during the performance period. period; or
>for all other awards, issuing additional vested PIUs equal to the excess, if any, of (1) the aggregate distributions that would have been paid with respect to vested PIUs issued in settlement of the earned awards through the date of settlement had such vested PIUs been issued on the grant date over (2) the aggregate distributions made on the PB-PIUs during the performance period, divided by the price of our common shares over a defined period of time.
If a performance period ends due to a sale event or qualified termination, the number of earned awards is prorated based on the portion of the three-year performance period that has elapsed. If employment is terminated by the employee or by us for cause, all PB-PIUs are forfeited.
Based on COPT Defense’s TSR relative to its peer group of companies:
>for the 2019 PB-PIUs issued to employees that vested on December 31, 2021, we issued 156,104 vested PIUs in settlement of the PB-PIUs on February 1, 2022;
>for the 2020 PB-PIUs issued to employees that vested on December 31, 2022, we issued 141,152 vested PIUs in settlement of the PB-PIUs on February 1, 2023; and
>for the 2021 PB-PIUs issued to employees that vested on December 31, 2023, we issued 211,845 vested PIUs in settlement of the PB-PIUs on February 1, 2024.
We computed grant date fair values for PB-PIUs using Monte Carlo models and are recognizingrecognize these values over the respective performance periods. The grant date fair value and certain of the assumptions used in the Monte Carlo models for the PB-PIUs granted in 20192021, 2022 and 20202023 are set forth below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Grant Date | | Grant Date Fair Value Per PB-PIU | | Baseline Common Share Value | | Expected Volatility of Common Shares | | Risk-free Interest Rate |
| 1/1/2019 | | $ | 12.47 | | | $ | 21.03 | | | 21.0 | % | | 2.51 | % |
| 1/1/2020 | | $ | 16.36 | | | $ | 29.38 | | | 18.0 | % | | 1.65 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Grant Date | | Grant Date Fair Value Per PB-PIU at Target-Level Award | | Baseline Common Share Value | | Expected Volatility of Common Shares | | Risk-free Interest Rate |
| 1/1/2021 | | $ | 30.03 | | | $ | 26.08 | | | 34.7 | % | | 0.18 | % |
| 1/1/2022 | | $ | 32.87 | | | $ | 27.97 | | | 31.7 | % | | 0.98 | % |
| 1/1/2023 | | $ | 31.54 | | | $ | 25.94 | | | 35.0 | % | | 4.28 | % |
PSUsIn 2023, 126,890 PB-PIUs were forfeited due to an award recipient’s resignation.
We made the following grants of PSUs to executives from 2016 through 2018 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Grant Date | | Number of PSUs Granted | | Performance Period Commencement Date | | Performance Period End Date | | Grant Date Fair Value | | Number of PSUs Outstanding as of December 31, 2020 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| 3/1/2016 | | 26,299 | | | 1/1/2016 | | 12/31/2018 | | $ | 1,005 | | | 0 | | |
| 1/1/2017 | | 39,351 | | | 1/1/2017 | | 12/31/2019 | | $ | 1,415 | | | 0 | | |
| 1/1/2018 | | 59,110 | | | 1/1/2018 | | 12/31/2020 | | $ | 1,890 | | | 46,912 | | (1) |
(1)Excludes 12,198 PSUs previously awarded to our former Executive Vice President and Chief Operating Officer that were forfeited upon his resignation.
The PSUs each had three-year performance periods concluding on the earlier of the respective performance period end dates set forth above or the date of: (1) termination by us without cause, death or disability of the executive or constructive discharge of the executive (collectively, “qualified termination”); or (2) a sale event. The number of PSUs earned (“earned PSUs”) at the end of the performance period were determined based on the percentile rank of COPT’s TSR relative to a peer group of companies, as set forth in the following schedule:
| | | | | | | | |
Percentile Rank | | Earned PSUs Payout % |
75th or greater | | 200% of PSUs granted |
50th (target) | | 100% of PSUs granted |
25th | | 50% of PSUs granted |
Below 25th | | 0% of PSUs granted |
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
If the percentile rank exceeded the 25th percentile and was between 2 of the percentile ranks set forth in the table above, then the percentage of the earned PSUs was interpolated between the ranges set forth in the table above to reflect any performance between the listed percentiles. At the end of the performance period, we settled the award by issuing fully-vested COPT shares equal to the number of earned PSUs in settlement of the award plan and either:
•for awards granted January 1, 2017 and prior thereto, issuing fully-vested COPT shares equal to the aggregate dividends that would have been paid with respect to the common shares issued in settlement of the earned PSUs through the date of settlement had such shares been issued on the grant date, divided by the share price on such settlement date, as defined under the terms of the agreement; or
•for awards issued subsequent to January 1, 2017, paying cash equal to the aggregate dividends that would have been paid with respect to the common shares issued in settlement of the earned PSUs through the date of settlement had such shares been issued on the grant date.
If a performance period ends due to a sale event or qualified termination, the number of earned PSUs was prorated based on the portion of the three-year performance period that had elapsed. If employment was terminated by the employee or by us for cause, all PSUs were forfeited. PSUs do not carry voting rights.
Based on COPT’s TSR relative to its peer group of companies:
•for the 2016 PSUs issued to executives that vested on December 31, 2018, we issued 44,757 common shares in settlement of the PSUs on January 18, 2019;
•for the 2017 PSUs issued to executives that vested on December 31, 2019, we issued 23,181 common shares in settlement of the PSUs on January 13, 2020; and
•for the 2018 PSUs issued to executives that vested on December 31, 2020, we issued 93,824 common shares in settlement of the PSUs on February 3, 2021.
We computed grant date fair values for PSUs using Monte Carlo models and recognized these values over the performance periods. The 2018 grant date fair value of $31.97 was computed using a Monte Carlo model that included the following assumptions: baseline common share value of $29.20; expected volatility for common shares of 17.0%; and a risk-free interest rate of 2.04%.
Deferred Share Awards
We made the following grants of deferred share awards to nonemployee members of our Board ofnon-employee Trustees in 2018, 20192021, 2022 and 20202023 (dollars in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | |
| Year of Grant | | Number of Deferred Share Awards Granted | | Aggregate Grant Date Fair Value | | Grant Date Fair Value Per Share |
| 2018 | | 13,832 | | | $ | 388 | | | $ | 28.08 | |
| 2019 | | 3,432 | | | $ | 95 | | | $ | 27.60 | |
| 2020 | | 10,679 | | | $ | 253 | | | $ | 23.68 | |
| | | | | | | | | | | | | | | | | | | | |
| Year of Grant | | Number of Deferred Share Awards Granted | | Aggregate Grant Date Fair Value | | Grant Date Fair Value Per Award |
| 2021 | | 3,416 | | | $ | 93 | | | $ | 27.12 | |
| 2022 | | 6,771 | | | $ | 166 | | | $ | 24.50 | |
| 2023 | | 9,046 | | | $ | 215 | | | $ | 23.75 | |
Deferred share awards vest on the first anniversary of the grant date, provided that the Trustee remains in his or her position. We settle deferred share awards by issuing an equivalent number of common shares upon vesting of the awards or a later date elected by the Trustee (generally upon cessation of being a Trustee). We issued the following common sharesdid not have any award settlements in settlement of deferred shares in 2018, 2019 and 2020 (dollars in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | |
| Year of Settlement | | Number of Common Shares Issued | | Grant Date Fair Value Per Share | | Aggregate Intrinsic Value |
| 2018 | | 5,515 | | | $ | 29.32 | | | $ | 154 | |
| 2019 | | 3,097 | | | $ | 26.77 | | | $ | 86 | |
| 2020 | | 0 | | | N/A | | N/A |
Corporate OfficeCOPT Defense Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Options
We have not issued options since 2009, the last of which expired in 2019, and all of our options were vested and fully expensed prior to 2018.
16. Credit Losses, Financial Assets and Other Instruments
The table below sets forth the activity for the allowance for credit losses (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, 2020 |
| Investing Receivables | | Tenant Notes
Receivable (1) | | Other Assets (2) | | | | Off-Balance Sheet Credit Exposures | | Total |
| December 31, 2019 | $ | 0 | | | $ | 97 | | | $ | 0 | | | | | $ | 0 | | | $ | 97 | |
| Cumulative effect of change for adoption of credit loss guidance | 3,732 | | | 325 | | | 144 | | | | | 1,340 | | | 5,541 | |
| Credit loss (recoveries) expense | (881) | | | 729 | | | 559 | | | | | (1,340) | | | (933) | |
| Other changes | 0 | | | 52 | | | (60) | | | | | 0 | | | (8) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| December 31, 2020 | $ | 2,851 | | | $ | 1,203 | | | $ | 643 | | | | | $ | 0 | | | $ | 4,697 | |
(1)Included in the line entitled “accounts receivable, net” on our consolidated balance sheets.
(2)The balance as of December 31, 2020 included $257,000 in the line entitled “accounts receivable, net” and $386,000 in the line entitled “prepaid expenses and other assets, net” on our consolidated balance sheets.
The following table presents the amortized cost basis of our investing receivables and tenants notes receivable by credit risk classification, by origination year as of December 31, 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Origination Year | | | | | |
| 2015 and Earlier | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 | | Total | | | |
| Investing receivables: | | | | | | | | | | | | | | | | |
| Credit risk classification: | | | | | | | | | | | | | | | | |
| Investment grade | $ | 64,354 | | | $ | 0 | | | $ | 971 | | | $ | 0 | | | $ | 0 | | | $ | 239 | | | $ | 65,564 | | | | |
| Non-investment grade | 0 | | | 0 | | | 0 | | | 0 | | | 6,041 | | | 0 | | | 6,041 | | | | |
| Total | $ | 64,354 | | | $ | 0 | | | $ | 971 | | | $ | 0 | | | $ | 6,041 | | | $ | 239 | | | $ | 71,605 | | | | |
| | | | | | | | | | | | | | | | |
| Tenant notes receivable: | | | | | | | | | | | | | | | | |
| Credit risk classification: | | | | | | | | | | | | | | | | |
| Investment grade | $ | 0 | | | $ | 14 | | | $ | 0 | | | $ | 1,028 | | | $ | 84 | | | $ | 343 | | | $ | 1,469 | | | | |
| Non-investment grade | 97 | | | 165 | | | 0 | | | 164 | | | 1,883 | | | 1,803 | | | 4,112 | | | | |
| Total | $ | 97 | | | $ | 179 | | | $ | 0 | | | $ | 1,192 | | | $ | 1,967 | | | $ | 2,146 | | | $ | 5,581 | | | | |
| | | | | | | | | | | | | | | | |
| Sales-type lease receivable: | | | | | | | | | | | | | | | | |
| Credit risk classification: | | | | | | | | | | | | | | | | |
| Investment grade | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 6,573 | | | $ | 6,573 | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Our investment grade credit risk classification represents entities with investment grade credit ratings from ratings agencies (such as Standard & Poor’s Ratings Services, Moody’s Investors Service, Inc. or Fitch Ratings Ltd.), meaning that they are considered to have at least an adequate capacity to meet their financial commitments, with credit risk ranging from minimal to moderate. Our non-investment grade credit risk classification represents entities with either no credit agency credit ratings or ratings deemed to be sub-investment grade; we believe that there is significantly more credit risk associated with this classification. The credit risk classifications of our investing receivables and tenant notes receivable were last updated in December 2020.
An insignificant portion of the investing and tenant notes receivables set forth above was past due, which we define as being delinquent by more than three months from the due date.
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Notes receivable on nonaccrual status as of December 31, 2020 and 2019 were not significant. We did not recognize any interest income during the year ended December 31, 2020 on notes receivable on nonaccrual status.
17.13. Information by Business Segment
We have the following reportable segments: Defense/IT Locations; Regional Office;Portfolio, which we referred to as Defense/IT Locations in our 2022 Annual Report on Form 10-K; Wholesale Data Center;Center (the only property in which we sold on January 25, 2022); and Other. We also report on Defense/IT LocationsPortfolio sub-segments, which include the following: Fort George G. Meade and the Baltimore/Washington Corridor (“Fort Meade/BW Corridor”); Northern VirginiaCorridor; NoVA Defense/IT Locations;IT; Lackland Air Force Base (in San Antonio); locations serving the U.S. Navy (“Navy Support Locations”Support”), which included properties proximate to the Washington Navy Yard, the Naval Air Station Patuxent River in Maryland and the Naval Surface Warfare Center Dahlgren Division in Virginia; Redstone Arsenal (in Huntsville); and data center shells (properties leased to tenants to be operated as data centers in which the tenants fund the costs for the power, fiber connectivity and data center infrastructure). In the third quarter of 2023, we retrospectively reclassified to our Other reportable segment a portfolio of office properties located in the Greater Washington, DC/Baltimore region that we previously reported as a separate reportable segment referred to as Regional Office.
We measure the performance of our segments through the measure we define as net operating income from real estate operations (“NOI from real estate operations”), which includes: real estate revenues and property operating expenses; and the net of revenues and property operating expenses of real estate operations owned through unconsolidated real estate joint ventures (“UJVs”) that is allocable to COPT’sour ownership interest (“UJV NOI allocable to COPT”COPT Defense”). Amounts reported for segment assets represent long-lived assets associated with consolidated operating properties (including the carrying value of properties, right-of-use assets, net of related lease liabilities, intangible assets, deferred leasing costs, deferred rents receivable and lease incentives) and the carrying value of investments in UJVs owning operating properties. Amounts reported as additions to long-lived assets represent additions to existing consolidated operating properties, excluding transfers from non-operating properties, which we report separately.
Corporate OfficeCOPT Defense Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The table below reports segment financial information for our reportable segments (in thousands):
| | Defense/IT Portfolio | |
| | | Operating Property Segments | | | |
| | Defense/Information Technology Locations | | | | | Fort Meade/BW Corridor | | NoVA Defense/IT | | Lackland Air Force Base | | Navy Support | | Redstone Arsenal | | Data Center Shells | | Total Defense/IT Portfolio | |
Wholesale
Data Center | | Other | | Total |
| | Fort Meade/BW Corridor | | Northern Virginia Defense/IT | | Lackland Air Force Base | | Navy Support Locations | | Redstone Arsenal | | Data Center Shells | | Total Defense/IT Locations | | Regional Office | | | Operating
Wholesale
Data Center | | Other | | Total |
| Year Ended December 31, 2020 | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2023 | | Year Ended December 31, 2023 | | | | | | | | | | | | | | | |
| Revenues from real estate operations | Revenues from real estate operations | $ | 254,197 | | | $ | 57,817 | | | $ | 50,982 | | | $ | 32,869 | | | $ | 22,515 | | | $ | 29,139 | | | $ | 447,519 | | | $ | 60,627 | | | | $ | 27,788 | | | $ | 2,791 | | | $ | 538,725 | |
| Property operating expenses | Property operating expenses | (85,032) | | | (21,321) | | | (29,055) | | | (12,655) | | | (8,119) | | | (3,195) | | | (159,377) | | | (29,144) | | | | (14,171) | | | (1,148) | | | (203,840) | |
| UJV NOI allocable to COPT | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 6,951 | | | 6,951 | | | 0 | | | | 0 | | | 0 | | | 6,951 | |
| UJV NOI allocable to COPT Defense | |
| NOI from real estate operations | NOI from real estate operations | $ | 169,165 | | | $ | 36,496 | | | $ | 21,927 | | | $ | 20,214 | | | $ | 14,396 | | | $ | 32,895 | | | $ | 295,093 | | | $ | 31,483 | | | | $ | 13,617 | | | $ | 1,643 | | | $ | 341,836 | |
| Additions to long-lived assets | Additions to long-lived assets | $ | 31,295 | | | $ | 11,620 | | | $ | 0 | | | $ | 7,104 | | | $ | 2,905 | | | $ | 0 | | | $ | 52,924 | | | $ | 17,232 | | | | $ | 11,158 | | | $ | 165 | | | $ | 81,479 | |
| Transfers from non-operating properties | Transfers from non-operating properties | $ | 21,859 | | | $ | 2,557 | | | $ | 456 | | | $ | 0 | | | $ | 138,122 | | | $ | 230,277 | | | $ | 393,271 | | | $ | 83,091 | | | | $ | 0 | | | $ | 0 | | | $ | 476,362 | |
| Segment assets at December 31, 2020 | $ | 1,277,849 | | | $ | 392,714 | | | $ | 142,137 | | | $ | 178,897 | | | $ | 281,386 | | | $ | 419,929 | | | $ | 2,692,912 | | | $ | 490,422 | | | | $ | 202,089 | | | $ | 3,555 | | | $ | 3,388,978 | |
| Segment assets at December 31, 2023 | |
| | Year Ended December 31, 2019 | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 | |
| Year Ended December 31, 2022 | |
| Year Ended December 31, 2022 | | | | | | | | | | |
| Revenues from real estate operations | Revenues from real estate operations | $ | 252,781 | | | $ | 55,742 | | | $ | 51,140 | | | $ | 32,659 | | | $ | 16,593 | | | $ | 26,571 | | | $ | 435,486 | | | $ | 59,611 | | | | $ | 29,405 | | | $ | 2,961 | | | $ | 527,463 | |
| Property operating expenses | Property operating expenses | (82,815) | | | (19,779) | | | (29,042) | | | (13,579) | | | (6,626) | | | (1,962) | | | (153,803) | | | (29,682) | | | | (13,213) | | | (1,445) | | | (198,143) | |
| UJV NOI allocable to COPT | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 5,705 | | | 5,705 | | | 0 | | | | 0 | | | 0 | | | 5,705 | |
| UJV NOI allocable to COPT Defense | |
| NOI from real estate operations | NOI from real estate operations | $ | 169,966 | | | $ | 35,963 | | | $ | 22,098 | | | $ | 19,080 | | | $ | 9,967 | | | $ | 30,314 | | | $ | 287,388 | | | $ | 29,929 | | | | $ | 16,192 | | | $ | 1,516 | | | $ | 335,025 | |
| Additions to long-lived assets | Additions to long-lived assets | $ | 34,618 | | | $ | 9,326 | | | $ | 0 | | | $ | 8,912 | | | $ | 1,548 | | | $ | 0 | | | $ | 54,404 | | | $ | 20,925 | | | | $ | 893 | | | $ | 128 | | | $ | 76,350 | |
| Transfers from non-operating properties | Transfers from non-operating properties | $ | 18,606 | | | $ | 4,548 | | | $ | 10,781 | | | $ | 0 | | | $ | 33,606 | | | $ | 159,472 | | | $ | 227,013 | | | $ | 0 | | | | $ | (1,012) | | | $ | 0 | | | $ | 226,001 | |
| Segment assets at December 31, 2019 | $ | 1,280,656 | | | $ | 396,914 | | | $ | 146,592 | | | $ | 184,257 | | | $ | 138,501 | | | $ | 279,099 | | | $ | 2,426,019 | | | $ | 392,319 | | | | $ | 202,935 | | | $ | 3,685 | | | $ | 3,024,958 | |
| Segment assets at December 31, 2022 | |
| | Year Ended December 31, 2018 | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 | |
| Year Ended December 31, 2021 | |
| Year Ended December 31, 2021 | | | | | | | | | | |
| Revenues from real estate operations | Revenues from real estate operations | $ | 248,927 | | | $ | 53,518 | | | $ | 46,286 | | | $ | 31,927 | | | $ | 14,745 | | | $ | 25,650 | | | $ | 421,053 | | | $ | 61,181 | | | | $ | 31,892 | | | $ | 3,127 | | | $ | 517,253 | |
| Property operating expenses | Property operating expenses | (82,975) | | | (20,330) | | | (26,888) | | | (13,536) | | | (6,050) | | | (3,225) | | | (153,004) | | | (30,253) | | | | (16,342) | | | (1,436) | | | (201,035) | |
| UJV NOI allocable to COPT | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 4,818 | | | 4,818 | | | 0 | | | | 0 | | | 0 | | | 4,818 | |
| UJV NOI allocable to COPT Defense | |
| NOI from real estate operations | NOI from real estate operations | $ | 165,952 | | | $ | 33,188 | | | $ | 19,398 | | | $ | 18,391 | | | $ | 8,695 | | | $ | 27,243 | | | $ | 272,867 | | | $ | 30,928 | | | | $ | 15,550 | | | $ | 1,691 | | | $ | 321,036 | |
| Additions to long-lived assets | Additions to long-lived assets | $ | 38,612 | | | $ | 7,956 | | | $ | 0 | | | $ | 6,535 | | | $ | 573 | | | $ | 0 | | | $ | 53,676 | | | $ | 19,730 | | | | $ | 856 | | | $ | 480 | | | $ | 74,742 | |
| Transfers from non-operating properties | Transfers from non-operating properties | $ | 35,648 | | | $ | 10,231 | | | $ | 14,718 | | | $ | (116) | | | $ | 4,167 | | | $ | 99,191 | | | $ | 163,839 | | | $ | 0 | | | | $ | 2,304 | | | $ | 0 | | | $ | 166,143 | |
| Segment assets at December 31, 2018 | $ | 1,279,571 | | | $ | 399,339 | | | $ | 139,731 | | | $ | 188,911 | | | $ | 108,010 | | | $ | 353,165 | | | $ | 2,468,727 | | | $ | 395,380 | | | | $ | 216,640 | | | $ | 4,115 | | | $ | 3,084,862 | |
| Segment assets at December 31, 2021 | |
Corporate OfficeCOPT Defense Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The following table reconciles our segment revenues to total revenues as reported on our consolidated statements of operations (in thousands):
| | For the Years Ended December 31, |
| | For the Years Ended December 31, | | | | For the Years Ended December 31, |
| | | | 2020 | | 2019 | | 2018 | | | 2023 | | 2022 | | 2021 |
| Segment revenues from real estate operations | Segment revenues from real estate operations | | $ | 538,725 | | | $ | 527,463 | | | $ | 517,253 | |
| Construction contract and other service revenues | Construction contract and other service revenues | | 70,640 | | | 113,763 | | | 60,859 | |
| Less: Revenues from discontinued operations (Note 4) | |
| Total revenues | Total revenues | | $ | 609,365 | | | $ | 641,226 | | | $ | 578,112 | |
The following table reconciles our segment property operating expenses to property operating expenses as reported on our consolidated statements of operations (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | | 2023 | | 2022 | | 2021 |
| Segment property operating expenses | | $ | 247,385 | | | $ | 228,401 | | | $ | 230,219 | |
| Less: Property operating expenses from discontinued operations (Note 4) | | — | | | (971) | | | (16,842) | |
| Total property operating expenses | | $ | 247,385 | | | $ | 227,430 | | | $ | 213,377 | |
The following table reconciles UJV NOI allocable to COPT Defense to equity in (loss) income of unconsolidated entities as reported on our consolidated statements of operations (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | | 2020 | | 2019 | | 2018 |
| UJV NOI allocable to COPT | | $ | 6,951 | | | $ | 5,705 | | | $ | 4,818 | |
| Less: Income from UJV allocable to COPT attributable to depreciation and amortization expense and interest expense | | (5,120) | | | (4,065) | | | (3,314) | |
| Add: Equity in (loss) income of unconsolidated non-real estate entities | | (6) | | | (7) | | | 1,193 | |
| Equity in income of unconsolidated entities | | $ | 1,825 | | | $ | 1,633 | | | $ | 2,697 | |
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | | 2023 | | 2022 | | 2021 |
| UJV NOI allocable to COPT Defense | | $ | 6,659 | | | $ | 4,327 | | | $ | 4,029 | |
| Less: Income from UJVs allocable to COPT Defense attributable to depreciation and amortization expense, interest expense and gain on early extinguishment of debt | | (6,917) | | | (3,145) | | | (2,930) | |
| Add: Equity in (loss) income of unconsolidated non-real estate entities | | (3) | | | 561 | | | (6) | |
| Equity in (loss) income of unconsolidated entities | | $ | (261) | | | $ | 1,743 | | | $ | 1,093 | |
As previously discussed, we provide real estate services such as property management, development and construction services primarily for our properties but also for third parties. The primary manner in which we evaluate the operating performance of our service activities is through a measure we define as net operating income from service operations (“NOI from service operations”), which is based on the net of revenues and expenses from these activities. Construction contract and other service revenues and expenses consist primarily of subcontracted costs that are reimbursed to us by the customer along with a management fee. The operating margins from these activities are small relative to the revenue. We believe NOI from service operations is a useful measure in assessing both our level of activity and our profitability in conducting such operations. The table below sets forth the computation of our NOI from service operations (in thousands):
| | For the Years Ended December 31, |
| | For the Years Ended December 31, | | | | For the Years Ended December 31, |
| | | | 2020 | | 2019 | | 2018 | | | 2023 | | 2022 | | 2021 |
| Construction contract and other service revenues | Construction contract and other service revenues | | $ | 70,640 | | | $ | 113,763 | | | $ | 60,859 | |
| Construction contract and other service expenses | Construction contract and other service expenses | | (67,615) | | | (109,962) | | | (58,326) | |
| NOI from service operations | NOI from service operations | | $ | 3,025 | | | $ | 3,801 | | | $ | 2,533 | |
Corporate OfficeCOPT Defense Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The following table reconciles our NOI from real estate operations for reportable segments and NOI from service operations to net(loss) income from continuing operations as reported on our consolidated statements of operations (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | | 2020 | | 2019 | | 2018 |
| NOI from real estate operations | | $ | 341,836 | | | $ | 335,025 | | | $ | 321,036 | |
| NOI from service operations | | 3,025 | | | 3,801 | | | 2,533 | |
| Interest and other income | | 8,574 | | | 7,894 | | | 4,358 | |
| Credit loss recoveries | | 933 | | | 0 | | | 0 | |
| Gain on sales of real estate | | 30,209 | | | 105,230 | | | 2,340 | |
| Gain on sale of investment in unconsolidated real estate joint venture | | 29,416 | | | 0 | | | 0 | |
| Equity in income of unconsolidated entities | | 1,825 | | | 1,633 | | | 2,697 | |
| Income tax (expense) benefit | | (353) | | | 217 | | | 363 | |
| Depreciation and other amortization associated with real estate operations | | (138,193) | | | (137,069) | | | (137,116) | |
| Impairment losses | | (1,530) | | | (329) | | | (2,367) | |
| General, administrative and leasing expenses | | (33,001) | | | (35,402) | | | (28,900) | |
| Business development expenses and land carry costs | | (4,473) | | | (4,239) | | | (5,840) | |
| Interest expense | | (67,937) | | | (71,052) | | | (75,385) | |
| UJV NOI allocable to COPT included in equity in income of unconsolidated entities | | (6,951) | | | (5,705) | | | (4,818) | |
| Loss on early extinguishment of debt | | (7,306) | | | 0 | | | (258) | |
| Loss on interest rate derivatives | | (53,196) | | | 0 | | | 0 | |
| Net income | | $ | 102,878 | | | $ | 200,004 | | | $ | 78,643 | |
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | | 2023 | | 2022 | | 2021 |
| NOI from real estate operations | | $ | 384,077 | | | $ | 362,304 | | | $ | 360,870 | |
| NOI from service operations | | 2,763 | | | 4,669 | | | 3,823 | |
| Depreciation and other amortization associated with real estate operations | | (148,950) | | | (141,230) | | | (137,543) | |
| Impairment losses | | (252,797) | | | — | | | — | |
| General, administrative, leasing and other expenses | | (42,769) | | | (38,991) | | | (40,774) | |
| Interest expense | | (71,142) | | | (61,174) | | | (65,398) | |
| Interest and other income, net | | 12,587 | | | 9,070 | | | 9,007 | |
| Gain on sales of real estate | | 49,392 | | | 19,250 | | | 65,590 | |
| | | | | | |
| Loss on early extinguishment of debt | | — | | | (609) | | | (100,626) | |
| | | | | | |
| Equity in (loss) income of unconsolidated entities | | (261) | | | 1,743 | | | 1,093 | |
| UJV NOI allocable to COPT Defense included in equity in (loss) income of unconsolidated entities | | (6,659) | | | (4,327) | | | (4,029) | |
| Income tax expense | | (588) | | | (447) | | | (145) | |
| Revenues from real estate operations from discontinued operations (Note 4) | | — | | | (1,980) | | | (30,490) | |
| Property operating expenses from discontinued operations (Note 4) | | — | | | 971 | | | 16,842 | |
| (Loss) income from continuing operations | | $ | (74,347) | | | $ | 149,249 | | | $ | 78,220 | |
The following table reconciles our segment assets to theour consolidated total assets of COPT and subsidiaries (in thousands):
| | As of December 31, |
| 2020 | | 2019 |
| As of December 31, | | | As of December 31, |
| 2023 | | | 2023 | | 2022 |
| Segment assets | Segment assets | $ | 3,388,978 | | | $ | 3,024,958 | |
| Operating properties lease liabilities included in segment assets | Operating properties lease liabilities included in segment assets | 30,721 | | | 17,317 | |
| Non-operating property assets | Non-operating property assets | 466,991 | | | 621,630 | |
| Other assets | Other assets | 190,333 | | | 190,548 | |
| Total COPT consolidated assets | $ | 4,077,023 | | | $ | 3,854,453 | |
| Total consolidated assets | |
The accounting policies of the segments are the same as those used to prepare our consolidated financial statements.statements, except that discontinued operations are not presented separately for segment purposes. In the segment reporting presented above, we did not allocate interest expense, depreciation and amortization, impairment losses, gain on sales of real estate, gain on sale of investment in unconsolidated real estate joint venture, loss on early extinguishment of debt loss on interest rate derivatives and equity in (loss) income of unconsolidated entities not included in NOI to our real estate segments since they are not included in the measure of segment profit reviewed by management. We also did not allocate general, administrative, leasing and leasingother expenses, business development expenses and land carry costs, interest and other income, credit loss recoveries (expense),net, income taxes and noncontrolling interests because these items represent general corporate or non-operating property items not attributable to segments.
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
18.14. Construction Contract and Other Service Revenues
We disaggregate in the table below our construction contract and other service revenues by compensation arrangement and by service type as we believe it best depicts the nature, timing and uncertainty of our revenue. The table below reports construction contract and other service revenues by compensation arrangementrevenue: (in thousands):
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Construction contract revenue: | | | | | |
| GMP | $ | 22,032 | | | $ | 67,708 | | | $ | 34,050 | |
| Cost-plus fee | 34,025 | | | 34,386 | | | 5,540 | |
| FFP | 12,373 | | | 10,688 | | | 20,327 | |
| Other | 2,210 | | | 981 | | | 942 | |
| $ | 70,640 | | | $ | 113,763 | | | $ | 60,859 | |
The table below reports construction contract and other service revenues by service type (in thousands):
| | For the Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
| For the Years Ended December 31, | | | For the Years Ended December 31, |
| 2023 | | | 2023 | | 2022 | | 2021 |
| Construction contract revenue: | Construction contract revenue: | | | | | |
| Construction | $ | 66,087 | | | $ | 112,170 | | | $ | 57,986 | |
| Design | 2,343 | | | 612 | | | 1,931 | |
| FFP | |
| FFP | |
| FFP | |
| GMP | |
| Cost-plus fee | |
| Other | Other | 2,210 | | | 981 | | | 942 | |
| $ | 70,640 | | | $ | 113,763 | | | $ | 60,859 | |
| $ | |
We derived 55%88% of our construction contract revenue from the USG in 2020, 74%2023, 90% in 20192022 and 95%79% in 2018.2021.
We recognized an insignificant amount of revenue in 2020, 20192023, 2022 and 20182021 from performance obligations satisfied (or partially satisfied) in previous periods.
COPT Defense Properties and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Accounts receivable related to our construction contract services is included in accounts receivable, net on our consolidated balance sheets. The beginning and ending balances of accounts receivable related to our construction contracts were as follows (in thousands):
| | For the Years Ended December 31, |
| 2020 | | 2019 |
| For the Years Ended December 31, | | | For the Years Ended December 31, |
| 2023 | | | 2023 | | 2022 |
| Beginning balance | Beginning balance | $ | 12,378 | | | $ | 6,701 | |
| Ending balance | Ending balance | $ | 13,997 | | | $ | 12,378 | |
Contract assets which we refer to herein as construction contract costs in excess of billings, are included in prepaid expenses and other assets, net reported on our consolidated balance sheets. The beginning and ending balances of our contract assets were as follows (in thousands):
| | For the Years Ended December 31, |
| 2020 | | 2019 |
| For the Years Ended December 31, | | | For the Years Ended December 31, |
| 2023 | | | 2023 | | 2022 |
| Beginning balance | Beginning balance | $ | 17,223 | | | $ | 3,189 | |
| Ending balance | Ending balance | $ | 10,343 | | | $ | 17,223 | |
Contract liabilities are included in other liabilities reported on our consolidated balance sheets. Changes in contract liabilities were as follows (in thousands):
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2020 | | 2019 |
| Beginning balance | $ | 1,184 | | | $ | 568 | |
| Ending balance | $ | 4,610 | | | $ | 1,184 | |
| Portion of beginning balance recognized in revenue during the year | $ | 757 | | | $ | 446 | |
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2023 | | 2022 |
| Beginning balance | $ | 2,867 | | | $ | 2,499 | |
| Ending balance | $ | 4,176 | | | $ | 2,867 | |
| Portion of beginning balance recognized in revenue during the year | $ | 326 | | | $ | 278 | |
Revenue allocated to the remaining performance obligations under existing contracts as of December 31, 20202023 that will be recognized as revenue in future periods was $81.9$70.4 million, all of which we expect to recognize in 2021.2024.
We have 0no deferred incremental costs incurred to obtain or fulfill our construction contracts or other service revenues as of December 31, 2023 and had no significantDecember 31, 2022. Credit loss recoveries on construction contracts receivable and unbilled construction revenue were insignificant in 2023 and $740,000 in 2022 and credit loss expense on construction contracts receivable orand unbilled construction revenue was $211,000 in 2020, 2019 and 2018.2021.
19.15. Credit Losses on Financial Assets and Other Instruments
The table below sets forth the activity for our allowance for credit losses in 2021, 2022 and 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| Investing Receivables | | Tenant Notes
Receivable (1) | | Other Assets (2) | | | | | | Total |
| December 31, 2020 | $ | 2,851 | | | $ | 1,203 | | | $ | 643 | | | | | | | $ | 4,697 | |
| | | | | | | | | | | |
| Credit loss (recoveries) expense (3) | (1,252) | | | (146) | | | 270 | | | | | | | (1,128) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| December 31, 2021 | 1,599 | | | 1,057 | | | 913 | | | | | | | 3,569 | |
| Credit loss expense (recoveries) (3) | 1,195 | | | (279) | | | (645) | | | | | | | 271 | |
| December 31, 2022 | 2,794 | | | 778 | | | 268 | | | | | | | 3,840 | |
| Credit loss recoveries (3) | (417) | | | (79) | | | (115) | | | | | | | (611) | |
| Write-offs | — | | | (33) | | | — | | | | | | | (33) | |
| December 31, 2023 | $ | 2,377 | | | $ | 666 | | | $ | 153 | | | | | | | $ | 3,196 | |
(1)Included in the line entitled “accounts receivable, net” on our consolidated balance sheets.
(2)The balance as of December 31, 2023 and December 31, 2022 included $87,000 and $52,000, respectively, in the line entitled “accounts receivable, net” and $66,000 and $216,000, respectively, in the line entitled “prepaid expenses and other assets, net” on our consolidated balance sheets.
(3)Included in the line entitled “interest and other income, net” on our consolidated statements of operations.
COPT Defense Properties and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The following table presents the amortized cost basis of our investing receivables, tenant notes receivable and sales-type lease receivables by credit risk classification, by origination year as of December 31, 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Origination Year | | | | | |
| 2018 and Earlier | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | Total | | | |
| Investing receivables: | | | | | | | | | | | | | | | | |
| Credit risk classification: | | | | | | | | | | | | | | | | |
| Investment grade | $ | 66,105 | | | $ | — | | | $ | 2,326 | | | $ | 8,336 | | | $ | — | | | $ | 255 | | | $ | 77,022 | | | | |
| Non-investment grade | — | | | — | | | — | | | — | | | 6,867 | | | — | | | 6,867 | | | | |
| Total | $ | 66,105 | | | $ | — | | | $ | 2,326 | | | $ | 8,336 | | | $ | 6,867 | | | $ | 255 | | | $ | 83,889 | | | | |
| | | | | | | | | | | | | | | | |
| Tenant notes receivable: | | | | | | | | | | | | | | | | |
| Credit risk classification: | | | | | | | | | | | | | | | | |
| Investment grade | $ | 686 | | | $ | 15 | | | $ | 115 | | | $ | — | | | $ | — | | | $ | — | | | $ | 816 | | | | |
| Non-investment grade | 125 | | | 46 | | | 1,433 | | | — | | | — | | | — | | | 1,604 | | | | |
| Total | $ | 811 | | | $ | 61 | | | $ | 1,548 | | | $ | — | | | $ | — | | | $ | — | | | $ | 2,420 | | | | |
| Gross write-offs during the year ended December 31, 2023 | $ | 33 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 33 | | | | |
| | | | | | | | | | | | | | | | |
| Sales-type lease receivable: | | | | | | | | | | | | | | | | |
| Credit risk classification: | | | | | | | | | | | | | | | | |
| Investment grade | $ | — | | | $ | — | | | $ | 5,098 | | | $ | — | | | $ | — | | | $ | — | | | $ | 5,098 | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Our investment grade credit risk classification represents entities with investment grade credit ratings from ratings agencies (such as S&P Global Ratings, Moody’s Investors Service, Inc. or Fitch Ratings, Inc.), meaning that they are considered to have at least an adequate capacity to meet their financial commitments, with credit risk ranging from minimal to moderate. Our non-investment grade credit risk classification represents entities with either no credit agency credit ratings or ratings deemed to be sub-investment grade; we believe that there is significantly more credit risk associated with this classification. The credit risk classifications of our investing receivables and tenant notes receivable were last updated in December 2023.
An insignificant portion of the investing and tenant notes receivables set forth above was past due, which we define as being delinquent by more than three months from the due date.
Notes receivable on nonaccrual status as of December 31, 2023 and 2022 were not significant. We did not recognize any interest income on notes receivable on nonaccrual status during the years ended December 31, 2023, 2022 and 2021.
16. Earnings Per Share (“EPS”) and Earnings Per Unit (“EPU”)
COPT and Subsidiaries EPS
We present both basic and diluted EPS. We compute basic EPS by dividing net (loss) income available to common shareholders allocable to unrestricted common shares under the two-class method by the weighted average number of unrestricted common shares outstanding during the period.period after allocating undistributed earnings between common shareholders and participating securities under the two-class method. Our participating securities include restricted shares and PIUs and deferred share awards not previously settled by common share issuances. Our computation of diluted EPS is similar except that:
•>the denominator is increased to include: (1) the weighted average number of potential additional common shares that would have been outstanding if securities that are convertible into common shares were converted; and (2) the effect of dilutive potential common shares outstanding during the period attributable to COPT’s forward equity sale agreements, redeemable noncontrolling interests and our share-based compensation awards using the if-converted or treasury stock or if-converted methods; and
•>the numerator is adjusted to add back any changes in income or loss that would result from the assumed conversion into common shares that we add to the denominator.
We compute diluted EPS using the treasury stock method for unvested restricted shares, TB-PIUs and deferred share awards and the if-converted method for common units, redeemable noncontrolling interests, PB-PIUs and vested PIUs and deferred share awards not previously settled by common share issuances.
COPT Defense Properties and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Summaries of the numerator and denominator for purposes of basic and diluted EPS calculations are set forth below (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | | 2020 | | 2019 | | 2018 |
| Numerator: | | | | | | |
| Net income attributable to COPT | | $ | 97,374 | | | $ | 191,692 | | | $ | 72,301 | |
| | | | | | |
| | | | | | |
| Income attributable to share-based compensation awards | | (431) | | | (656) | | | (462) | |
| Numerator for basic EPS on net income attributable to COPT common shareholders | | $ | 96,943 | | | $ | 191,036 | | | $ | 71,839 | |
| Redeemable noncontrolling interests | | 0 | | | 132 | | | 0 | |
| Income attributable to share-based compensation awards | | 27 | | | 33 | | | 0 | |
| Numerator for diluted EPS on net income attributable to COPT common shareholders | | $ | 96,970 | | | $ | 191,201 | | | $ | 71,839 | |
| Denominator (all weighted averages): | | | | | | |
| Denominator for basic EPS (common shares) | | 111,788 | | | 111,196 | | | 103,946 | |
| Dilutive effect of redeemable noncontrolling interests | | 0 | | | 119 | | | 0 | |
| Dilutive effect of share-based compensation awards | | 288 | | | 308 | | | 134 | |
| Dilutive effect of forward equity sale agreements | | 0 | | | 0 | | | 45 | |
| | | | | | |
| Denominator for diluted EPS (common shares) | | 112,076 | | | 111,623 | | | 104,125 | |
| Basic EPS | | $ | 0.87 | | | $ | 1.72 | | | $ | 0.69 | |
| Diluted EPS | | $ | 0.87 | | | $ | 1.71 | | | $ | 0.69 | |
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | | 2023 | | 2022 | | 2021 |
| Numerator: | | | | | | |
| (Loss) income from continuing operations | | $ | (74,347) | | | $ | 149,249 | | | $ | 78,220 | |
| | | | | | |
| | | | | | |
| Loss (income) from continuing operations attributable to noncontrolling interests | | 878 | | | (5,372) | | | (4,994) | |
| Income from continuing operations attributable to share-based compensation awards for basic EPS | | (1,199) | | | (451) | | | (467) | |
| Numerator for basic EPS from continuing operations attributable to common shareholders | | $ | (74,668) | | | $ | 143,426 | | | $ | 72,759 | |
| Redeemable noncontrolling interests | | — | | | (169) | | | (128) | |
| Adjustment to income from continuing operations attributable to share-based compensation awards for diluted EPS | | — | | | 78 | | | 44 | |
| Numerator for diluted EPS from continuing operations attributable to common shareholders | | $ | (74,668) | | | $ | 143,335 | | | $ | 72,675 | |
| Discontinued operations | | — | | | 29,573 | | | 3,358 | |
| Discontinued operations attributable to noncontrolling interests | | — | | | (421) | | | (43) | |
| Income from discontinued operations attributable to share-based compensation awards for diluted EPS | | — | | | (90) | | | 6 | |
| Numerator for diluted EPS on net (loss) income attributable to common shareholders | | $ | (74,668) | | | $ | 172,397 | | | $ | 75,996 | |
| | | | | | |
| Denominator (all weighted averages): | | | | | | |
| Denominator for basic EPS (common shares) | | 112,178 | | | 112,073 | | | 111,960 | |
| Dilutive effect of redeemable noncontrolling interests | | — | | | 116 | | | 128 | |
| Dilutive effect of share-based compensation awards | | — | | | 431 | | | 330 | |
| | | | | | |
| | | | | | |
| Denominator for diluted EPS (common shares) | | 112,178 | | | 112,620 | | | 112,418 | |
| | | | | | |
| Basic EPS attributable to common shareholders: | | | | | | |
| (Loss) income from continuing operations | | $ | (0.67) | | | $ | 1.28 | | | $ | 0.65 | |
| Discontinued operations | | — | | | 0.26 | | | 0.03 | |
| Net (loss) income | | $ | (0.67) | | | $ | 1.54 | | | $ | 0.68 | |
| Diluted EPS attributable to common shareholders: | | | | | | |
| (Loss) income from continuing operations | | $ | (0.67) | | | $ | 1.27 | | | $ | 0.65 | |
| Discontinued operations | | — | | | 0.26 | | | 0.03 | |
| Net (loss) income | | $ | (0.67) | | | $ | 1.53 | | | $ | 0.68 | |
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Our diluted EPS computations do not include the effects of the following securities since the conversions of such securities would increase diluted EPS for the respective periods (in thousands):
| | Weighted Average Shares Excluded from Denominator for the Years Ended December 31, |
| | Weighted Average Shares Excluded from Denominator for the Years Ended December 31, | | | | Weighted Average Shares Excluded from Denominator for the Years Ended December 31, |
| | | | 2020 | | 2019 | | 2018 | | | 2023 | | 2022 | | 2021 |
| Conversion of common units | Conversion of common units | | 1,236 | | | 1,299 | | | 2,468 | |
| Conversion of redeemable noncontrolling interests | Conversion of redeemable noncontrolling interests | | 957 | | | 896 | | | 936 | |
| Conversion of Series I Preferred Units | | 171 | | | 176 | | | 176 | |
The following securities were also excluded from the computation of diluted EPS because their effect was antidilutive:
•>weighted average restricted shares and deferred share awards of 430,000416,000 for 2020, 441,0002023, 399,000 for 20192022 and 452,000412,000 for 2018;2021;
•>weighted average unvested TB-PIUs of 89,000175,000 for 20202023, 187,000 for 2022 and 51,000158,000 for 2019;2021;
•>weighted average optionsvested PIUs of 12,000154,000 for 2019 and 42,000 for 2018;2023; and
•>weighted average shares related to COPT’s forward equity sale agreementsPB-PIUs of 376,000629,000 for 2019.2023.
COPLP and Subsidiaries EPU
We present both basic and diluted EPU. We compute basic EPU by dividing net income available to common unitholders allocable to unrestricted common unitsAs discussed in Note 8, our 5.25% Notes issued on September 12, 2023 have an exchange settlement feature under which the two-class method byprincipal amount of notes exchanged is payable in cash, with the weighted average number of unrestricted common units outstanding during the period. Our computation of diluted EPU is similar except that:
•the denominator is increased to include: (1) the weighted average number of potential additional common units that would have been outstanding if securities that are convertible into our common units were converted; and (2) the effect of dilutive potential common units outstanding during the period attributable to COPT’s forward equity sale agreements, redeemable noncontrolling interests and our share-based compensation using the treasury stock or if-converted methods; and
•the numerator is adjusted to add back any changes in income or loss that would result from the assumed conversion into common units that we add to the denominator.
Summariesremainder of the numerator and denominator for purposesexchange obligation, if any, as determined based on the exchange price per common share at the time of basic and diluted EPU calculations are set forth below (in thousands, except per unit data):
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | | 2020 | | 2019 | | 2018 |
| Numerator: | | | | | | |
| Net income attributable to COPLP | | $ | 98,854 | | | $ | 194,619 | | | $ | 74,703 | |
| Preferred unit distributions | | (300) | | | (564) | | | (660) | |
| | | | | | |
| Income attributable to share-based compensation awards | | (511) | | | (785) | | | (462) | |
| Numerator for basic EPU on net income attributable to COPLP common unitholders | | 98,043 | | | 193,270 | | | 73,581 | |
| Redeemable noncontrolling interests | | 0 | | | 132 | | | 0 | |
| Income attributable to share-based compensation awards | | 0 | | | 33 | | | 0 | |
| Numerator for diluted EPU on net income attributable to COPLP common unitholders | | $ | 98,043 | | | $ | 193,435 | | | $ | 73,581 | |
| Denominator (all weighted averages): | | | | | | |
| Denominator for basic EPU (common units) | | 113,024 | | | 112,495 | | | 106,414 | |
| Dilutive effect of redeemable noncontrolling interests | | 0 | | | 119 | | | 0 | |
| Dilutive effect of share-based compensation awards | | 288 | | | 308 | | | 134 | |
| Dilutive effect of forward equity sale agreements | | 0 | | | 0 | | | 45 | |
| Denominator for diluted EPU (common units) | | 113,312 | | | 112,922 | | | 106,593 | |
| Basic EPU | | $ | 0.87 | | | $ | 1.72 | | | $ | 0.69 | |
| Diluted EPU | | $ | 0.87 | | | $ | 1.71 | | | $ | 0.69 | |
Corporate OfficeCOPT Defense Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Ourthereof at our election. These notes did not affect our diluted EPU computations do not include the effects of the following securitiesEPS reported above since the conversionsweighted average closing price of such securities would increase diluted EPUour common shares for the respective periods (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Weighted Average Units Excluded from Denominator for the Years Ended December 31, |
| | | 2020 | | 2019 | | 2018 |
| Conversion of redeemable noncontrolling interests | | 957 | | | 896 | | | 936 | |
| Conversion of Series I Preferred Units | | 171 | | | 176 | | | 176 | |
The following securities were also excluded fromyear ended December 31, 2023 was less than the computation of diluted EPU because their effect was antidilutive:
•weighted average restricted units and deferred share awards of 430,000 for 2020, 441,000 for 2019 and 452,000 for 2018;
•weighted average unvested TB-PIUs of 89,000 for 2020 and 51,000 for 2019;
•weighted average options of 12,000 for 2019 and 42,000 for 2018; and
•weighted average shares relatedexchange price applicable to COPT’s forward equity sale agreements of 376,000 for 2019.that period.
20.17. Commitments and Contingencies
Litigation and Claims
In the normal course of business, we are subject to legal actions and other claims. We record losses for specific legal proceedings and claims when we determine that a loss is probable and the amount of loss can be reasonably estimated. As of December 31, 2020,2023, management believes that it is reasonably possible that we could recognize a loss of up to $3.1$4.5 million for certain municipal tax claims. Whileclaims; while we do not believe this loss would materially affect our financial position or liquidity, it could be material to our results of operations. Management believes that it is also reasonably possible that we could incur losses pursuant to other such claims but do not believe such losses would materially affect our financial position, liquidity or results of operations. Our assessment of the potential outcomes of these matters involves significant judgment and is subject to change based on future developments.
Environmental
We are subject to various Federal,federal, state and local environmental regulations related to our property ownership and operation.operations. We have performed environmental assessments of our properties, the results of which have not revealed any environmental liability that we believe would have a materially adverse effect on our financial position, operations or liquidity.
In connection with a lease and subsequent sale in 2008 and 2010 of 3three properties in Dayton, New Jersey, we agreed to provide certain environmental indemnifications limited to $19 million in the aggregate. We have insurance coverage in place to mitigate muchmost of any potential future losses that may result from these indemnification agreements.
Tax Incremental Financing Obligation
Anne Arundel County, Maryland issued tax incremental financing bonds to third-party investors in order to finance public improvements needed in connection with our project known as the National Business Park. These bonds had a remaining principal balance of approximately $33$27 million as of December 31, 2020.2023. The real estate taxes on increases in assessed values post-bond issuance of properties in development districts encompassing the National Business Park are transferred to a special fund pledged to the repayment of the bonds. While we are obligated to fund, through a special tax, any future shortfalls between debt service of the bonds and real estate taxes available to repay the bonds, as of December 31, 2020,2023, we do not expect any such future fundings will be required.
Effects of COVID-19
Since first being declared a pandemic by the World Health Organization in early March 2020, the coronavirus, or COVID-19, has spread worldwide. In an effort to control its spread, governments and other authorities imposed restrictive measures affecting freedom of movement and business operations, such as shelter-in-place orders and business closures. Strong restrictive measures were put into place in much of the United States beginning in March 2020, bringing many businesses to a halt while forcing others to change the way in which they conduct their operations, with much of the workforce working from
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
their homes to the extent they were able. States and local governments began easing these measures to varying extents in late April 2020, with some lifting restrictive measures entirely, while others chose a more gradual, extended easing approach. While the easing of these measures enabled many businesses to gradually resume normal operations, most businesses continue to be hindered to varying extents by either measures still in effect, operational challenges resulting from social distancing requirements/expectations and/or a reluctance by much of the population to engage in certain activities while the pandemic is still active. As of the date of this filing, COVID-19 spread continues world- and nation-wide, and is expected to continue until vaccinations have been administered to much of the population, which is not expected to occur in the United States until at least mid- to late 2021. As a result, there continues to be significant uncertainty regarding the duration and extent of this pandemic. The outbreak significantly disrupted financial and economic markets worldwide, as well as in the United States at a national, regional and local level. These conditions could continue or further deteriorate as businesses feel the prolonged effects of stalled or reduced operations and uncertainty regarding the pandemic continues.
COVID-19, and any similar pandemics should they occur, along with measures instituted to prevent spread, may adversely affect us in many ways, including, but not limited to:
•disruption of our tenants’ operations, which could adversely affect their ability, or willingness, to sustain their businesses and/or fulfill their lease obligations;
•our ability to maintain occupancy in our properties and obtain new leases for unoccupied and new development space at favorable terms or at all;
•shortages in supply of products or services from our and our tenants’ vendors that are needed for us and our tenants to operate effectively, and which could lead to increased costs for such products and services;
•access to debt and equity capital on attractive terms or at all. Severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions may affect our or our tenants’ ability to access capital necessary to fund operations, refinance debt or fund planned investments on a timely basis, and may adversely affect the valuation of financial assets and liabilities;
•our and our tenants’ ability to continue or complete planned development, including the potential for delays in the supply of materials or labor necessary for development; and
•an increase in the pace of businesses implementing remote work arrangements over the long-term, which would adversely effect demand for office space.
The extent of the effect on our operations, financial condition and cash flows will be dependent on future developments, including the duration of the pandemic and any future resurgence or variants thereof, the prevalence, strength and duration of restrictive measures and the resulting effects on our tenants, potential future tenants, the commercial real estate industry and the broader economy, all of which are uncertain and difficult to predict.
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Schedule III—Real Estate and Accumulated Depreciation
December 31, 20202023
(Dollars in thousands)
| | Initial Cost | | Gross Amounts Carried
At Close of Period | |
| | | Initial Cost | |
| Property (Type) (1) | |
| Property (Type) (1) | |
| Property (Type) (1) | Property (Type) (1) | Location | Encumbrances (2) | Land | Building
and Land Improvements | Costs Capitalized Subsequent to Acquisition | Land | Building
and Land Improvements | Total
(3) | Accumulated Depreciation (4) | Year Built or Renovated | Date Acquired (5) | Location | Encumbrances (2) | Land | Building
and Land Improvements | Costs Capitalized Subsequent to Acquisition | Land | Building
and Land Improvements | Total
(3) | Accumulated Depreciation (4) | Year Built or Renovated | Date Acquired (5) |
| 100 Light Street (O) | 100 Light Street (O) | Baltimore, MD | $ | 46,543 | | $ | 26,715 | | $ | 58,002 | | $ | 21,859 | | $ | 26,715 | | $ | 79,861 | | $ | 106,576 | | $ | (20,981) | | 1973/2011 | 8/7/2015 | 100 Light Street (O) | Baltimore, MD | $ | — | | $ | 6,720 | | $ | 31,215 | | $ | 27,021 | | $ | 6,720 | | $ | 58,236 | | $ | 64,956 | | $ | (36,309) | | 1973/2011 | 1973/2011 | 8/7/2015 |
| 100 Secured Gateway (O) | 100 Secured Gateway (O) | Huntsville, AL | — | | — | | 70,552 | | — | | — | | 70,552 | | 70,552 | | (566) | | 2020 | 3/23/2010 | 100 Secured Gateway (O) | Huntsville, AL | — | | — | — | | 71,174 | 71,174 | | 52 | 52 | | — | — | | 71,226 | 71,226 | | 71,226 | 71,226 | | (5,910) | (5,910) | | 2020 | 2020 | 3/23/2010 |
| 1000 Redstone Gateway (O) | 1000 Redstone Gateway (O) | Huntsville, AL | 9,666 | | — | | 20,533 | | 65 | | — | | 20,598 | | 20,598 | | (4,007) | | 2013 | 3/23/2010 | 1000 Redstone Gateway (O) | Huntsville, AL | 8,461 | | — | — | | 20,533 | 20,533 | | 217 | 217 | | — | — | | 20,750 | 20,750 | | 20,750 | 20,750 | | (5,566) | (5,566) | | 2013 | 2013 | 3/23/2010 |
| 1100 Redstone Gateway (O) | 1100 Redstone Gateway (O) | Huntsville, AL | 10,263 | | — | | 19,593 | | 66 | | — | | 19,659 | | 19,659 | | (3,418) | | 2014 | 3/23/2010 | 1100 Redstone Gateway (O) | Huntsville, AL | 9,163 | | — | — | | 19,593 | 19,593 | | 2,929 | 2,929 | | — | — | | 22,522 | 22,522 | | 22,522 | 22,522 | | (4,956) | (4,956) | | 2014 | 2014 | 3/23/2010 |
| 114 National Business Parkway (O) | 114 National Business Parkway (O) | Annapolis Junction, MD | — | | 364 | | 3,109 | | 302 | | 364 | | 3,411 | | 3,775 | | (1,584) | | 2002 | 6/30/2000 | 114 National Business Parkway (O) | Annapolis Junction, MD | — | | 364 | 364 | | 3,109 | 3,109 | | 427 | 427 | | 364 | 364 | | 3,536 | 3,536 | | 3,900 | 3,900 | | (1,883) | (1,883) | | 2002 | 2002 | 6/30/2000 |
| 1200 Redstone Gateway (O) | 1200 Redstone Gateway (O) | Huntsville, AL | 11,851 | | — | | 22,389 | | 60 | | — | | 22,449 | | 22,449 | | (3,945) | | 2013 | 3/23/2010 | 1200 Redstone Gateway (O) | Huntsville, AL | 10,563 | | — | — | | 22,389 | 22,389 | | 9,493 | 9,493 | | — | — | | 31,882 | 31,882 | | 31,882 | 31,882 | | (6,195) | (6,195) | | 2013 | 2013 | 3/23/2010 |
| 1201 M Street SE (O) | 1201 M Street SE (O) | Washington, DC | — | | — | | 49,785 | | 9,621 | | — | | 59,406 | | 59,406 | | (19,011) | | 2001 | 9/28/2010 | 1201 M Street SE (O) | Washington, DC | — | | — | — | | 49,775 | 49,775 | | 10,883 | 10,883 | | — | — | | 60,658 | 60,658 | | 60,658 | 60,658 | | (25,428) | (25,428) | | 2001 | 2001 | 9/28/2010 |
| 1201 Winterson Road (O) | 1201 Winterson Road (O) | Linthicum, MD | — | | 2,130 | | 17,007 | | 901 | | 2,130 | | 17,908 | | 20,038 | | (5,506) | | 1985/2017 | 4/30/1998 | 1201 Winterson Road (O) | Linthicum, MD | — | | 2,130 | 2,130 | | 17,207 | 17,207 | | 937 | 937 | | 2,130 | 2,130 | | 18,144 | 18,144 | | 20,274 | 20,274 | | (6,857) | (6,857) | | 1985/2017 | 1985/2017 | 4/30/1998 |
| 1220 12th Street SE (O) | 1220 12th Street SE (O) | Washington, DC | — | | — | | 42,464 | | 8,795 | | — | | 51,259 | | 51,259 | | (17,812) | | 2003 | 9/28/2010 | 1220 12th Street SE (O) | Washington, DC | — | | — | — | | 42,464 | 42,464 | | 11,714 | 11,714 | | — | — | | 54,178 | 54,178 | | 54,178 | 54,178 | | (23,306) | (23,306) | | 2003 | 2003 | 9/28/2010 |
| 1243 Winterson Road (L) | 1243 Winterson Road (L) | Linthicum, MD | — | | 630 | | — | | — | | 630 | | — | | 630 | | — | | (6) | 12/19/2001 | 1243 Winterson Road (L) | Linthicum, MD | — | | 630 | 630 | | — | — | | — | — | | 630 | 630 | | — | — | | 630 | 630 | | — | — | | (6) | (6) | 12/19/2001 |
| 131 National Business Parkway (O) | 131 National Business Parkway (O) | Annapolis Junction, MD | — | | 1,906 | | 7,623 | | 5,075 | | 1,906 | | 12,698 | | 14,604 | | (7,442) | | 1990 | 9/28/1998 | 131 National Business Parkway (O) | Annapolis Junction, MD | — | | 1,906 | 1,906 | | 7,623 | 7,623 | | 6,520 | 6,520 | | 1,906 | 1,906 | | 14,143 | 14,143 | | 16,049 | 16,049 | | (9,286) | (9,286) | | 1990 | 1990 | 9/28/1998 |
| 132 National Business Parkway (O) | 132 National Business Parkway (O) | Annapolis Junction, MD | — | | 2,917 | | 12,259 | | 4,730 | | 2,917 | | 16,989 | | 19,906 | | (10,566) | | 2000 | 5/28/1999 | 132 National Business Parkway (O) | Annapolis Junction, MD | — | | 2,917 | 2,917 | | 12,259 | 12,259 | | 4,995 | 4,995 | | 2,917 | 2,917 | | 17,254 | 17,254 | | 20,171 | 20,171 | | (11,842) | (11,842) | | 2000 | 2000 | 5/28/1999 |
| 133 National Business Parkway (O) | 133 National Business Parkway (O) | Annapolis Junction, MD | — | | 2,517 | | 10,068 | | 6,274 | | 2,517 | | 16,342 | | 18,859 | | (10,443) | | 1997 | 9/28/1998 | 133 National Business Parkway (O) | Annapolis Junction, MD | — | | 2,517 | 2,517 | | 10,068 | 10,068 | | 6,842 | 6,842 | | 2,517 | 2,517 | | 16,910 | 16,910 | | 19,427 | 19,427 | | (11,967) | (11,967) | | 1997 | 1997 | 9/28/1998 |
| 134 National Business Parkway (O) | 134 National Business Parkway (O) | Annapolis Junction, MD | — | | 3,684 | | 7,517 | | 5,007 | | 3,684 | | 12,524 | | 16,208 | | (7,329) | | 1999 | 11/13/1998 | 134 National Business Parkway (O) | Annapolis Junction, MD | — | | 3,684 | 3,684 | | 7,517 | 7,517 | | 5,973 | 5,973 | | 3,684 | 3,684 | | 13,490 | 13,490 | | 17,174 | 17,174 | | (9,640) | (9,640) | | 1999 | 1999 | 11/13/1998 |
| 1340 Ashton Road (O) | 1340 Ashton Road (O) | Hanover, MD | — | | 905 | | 3,620 | | 2,042 | | 905 | | 5,662 | | 6,567 | | (3,255) | | 1989 | 4/28/1999 | 1340 Ashton Road (O) | Hanover, MD | — | | 905 | 905 | | 3,620 | 3,620 | | 2,631 | 2,631 | | 905 | 905 | | 6,251 | 6,251 | | 7,156 | 7,156 | | (3,861) | (3,861) | | 1989 | 1989 | 4/28/1999 |
| 13450 Sunrise Valley Drive (O) | 13450 Sunrise Valley Drive (O) | Herndon, VA | — | | 1,386 | | 5,576 | | 4,636 | | 1,386 | | 10,212 | | 11,598 | | (6,156) | | 1998 | 7/25/2003 | 13450 Sunrise Valley Drive (O) | Herndon, VA | — | | 1,386 | 1,386 | | 5,576 | 5,576 | | 5,076 | 5,076 | | 1,386 | 1,386 | | 10,652 | 10,652 | | 12,038 | 12,038 | | (7,417) | (7,417) | | 1998 | 1998 | 7/25/2003 |
| 13454 Sunrise Valley Drive (O) | 13454 Sunrise Valley Drive (O) | Herndon, VA | — | | 2,847 | | 11,986 | | 9,184 | | 2,847 | | 21,170 | | 24,017 | | (12,075) | | 1998 | 7/25/2003 | 13454 Sunrise Valley Drive (O) | Herndon, VA | — | | 2,847 | 2,847 | | 11,986 | 11,986 | | 12,997 | 12,997 | | 2,847 | 2,847 | | 24,983 | 24,983 | | 27,830 | 27,830 | | (14,469) | (14,469) | | 1998 | 1998 | 7/25/2003 |
| 135 National Business Parkway (O) | 135 National Business Parkway (O) | Annapolis Junction, MD | — | | 2,484 | | 9,750 | | 6,528 | | 2,484 | | 16,278 | | 18,762 | | (10,164) | | 1998 | 12/30/1998 | 135 National Business Parkway (O) | Annapolis Junction, MD | — | | 2,484 | 2,484 | | 9,750 | 9,750 | | 7,296 | 7,296 | | 2,484 | 2,484 | | 17,046 | 17,046 | | 19,530 | 19,530 | | (12,106) | (12,106) | | 1998 | 1998 | 12/30/1998 |
| 1362 Mellon Road (O) | 1362 Mellon Road (O) | Hanover, MD | — | | 950 | | 3,864 | | 1,065 | | 950 | | 4,929 | | 5,879 | | (854) | | 2006 | 2/10/2006 | 1362 Mellon Road (O) | Hanover, MD | — | | 950 | 950 | | 3,864 | 3,864 | | 3,031 | 3,031 | | 950 | 950 | | 6,895 | 6,895 | | 7,845 | 7,845 | | (1,898) | (1,898) | | 2006 | 2006 | 2/10/2006 |
| 13857 McLearen Road (O) | 13857 McLearen Road (O) | Herndon, VA | — | | 3,507 | | 30,177 | | 4,915 | | 3,507 | | 35,092 | | 38,599 | | (12,784) | | 2007 | 7/11/2012 | 13857 McLearen Road (O) | Herndon, VA | — | | 3,507 | 3,507 | | 30,177 | 30,177 | | 5,911 | 5,911 | | 3,507 | 3,507 | | 36,088 | 36,088 | | 39,595 | 39,595 | | (16,023) | (16,023) | | 2007 | 2007 | 7/11/2012 |
| 140 National Business Parkway (O) | 140 National Business Parkway (O) | Annapolis Junction, MD | — | | 3,407 | | 24,167 | | 1,751 | | 3,407 | | 25,918 | | 29,325 | | (10,941) | | 2003 | 12/31/2003 | 140 National Business Parkway (O) | Annapolis Junction, MD | — | | 3,407 | 3,407 | | 24,167 | 24,167 | | 2,975 | 2,975 | | 3,407 | 3,407 | | 27,142 | 27,142 | | 30,549 | 30,549 | | (13,110) | (13,110) | | 2003 | 2003 | 12/31/2003 |
| 141 National Business Parkway (O) | 141 National Business Parkway (O) | Annapolis Junction, MD | — | | 2,398 | | 9,538 | | 4,832 | | 2,398 | | 14,370 | | 16,768 | | (9,190) | | 1990 | 9/28/1998 | 141 National Business Parkway (O) | Annapolis Junction, MD | — | | 2,398 | 2,398 | | 9,538 | 9,538 | | 4,844 | 4,844 | | 2,398 | 2,398 | | 14,382 | 14,382 | | 16,780 | 16,780 | | (10,511) | (10,511) | | 1990 | 1990 | 9/28/1998 |
| 14280 Park Meadow Drive (O) | 14280 Park Meadow Drive (O) | Chantilly, VA | — | | 3,731 | | 15,953 | | 5,485 | | 3,731 | | 21,438 | | 25,169 | | (9,512) | | 1999 | 9/29/2004 | 14280 Park Meadow Drive (O) | Chantilly, VA | — | | 3,731 | 3,731 | | 15,953 | 15,953 | | 5,641 | 5,641 | | 3,731 | 3,731 | | 21,594 | 21,594 | | 25,325 | 25,325 | | (12,342) | (12,342) | | 1999 | 1999 | 9/29/2004 |
| 1460 Dorsey Road (L) | 1460 Dorsey Road (L) | Hanover, MD | — | | 1,577 | | 76 | | — | | 1,577 | | 76 | | 1,653 | | — | | (6) | 2/28/2006 | 1460 Dorsey Road (L) | Hanover, MD | — | | 1,577 | 1,577 | | 187 | 187 | | — | — | | 1,577 | 1,577 | | 187 | 187 | | 1,764 | 1,764 | | — | — | | (6) | (6) | 2/28/2006 |
| 14840 Conference Center Drive (O) | 14840 Conference Center Drive (O) | Chantilly, VA | — | | 1,572 | | 8,175 | | 5,751 | | 1,572 | | 13,926 | | 15,498 | | (7,351) | | 2000 | 7/25/2003 | 14840 Conference Center Drive (O) | Chantilly, VA | — | | 1,572 | 1,572 | | 8,175 | 8,175 | | 5,833 | 5,833 | | 1,572 | 1,572 | | 14,008 | 14,008 | | 15,580 | 15,580 | | (8,945) | (8,945) | | 2000 | 2000 | 7/25/2003 |
| 14850 Conference Center Drive (O) | 14850 Conference Center Drive (O) | Chantilly, VA | — | | 1,615 | | 8,358 | | 3,873 | | 1,615 | | 12,231 | | 13,846 | | (7,115) | | 2000 | 7/25/2003 | 14850 Conference Center Drive (O) | Chantilly, VA | — | | 1,615 | 1,615 | | 8,358 | 8,358 | | 7,740 | 7,740 | | 1,615 | 1,615 | | 16,098 | 16,098 | | 17,713 | 17,713 | | (8,803) | (8,803) | | 2000 | 2000 | 7/25/2003 |
| 14900 Conference Center Drive (O) | 14900 Conference Center Drive (O) | Chantilly, VA | — | | 3,436 | | 14,402 | | 8,659 | | 3,436 | | 23,061 | | 26,497 | | (13,126) | | 1999 | 7/25/2003 | 14900 Conference Center Drive (O) | Chantilly, VA | — | | 3,436 | 3,436 | | 14,402 | 14,402 | | 10,459 | 10,459 | | 3,436 | 3,436 | | 24,861 | 24,861 | | 28,297 | 28,297 | | (15,682) | (15,682) | | 1999 | 1999 | 7/25/2003 |
| 1501 South Clinton Street (O) | 1501 South Clinton Street (O) | Baltimore, MD | — | | 27,964 | | 51,990 | | 20,656 | | 27,964 | | 72,646 | | 100,610 | | (28,175) | | 2006 | 10/27/2009 | 1501 South Clinton Street (O) | Baltimore, MD | — | | 13,137 | 13,137 | | 20,753 | 20,753 | | 46,956 | 46,956 | | 13,137 | 13,137 | | 67,709 | 67,709 | | 80,846 | 80,846 | | (38,074) | (38,074) | | 2006 | 2006 | 10/27/2009 |
| 15049 Conference Center Drive (O) | 15049 Conference Center Drive (O) | Chantilly, VA | — | | 4,415 | | 20,365 | | 17,851 | | 4,415 | | 38,216 | | 42,631 | | (18,061) | | 1997 | 8/14/2002 | 15049 Conference Center Drive (O) | Chantilly, VA | — | | 4,415 | 4,415 | | 20,365 | 20,365 | | 18,213 | 18,213 | | 4,415 | 4,415 | | 38,578 | 38,578 | | 42,993 | 42,993 | | (24,412) | (24,412) | | 1997 | 1997 | 8/14/2002 |
| 15059 Conference Center Drive (O) | 15059 Conference Center Drive (O) | Chantilly, VA | — | | 5,753 | | 13,615 | | 4,386 | | 5,753 | | 18,001 | | 23,754 | | (10,079) | | 2000 | 8/14/2002 | 15059 Conference Center Drive (O) | Chantilly, VA | — | | 5,753 | 5,753 | | 13,615 | 13,615 | | 9,602 | 9,602 | | 5,753 | 5,753 | | 23,217 | 23,217 | | 28,970 | 28,970 | | (12,086) | (12,086) | | 2000 | 2000 | 8/14/2002 |
| 1550 West Nursery Road (O) | 1550 West Nursery Road (O) | Linthicum, MD | — | | 14,071 | | 16,930 | | — | | 14,071 | | 16,930 | | 31,001 | | (6,310) | | 2009 | 10/28/2009 | 1550 West Nursery Road (O) | Linthicum, MD | — | | 14,071 | 14,071 | | 16,930 | 16,930 | | — | — | | 14,071 | 14,071 | | 16,930 | 16,930 | | 31,001 | 31,001 | | (7,415) | (7,415) | | 2009 | 2009 | 10/28/2009 |
| 1560 West Nursery Road (O) | 1560 West Nursery Road (O) | Linthicum, MD | — | | 1,441 | | 113 | | — | | 1,441 | | 113 | | 1,554 | | (19) | | 2014 | 10/28/2009 | 1560 West Nursery Road (O) | Linthicum, MD | — | | 1,441 | 1,441 | | 113 | 113 | | — | — | | 1,441 | 1,441 | | 113 | 113 | | 1,554 | 1,554 | | (27) | (27) | | 2014 | 2014 | 10/28/2009 |
| 1610 West Nursery Road (O) | 1610 West Nursery Road (O) | Linthicum, MD | — | | 259 | | 246 | | — | | 259 | | 246 | | 505 | | (23) | | 2016 | 4/30/1998 | 1610 West Nursery Road (O) | Linthicum, MD | — | | 259 | 259 | | 246 | 246 | | — | — | | 259 | 259 | | 246 | 246 | | 505 | 505 | | (42) | (42) | | 2016 | 2016 | 4/30/1998 |
| 1616 West Nursery Road (O) | 1616 West Nursery Road (O) | Linthicum, MD | — | | 393 | | 3,323 | | 75 | | 393 | | 3,398 | | 3,791 | | (268) | | 2017 | 4/30/1998 | 1616 West Nursery Road (O) | Linthicum, MD | — | | 393 | 393 | | 3,323 | 3,323 | | 75 | 75 | | 393 | 393 | | 3,398 | 3,398 | | 3,791 | 3,791 | | (539) | (539) | | 2017 | 2017 | 4/30/1998 |
| 1622 West Nursery Road (O) | 1622 West Nursery Road (O) | Linthicum, MD | — | | 393 | | 2,542 | | — | | 393 | | 2,542 | | 2,935 | | (244) | | 2016 | 4/30/1998 | 1622 West Nursery Road (O) | Linthicum, MD | — | | 393 | 393 | | 2,542 | 2,542 | | — | — | | 393 | 393 | | 2,542 | 2,542 | | 2,935 | 2,935 | | (436) | (436) | | 2016 | 2016 | 4/30/1998 |
| 16442 Commerce Drive (O) | 16442 Commerce Drive (O) | Dahlgren, VA | — | | 613 | | 2,582 | | 980 | | 613 | | 3,562 | | 4,175 | | (1,860) | | 2002 | 12/21/2004 | 16442 Commerce Drive (O) | Dahlgren, VA | — | | 613 | 613 | | 2,582 | 2,582 | | 1,142 | 1,142 | | 613 | 613 | | 3,724 | 3,724 | | 4,337 | 4,337 | | (2,275) | (2,275) | | 2002 | 2002 | 12/21/2004 |
| 16480 Commerce Drive (O) | | 16480 Commerce Drive (O) | Dahlgren, VA | — | | 1,856 | | 7,425 | | 2,878 | | 1,856 | | 10,303 | | 12,159 | | (5,623) | | 2000 | 12/28/2004 |
| | Initial Cost | | Gross Amounts Carried
At Close of Period | |
| | | Initial Cost | |
| Property (Type) (1) | Property (Type) (1) | Location | Encumbrances (2) | Land | Building
and Land Improvements | Costs Capitalized Subsequent to Acquisition | Land | Building
and Land Improvements | Total
(3) | Accumulated Depreciation (4) | Year Built or Renovated | Date Acquired (5) |
| 16480 Commerce Drive (O) | Dahlgren, VA | — | | 1,856 | | 7,425 | | 2,602 | | 1,856 | | 10,027 | | 11,883 | | (4,274) | | 2000 | 12/28/2004 |
| Property (Type) (1) | |
| Property (Type) (1) | | Location | Encumbrances (2) | Land | Building
and Land Improvements | Costs Capitalized Subsequent to Acquisition | Land | Building
and Land Improvements | Total
(3) | Accumulated Depreciation (4) | Year Built or Renovated | Date Acquired (5) |
| 16501 Commerce Drive (O) | 16501 Commerce Drive (O) | Dahlgren, VA | — | | 522 | | 2,090 | | 1,040 | | 522 | | 3,130 | | 3,652 | | (1,399) | | 2002 | 12/21/2004 | 16501 Commerce Drive (O) | Dahlgren, VA | — | | 522 | 522 | | 2,090 | 2,090 | | 1,251 | 1,251 | | 522 | 522 | | 3,341 | 3,341 | | 3,863 | 3,863 | | (1,794) | (1,794) | | 2002 | 2002 | 12/21/2004 |
| 16539 Commerce Drive (O) | 16539 Commerce Drive (O) | Dahlgren, VA | — | | 688 | | 2,860 | | 2,326 | | 688 | | 5,186 | | 5,874 | | (2,879) | | 1990 | 12/21/2004 | 16539 Commerce Drive (O) | Dahlgren, VA | — | | 688 | 688 | | 2,860 | 2,860 | | 2,345 | 2,345 | | 688 | 688 | | 5,205 | 5,205 | | 5,893 | 5,893 | | (3,316) | (3,316) | | 1990 | 1990 | 12/21/2004 |
| 16541 Commerce Drive (O) | 16541 Commerce Drive (O) | Dahlgren, VA | — | | 773 | | 3,094 | | 2,594 | | 773 | | 5,688 | | 6,461 | | (2,696) | | 1996 | 12/21/2004 | 16541 Commerce Drive (O) | Dahlgren, VA | — | | 773 | 773 | | 3,094 | 3,094 | | 2,715 | 2,715 | | 773 | 773 | | 5,809 | 5,809 | | 6,582 | 6,582 | | (3,540) | (3,540) | | 1996 | 1996 | 12/21/2004 |
| 16543 Commerce Drive (O) | 16543 Commerce Drive (O) | Dahlgren, VA | — | | 436 | | 1,742 | | 838 | | 436 | | 2,580 | | 3,016 | | (1,231) | | 2002 | 12/21/2004 | 16543 Commerce Drive (O) | Dahlgren, VA | — | | 436 | 436 | | 1,742 | 1,742 | | 907 | 907 | | 436 | 436 | | 2,649 | 2,649 | | 3,085 | 3,085 | | (1,543) | (1,543) | | 2002 | 2002 | 12/21/2004 |
| 1751 Pinnacle Drive (O) | 1751 Pinnacle Drive (O) | McLean, VA | — | | 10,486 | | 42,339 | | 33,689 | | 10,486 | | 76,028 | | 86,514 | | (38,872) | | 1989/1995 | 9/23/2004 | 1751 Pinnacle Drive (O) | McLean, VA | — | | 4,762 | 4,762 | | 26,046 | 26,046 | | 33,008 | 33,008 | | 4,762 | 4,762 | | 59,054 | 59,054 | | 63,816 | 63,816 | | (48,466) | (48,466) | | 1989/1995 | 1989/1995 | 9/23/2004 |
| 1753 Pinnacle Drive (O) | 1753 Pinnacle Drive (O) | McLean, VA | — | | 8,275 | | 34,353 | | 23,954 | | 8,275 | | 58,307 | | 66,582 | | (25,248) | | 1976/2004 | 9/23/2004 | 1753 Pinnacle Drive (O) | McLean, VA | — | | 3,729 | 3,729 | | 21,500 | 21,500 | | 27,446 | 27,446 | | 3,729 | 3,729 | | 48,946 | 48,946 | | 52,675 | 52,675 | | (33,423) | (33,423) | | 1976/2004 | 1976/2004 | 9/23/2004 |
| 206 Research Boulevard (O) | 206 Research Boulevard (O) | Aberdeen, MD | — | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | (1) | | 2012 | 9/14/2007 | 206 Research Boulevard (O) | Aberdeen, MD | — | | — | — | | — | — | | — | — | | — | — | | — | — | | — | — | | — | — | | 2012 | 2012 | 9/14/2007 |
| 209 Research Boulevard (O) | 209 Research Boulevard (O) | Aberdeen, MD | — | | 134 | | 1,711 | | 327 | | 134 | | 2,038 | | 2,172 | | (599) | | 2010 | 9/14/2007 | 209 Research Boulevard (O) | Aberdeen, MD | — | | 134 | 134 | | 1,711 | 1,711 | | 842 | 842 | | 134 | 134 | | 2,553 | 2,553 | | 2,687 | 2,687 | | (874) | (874) | | 2010 | 2010 | 9/14/2007 |
| 210 Research Boulevard (O) | 210 Research Boulevard (O) | Aberdeen, MD | — | | 113 | | 1,402 | | 248 | | 113 | | 1,650 | | 1,763 | | (493) | | 2010 | 9/14/2007 | 210 Research Boulevard (O) | Aberdeen, MD | — | | 113 | 113 | | 1,402 | 1,402 | | 539 | 539 | | 113 | 113 | | 1,941 | 1,941 | | 2,054 | 2,054 | | (710) | (710) | | 2010 | 2010 | 9/14/2007 |
| 2100 L Street (O) | 2100 L Street (O) | Washington, DC | 82,882 | | 19,024 | | 92,387 | | — | | 19,024 | | 92,387 | | 111,411 | | — | | 2020 (7) | 8/11/2015 | 2100 L Street (O) | Washington, DC | — | | 41,935 | 41,935 | | 71,067 | 71,067 | | — | — | | 41,935 | 41,935 | | 71,067 | 71,067 | | 113,002 | 113,002 | | (6,645) | (6,645) | | 2020 | 2020 | 8/11/2015 |
| 2100 Rideout Road (O) | 2100 Rideout Road (O) | Huntsville, AL | — | | 0 | | 7,347 | | 2,995 | | 0 | | 10,342 | | 10,342 | | (1,786) | | 2016 | 3/23/2010 | 2100 Rideout Road (O) | Huntsville, AL | — | | — | — | | 7,336 | 7,336 | | 3,256 | 3,256 | | — | — | | 10,592 | 10,592 | | 10,592 | 10,592 | | (3,248) | (3,248) | | 2016 | 2016 | 3/23/2010 |
| 22289 Exploration Drive (O) | 22289 Exploration Drive (O) | Lexington Park, MD | — | | 1,422 | | 5,719 | | 2,061 | | 1,422 | | 7,780 | | 9,202 | | (4,126) | | 2000 | 3/24/2004 | 22289 Exploration Drive (O) | Lexington Park, MD | — | | 1,422 | 1,422 | | 5,719 | 5,719 | | 2,379 | 2,379 | | 1,422 | 1,422 | | 8,098 | 8,098 | | 9,520 | 9,520 | | (4,804) | (4,804) | | 2000 | 2000 | 3/24/2004 |
| 22299 Exploration Drive (O) | 22299 Exploration Drive (O) | Lexington Park, MD | — | | 1,362 | | 5,791 | | 2,994 | | 1,362 | | 8,785 | | 10,147 | | (4,888) | | 1998 | 3/24/2004 | 22299 Exploration Drive (O) | Lexington Park, MD | — | | 1,278 | 1,278 | | 5,791 | 5,791 | | 3,085 | 3,085 | | 1,278 | 1,278 | | 8,876 | 8,876 | | 10,154 | 10,154 | | (5,765) | (5,765) | | 1998 | 1998 | 3/24/2004 |
| 22300 Exploration Drive (O) | 22300 Exploration Drive (O) | Lexington Park, MD | — | | 1,094 | | 5,038 | | 2,770 | | 1,094 | | 7,808 | | 8,902 | | (3,624) | | 1997 | 11/9/2004 | 22300 Exploration Drive (O) | Lexington Park, MD | — | | 1,094 | 1,094 | | 5,038 | 5,038 | | 3,060 | 3,060 | | 1,094 | 1,094 | | 8,098 | 8,098 | | 9,192 | 9,192 | | (5,054) | (5,054) | | 1997 | 1997 | 11/9/2004 |
| 22309 Exploration Drive (O) | 22309 Exploration Drive (O) | Lexington Park, MD | — | | 2,243 | | 10,419 | | 8,205 | | 2,243 | | 18,624 | | 20,867 | | (8,227) | | 1984/1997 | 3/24/2004 | 22309 Exploration Drive (O) | Lexington Park, MD | — | | 2,160 | 2,160 | | 10,419 | 10,419 | | 8,179 | 8,179 | | 2,160 | 2,160 | | 18,598 | 18,598 | | 20,758 | 20,758 | | (10,400) | (10,400) | | 1984/1997 | 1984/1997 | 3/24/2004 |
| 23535 Cottonwood Parkway (O) | 23535 Cottonwood Parkway (O) | California, MD | — | | 692 | | 3,051 | | 648 | | 692 | | 3,699 | | 4,391 | | (2,027) | | 1984 | 3/24/2004 | 23535 Cottonwood Parkway (O) | California, MD | — | | 692 | 692 | | 3,051 | 3,051 | | 648 | 648 | | 692 | 692 | | 3,699 | 3,699 | | 4,391 | 4,391 | | (2,524) | (2,524) | | 1984 | 1984 | 3/24/2004 |
| 250 W Pratt St (O) | 250 W Pratt St (O) | Baltimore, MD | — | | 8,057 | | 34,588 | | 16,213 | | 8,057 | | 50,801 | | 58,858 | | (15,418) | | 1985 | 3/19/2015 | 250 W Pratt St (O) | Baltimore, MD | — | | 4,704 | 4,704 | | 21,487 | 21,487 | | 21,784 | 21,784 | | 4,704 | 4,704 | | 43,271 | 43,271 | | 47,975 | 47,975 | | (25,472) | (25,472) | | 1985 | 1985 | 3/19/2015 |
| 2500 Riva Road (O) | Annapolis, MD | — | | 2,791 | | 12,155 | | 1 | | 2,791 | | 12,156 | | 14,947 | | (12,146) | | 2000 | 3/4/2003 |
| 2600 Park Tower Drive (O) | 2600 Park Tower Drive (O) | Vienna, VA | — | | 20,284 | | 34,443 | | 3,883 | | 20,284 | | 38,326 | | 58,610 | | (7,108) | | 1999 | 4/15/2015 | 2600 Park Tower Drive (O) | Vienna, VA | — | | 20,284 | 20,284 | | 34,443 | 34,443 | | 8,431 | 8,431 | | 20,284 | 20,284 | | 42,874 | 42,874 | | 63,158 | 63,158 | | (11,121) | (11,121) | | 1999 | 1999 | 4/15/2015 |
| 2691 Technology Drive (O) | 2691 Technology Drive (O) | Annapolis Junction, MD | — | | 2,098 | | 17,334 | | 5,565 | | 2,098 | | 22,899 | | 24,997 | | (11,747) | | 2005 | 5/26/2000 | 2691 Technology Drive (O) | Annapolis Junction, MD | — | | 2,098 | 2,098 | | 17,334 | 17,334 | | 9,191 | 9,191 | | 2,098 | 2,098 | | 26,525 | 26,525 | | 28,623 | 28,623 | | (13,995) | (13,995) | | 2005 | 2005 | 5/26/2000 |
| 2701 Technology Drive (O) | 2701 Technology Drive (O) | Annapolis Junction, MD | — | | 1,737 | | 15,266 | | 5,629 | | 1,737 | | 20,895 | | 22,632 | | (12,487) | | 2001 | 5/26/2000 | 2701 Technology Drive (O) | Annapolis Junction, MD | — | | 1,737 | 1,737 | | 15,266 | 15,266 | | 7,366 | 7,366 | | 1,737 | 1,737 | | 22,632 | 22,632 | | 24,369 | 24,369 | | (14,744) | (14,744) | | 2001 | 2001 | 5/26/2000 |
| 2711 Technology Drive (O) | 2711 Technology Drive (O) | Annapolis Junction, MD | — | | 2,251 | | 21,611 | | 4,332 | | 2,251 | | 25,943 | | 28,194 | | (13,586) | | 2002 | 11/13/2000 | 2711 Technology Drive (O) | Annapolis Junction, MD | — | | 2,251 | 2,251 | | 21,611 | 21,611 | | 4,509 | 4,509 | | 2,251 | 2,251 | | 26,120 | 26,120 | | 28,371 | 28,371 | | (16,956) | (16,956) | | 2002 | 2002 | 11/13/2000 |
| 2720 Technology Drive (O) | 2720 Technology Drive (O) | Annapolis Junction, MD | — | | 3,863 | | 29,272 | | 2,796 | | 3,863 | | 32,068 | | 35,931 | | (13,249) | | 2004 | 1/31/2002 | 2720 Technology Drive (O) | Annapolis Junction, MD | — | | 3,863 | 3,863 | | 29,272 | 29,272 | | 3,227 | 3,227 | | 3,863 | 3,863 | | 32,499 | 32,499 | | 36,362 | 36,362 | | (16,331) | (16,331) | | 2004 | 2004 | 1/31/2002 |
| 2721 Technology Drive (O) | 2721 Technology Drive (O) | Annapolis Junction, MD | — | | 4,611 | | 14,597 | | 3,247 | | 4,611 | | 17,844 | | 22,455 | | (10,267) | | 2000 | 10/21/1999 | 2721 Technology Drive (O) | Annapolis Junction, MD | — | | 4,611 | 4,611 | | 14,597 | 14,597 | | 3,836 | 3,836 | | 4,611 | 4,611 | | 18,433 | 18,433 | | 23,044 | 23,044 | | (12,025) | (12,025) | | 2000 | 2000 | 10/21/1999 |
| 2730 Hercules Road (O) | 2730 Hercules Road (O) | Annapolis Junction, MD | — | | 8,737 | | 31,612 | | 8,726 | | 8,737 | | 40,338 | | 49,075 | | (22,740) | | 1990 | 9/28/1998 | 2730 Hercules Road (O) | Annapolis Junction, MD | — | | 8,737 | 8,737 | | 31,612 | 31,612 | | 9,569 | 9,569 | | 8,737 | 8,737 | | 41,181 | 41,181 | | 49,918 | 49,918 | | (26,409) | (26,409) | | 1990 | 1990 | 9/28/1998 |
| 30 Light Street (O) | 30 Light Street (O) | Baltimore, MD | 3,915 | | 0 | | 12,101 | | 1,009 | | 0 | | 13,110 | | 13,110 | | (1,894) | | 2009 | 8/7/2015 | 30 Light Street (O) | Baltimore, MD | — | | — | — | | 2,501 | 2,501 | | 625 | 625 | | — | — | | 3,126 | 3,126 | | 3,126 | 3,126 | | (3,084) | (3,084) | | 2009 | 2009 | 8/7/2015 |
| 300 Secured Gateway (O) | | 300 Secured Gateway (O) | Huntsville, AL | — | | — | | 63,500 | | — | | — | | 63,500 | | 63,500 | | (379) | | 2023 | 3/23/2010 |
| 300 Sentinel Drive (O) | 300 Sentinel Drive (O) | Annapolis Junction, MD | — | | 1,517 | | 59,165 | | 2,095 | | 1,517 | | 61,260 | | 62,777 | | (16,564) | | 2009 | 11/14/2003 | 300 Sentinel Drive (O) | Annapolis Junction, MD | — | | 1,517 | 1,517 | | 59,165 | 59,165 | | 2,590 | 2,590 | | 1,517 | 1,517 | | 61,755 | 61,755 | | 63,272 | 63,272 | | (22,195) | (22,195) | | 2009 | 2009 | 11/14/2003 |
| 302 Sentinel Drive (O) | 302 Sentinel Drive (O) | Annapolis Junction, MD | — | | 2,648 | | 29,687 | | 1,094 | | 2,648 | | 30,781 | | 33,429 | | (10,028) | | 2007 | 11/14/2003 | 302 Sentinel Drive (O) | Annapolis Junction, MD | — | | 2,648 | 2,648 | | 29,687 | 29,687 | | 6,540 | 6,540 | | 2,648 | 2,648 | | 36,227 | 36,227 | | 38,875 | 38,875 | | (13,417) | (13,417) | | 2007 | 2007 | 11/14/2003 |
| 304 Sentinel Drive (O) | 304 Sentinel Drive (O) | Annapolis Junction, MD | — | | 3,411 | | 24,917 | | 1,982 | | 3,411 | | 26,899 | | 30,310 | | (11,186) | | 2005 | 11/14/2003 | 304 Sentinel Drive (O) | Annapolis Junction, MD | — | | 3,411 | 3,411 | | 24,917 | 24,917 | | 5,335 | 5,335 | | 3,411 | 3,411 | | 30,252 | 30,252 | | 33,663 | 33,663 | | (14,610) | (14,610) | | 2005 | 2005 | 11/14/2003 |
| 306 Sentinel Drive (O) | 306 Sentinel Drive (O) | Annapolis Junction, MD | — | | 3,260 | | 22,592 | | 2,566 | | 3,260 | | 25,158 | | 28,418 | | (9,147) | | 2006 | 11/14/2003 | 306 Sentinel Drive (O) | Annapolis Junction, MD | — | | 3,260 | 3,260 | | 22,592 | 22,592 | | 3,755 | 3,755 | | 3,260 | 3,260 | | 26,347 | 26,347 | | 29,607 | 29,607 | | (12,080) | (12,080) | | 2006 | 2006 | 11/14/2003 |
| | 308 Sentinel Drive (O) | |
| 308 Sentinel Drive (O) | |
| 308 Sentinel Drive (O) | 308 Sentinel Drive (O) | Annapolis Junction, MD | — | | 1,422 | | 26,208 | | 2,354 | | 1,422 | | 28,562 | | 29,984 | | (7,003) | | 2010 | 11/14/2003 | Annapolis Junction, MD | — | | 1,422 | 1,422 | | 26,208 | 26,208 | | 2,365 | 2,365 | | 1,422 | 1,422 | | 28,573 | 28,573 | | 29,995 | 29,995 | | (9,641) | (9,641) | | 2010 | 2010 | 11/14/2003 |
| 310 Sentinel Way (O) | 310 Sentinel Way (O) | Annapolis Junction, MD | — | | 2,372 | | 42,584 | | — | | 2,372 | | 42,584 | | 44,956 | | (5,027) | | 2016 | 11/14/2003 | 310 Sentinel Way (O) | Annapolis Junction, MD | — | | 2,372 | 2,372 | | 50,677 | 50,677 | | 716 | 716 | | 2,372 | 2,372 | | 51,393 | 51,393 | | 53,765 | 53,765 | | (8,291) | (8,291) | | 2016 | 2016 | 11/14/2003 |
| 310 The Bridge Street (O) | 310 The Bridge Street (O) | Huntsville, AL | — | | 261 | | 26,531 | | 5,135 | | 261 | | 31,666 | | 31,927 | | (11,066) | | 2009 | 8/9/2011 | 310 The Bridge Street (O) | Huntsville, AL | — | | 261 | 261 | | 26,530 | 26,530 | | 6,406 | 6,406 | | 261 | 261 | | 32,936 | 32,936 | | 33,197 | 33,197 | | (14,449) | (14,449) | | 2009 | 2009 | 8/9/2011 |
| 312 Sentinel Way (O) | 312 Sentinel Way (O) | Annapolis Junction, MD | — | | 3,138 | | 27,797 | | — | | 3,138 | | 27,797 | | 30,935 | | (4,389) | | 2014 | 11/14/2003 | 312 Sentinel Way (O) | Annapolis Junction, MD | — | | 3,138 | 3,138 | | 27,797 | 27,797 | | — | — | | 3,138 | 3,138 | | 27,797 | 27,797 | | 30,935 | 30,935 | | (6,474) | (6,474) | | 2014 | 2014 | 11/14/2003 |
| 314 Sentinel Way (O) | 314 Sentinel Way (O) | Annapolis Junction, MD | — | | 1,254 | | 7,741 | | — | | 1,254 | | 7,741 | | 8,995 | | (1,247) | | 2008 | 11/14/2003 | 314 Sentinel Way (O) | Annapolis Junction, MD | — | | 1,254 | 1,254 | | 7,741 | 7,741 | | — | — | | 1,254 | 1,254 | | 7,741 | 7,741 | | 8,995 | 8,995 | | (1,947) | (1,947) | | 2008 | 2008 | 11/14/2003 |
| 316 Sentinel Way (O) | | 316 Sentinel Way (O) | Annapolis Junction, MD | — | | 2,748 | | 38,156 | | 298 | | 2,748 | | 38,454 | | 41,202 | | (11,361) | | 2011 | 11/14/2003 |
| 318 Sentinel Way (O) | | 318 Sentinel Way (O) | Annapolis Junction, MD | — | | 2,185 | | 28,426 | | 562 | | 2,185 | | 28,988 | | 31,173 | | (13,016) | | 2005 | 11/14/2003 |
| | Initial Cost | | Gross Amounts Carried
At Close of Period | |
| | | Initial Cost | |
| Property (Type) (1) | Property (Type) (1) | Location | Encumbrances (2) | Land | Building
and Land Improvements | Costs Capitalized Subsequent to Acquisition | Land | Building
and Land Improvements | Total
(3) | Accumulated Depreciation (4) | Year Built or Renovated | Date Acquired (5) |
| 316 Sentinel Way (O) | Annapolis Junction, MD | — | | 2,748 | | 38,156 | | 226 | | 2,748 | | 38,382 | | 41,130 | | (8,426) | | 2011 | 11/14/2003 |
| 318 Sentinel Way (O) | Annapolis Junction, MD | — | | 2,185 | | 28,426 | | 560 | | 2,185 | | 28,986 | | 31,171 | | (10,716) | | 2005 | 11/14/2003 |
| Property (Type) (1) | |
| Property (Type) (1) | | Location | Encumbrances (2) | Land | Building
and Land Improvements | Costs Capitalized Subsequent to Acquisition | Land | Building
and Land Improvements | Total
(3) | Accumulated Depreciation (4) | Year Built or Renovated | Date Acquired (5) |
| 320 Sentinel Way (O) | 320 Sentinel Way (O) | Annapolis Junction, MD | — | | 2,067 | | 21,623 | | 132 | | 2,067 | | 21,755 | | 23,822 | | (7,029) | | 2007 | 11/14/2003 | 320 Sentinel Way (O) | Annapolis Junction, MD | — | | 2,067 | 2,067 | | 21,623 | 21,623 | | 148 | 148 | | 2,067 | 2,067 | | 21,771 | 21,771 | | 23,838 | 23,838 | | (8,753) | (8,753) | | 2007 | 2007 | 11/14/2003 |
| 322 Sentinel Way (O) | 322 Sentinel Way (O) | Annapolis Junction, MD | — | | 2,605 | | 22,827 | | 1,900 | | 2,605 | | 24,727 | | 27,332 | | (8,568) | | 2006 | 11/14/2003 | 322 Sentinel Way (O) | Annapolis Junction, MD | — | | 2,605 | 2,605 | | 22,827 | 22,827 | | 1,900 | 1,900 | | 2,605 | 2,605 | | 24,727 | 24,727 | | 27,332 | 27,332 | | (10,851) | (10,851) | | 2006 | 2006 | 11/14/2003 |
| 324 Sentinel Way (O) | 324 Sentinel Way (O) | Annapolis Junction, MD | — | | 1,656 | | 23,018 | | 38 | | 1,656 | | 23,056 | | 24,712 | | (5,956) | | 2010 | 6/29/2006 | 324 Sentinel Way (O) | Annapolis Junction, MD | — | | 1,656 | 1,656 | | 23,018 | 23,018 | | 61 | 61 | | 1,656 | 1,656 | | 23,079 | 23,079 | | 24,735 | 24,735 | | (7,690) | (7,690) | | 2010 | 2010 | 6/29/2006 |
| | 4000 Market Street (O) | |
| 4000 Market Street (O) | |
| 4000 Market Street (O) | 4000 Market Street (O) | Huntsville, AL | 6,052 | | — | | 9,207 | | — | | — | | 9,207 | | 9,207 | | (394) | | 2018 | 3/23/2010 | Huntsville, AL | 5,914 | | — | — | | 9,198 | 9,198 | | 1,955 | 1,955 | | — | — | | 11,153 | 11,153 | | 11,153 | 11,153 | | (1,231) | (1,231) | | 2018 | 2018 | 3/23/2010 |
| 410 National Business Parkway (O) | 410 National Business Parkway (O) | Annapolis Junction, MD | — | | 1,831 | | 23,257 | | 2,080 | | 1,831 | | 25,337 | | 27,168 | | (5,032) | | 2012 | 6/29/2006 | 410 National Business Parkway (O) | Annapolis Junction, MD | — | | 1,831 | 1,831 | | 23,257 | 23,257 | | 2,259 | 2,259 | | 1,831 | 1,831 | | 25,516 | 25,516 | | 27,347 | 27,347 | | (8,066) | (8,066) | | 2012 | 2012 | 6/29/2006 |
| 4100 Market Street (O) | 4100 Market Street (O) | Huntsville, AL | 5,269 | | — | | 8,020 | | — | | — | | 8,020 | | 8,020 | | (304) | | 2019 | 3/23/2010 | 4100 Market Street (O) | Huntsville, AL | 5,148 | | — | — | | 8,046 | 8,046 | | 7 | 7 | | — | — | | 8,053 | 8,053 | | 8,053 | 8,053 | | (913) | (913) | | 2019 | 2019 | 3/23/2010 |
| 420 National Business Parkway (O) | 420 National Business Parkway (O) | Annapolis Junction, MD | — | | 2,370 | | 27,751 | | 148 | | 2,370 | | 27,899 | | 30,269 | | (4,752) | | 2013 | 6/29/2006 | 420 National Business Parkway (O) | Annapolis Junction, MD | — | | 2,370 | 2,370 | | 31,397 | 31,397 | | 3,199 | 3,199 | | 2,370 | 2,370 | | 34,596 | 34,596 | | 36,966 | 36,966 | | (7,049) | (7,049) | | 2013 | 2013 | 6/29/2006 |
| 430 National Business Parkway (O) | 430 National Business Parkway (O) | Annapolis Junction, MD | — | | 1,852 | | 21,563 | | 830 | | 1,852 | | 22,393 | | 24,245 | | (4,936) | | 2011 | 6/29/2006 | 430 National Business Parkway (O) | Annapolis Junction, MD | — | | 1,852 | 1,852 | | 21,563 | 21,563 | | 3,118 | 3,118 | | 1,852 | 1,852 | | 24,681 | 24,681 | | 26,533 | 26,533 | | (7,560) | (7,560) | | 2011 | 2011 | 6/29/2006 |
| 44408 Pecan Court (O) | 44408 Pecan Court (O) | California, MD | — | | 817 | | 1,583 | | 1,706 | | 817 | | 3,289 | | 4,106 | | (1,679) | | 1986 | 3/24/2004 | 44408 Pecan Court (O) | California, MD | — | | 817 | 817 | | 1,583 | 1,583 | | 1,861 | 1,861 | | 817 | 817 | | 3,444 | 3,444 | | 4,261 | 4,261 | | (2,432) | (2,432) | | 1986 | 1986 | 3/24/2004 |
| 44414 Pecan Court (O) | 44414 Pecan Court (O) | California, MD | — | | 405 | | 1,619 | | 1,138 | | 405 | | 2,757 | | 3,162 | | (1,512) | | 1986 | 3/24/2004 | 44414 Pecan Court (O) | California, MD | — | | 405 | 405 | | 1,619 | 1,619 | | 1,229 | 1,229 | | 405 | 405 | | 2,848 | 2,848 | | 3,253 | 3,253 | | (2,015) | (2,015) | | 1986 | 1986 | 3/24/2004 |
| 44417 Pecan Court (O) | 44417 Pecan Court (O) | California, MD | — | | 434 | | 3,822 | | 180 | | 434 | | 4,002 | | 4,436 | | (2,005) | | 1989/2015 | 3/24/2004 | 44417 Pecan Court (O) | California, MD | — | | 434 | 434 | | 3,822 | 3,822 | | 295 | 295 | | 434 | 434 | | 4,117 | 4,117 | | 4,551 | 4,551 | | (2,576) | (2,576) | | 1989/2015 | 1989/2015 | 3/24/2004 |
| 44420 Pecan Court (O) | 44420 Pecan Court (O) | California, MD | — | | 344 | | 890 | | 291 | | 344 | | 1,181 | | 1,525 | | (546) | | 1989 | 11/9/2004 | 44420 Pecan Court (O) | California, MD | — | | 344 | 344 | | 890 | 890 | | 329 | 329 | | 344 | 344 | | 1,219 | 1,219 | | 1,563 | 1,563 | | (729) | (729) | | 1989 | 1989 | 11/9/2004 |
| 44425 Pecan Court (O) | 44425 Pecan Court (O) | California, MD | — | | 1,309 | | 3,506 | | 2,349 | | 1,309 | | 5,855 | | 7,164 | | (3,431) | | 1997 | 5/5/2004 | 44425 Pecan Court (O) | California, MD | — | | 1,309 | 1,309 | | 3,506 | 3,506 | | 2,694 | 2,694 | | 1,309 | 1,309 | | 6,200 | 6,200 | | 7,509 | 7,509 | | (4,310) | (4,310) | | 1997 | 1997 | 5/5/2004 |
| 45310 Abell House Lane (O) | 45310 Abell House Lane (O) | California, MD | — | | 2,272 | | 13,808 | | 816 | | 2,272 | | 14,624 | | 16,896 | | (3,455) | | 2011 | 8/30/2010 | 45310 Abell House Lane (O) | California, MD | — | | 2,272 | 2,272 | | 13,808 | 13,808 | | 1,812 | 1,812 | | 2,272 | 2,272 | | 15,620 | 15,620 | | 17,892 | 17,892 | | (5,025) | (5,025) | | 2011 | 2011 | 8/30/2010 |
| 4600 River Road (O) | 4600 River Road (O) | College Park, MD | — | | 0 | | 23,294 | | — | | — | | 23,294 | | 23,294 | | (19) | | 2020 (7) | 1/29/2008 | 4600 River Road (O) | College Park, MD | — | | — | — | | 26,255 | 26,255 | | — | — | | — | — | | 26,255 | 26,255 | | 26,255 | 26,255 | | (1,706) | (1,706) | | 2020 | 2020 | 1/29/2008 |
| 46579 Expedition Drive (O) | 46579 Expedition Drive (O) | Lexington Park, MD | — | | 1,406 | | 5,796 | | 2,712 | | 1,406 | | 8,508 | | 9,914 | | (4,231) | | 2002 | 3/24/2004 | 46579 Expedition Drive (O) | Lexington Park, MD | — | | 1,406 | 1,406 | | 5,796 | 5,796 | | 2,987 | 2,987 | | 1,406 | 1,406 | | 8,783 | 8,783 | | 10,189 | 10,189 | | (5,214) | (5,214) | | 2002 | 2002 | 3/24/2004 |
| 46591 Expedition Drive (O) | 46591 Expedition Drive (O) | Lexington Park, MD | — | | 1,200 | | 7,199 | | 3,399 | | 1,200 | | 10,598 | | 11,798 | | (3,932) | | 2005 | 3/24/2004 | 46591 Expedition Drive (O) | Lexington Park, MD | — | | 1,200 | 1,200 | | 7,199 | 7,199 | | 4,727 | 4,727 | | 1,200 | 1,200 | | 11,926 | 11,926 | | 13,126 | 13,126 | | (5,899) | (5,899) | | 2005 | 2005 | 3/24/2004 |
| 4851 Stonecroft Boulevard (O) | 4851 Stonecroft Boulevard (O) | Chantilly, VA | — | | 1,878 | | 11,558 | | 299 | | 1,878 | | 11,857 | | 13,735 | | (4,697) | | 2004 | 8/14/2002 | 4851 Stonecroft Boulevard (O) | Chantilly, VA | — | | 1,878 | 1,878 | | 11,558 | 11,558 | | 483 | 483 | | 1,878 | 1,878 | | 12,041 | 12,041 | | 13,919 | 13,919 | | (5,618) | (5,618) | | 2004 | 2004 | 8/14/2002 |
| 5300 Redstone Gateway (O) | | 5300 Redstone Gateway (O) | Huntsville, AL | — | | — | | 17,350 | | — | | — | | 17,350 | | 17,350 | | — | | (7) | 3/23/2010 |
| 540 National Business Parkway (O) | 540 National Business Parkway (O) | Annapolis Junction, MD | — | | 2,035 | | 31,249 | | 9 | | 2,035 | | 31,258 | | 33,293 | | (2,521) | | 2017 | 6/29/2006 | 540 National Business Parkway (O) | Annapolis Junction, MD | — | | 2,035 | 2,035 | | 35,545 | 35,545 | | 41 | 41 | | 2,035 | 2,035 | | 35,586 | 35,586 | | 37,621 | 37,621 | | (5,003) | (5,003) | | 2017 | 2017 | 6/29/2006 |
| 550 National Business Parkway (O) | | 550 National Business Parkway (O) | Annapolis Junction, MD | — | | 2,678 | | 43,521 | | — | | 2,678 | | 43,521 | | 46,199 | | (98) | | 2023 | 6/29/2006 |
| 5520 Research Park Drive (O) | 5520 Research Park Drive (O) | Catonsville, MD | — | | — | | 20,072 | | 1,641 | | — | | 21,713 | | 21,713 | | (6,375) | | 2009 | 4/4/2006 | 5520 Research Park Drive (O) | Catonsville, MD | — | | — | — | | 20,072 | 20,072 | | 2,356 | 2,356 | | — | — | | 22,428 | 22,428 | | 22,428 | 22,428 | | (8,416) | (8,416) | | 2009 | 2009 | 4/4/2006 |
| 5522 Research Park Drive (O) | 5522 Research Park Drive (O) | Catonsville, MD | — | | — | | 4,550 | | 855 | | — | | 5,405 | | 5,405 | | (1,652) | | 2007 | 3/8/2006 | 5522 Research Park Drive (O) | Catonsville, MD | — | | — | — | | 4,550 | 4,550 | | 883 | 883 | | — | — | | 5,433 | 5,433 | | 5,433 | 5,433 | | (2,249) | (2,249) | | 2007 | 2007 | 3/8/2006 |
| 560 National Business Parkway (O) | | 560 National Business Parkway (O) | Annapolis Junction, MD | — | | 2,193 | | 55,079 | | — | | 2,193 | | 55,079 | | 57,272 | | (1,635) | | 2022 | 6/29/2006 |
| 5801 University Research Court (O) | 5801 University Research Court (O) | College Park, MD | 11,200 | | — | | 17,434 | | — | | — | | 17,434 | | 17,434 | | (1,195) | | 2018 | 1/29/2008 | 5801 University Research Court (O) | College Park, MD | 10,640 | | — | — | | 17,431 | 17,431 | | 162 | 162 | | — | — | | 17,593 | 17,593 | | 17,593 | 17,593 | | (2,726) | (2,726) | | 2018 | 2018 | 1/29/2008 |
| 5825 University Research Court (O) | 5825 University Research Court (O) | College Park, MD | 20,011 | | — | | 22,771 | | 1,780 | | — | | 24,551 | | 24,551 | | (7,170) | | 2008 | 1/29/2008 | 5825 University Research Court (O) | College Park, MD | 18,580 | | — | — | | 22,771 | 22,771 | | 2,874 | 2,874 | | — | — | | 25,645 | 25,645 | | 25,645 | 25,645 | | (9,925) | (9,925) | | 2008 | 2008 | 1/29/2008 |
| 5850 University Research Court (O) | 5850 University Research Court (O) | College Park, MD | 21,171 | | — | | 31,906 | | 405 | | — | | 32,311 | | 32,311 | | (8,885) | | 2008 | 1/29/2008 | 5850 University Research Court (O) | College Park, MD | 19,657 | | — | — | | 31,906 | 31,906 | | 1,112 | 1,112 | | — | — | | 33,018 | 33,018 | | 33,018 | 33,018 | | (11,519) | (11,519) | | 2008 | 2008 | 1/29/2008 |
| 6000 Redstone Gateway (O) | 6000 Redstone Gateway (O) | Huntsville, AL | — | | — | | 8,268 | | — | | — | | 8,268 | | 8,268 | | (14) | | 2020 (7) | 3/23/2010 | 6000 Redstone Gateway (O) | Huntsville, AL | — | | — | — | | 8,542 | 8,542 | | 17 | 17 | | — | — | | 8,559 | 8,559 | | 8,559 | 8,559 | | (633) | (633) | | 2020 | 2020 | 3/23/2010 |
| 610 Guardian Way (O) | 610 Guardian Way (O) | Annapolis Junction, MD | — | | 6,946 | | 14,597 | | — | | 6,946 | | 14,597 | | 21,543 | | — | | (7) | 6/29/2006 | 610 Guardian Way (O) | Annapolis Junction, MD | — | | 7,636 | 7,636 | | 53,682 | 53,682 | | — | — | | 7,636 | 7,636 | | 53,682 | 53,682 | | 61,318 | 61,318 | | (2,915) | (2,915) | | 2021 | 2021 | 6/29/2006 |
| 6200 Redstone Gateway (O) | | 6200 Redstone Gateway (O) | Huntsville, AL | — | | — | | 50,086 | | — | | — | | 50,086 | | 50,086 | | (922) | | 2022 | 3/23/2010 |
| 6700 Alexander Bell Drive (O) | 6700 Alexander Bell Drive (O) | Columbia, MD | — | | 1,755 | | 7,019 | | 8,788 | | 1,755 | | 15,807 | | 17,562 | | (8,825) | | 1988 | 5/14/2001 | 6700 Alexander Bell Drive (O) | Columbia, MD | — | | 1,755 | 1,755 | | 7,019 | 7,019 | | 10,647 | 10,647 | | 1,755 | 1,755 | | 17,666 | 17,666 | | 19,421 | 19,421 | | (11,013) | (11,013) | | 1988 | 1988 | 5/14/2001 |
| 6708 Alexander Bell Drive (O) | 6708 Alexander Bell Drive (O) | Columbia, MD | — | | 897 | | 12,644 | | 1,618 | | 897 | | 14,262 | | 15,159 | | (4,674) | | 1988/2016 | 5/14/2001 | 6708 Alexander Bell Drive (O) | Columbia, MD | — | | 897 | 897 | | 12,693 | 12,693 | | 1,618 | 1,618 | | 897 | 897 | | 14,311 | 14,311 | | 15,208 | 15,208 | | (5,520) | (5,520) | | 1988/2016 | 1988/2016 | 5/14/2001 |
| 6711 Columbia Gateway Drive (O) | 6711 Columbia Gateway Drive (O) | Columbia, MD | — | | 2,683 | | 23,239 | | 1,557 | | 2,683 | | 24,796 | | 27,479 | | (9,200) | | 2006-2007 | 9/28/2000 | 6711 Columbia Gateway Drive (O) | Columbia, MD | — | | 2,683 | 2,683 | | 23,239 | 23,239 | | 3,243 | 3,243 | | 2,683 | 2,683 | | 26,482 | 26,482 | | 29,165 | 29,165 | | (11,617) | (11,617) | | 2006-2007 | 2006-2007 | 9/28/2000 |
| 6716 Alexander Bell Drive (O) | 6716 Alexander Bell Drive (O) | Columbia, MD | — | | 1,242 | | 4,969 | | 4,672 | | 1,242 | | 9,641 | | 10,883 | | (6,123) | | 1990 | 12/31/1998 | 6716 Alexander Bell Drive (O) | Columbia, MD | — | | 1,242 | 1,242 | | 4,969 | 4,969 | | 7,391 | 7,391 | | 1,242 | 1,242 | | 12,360 | 12,360 | | 13,602 | 13,602 | | (7,078) | (7,078) | | 1990 | 1990 | 12/31/1998 |
| 6721 Columbia Gateway Drive (O) | 6721 Columbia Gateway Drive (O) | Columbia, MD | — | | 1,753 | | 34,090 | | 2,391 | | 1,753 | | 36,481 | | 38,234 | | (10,096) | | 2009 | 9/28/2000 | 6721 Columbia Gateway Drive (O) | Columbia, MD | — | | 1,753 | 1,753 | | 34,090 | 34,090 | | 9,251 | 9,251 | | 1,753 | 1,753 | | 43,341 | 43,341 | | 45,094 | 45,094 | | (15,125) | (15,125) | | 2009 | 2009 | 9/28/2000 |
| 6724 Alexander Bell Drive (O) | 6724 Alexander Bell Drive (O) | Columbia, MD | — | | 449 | | 5,039 | | 2,507 | | 449 | | 7,546 | | 7,995 | | (3,592) | | 2001 | 5/14/2001 | 6724 Alexander Bell Drive (O) | Columbia, MD | — | | 449 | 449 | | 5,039 | 5,039 | | 2,680 | 2,680 | | 449 | 449 | | 7,719 | 7,719 | | 8,168 | 8,168 | | (4,620) | (4,620) | | 2001 | 2001 | 5/14/2001 |
| 6731 Columbia Gateway Drive (O) | 6731 Columbia Gateway Drive (O) | Columbia, MD | — | | 2,807 | | 19,098 | | 5,605 | | 2,807 | | 24,703 | | 27,510 | | (13,179) | | 2002 | 3/29/2000 | 6731 Columbia Gateway Drive (O) | Columbia, MD | — | | 2,807 | 2,807 | | 19,098 | 19,098 | | 6,920 | 6,920 | | 2,807 | 2,807 | | 26,018 | 26,018 | | 28,825 | 28,825 | | (15,938) | (15,938) | | 2002 | 2002 | 3/29/2000 |
| 6740 Alexander Bell Drive (O) | Columbia, MD | — | | 1,424 | | 5,696 | | 3,466 | | 1,424 | | 9,162 | | 10,586 | | (6,236) | | 1992 | 12/31/1998 |
| | Initial Cost | | Gross Amounts Carried
At Close of Period | |
| | | Initial Cost | |
| Property (Type) (1) | Property (Type) (1) | Location | Encumbrances (2) | Land | Building
and Land Improvements | Costs Capitalized Subsequent to Acquisition | Land | Building
and Land Improvements | Total
(3) | Accumulated Depreciation (4) | Year Built or Renovated | Date Acquired (5) |
| Property (Type) (1) | |
| Property (Type) (1) | | Location | Encumbrances (2) | Land | Building
and Land Improvements | Costs Capitalized Subsequent to Acquisition | Land | Building
and Land Improvements | Total
(3) | Accumulated Depreciation (4) | Year Built or Renovated | Date Acquired (5) |
| 6740 Alexander Bell Drive (O) | | 6740 Alexander Bell Drive (O) | Columbia, MD | — | | 1,424 | | 4,209 | | 9,685 | | 1,424 | | 13,894 | | 15,318 | | (3,397) | | 1992 | 12/31/1998 |
| 6741 Columbia Gateway Drive (O) | 6741 Columbia Gateway Drive (O) | Columbia, MD | — | | 675 | | 1,711 | | 169 | | 675 | | 1,880 | | 2,555 | | (639) | | 2008 | 9/28/2000 | 6741 Columbia Gateway Drive (O) | Columbia, MD | — | | 675 | 675 | | 1,711 | 1,711 | | 179 | 179 | | 675 | 675 | | 1,890 | 1,890 | | 2,565 | 2,565 | | (807) | (807) | | 2008 | 2008 | 9/28/2000 |
| 6750 Alexander Bell Drive (O) | 6750 Alexander Bell Drive (O) | Columbia, MD | — | | 1,263 | | 12,461 | | 5,075 | | 1,263 | | 17,536 | | 18,799 | | (10,635) | | 2001 | 12/31/1998 | 6750 Alexander Bell Drive (O) | Columbia, MD | — | | 1,263 | 1,263 | | 12,461 | 12,461 | | 6,070 | 6,070 | | 1,263 | 1,263 | | 18,531 | 18,531 | | 19,794 | 19,794 | | (12,322) | (12,322) | | 2001 | 2001 | 12/31/1998 |
| 6760 Alexander Bell Drive (O) | 6760 Alexander Bell Drive (O) | Columbia, MD | — | | 890 | | 3,561 | | 3,920 | | 890 | | 7,481 | | 8,371 | | (4,859) | | 1991 | 12/31/1998 | 6760 Alexander Bell Drive (O) | Columbia, MD | — | | 890 | 890 | | 3,561 | 3,561 | | 3,946 | 3,946 | | 890 | 890 | | 7,507 | 7,507 | | 8,397 | 8,397 | | (5,576) | (5,576) | | 1991 | 1991 | 12/31/1998 |
| 6940 Columbia Gateway Drive (O) | 6940 Columbia Gateway Drive (O) | Columbia, MD | — | | 3,545 | | 9,916 | | 8,739 | | 3,545 | | 18,655 | | 22,200 | | (10,795) | | 1999 | 11/13/1998 | 6940 Columbia Gateway Drive (O) | Columbia, MD | — | | 3,545 | 3,545 | | 9,916 | 9,916 | | 12,806 | 12,806 | | 3,545 | 3,545 | | 22,722 | 22,722 | | 26,267 | 26,267 | | (13,989) | (13,989) | | 1999 | 1999 | 11/13/1998 |
| 6950 Columbia Gateway Drive (O) | 6950 Columbia Gateway Drive (O) | Columbia, MD | — | | 3,596 | | 27,723 | | 3,223 | | 3,596 | | 30,946 | | 34,542 | | (11,991) | | 1998/2019 | 10/22/1998 | 6950 Columbia Gateway Drive (O) | Columbia, MD | — | | 3,596 | 3,596 | | 28,278 | 28,278 | | 3,223 | 3,223 | | 3,596 | 3,596 | | 31,501 | 31,501 | | 35,097 | 35,097 | | (14,171) | (14,171) | | 1998/2019 | 1998/2019 | 10/22/1998 |
| 7000 Columbia Gateway Drive (O) | 7000 Columbia Gateway Drive (O) | Columbia, MD | — | | 3,131 | | 12,103 | | 7,537 | | 3,131 | | 19,640 | | 22,771 | | (9,679) | | 1999 | 5/31/2002 | 7000 Columbia Gateway Drive (O) | Columbia, MD | — | | 3,131 | 3,131 | | 12,103 | 12,103 | | 10,509 | 10,509 | | 3,131 | 3,131 | | 22,612 | 22,612 | | 25,743 | 25,743 | | (13,223) | (13,223) | | 1999 | 1999 | 5/31/2002 |
| 7000 Redstone Gateway (O) | | 7000 Redstone Gateway (O) | Huntsville, AL | — | | — | | 8,900 | | — | | — | | 8,900 | | 8,900 | | (147) | | 2022 | 3/23/2010 |
| 7005 Columbia Gateway Drive (L) | 7005 Columbia Gateway Drive (L) | Columbia, MD | — | | 3,036 | | 747 | | — | | 3,036 | | 747 | | 3,783 | | — | | (6) | 6/26/2014 | 7005 Columbia Gateway Drive (L) | Columbia, MD | — | | 3,036 | 3,036 | | 747 | 747 | | — | — | | 3,036 | 3,036 | | 747 | 747 | | 3,783 | 3,783 | | — | — | | (6) | (6) | 6/26/2014 |
| 7015 Albert Einstein Drive (O) | 7015 Albert Einstein Drive (O) | Columbia, MD | — | | 2,058 | | 6,093 | | 3,319 | | 2,058 | | 9,412 | | 11,470 | | (4,585) | | 1999 | 12/1/2005 | 7015 Albert Einstein Drive (O) | Columbia, MD | — | | 2,058 | 2,058 | | 6,093 | 6,093 | | 3,560 | 3,560 | | 2,058 | 2,058 | | 9,653 | 9,653 | | 11,711 | 11,711 | | (5,853) | (5,853) | | 1999 | 1999 | 12/1/2005 |
| 7061 Columbia Gateway Drive (O) | 7061 Columbia Gateway Drive (O) | Columbia, MD | — | | 729 | | 3,094 | | 2,640 | | 729 | | 5,734 | | 6,463 | | (3,393) | | 2000 | 8/30/2001 | 7061 Columbia Gateway Drive (O) | Columbia, MD | — | | 729 | 729 | | 3,094 | 3,094 | | 2,907 | 2,907 | | 729 | 729 | | 6,001 | 6,001 | | 6,730 | 6,730 | | (3,964) | (3,964) | | 2000 | 2000 | 8/30/2001 |
| 7063 Columbia Gateway Drive (O) | 7063 Columbia Gateway Drive (O) | Columbia, MD | — | | 902 | | 3,684 | | 3,468 | | 902 | | 7,152 | | 8,054 | | (4,450) | | 2000 | 8/30/2001 | 7063 Columbia Gateway Drive (O) | Columbia, MD | — | | 902 | 902 | | 3,684 | 3,684 | | 3,707 | 3,707 | | 902 | 902 | | 7,391 | 7,391 | | 8,293 | 8,293 | | (5,139) | (5,139) | | 2000 | 2000 | 8/30/2001 |
| 7065 Columbia Gateway Drive (O) | 7065 Columbia Gateway Drive (O) | Columbia, MD | — | | 919 | | 3,763 | | 3,097 | | 919 | | 6,860 | | 7,779 | | (4,565) | | 2000 | 8/30/2001 | 7065 Columbia Gateway Drive (O) | Columbia, MD | — | | 919 | 919 | | 3,763 | 3,763 | | 3,302 | 3,302 | | 919 | 919 | | 7,065 | 7,065 | | 7,984 | 7,984 | | (4,991) | (4,991) | | 2000 | 2000 | 8/30/2001 |
| 7067 Columbia Gateway Drive (O) | 7067 Columbia Gateway Drive (O) | Columbia, MD | — | | 1,829 | | 11,823 | | 5,404 | | 1,829 | | 17,227 | | 19,056 | | (8,693) | | 2001 | 8/30/2001 | 7067 Columbia Gateway Drive (O) | Columbia, MD | — | | 1,829 | 1,829 | | 11,823 | 11,823 | | 9,177 | 9,177 | | 1,829 | 1,829 | | 21,000 | 21,000 | | 22,829 | 22,829 | | (11,144) | (11,144) | | 2001 | 2001 | 8/30/2001 |
| 7100 Redstone Gateway (O) | 7100 Redstone Gateway (O) | Huntsville, AL | — | | — | | 9,101 | | — | | — | | 9,101 | | 9,101 | | — | | (7) | 3/23/2010 | 7100 Redstone Gateway (O) | Huntsville, AL | — | | — | — | | 12,989 | 12,989 | | — | — | | — | — | | 12,989 | 12,989 | | 12,989 | 12,989 | | (839) | (839) | | 2021 | 2021 | 3/23/2010 |
| 7125 Columbia Gateway Drive (O) | 7125 Columbia Gateway Drive (O) | Columbia, MD | — | | 20,487 | | 47,029 | | 23,580 | | 20,487 | | 70,609 | | 91,096 | | (27,691) | | 1973/1999 | 6/29/2006 | 7125 Columbia Gateway Drive (O) | Columbia, MD | — | | 20,487 | 20,487 | | 49,926 | 49,926 | | 29,466 | 29,466 | | 20,487 | 20,487 | | 79,392 | 79,392 | | 99,879 | 99,879 | | (35,289) | (35,289) | | 1973/1999 | 1973/1999 | 6/29/2006 |
| 7130 Columbia Gateway Drive (O) | 7130 Columbia Gateway Drive (O) | Columbia, MD | — | | 1,350 | | 4,359 | | 2,896 | | 1,350 | | 7,255 | | 8,605 | | (3,848) | | 1989 | 9/19/2005 | 7130 Columbia Gateway Drive (O) | Columbia, MD | — | | 1,350 | 1,350 | | 4,359 | 4,359 | | 3,167 | 3,167 | | 1,350 | 1,350 | | 7,526 | 7,526 | | 8,876 | 8,876 | | (4,626) | (4,626) | | 1989 | 1989 | 9/19/2005 |
| 7134 Columbia Gateway Drive (O) | 7134 Columbia Gateway Drive (O) | Columbia, MD | — | | 704 | | 4,700 | | 668 | | 704 | | 5,368 | | 6,072 | | (1,803) | | 1990/2016 | 9/19/2005 | 7134 Columbia Gateway Drive (O) | Columbia, MD | — | | 704 | 704 | | 4,700 | 4,700 | | 817 | 817 | | 704 | 704 | | 5,517 | 5,517 | | 6,221 | 6,221 | | (2,330) | (2,330) | | 1990/2016 | 1990/2016 | 9/19/2005 |
| 7138 Columbia Gateway Drive (O) | 7138 Columbia Gateway Drive (O) | Columbia, MD | — | | 1,104 | | 3,518 | | 2,853 | | 1,104 | | 6,371 | | 7,475 | | (4,072) | | 1990 | 9/19/2005 | 7138 Columbia Gateway Drive (O) | Columbia, MD | — | | 1,104 | 1,104 | | 3,518 | 3,518 | | 2,989 | 2,989 | | 1,104 | 1,104 | | 6,507 | 6,507 | | 7,611 | 7,611 | | (4,725) | (4,725) | | 1990 | 1990 | 9/19/2005 |
| 7142 Columbia Gateway Drive (O) | 7142 Columbia Gateway Drive (O) | Columbia, MD | — | | 1,342 | | 7,148 | | 2,611 | | 1,342 | | 9,759 | | 11,101 | | (4,052) | | 1994/2018 | 9/19/2005 | 7142 Columbia Gateway Drive (O) | Columbia, MD | — | | 1,342 | 1,342 | | 7,148 | 7,148 | | 4,265 | 4,265 | | 1,342 | 1,342 | | 11,413 | 11,413 | | 12,755 | 12,755 | | (5,145) | (5,145) | | 1994/2018 | 1994/2018 | 9/19/2005 |
| 7150 Columbia Gateway Drive (O) | 7150 Columbia Gateway Drive (O) | Columbia, MD | — | | 1,032 | | 3,429 | | 813 | | 1,032 | | 4,242 | | 5,274 | | (1,789) | | 1991 | 9/19/2005 | 7150 Columbia Gateway Drive (O) | Columbia, MD | — | | 1,032 | 1,032 | | 3,429 | 3,429 | | 1,659 | 1,659 | | 1,032 | 1,032 | | 5,088 | 5,088 | | 6,120 | 6,120 | | (2,392) | (2,392) | | 1991 | 1991 | 9/19/2005 |
| 7150 Riverwood Drive (O) | 7150 Riverwood Drive (O) | Columbia, MD | — | | 1,821 | | 4,388 | | 1,850 | | 1,821 | | 6,238 | | 8,059 | | (3,016) | | 2000 | 1/10/2007 | 7150 Riverwood Drive (O) | Columbia, MD | — | | 1,821 | 1,821 | | 4,388 | 4,388 | | 16,234 | 16,234 | | 1,821 | 1,821 | | 20,622 | 20,622 | | 22,443 | 22,443 | | (3,599) | (3,599) | | 2000 | 2000 | 1/10/2007 |
| 7160 Riverwood Drive (O) | 7160 Riverwood Drive (O) | Columbia, MD | — | | 2,732 | | 7,006 | | 4,405 | | 2,732 | | 11,411 | | 14,143 | | (4,768) | | 2000 | 1/10/2007 | 7160 Riverwood Drive (O) | Columbia, MD | — | | 2,732 | 2,732 | | 7,006 | 7,006 | | 4,609 | 4,609 | | 2,732 | 2,732 | | 11,615 | 11,615 | | 14,347 | 14,347 | | (6,322) | (6,322) | | 2000 | 2000 | 1/10/2007 |
| 7170 Riverwood Drive (O) | 7170 Riverwood Drive (O) | Columbia, MD | — | | 1,283 | | 3,096 | | 2,281 | | 1,283 | | 5,377 | | 6,660 | | (2,576) | | 2000 | 1/10/2007 | 7170 Riverwood Drive (O) | Columbia, MD | — | | 1,283 | 1,283 | | 3,096 | 3,096 | | 2,389 | 2,389 | | 1,283 | 1,283 | | 5,485 | 5,485 | | 6,768 | 6,768 | | (3,181) | (3,181) | | 2000 | 2000 | 1/10/2007 |
| 7175 Riverwood Drive (O) | 7175 Riverwood Drive (O) | Columbia, MD | — | | 1,788 | | 7,269 | | — | | 1,788 | | 7,269 | | 9,057 | | (1,298) | | 1996/2013 | 7/27/2005 | 7175 Riverwood Drive (O) | Columbia, MD | — | | 1,788 | 1,788 | | 7,269 | 7,269 | | — | — | | 1,788 | 1,788 | | 7,269 | 7,269 | | 9,057 | 9,057 | | (1,842) | (1,842) | | 1996/2013 | 1996/2013 | 7/27/2005 |
| 7200 Redstone Gateway (O) | 7200 Redstone Gateway (O) | Huntsville, AL | — | | — | | 8,348 | | 81 | | — | | 8,429 | | 8,429 | | (1,393) | | 2013 | 3/23/2010 | 7200 Redstone Gateway (O) | Huntsville, AL | — | | — | — | | 8,348 | 8,348 | | 185 | 185 | | — | — | | 8,533 | 8,533 | | 8,533 | 8,533 | | (2,048) | (2,048) | | 2013 | 2013 | 3/23/2010 |
| 7200 Riverwood Drive (O) | 7200 Riverwood Drive (O) | Columbia, MD | — | | 4,089 | | 22,630 | | 4,634 | | 4,089 | | 27,264 | | 31,353 | | (12,592) | | 1986 | 10/13/1998 | 7200 Riverwood Drive (O) | Columbia, MD | — | | 4,089 | 4,089 | | 22,630 | 22,630 | | 5,332 | 5,332 | | 4,089 | 4,089 | | 27,962 | 27,962 | | 32,051 | 32,051 | | (15,053) | (15,053) | | 1986 | 1986 | 10/13/1998 |
| 7205 Riverwood Drive (O) | 7205 Riverwood Drive (O) | Columbia, MD | — | | 1,367 | | 21,419 | | — | | 1,367 | | 21,419 | | 22,786 | | (3,987) | | 2013 | 7/27/2005 | 7205 Riverwood Drive (O) | Columbia, MD | — | | 1,367 | 1,367 | | 21,419 | 21,419 | | — | — | | 1,367 | 1,367 | | 21,419 | 21,419 | | 22,786 | 22,786 | | (5,593) | (5,593) | | 2013 | 2013 | 7/27/2005 |
| 7272 Park Circle Drive (O) | 7272 Park Circle Drive (O) | Hanover, MD | — | | 1,479 | | 6,300 | | 4,608 | | 1,479 | | 10,908 | | 12,387 | | (5,467) | | 1991/1996 | 1/10/2007 | 7272 Park Circle Drive (O) | Hanover, MD | — | | 1,479 | 1,479 | | 6,300 | 6,300 | | 4,618 | 4,618 | | 1,479 | 1,479 | | 10,918 | 10,918 | | 12,397 | 12,397 | | (6,956) | (6,956) | | 1991/1996 | 1991/1996 | 1/10/2007 |
| 7318 Parkway Drive (O) | 7318 Parkway Drive (O) | Hanover, MD | — | | 972 | | 3,888 | | 1,324 | | 972 | | 5,212 | | 6,184 | | (2,929) | | 1984 | 4/16/1999 | 7318 Parkway Drive (O) | Hanover, MD | — | | 972 | 972 | | 3,888 | 3,888 | | 2,297 | 2,297 | | 972 | 972 | | 6,185 | 6,185 | | 7,157 | 7,157 | | (3,590) | (3,590) | | 1984 | 1984 | 4/16/1999 |
| 7400 Redstone Gateway (O) | 7400 Redstone Gateway (O) | Huntsville, AL | — | | — | | 9,223 | | 75 | | — | | 9,298 | | 9,298 | | (1,281) | | 2015 | 3/23/2010 | 7400 Redstone Gateway (O) | Huntsville, AL | — | | — | — | | 9,223 | 9,223 | | 75 | 75 | | — | — | | 9,298 | 9,298 | | 9,298 | 9,298 | | (1,993) | (1,993) | | 2015 | 2015 | 3/23/2010 |
| 7467 Ridge Road (O) | 7467 Ridge Road (O) | Hanover, MD | — | | 1,565 | | 3,116 | | 5,041 | | 1,565 | | 8,157 | | 9,722 | | (4,110) | | 1990 | 4/28/1999 | 7467 Ridge Road (O) | Hanover, MD | — | | 1,565 | 1,565 | | 3,116 | 3,116 | | 7,657 | 7,657 | | 1,565 | 1,565 | | 10,773 | 10,773 | | 12,338 | 12,338 | | (5,750) | (5,750) | | 1990 | 1990 | 4/28/1999 |
| 7500 Advanced Gateway (O) | 7500 Advanced Gateway (O) | Huntsville, AL | — | | — | | 19,070 | | — | | — | | 19,070 | | 19,070 | | (264) | | 2020 | 3/23/2010 | 7500 Advanced Gateway (O) | Huntsville, AL | — | | — | — | | 18,665 | 18,665 | | — | — | | — | — | | 18,665 | 18,665 | | 18,665 | 18,665 | | (1,667) | (1,667) | | 2020 | 2020 | 3/23/2010 |
| 7600 Advanced Gateway (O) | 7600 Advanced Gateway (O) | Huntsville, AL | — | | — | | 14,126 | | — | | — | | 14,126 | | 14,126 | | (135) | | 2020 | 3/23/2010 | 7600 Advanced Gateway (O) | Huntsville, AL | — | | — | — | | 13,752 | 13,752 | | — | — | | — | — | | 13,752 | 13,752 | | 13,752 | 13,752 | | (1,170) | (1,170) | | 2020 | 2020 | 3/23/2010 |
| 7740 Milestone Parkway (O) | 7740 Milestone Parkway (O) | Hanover, MD | 16,902 | | 3,825 | | 34,176 | | 1,084 | | 3,825 | | 35,260 | | 39,085 | | (9,279) | | 2009 | 7/2/2007 | 7740 Milestone Parkway (O) | Hanover, MD | — | | 3,825 | 3,825 | | 34,176 | 34,176 | | 1,855 | 1,855 | | 3,825 | 3,825 | | 36,031 | 36,031 | | 39,856 | 39,856 | | (12,142) | (12,142) | | 2009 | 2009 | 7/2/2007 |
| 7770 Backlick Road (O) | 7770 Backlick Road (O) | Springfield, VA | — | | 6,387 | | 78,779 | | 1,531 | | 6,387 | | 80,310 | | 86,697 | | (14,971) | | 2012 | 3/10/2010 | 7770 Backlick Road (O) | Springfield, VA | — | | 6,387 | 6,387 | | 78,892 | 78,892 | | 1,747 | 1,747 | | 6,387 | 6,387 | | 80,639 | 80,639 | | 87,026 | 87,026 | | (21,899) | (21,899) | | 2012 | 2012 | 3/10/2010 |
| 7880 Milestone Parkway (O) | 7880 Milestone Parkway (O) | Hanover, MD | — | | 4,857 | | 25,916 | | 321 | | 4,857 | | 26,237 | | 31,094 | | (3,384) | | 2015 | 9/17/2013 | 7880 Milestone Parkway (O) | Hanover, MD | — | | 4,857 | 4,857 | | 27,173 | 27,173 | | 1,619 | 1,619 | | 4,857 | 4,857 | | 28,792 | 28,792 | | 33,649 | 33,649 | | (6,037) | (6,037) | | 2015 | 2015 | 9/17/2013 |
| 8000 Rideout Road (O) | Huntsville, AL | — | | — | | 16,138 | | — | | — | | 16,138 | | 16,138 | | — | | (7) | 3/23/2010 |
| | Initial Cost | | Gross Amounts Carried
At Close of Period | |
| | | Initial Cost | |
| Property (Type) (1) | Property (Type) (1) | Location | Encumbrances (2) | Land | Building
and Land Improvements | Costs Capitalized Subsequent to Acquisition | Land | Building
and Land Improvements | Total
(3) | Accumulated Depreciation (4) | Year Built or Renovated | Date Acquired (5) |
| Property (Type) (1) | |
| Property (Type) (1) | | Location | Encumbrances (2) | Land | Building
and Land Improvements | Costs Capitalized Subsequent to Acquisition | Land | Building
and Land Improvements | Total
(3) | Accumulated Depreciation (4) | Year Built or Renovated | Date Acquired (5) |
| 8000 Rideout Road (O) | | 8000 Rideout Road (O) | Huntsville, AL | — | | — | | 28,155 | | 49 | | — | | 28,204 | | 28,204 | | (1,240) | | 2021 | 3/23/2010 |
| 8100 Rideout Road (O) | | 8100 Rideout Road (O) | Huntsville, AL | — | | — | | 29,681 | | — | | — | | 29,681 | | 29,681 | | — | | (7) | 3/23/2010 |
| 8200 Rideout Road (O) | | 8200 Rideout Road (O) | Huntsville, AL | — | | — | | 45,653 | | — | | — | | 45,653 | | 45,653 | | (1,556) | | 2022 | 3/23/2010 |
| 8300 Rideout Road (O) | | 8300 Rideout Road (O) | Huntsville, AL | — | | — | | 52,678 | | — | | — | | 52,678 | | 52,678 | | (1,803) | | 2022 | 3/23/2010 |
| 8600 Advanced Gateway (O) | 8600 Advanced Gateway (O) | Huntsville, AL | — | | — | | 25,168 | | — | | — | | 25,168 | | 25,168 | | (45) | | 2020 | 3/23/2010 | 8600 Advanced Gateway (O) | Huntsville, AL | — | | — | — | | 27,312 | 27,312 | | 24 | 24 | | — | — | | 27,336 | 27,336 | | 27,336 | 27,336 | | (2,079) | (2,079) | | 2020 | 2020 | 3/23/2010 |
| 8621 Robert Fulton Drive (O) | 8621 Robert Fulton Drive (O) | Columbia, MD | — | | 2,317 | | 12,642 | | 6,191 | | 2,317 | | 18,833 | | 21,150 | | (6,700) | | 2005-2006 | 6/10/2005 | 8621 Robert Fulton Drive (O) | Columbia, MD | — | | 2,317 | 2,317 | | 12,642 | 12,642 | | 8,084 | 8,084 | | 2,317 | 2,317 | | 20,726 | 20,726 | | 23,043 | 23,043 | | (10,265) | (10,265) | | 2005-2006 | 2005-2006 | 6/10/2005 |
| 8661 Robert Fulton Drive (O) | 8661 Robert Fulton Drive (O) | Columbia, MD | — | | 1,510 | | 3,764 | | 3,019 | | 1,510 | | 6,783 | | 8,293 | | (3,528) | | 2002 | 12/30/2003 | 8661 Robert Fulton Drive (O) | Columbia, MD | — | | 1,510 | 1,510 | | 3,764 | 3,764 | | 3,379 | 3,379 | | 1,510 | 1,510 | | 7,143 | 7,143 | | 8,653 | 8,653 | | (4,437) | (4,437) | | 2002 | 2002 | 12/30/2003 |
| 8671 Robert Fulton Drive (O) | 8671 Robert Fulton Drive (O) | Columbia, MD | — | | 1,718 | | 4,280 | | 4,294 | | 1,718 | | 8,574 | | 10,292 | | (4,716) | | 2002 | 12/30/2003 | 8671 Robert Fulton Drive (O) | Columbia, MD | — | | 1,718 | 1,718 | | 4,280 | 4,280 | | 4,848 | 4,848 | | 1,718 | 1,718 | | 9,128 | 9,128 | | 10,846 | 10,846 | | (5,796) | (5,796) | | 2002 | 2002 | 12/30/2003 |
| 870 Elkridge Landing Road (O) | 870 Elkridge Landing Road (O) | Linthicum, MD | — | | 2,003 | | 9,442 | | 10,464 | | 2,003 | | 19,906 | | 21,909 | | (11,574) | | 1981 | 8/3/2001 | 870 Elkridge Landing Road (O) | Linthicum, MD | — | | 2,003 | 2,003 | | 9,442 | 9,442 | | 10,464 | 10,464 | | 2,003 | 2,003 | | 19,906 | 19,906 | | 21,909 | 21,909 | | (14,016) | (14,016) | | 1981 | 1981 | 8/3/2001 |
| 8800 Redstone Gateway (O) | 8800 Redstone Gateway (O) | Huntsville, AL | 11,679 | | — | | 18,446 | | — | | — | | 18,446 | | 18,446 | | (511) | | 2019 | 3/23/2010 | 8800 Redstone Gateway (O) | Huntsville, AL | 11,413 | | — | — | | 18,470 | 18,470 | | — | — | | — | — | | 18,470 | 18,470 | | 18,470 | 18,470 | | (1,900) | (1,900) | | 2019 | 2019 | 3/23/2010 |
| 891 Elkridge Landing Road (O) | 891 Elkridge Landing Road (O) | Linthicum, MD | — | | 1,165 | | 4,772 | | 3,512 | | 1,165 | | 8,284 | | 9,449 | | (5,193) | | 1984 | 7/2/2001 | 891 Elkridge Landing Road (O) | Linthicum, MD | — | | 1,165 | 1,165 | | 4,772 | 4,772 | | 4,192 | 4,192 | | 1,165 | 1,165 | | 8,964 | 8,964 | | 10,129 | 10,129 | | (6,042) | (6,042) | | 1984 | 1984 | 7/2/2001 |
| 901 Elkridge Landing Road (O) | 901 Elkridge Landing Road (O) | Linthicum, MD | — | | 1,156 | | 4,437 | | 4,789 | | 1,156 | | 9,226 | | 10,382 | | (4,687) | | 1984 | 7/2/2001 | 901 Elkridge Landing Road (O) | Linthicum, MD | — | | 1,156 | 1,156 | | 4,437 | 4,437 | | 7,429 | 7,429 | | 1,156 | 1,156 | | 11,866 | 11,866 | | 13,022 | 13,022 | | (6,397) | (6,397) | | 1984 | 1984 | 7/2/2001 |
| 911 Elkridge Landing Road (O) | 911 Elkridge Landing Road (O) | Linthicum, MD | — | | 1,215 | | 4,861 | | 3,431 | | 1,215 | | 8,292 | | 9,507 | | (4,786) | | 1985 | 4/30/1998 | 911 Elkridge Landing Road (O) | Linthicum, MD | — | | 1,215 | 1,215 | | 4,861 | 4,861 | | 3,383 | 3,383 | | 1,215 | 1,215 | | 8,244 | 8,244 | | 9,459 | 9,459 | | (5,783) | (5,783) | | 1985 | 1985 | 4/30/1998 |
| 938 Elkridge Landing Road (O) | 938 Elkridge Landing Road (O) | Linthicum, MD | — | | 922 | | 4,748 | | 1,516 | | 922 | | 6,264 | | 7,186 | | (3,221) | | 1984 | 7/2/2001 | 938 Elkridge Landing Road (O) | Linthicum, MD | — | | 922 | 922 | | 4,748 | 4,748 | | 1,538 | 1,538 | | 922 | 922 | | 6,286 | 6,286 | | 7,208 | 7,208 | | (3,816) | (3,816) | | 1984 | 1984 | 7/2/2001 |
| 939 Elkridge Landing Road (O) | 939 Elkridge Landing Road (O) | Linthicum, MD | — | | 939 | | 3,756 | | 4,444 | | 939 | | 8,200 | | 9,139 | | (5,388) | | 1983 | 4/30/1998 | 939 Elkridge Landing Road (O) | Linthicum, MD | — | | 939 | 939 | | 3,756 | 3,756 | | 6,229 | 6,229 | | 939 | 939 | | 9,985 | 9,985 | | 10,924 | 10,924 | | (6,565) | (6,565) | | 1983 | 1983 | 4/30/1998 |
| 9651 Hornbaker Road (D) | Manassas, VA | — | | 6,050 | | 250,355 | | 16,105 | | 6,050 | | 266,460 | | 272,510 | | (72,246) | | 2010 | 9/14/2010 |
| Arundel Preserve (L) | Arundel Preserve (L) | Hanover, MD | — | | 13,352 | | 9,699 | | — | | 13,352 | | 9,699 | | 23,051 | | — | | (6) | 7/2/2007 | Arundel Preserve (L) | Hanover, MD | — | | 13,352 | 13,352 | | 9,888 | 9,888 | | — | — | | 13,352 | 13,352 | | 9,888 | 9,888 | | 23,240 | 23,240 | | — | — | | (6) | (6) | 7/2/2007 |
| Canton Crossing Land (L) | Canton Crossing Land (L) | Baltimore, MD | — | | 17,285 | | 8,363 | | 142 | | 17,285 | | 8,505 | | 25,790 | | — | | (6) | 10/27/2009 | Canton Crossing Land (L) | Baltimore, MD | — | | — | — | | 6,009 | 6,009 | | 57 | 57 | | — | — | | 6,066 | 6,066 | | 6,066 | 6,066 | | (57) | (57) | | (6) | (6) | 10/27/2009 |
| Canton Crossing Util Distr Ctr (O) | Canton Crossing Util Distr Ctr (O) | Baltimore, MD | — | | 6,100 | | 10,450 | | 1,689 | | 6,100 | | 12,139 | | 18,239 | | (6,269) | | 2006 | 10/27/2009 | Canton Crossing Util Distr Ctr (O) | Baltimore, MD | — | | 2,866 | 2,866 | | 7,271 | 7,271 | | 1,976 | 1,976 | | 2,866 | 2,866 | | 9,247 | 9,247 | | 12,113 | 12,113 | | (8,026) | (8,026) | | 2006 | 2006 | 10/27/2009 |
| Columbia Gateway - Southridge (L) | Columbia Gateway - Southridge (L) | Columbia, MD | — | | 6,387 | | 3,722 | | — | | 6,387 | | 3,722 | | 10,109 | | — | | (6) | 9/20/2004 | Columbia Gateway - Southridge (L) | Columbia, MD | — | | 6,387 | 6,387 | | 3,725 | 3,725 | | — | — | | 6,387 | 6,387 | | 3,725 | 3,725 | | 10,112 | 10,112 | | — | — | | (6) | (6) | 9/20/2004 |
| Dahlgren Technology Center (L) | Dahlgren Technology Center (L) | Dahlgren, VA | — | | 978 | | 178 | | — | | 978 | | 178 | | 1,156 | | — | | (6) | 3/16/2005 | Dahlgren Technology Center (L) | Dahlgren, VA | — | | 978 | 978 | | 178 | 178 | | — | — | | 978 | 978 | | 178 | 178 | | 1,156 | 1,156 | | — | — | | (6) | (6) | 3/16/2005 |
| Expedition VII (O) | Expedition VII (O) | Lexington Park, MD | — | | 705 | | 862 | | — | | 705 | | 862 | | 1,567 | | — | | (7) | 3/24/2004 | Expedition VII (O) | Lexington Park, MD | — | | 705 | 705 | | 8,366 | 8,366 | | — | — | | 705 | 705 | | 8,366 | 8,366 | | 9,071 | 9,071 | | (319) | (319) | | 2022 | 2022 | 3/24/2004 |
| IN 1 (O) | Northern Virginia | — | | 1,815 | | 15,972 | | — | | 1,815 | | 15,972 | | 17,787 | | (735) | | 2019 | 8/31/2016 |
| IN 2 (O) | Northern Virginia | — | | 2,627 | | 28,829 | | — | | 2,627 | | 28,829 | | 31,456 | | (1,081) | | 2019 | 8/31/2016 |
| M Square Research Park (L) | M Square Research Park (L) | College Park, MD | — | | — | | 2,020 | | — | | — | | 2,020 | | 2,020 | | — | | (6) | 1/29/2008 | M Square Research Park (L) | College Park, MD | — | | — | — | | 3,352 | 3,352 | | — | — | | — | — | | 3,352 | 3,352 | | 3,352 | 3,352 | | — | — | | (6) | (6) | 1/29/2008 |
| MP 1 (O) | Northern Virginia | — | | 9,426 | | 30,924 | | — | | 9,426 | | 30,924 | | 40,350 | | (1,240) | | 2019 | 11/20/2017 |
| MP 2 (O) | Northern Virginia | — | | 9,426 | | 29,989 | | — | | 9,426 | | 29,989 | | 39,415 | | (1,416) | | 2018 | 11/20/2017 |
| MR Land (L) | Northern Virginia | — | | 9,038 | | 514 | | — | | 9,038 | | 514 | | 9,552 | | — | | (6) | 11/8/2018 |
| MP 3 (O) | | MP 3 (O) | Northern Virginia | — | | 9,038 | | 993 | | — | | 9,038 | | 993 | | 10,031 | | — | | (7) | 11/8/2018 |
| National Business Park North (L) | National Business Park North (L) | Annapolis Junction, MD | — | | 21,898 | | 35,639 | | — | | 21,898 | | 35,639 | | 57,537 | | — | | (6) | 6/29/2006 | National Business Park North (L) | Annapolis Junction, MD | — | | 15,554 | 15,554 | | 28,744 | 28,744 | | — | — | | 15,554 | 15,554 | | 28,744 | 28,744 | | 44,298 | 44,298 | | — | — | | (6) | (6) | 6/29/2006 |
| North Gate Business Park (L) | North Gate Business Park (L) | Aberdeen, MD | — | | 1,755 | | 5 | | — | | 1,755 | | 5 | | 1,760 | | — | | (6) | 9/14/2007 | North Gate Business Park (L) | Aberdeen, MD | — | | 1,755 | 1,755 | | 5 | 5 | | — | — | | 1,755 | 1,755 | | 5 | 5 | | 1,760 | 1,760 | | — | — | | (6) | (6) | 9/14/2007 |
| NoVA Office A (O) (8) | Chantilly, VA | — | | 2,096 | | 46,849 | | 10 | | 2,096 | | 46,859 | | 48,955 | | (6,926) | | 2015 | 7/18/2002 |
| NoVA Office B (O) (8) | Chantilly, VA | — | | 739 | | 38,376 | | — | | 739 | | 38,376 | | 39,115 | | (3,734) | | 2016 | 7/18/2002 |
| NoVA Office C (O) (8) | Chantilly, VA | — | | 5,604 | | 48,235 | | — | | 5,604 | | 48,235 | | 53,839 | | — | | (7) | 7/18/2002 |
| NoVA Office D (O) (8) | Chantilly, VA | — | | 6,587 | | 40,559 | | — | | 6,587 | | 40,559 | | 47,146 | | (3,450) | | 2017 | 7/2/2013 |
| NoVA Office A (O) | | NoVA Office A (O) | Chantilly, VA | — | | 2,096 | | 46,849 | | — | | 2,096 | | 46,849 | | 48,945 | | (10,436) | | 2015 | 7/18/2002 |
| NoVA Office B (O) | | NoVA Office B (O) | Chantilly, VA | — | | 739 | | 38,376 | | — | | 739 | | 38,376 | | 39,115 | | (6,675) | | 2016 | 7/18/2002 |
| NoVA Office C (O) | | NoVA Office C (O) | Chantilly, VA | — | | 7,751 | | 84,815 | | — | | 7,751 | | 84,815 | | 92,566 | | (4,503) | | 2021 | 7/18/2002 |
| NoVA Office D (O) | | NoVA Office D (O) | Chantilly, VA | — | | 6,587 | | 40,559 | | — | | 6,587 | | 40,559 | | 47,146 | | (6,499) | | 2017 | 7/2/2013 |
| Oak Grove A (O) | Oak Grove A (O) | Northern Virginia | — | | 12,866 | | 34,427 | | — | | 12,866 | | 34,427 | | 47,293 | | (494) | | 2020 | 11/1/2018 | Oak Grove A (O) | Northern Virginia | — | | 12,866 | 12,866 | | 42,087 | 42,087 | | — | — | | 12,866 | 12,866 | | 42,087 | 42,087 | | 54,953 | 54,953 | | (3,279) | (3,279) | | 2020 | 2020 | 11/1/2018 |
| Oak Grove B (O) | Oak Grove B (O) | Northern Virginia | — | | 12,866 | | 40,550 | | — | | 12,866 | | 40,550 | | 53,416 | | (811) | | 2019 | 11/1/2018 | Oak Grove B (O) | Northern Virginia | — | | 12,866 | 12,866 | | 41,621 | 41,621 | | — | — | | 12,866 | 12,866 | | 41,621 | 41,621 | | 54,487 | 54,487 | | (3,908) | (3,908) | | 2019 | 2019 | 11/1/2018 |
| Oak Grove Phase II (L) | Northern Virginia | — | | 23,483 | | 8,833 | | — | | 23,483 | | 8,833 | | 32,316 | | — | | (6) | 11/1/2018 |
| Oak Grove C (O) | | Oak Grove C (O) | Northern Virginia | — | | 11,741 | | 78,829 | | — | | 11,741 | | 78,829 | | 90,570 | | (3,323) | | 2022 | 11/1/2018 |
| Oak Grove D (O) | | Oak Grove D (O) | Northern Virginia | — | | 11,741 | | 77,097 | | — | | 11,741 | | 77,097 | | 88,838 | | (2,096) | | 2022 | 11/1/2018 |
| Old Annapolis Road (O) | Old Annapolis Road (O) | Columbia, MD | — | | 1,637 | | 5,500 | | 6,710 | | 1,637 | | 12,210 | | 13,847 | | (4,870) | | 1974/1985 | 12/14/2000 | Old Annapolis Road (O) | Columbia, MD | — | | 1,637 | 1,637 | | 5,500 | 5,500 | | 6,985 | 6,985 | | 1,637 | 1,637 | | 12,485 | 12,485 | | 14,122 | 14,122 | | (6,432) | (6,432) | | 1974/1985 | 1974/1985 | 12/14/2000 |
| P2 A (O) | Northern Virginia | — | | 16,878 | | 39,934 | | — | | 16,878 | | 39,934 | | 56,812 | | (738) | | 2020 | 5/2/2019 |
| P2 B (O) | Northern Virginia | — | | 22,866 | | 35,960 | | — | | 22,866 | | 35,960 | | 58,826 | | (292) | | 2020 | 5/2/2019 |
| Patriot Ridge (L) | | Patriot Ridge (L) | Springfield, VA | — | | 18,517 | | 14,616 | | — | | 18,517 | | 14,616 | | 33,133 | | — | | (6) | 3/10/2010 |
| Project EL (O) | | Project EL (O) | Confidential-USA | — | | 7,190 | | 46,912 | | — | | 7,190 | | 46,912 | | 54,102 | | (2,878) | | 2021 | 1/20/2006 |
| Project EX (O) | | Project EX (O) | Confidential-USA | — | | 13,010 | | 19,107 | | — | | 13,010 | | 19,107 | | 32,117 | | (2,225) | | 2018 | 7/16/2008 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Initial Cost | | Gross Amounts Carried
At Close of Period | | | |
| Property (Type) (1) | Location | Encumbrances (2) | Land | Building
and Land Improvements | Costs Capitalized Subsequent to Acquisition | Land | Building
and Land Improvements | Total
(3) | Accumulated Depreciation (4) | Year Built or Renovated | Date Acquired (5) |
| P2 C (O) | Northern Virginia | — | | 14,842 | | 30,272 | | — | | 14,842 | | 30,272 | | 45,114 | | (60) | | 2020 | 5/2/2019 |
| Paragon Park (L) | Northern Virginia | — | | 7,738 | | 462 | | — | | 7,738 | | 462 | | 8,200 | | — | | (6) | 5/8/2017 |
| Parkstone A (O) | Northern Virginia | — | | 3,942 | | 1,257 | | — | | 3,942 | | 1,257 | | 5,199 | | — | | (7) | 1/27/2005 |
| Parkstone B (O) | Northern Virginia | — | | 3,346 | | 1,074 | | — | | 3,346 | | 1,074 | | 4,420 | | — | | (7) | 1/27/2005 |
| Patriot Ridge (L) | Springfield, VA | — | | 18,517 | | 14,562 | | — | | 18,517 | | 14,562 | | 33,079 | | — | | (6) | 3/10/2010 |
| Project EL (O) | Confidential-USA | — | | 7,430 | | 7,479 | | — | | 7,430 | | 7,479 | | 14,909 | | — | | (7) | 1/20/2006 |
| Project EX (O) (9) | Confidential-USA | — | | 8,959 | | 16,981 | | — | | 8,959 | | 16,981 | | 25,940 | | (698) | | 2018 | 7/16/2008 |
| Redstone Gateway (L) | Huntsville, AL | — | | — | | 33,310 | | — | | — | | 33,310 | | 33,310 | | (5) | | (6) | 3/23/2010 |
| Sentry Gateway (L) | San Antonio, TX | — | | 4,052 | | 1,833 | | — | | 4,052 | | 1,833 | | 5,885 | | — | | (6) | 3/30/2005 |
| Sentry Gateway - T (O) | San Antonio, TX | — | | 14,020 | | 38,804 | | 13 | | 14,020 | | 38,817 | | 52,837 | | (13,473) | | 1982/2008 | 3/30/2005 |
| Sentry Gateway - V (O) | San Antonio, TX | — | | — | | 1,066 | | — | | — | | 1,066 | | 1,066 | | (321) | | 2007 | 3/30/2005 |
| Sentry Gateway - W (O) | San Antonio, TX | — | | — | | 1,884 | | 71 | | — | | 1,955 | | 1,955 | | (548) | | 2009 | 3/30/2005 |
| Sentry Gateway - X (O) | San Antonio, TX | — | | 1,964 | | 21,178 | | — | | 1,964 | | 21,178 | | 23,142 | | (5,375) | | 2010 | 1/20/2006 |
| Sentry Gateway - Y (O) | San Antonio, TX | — | | 1,964 | | 21,298 | | — | | 1,964 | | 21,298 | | 23,262 | | (5,407) | | 2010 | 1/20/2006 |
| Sentry Gateway - Z (O) | San Antonio, TX | — | | 1,964 | | 30,573 | | — | | 1,964 | | 30,573 | | 32,537 | | (4,438) | | 2015 | 6/14/2005 |
| SP Manassas (L) | Manassas, VA | — | | 8,156 | | 187 | | — | | 8,156 | | 187 | | 8,343 | | — | | (6) | 7/24/2019 |
| Westfields - Park Center (L) | Chantilly, VA | — | | 10,815 | | 6,206 | | — | | 10,815 | | 6,206 | | 17,021 | | — | | (6) | 7/2/2013 |
| | | | | | | | | | | |
| Other Developments, including intercompany eliminations (V) | Various | — | | — | | 282 | | 257 | | — | | 539 | | 539 | | (90) | | Various | Various |
| | $ | 257,404 | | $ | 712,057 | | $ | 3,427,401 | | $ | 547,344 | | $ | 712,057 | | $ | 3,974,745 | | $ | 4,686,802 | | $ | (1,124,253) | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Initial Cost | | Gross Amounts Carried
At Close of Period | | | |
| Property (Type) (1) | Location | Encumbrances (2) | Land | Building
and Land Improvements | Costs Capitalized Subsequent to Acquisition | Land | Building
and Land Improvements | Total
(3) | Accumulated Depreciation (4) | Year Built or Renovated | Date Acquired (5) |
| PS A (O) | Northern Virginia | — | | 4,078 | | 54,122 | | — | | 4,078 | | 54,122 | | 58,200 | | (512) | | 2023 | 1/27/2005 |
| PS B (O) | Northern Virginia | — | | 3,468 | | 45,377 | | — | | 3,468 | | 45,377 | | 48,845 | | (82) | | 2023 | 1/27/2005 |
| Redstone Gateway (L) | Huntsville, AL | — | | — | | 31,193 | | — | | — | | 31,193 | | 31,193 | | — | | (6) | 3/23/2010 |
| Sentry Gateway - T (O) | San Antonio, TX | — | | 14,020 | | 38,804 | | 13 | | 14,020 | | 38,817 | | 52,837 | | (16,384) | | 1982/2008 | 3/30/2005 |
| Sentry Gateway - V (O) | San Antonio, TX | — | | — | | 1,066 | | — | | — | | 1,066 | | 1,066 | | (401) | | 2007 | 3/30/2005 |
| Sentry Gateway - W (O) | San Antonio, TX | — | | — | | 1,884 | | 71 | | — | | 1,955 | | 1,955 | | (703) | | 2009 | 3/30/2005 |
| Sentry Gateway - X (O) | San Antonio, TX | — | | 1,964 | | 21,178 | | 53 | | 1,964 | | 21,231 | | 23,195 | | (6,978) | | 2010 | 1/20/2006 |
| Sentry Gateway - Y (O) | San Antonio, TX | — | | 1,964 | | 21,298 | | 8 | | 1,964 | | 21,306 | | 23,270 | | (7,007) | | 2010 | 1/20/2006 |
| Sentry Gateway - Z (O) | San Antonio, TX | — | | 1,964 | | 30,573 | | — | | 1,964 | | 30,573 | | 32,537 | | (6,733) | | 2015 | 6/14/2005 |
| Southpoint Phase 2 Bldg A (O) | Northern Virginia | — | | 4,404 | | 16,356 | | — | | 4,404 | | 16,356 | | 20,760 | | — | | (7) | 7/24/2019 |
| Southpoint Phase 2 Bldg B (O) | Northern Virginia | — | | 3,752 | | 1,398 | | — | | 3,752 | | 1,398 | | 5,150 | | — | | (7) | 7/24/2019 |
| | | | | | | | | | | |
| Westfields - Park Center (L) | Chantilly, VA | — | | 8,667 | | 3,515 | | — | | 8,667 | | 3,515 | | 12,182 | | — | | (6) | 7/2/2013 |
| | | | | | | | | | | |
Other Developments, including
intercompany eliminations (V) | Various | — | | — | | 1,140 | | 258 | | — | | 1,398 | | 1,398 | | (167) | | Various | Various |
| | $ | 99,539 | | $ | 570,610 | | $ | 3,607,812 | | $ | 725,418 | | $ | 570,610 | | $ | 4,333,230 | | $ | 4,903,840 | | $ | (1,400,162) | | | |
(1)A legend for the Property Type follows: (O) = Office or Data Center Shell Property;data center shell property; (L) = Land held or pre-development; (D) = Wholesale Data Center; and (V) = Various.
(2)Excludes our Revolving Credit Facility of $143.0$75.0 million, term loan facilities of $398.4$124.3 million, unsecured senior notes of $1.3$2.1 billion, unsecured notes payable of $900,000,$430,000, and deferred financing costs, net of premiums, on the remaining loans of $2.3 million.$331,000.
(3)The aggregate cost of these assets for Federalfederal income tax purposes was approximately $3.6$3.8 billion as of December 31, 2020.2023.
(4)The estimated lives over which depreciation is recognized follow: Building and land improvements: 10-40 years; and tenant improvements: related lease terms.
(5)The acquisition date of multi-parcel properties reflects the date of the earliest parcel acquisition. The acquisition date of properties owned through real estate joint ventures reflects the date of the formation of the joint venture.
(6)Held as of December 31, 2020.2023.
(7)Under development or redevelopment as of December 31, 2020.2023.
(8)The carrying amounts of these properties exclude allocated costs of the garage being constructed to support the properties.
(9)This property represents land under a long-term contract.
The following table summarizes our changes in cost of properties for the years ended December 31, 2020, 20192023, 2022 and 20182021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | 2020 | | 2019 | | 2018 |
| Beginning balance | | | $ | 4,348,006 | | | $ | 4,148,529 | | | $ | 3,980,813 | |
| | | | | | | | |
| Improvements and other additions | | | 405,940 | | | 480,418 | | | 224,524 | |
| Sales (1) | | | (65,475) | | | (242,497) | | | (53,547) | |
| Impairments | | | (1,530) | | | (329) | | | (2,493) | |
| Other dispositions | | | (139) | | | (340) | | | (768) | |
| Reclassification to right-of use asset | | | 0 | | | (37,775) | | | 0 | |
| Ending balance | | | $ | 4,686,802 | | | $ | 4,348,006 | | | $ | 4,148,529 | |
| | | | | | | | | | |
| The following table summarizes our changes in accumulated depreciation for the same time periods (in thousands): |
| | | | | | 2020 | | 2019 | | 2018 |
| Beginning balance | | | $ | 1,007,120 | | | $ | 897,903 | | | $ | 801,038 | |
| Depreciation expense | | | 119,377 | | | 117,973 | | | 112,610 | |
| Sales (1) | | | (2,105) | | | (8,416) | | | (14,845) | |
| Impairments | | | 0 | | | 0 | | | (132) | |
| Other dispositions | | | (139) | | | (340) | | | (768) | |
| Ending balance | | | $ | 1,124,253 | | | $ | 1,007,120 | | | $ | 897,903 | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | 2023 | | 2022 | | 2021 |
| Beginning balance | | | $ | 4,986,537 | | | $ | 4,959,709 | | | $ | 4,686,802 | |
| | | | | | | | |
| Improvements and other additions | | | 333,081 | | | 350,702 | | | 342,684 | |
| Sales (1) | | | (162,981) | | | (323,874) | | | (103,097) | |
| Impairments (2) | | | (252,797) | | | — | | | — | |
| Other dispositions | | | — | | | — | | | (4,511) | |
| Reclassification from right-of-use asset | | | — | | | — | | | 37,831 | |
| Ending balance | | | $ | 4,903,840 | | | $ | 4,986,537 | | | $ | 4,959,709 | |
| | | | | | | | | | |
| The following table summarizes our changes in accumulated depreciation for the same time periods (in thousands): |
| | | | | | 2023 | | 2022 | | 2021 |
| Beginning balance | | | $ | 1,273,448 | | | $ | 1,234,908 | | | $ | 1,124,253 | |
| Depreciation expense | | | 132,728 | | | 124,803 | | | 130,604 | |
| Sales (1) | | | (6,014) | | | (86,263) | | | (15,438) | |
| | | | | | | | |
| Other dispositions | | | — | | | — | | | (4,511) | |
| Ending balance | | | $ | 1,400,162 | | | $ | 1,273,448 | | | $ | 1,234,908 | |
| | | | | | | | | | |
(1)Includes sales of our sale, through a series of transactions, ofwholesale data center and ownership interests in data center shells through newly-formed unconsolidated real estate joint ventures, as described in 2020Note 4 to our consolidated financial statements.
(2)Includes impairment recognized on six operating properties and 2019,a parcel of land, as described in Note 4 to our consolidated financial statements.