UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark one)
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ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended | September 30, 2017March 31, 2019 |
or
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o | 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 Office Properties Trust
Corporate Office Properties, L.P.
(Exact name of registrant as specified in its charter) |
| | | | |
Corporate Office Properties Trust | | Maryland | | 23-2947217 |
| | (State or other jurisdiction of | | (IRS Employer |
| | incorporation or organization) | | Identification No.) |
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Corporate Office Properties, L.P. | | Delaware | | 23-2930022 |
| | (State or other jurisdiction of | | (IRS Employer |
| | incorporation or organization) | | Identification No.) |
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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
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Corporate Office Properties Trust ý Yes o No
Corporate Office Properties, L.P. ý Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Corporate Office Properties Trust ý Yes o No
Corporate Office Properties, L.P. ý Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Corporate Office Properties Trust
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Large accelerated filer ý | | Accelerated filer o | | Non-accelerated filer o | | Smaller reporting company o | Emerging growth company o |
| | | | (Do not check if a smaller reporting company) | | | |
Corporate Office Properties, L.P.
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Large accelerated filer ýo | | Accelerated filer o | | Non-accelerated filer oý | | Smaller reporting company o | Emerging growth company o |
| | | | (Do not check if a smaller reporting 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 o
Corporate Office Properties, L.P. o
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 o Yes ý No
Corporate Office Properties, L.P. o Yes ý No
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 | OFC | New York Stock Exchange |
As of October 20, 2017April 26, 2019, 99,609,634111,917,479 of Corporate Office Properties Trust’s Common Shares of Beneficial Interest, $0.01 par value, were issued and outstanding.
EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended September 30, 2017March 31, 2019 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 September 30, 2017March 31, 2019, COPT owned approximately 96.8%98.6% of the outstanding common units and none of the outstanding preferred units in COPLP; the remaining common units and all of the outstanding COPLP preferred units in COPLP 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-Q. We believe it is important to understand the differences between the Company and the Operating Partnership in the context of how the Company and the Operating Partnershiptwo operate as an interrelated, consolidated company. COPT is a real estate investment trust,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 from time to time 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 through COPLP’s operations, by COPLP’s direct or indirect incurrence of indebtedness or through the issuance of partnership units.
Noncontrolling interests, and 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. COPLP’s consolidated financial statements also reflect COPT’s noncontrolling interests in certain real estate partnerships and limited liability companies (“LLCs”); the differences between shareholders’ equity, partners’ capital and noncontrolling interests result from the differences in the equity issued at the COPT and COPLP levels and in COPT’s noncontrolling interests in these real estate partnerships and LLCs. The only other significant differences between the consolidated financial statements of COPT and those of COPLP are assets held in connection with a non-qualified elective deferred compensation plan (comprised primarily of mutual funds and equity securities) and the corresponding liability to the plan’s participants that are held directly by COPT.
We believe combining the quarterly reports on Form 10-Q 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 significant 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 8, Prepaid Expenses and Other Assets, Net of COPT and subsidiaries and COPLP and subsidiaries; and
Note 14,16, Earnings per Share of COPT and subsidiaries and Earnings per Unit of COPLP and subsidiaries;
“Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources of COPT”; and
“Item 2: 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 I, Item 4. 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-Q
PART I: FINANCIAL INFORMATION
ITEM 1. Financial Statements
Corporate Office Properties Trust and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
(unaudited)
| | | September 30, 2017 | | December 31, 2016 | March 31, 2019 | | December 31, 2018 |
Assets | |
| | |
| |
| | |
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Properties, net: | |
| | |
| |
| | |
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Operating properties, net | $ | 2,690,712 |
| | $ | 2,671,831 |
| $ | 2,865,829 |
| | $ | 2,847,265 |
|
Projects in development or held for future development | 406,319 |
| | 401,531 |
| 437,173 |
| | 403,361 |
|
Total properties, net | 3,097,031 |
| | 3,073,362 |
| 3,303,002 |
| | 3,250,626 |
|
Assets held for sale, net | 74,415 |
| | 94,654 |
| |
Property - operating right-of-use assets | | 27,569 |
| | — |
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Property - finance right-of-use assets | | 40,488 |
| | — |
|
Cash and cash equivalents | 10,858 |
| | 209,863 |
| 7,780 |
| | 8,066 |
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Restricted cash and marketable securities | 6,173 |
| | 8,193 |
| |
Investment in unconsolidated real estate joint venture | 25,194 |
| | 25,548 |
| 39,359 |
| | 39,845 |
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Accounts receivable (net of allowance for doubtful accounts of $639 and $603, respectively) | 27,624 |
| | 34,438 |
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Deferred rent receivable (net of allowance of $255 and $373, respectively) | 84,743 |
| | 90,219 |
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Accounts receivable | | 25,261 |
| | 26,277 |
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Deferred rent receivable | | 91,304 |
| | 89,350 |
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Intangible assets on real estate acquisitions, net | 64,055 |
| | 78,351 |
| 33,172 |
| | 43,470 |
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Deferred leasing costs (net of accumulated amortization of $28,590 and $65,988, respectively) | 47,033 |
| | 41,214 |
| |
Deferred leasing costs (net of accumulated amortization of $34,666 and $31,994, respectively) | | 51,736 |
| | 50,191 |
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Investing receivables | 56,108 |
| | 52,279 |
| 69,390 |
| | 56,982 |
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Interest rate derivatives | | 2,602 |
| | 5,617 |
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Prepaid expenses and other assets, net | 66,538 |
| | 72,764 |
| 84,196 |
| | 85,581 |
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Total assets | $ | 3,559,772 |
| | $ | 3,780,885 |
| $ | 3,775,859 |
| | $ | 3,656,005 |
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Liabilities and equity | |
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Liabilities: | |
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Debt, net | $ | 1,873,291 |
| | $ | 1,904,001 |
| $ | 1,876,149 |
| | $ | 1,823,909 |
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Accounts payable and accrued expenses | 121,483 |
| | 108,682 |
| 112,076 |
| | 92,855 |
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Rents received in advance and security deposits | 26,223 |
| | 29,798 |
| 25,635 |
| | 30,079 |
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Dividends and distributions payable | 28,462 |
| | 31,335 |
| 31,346 |
| | 30,856 |
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Deferred revenue associated with operating leases | 12,047 |
| | 12,666 |
| 8,415 |
| | 9,125 |
|
Redeemable preferred shares of beneficial interest ($0.01 par value; 531,667 shares issued and outstanding at December 31, 2016 and none at September 30, 2017) | — |
| | 26,583 |
| |
Capital lease obligation | 16,347 |
| | — |
| |
Property - operating lease liabilities | | 16,619 |
| | — |
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Interest rate derivatives | | 11,894 |
| | 5,459 |
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Other liabilities | 43,866 |
| | 50,177 |
| 10,162 |
| | 10,414 |
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Total liabilities | 2,121,719 |
| | 2,163,242 |
| 2,092,296 |
| | 2,002,697 |
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Commitments and contingencies (Note 15) |
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Commitments and contingencies (Note 17) | |
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Redeemable noncontrolling interests | 23,269 |
| | 22,979 |
| 27,385 |
| | 26,260 |
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Equity: | |
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Corporate Office Properties Trust’s shareholders’ equity: | |
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Preferred Shares of beneficial interest at liquidation preference ($0.01 par value; 25,000,000 shares authorized, 6,900,000 shares issued and outstanding at December 31, 2016 and none at September 30, 2017) | — |
| | 172,500 |
| |
Common Shares of beneficial interest ($0.01 par value; 125,000,000 shares authorized, shares issued and outstanding of 99,608,170 at September 30, 2017 and 98,498,651 at December 31, 2016) | 996 |
| | 985 |
| |
Common Shares of beneficial interest ($0.01 par value; 150,000,000 shares authorized; shares issued and outstanding of 111,939,790 at March 31, 2019 and 110,241,868 at December 31, 2018) | | 1,119 |
| | 1,102 |
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Additional paid-in capital | 2,150,067 |
| | 2,116,581 |
| 2,475,497 |
| | 2,431,355 |
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Cumulative distributions in excess of net income | (800,290 | ) | | (765,276 | ) | (856,703 | ) | | (846,808 | ) |
Accumulated other comprehensive loss | (859 | ) | | (1,731 | ) | (9,538 | ) | | (238 | ) |
Total Corporate Office Properties Trust’s shareholders’ equity | 1,349,914 |
| | 1,523,059 |
| 1,610,375 |
| | 1,585,411 |
|
Noncontrolling interests in subsidiaries: | |
| | |
| |
| | |
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Common units in COPLP | 44,089 |
| | 49,228 |
| 20,167 |
| | 19,168 |
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Preferred units in COPLP | 8,800 |
| | 8,800 |
| 8,800 |
| | 8,800 |
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Other consolidated entities | 11,981 |
| | 13,577 |
| 16,836 |
| | 13,669 |
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Noncontrolling interests in subsidiaries | 64,870 |
| | 71,605 |
| 45,803 |
| | 41,637 |
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Total equity | 1,414,784 |
| | 1,594,664 |
| 1,656,178 |
| | 1,627,048 |
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Total liabilities, redeemable noncontrolling interest and equity | $ | 3,559,772 |
| | $ | 3,780,885 |
| |
Total liabilities, redeemable noncontrolling interests and equity | | $ | 3,775,859 |
| | $ | 3,656,005 |
|
See accompanying notes to consolidated financial statements.
Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Revenues | |
| | |
| | | | |
Rental revenue | $ | 102,275 |
| | $ | 103,956 |
| | $ | 304,237 |
| | $ | 316,862 |
|
Tenant recoveries and other real estate operations revenue | 24,956 |
| | 26,998 |
| | 78,058 |
| | 81,103 |
|
Construction contract and other service revenues | 29,786 |
| | 11,149 |
| | 65,958 |
| | 34,372 |
|
Total revenues | 157,017 |
| | 142,103 |
| | 448,253 |
| | 432,337 |
|
Expenses | |
| | |
| | |
| | |
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Property operating expenses | 46,368 |
| | 49,952 |
| | 143,515 |
| | 149,968 |
|
Depreciation and amortization associated with real estate operations | 34,438 |
| | 32,015 |
| | 100,290 |
| | 99,790 |
|
Construction contract and other service expenses | 28,788 |
| | 10,341 |
| | 63,589 |
| | 32,513 |
|
Impairment (recoveries) losses | (161 | ) | | 27,699 |
| | 1,464 |
| | 99,837 |
|
General, administrative and leasing expenses | 7,368 |
| | 8,855 |
| | 23,838 |
| | 28,764 |
|
Business development expenses and land carry costs | 1,277 |
| | 1,716 |
| | 4,567 |
| | 6,497 |
|
Total operating expenses | 118,078 |
| | 130,578 |
| | 337,263 |
| | 417,369 |
|
Operating income | 38,939 |
| | 11,525 |
| | 110,990 |
| | 14,968 |
|
Interest expense | (19,615 | ) | | (18,301 | ) | | (57,772 | ) | | (64,499 | ) |
Interest and other income | 1,508 |
| | 1,391 |
| | 4,817 |
| | 3,877 |
|
Loss on early extinguishment of debt | — |
| | (59 | ) | | (513 | ) | | (37 | ) |
Income (loss) before equity in income of unconsolidated entities and income taxes | 20,832 |
| | (5,444 | ) | | 57,522 |
| | (45,691 | ) |
Equity in income of unconsolidated entities | 719 |
| | 594 |
| | 2,162 |
| | 614 |
|
Income tax (expense) benefit | (57 | ) | | 21 |
| | (145 | ) | | 28 |
|
Income (loss) before gain on sales of real estate | 21,494 |
| | (4,829 | ) | | 59,539 |
| | (45,049 | ) |
Gain on sales of real estate | 1,188 |
| | 34,101 |
| | 5,438 |
| | 34,101 |
|
Net income (loss) | 22,682 |
| | 29,272 |
| | 64,977 |
| | (10,948 | ) |
Net (income) loss attributable to noncontrolling interests: | |
| | |
| | |
| | |
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Common units in COPLP | (704 | ) | | (901 | ) | | (1,611 | ) | | 948 |
|
Preferred units in COPLP | (165 | ) | | (165 | ) | | (495 | ) | | (495 | ) |
Other consolidated entities | (897 | ) | | (907 | ) | | (2,738 | ) | | (2,799 | ) |
Net income (loss) attributable to COPT | 20,916 |
| | 27,299 |
| | 60,133 |
| | (13,294 | ) |
Preferred share dividends | — |
| | (3,552 | ) | | (6,219 | ) | | (10,657 | ) |
Issuance costs associated with redeemed preferred shares | — |
| | — |
| | (6,847 | ) | | — |
|
Net income (loss) attributable to COPT common shareholders | $ | 20,916 |
| | $ | 23,747 |
| | $ | 47,067 |
| | $ | (23,951 | ) |
Earnings per common share: | |
| | |
| | |
| | |
|
Net income (loss) attributable to COPT common shareholders - basic | $ | 0.21 |
| | $ | 0.25 |
| | $ | 0.47 |
| | $ | (0.26 | ) |
Net income (loss) attributable to COPT common shareholders - diluted | $ | 0.21 |
| | $ | 0.25 |
| | $ | 0.47 |
| | $ | (0.26 | ) |
Dividends declared per common share | $ | 0.275 |
| | $ | 0.275 |
| | $ | 0.825 |
| | $ | 0.825 |
|
|
| | | | | | | |
| For the Three Months Ended March 31, |
| 2019 | | 2018 |
Revenues | |
| | |
|
Lease revenue | $ | 130,903 |
| | $ | 127,133 |
|
Other property revenue | 1,087 |
| | 1,145 |
|
Construction contract and other service revenues | 16,950 |
| | 27,198 |
|
Total revenues | 148,940 |
| | 155,476 |
|
Operating expenses | |
| | |
|
Property operating expenses | 49,445 |
| | 50,951 |
|
Depreciation and amortization associated with real estate operations | 34,796 |
| | 33,512 |
|
Construction contract and other service expenses | 16,326 |
| | 26,216 |
|
General, administrative and leasing expenses | 8,751 |
| | 7,292 |
|
Business development expenses and land carry costs | 1,113 |
| | 1,614 |
|
Total operating expenses | 110,431 |
| | 119,585 |
|
Interest expense | (18,674 | ) | | (18,784 | ) |
Interest and other income | 2,286 |
| | 1,359 |
|
Gain on sales of real estate | — |
| | (4 | ) |
Income before equity in income of unconsolidated entities and income taxes | 22,121 |
| | 18,462 |
|
Equity in income of unconsolidated entities | 391 |
| | 373 |
|
Income tax expense | (194 | ) | | (55 | ) |
Net income | 22,318 |
| | 18,780 |
|
Net income attributable to noncontrolling interests: | |
| | |
|
Common units in COPLP | (257 | ) | | (544 | ) |
Preferred units in COPLP | (165 | ) | | (165 | ) |
Other consolidated entities | (1,037 | ) | | (921 | ) |
Net income attributable to COPT common shareholders | $ | 20,859 |
| | $ | 17,150 |
|
| | | |
Earnings per common share: (1) | |
| | |
|
Net income attributable to COPT common shareholders - basic | $ | 0.19 |
| | $ | 0.17 |
|
Net income attributable to COPT common shareholders - diluted | $ | 0.19 |
| | $ | 0.17 |
|
(1) Basic and diluted earnings per common share are calculated based on amounts attributable to common shareholders of Corporate Office Properties Trust.
See accompanying notes to consolidated financial statements.
Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net income (loss) | $ | 22,682 |
| | $ | 29,272 |
| | $ | 64,977 |
| | $ | (10,948 | ) |
Other comprehensive income (loss) | |
| | |
| | |
| | |
|
Unrealized (loss) gain on interest rate derivatives | (301 | ) | | 407 |
| | (1,877 | ) | | (16,581 | ) |
Loss on interest rate derivatives recognized in interest expense (effective portion) | 615 |
| | 1,043 |
| | 2,652 |
| | 2,763 |
|
Loss on interest rate derivatives recognized in interest expense (ineffective portion) | — |
| | — |
| | 88 |
| | — |
|
Equity in other comprehensive income (loss) of equity method investee | — |
| | — |
| | 39 |
| | (184 | ) |
Other comprehensive income (loss) | 314 |
| | 1,450 |
| | 902 |
| | (14,002 | ) |
Comprehensive income (loss) | 22,996 |
| | 30,722 |
| | 65,879 |
| | (24,950 | ) |
Comprehensive income attributable to noncontrolling interests | (1,776 | ) | | (2,025 | ) | | (4,874 | ) | | (1,820 | ) |
Comprehensive income (loss) attributable to COPT | $ | 21,220 |
| | $ | 28,697 |
| | $ | 61,005 |
| | $ | (26,770 | ) |
|
| | | | | | | |
| For the Three Months Ended March 31, |
| 2019 | | 2018 |
Net income | $ | 22,318 |
| | $ | 18,780 |
|
Other comprehensive (loss) income | |
| | |
|
Unrealized (loss) gain on interest rate derivatives | (8,845 | ) | | 4,676 |
|
(Gain) loss on interest rate derivatives recognized in interest expense | (570 | ) | | 245 |
|
Other comprehensive (loss) income | (9,415 | ) | | 4,921 |
|
Comprehensive income | 12,903 |
| | 23,701 |
|
Comprehensive income attributable to noncontrolling interests | (1,344 | ) | | (1,790 | ) |
Comprehensive income attributable to COPT | $ | 11,559 |
| | $ | 21,911 |
|
See accompanying notes to consolidated financial statements.
Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Equity
(Dollars in thousands)
(unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred Shares | | Common Shares | | Additional Paid-in Capital | | Cumulative Distributions in Excess of Net Income | | Accumulated Other Comprehensive Loss | | Noncontrolling Interests | | Total |
Balance at December 31, 2015 (94,531,512 common shares outstanding) | $ | 199,083 |
| | $ | 945 |
| | $ | 2,004,507 |
| | $ | (657,172 | ) | | $ | (2,838 | ) | | $ | 72,039 |
| | $ | 1,616,564 |
|
Conversion of common units to common shares (87,000 shares) | — |
| | 1 |
| | 1,166 |
| | — |
| | — |
| | (1,167 | ) | | — |
|
Costs associated with common shares issued to the public | — |
| | — |
| | (5 | ) | | — |
| | — |
| | — |
| | (5 | ) |
Share-based compensation (146,274 shares issued, net of redemptions) | — |
| | 2 |
| | 6,175 |
| | — |
| | — |
| | — |
| | 6,177 |
|
Redemption of vested equity awards | — |
| | — |
| | (2,179 | ) | | — |
| | — |
| | — |
| | (2,179 | ) |
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP | — |
| | — |
| | (42 | ) | | — |
| | — |
| | 42 |
| | — |
|
Comprehensive loss | — |
| | — |
| | — |
| | (13,294 | ) | | (13,476 | ) | | 141 |
| | (26,629 | ) |
Dividends | — |
| | — |
| | — |
| | (88,796 | ) | | — |
| | — |
| | (88,796 | ) |
Distributions to owners of common and preferred units in COPLP | — |
| | — |
| | — |
| | — |
| | — |
| | (3,498 | ) | | (3,498 | ) |
Distributions to noncontrolling interests in other consolidated entities | — |
| | — |
| | — |
| | — |
| | — |
| | (12 | ) | | (12 | ) |
Adjustment to arrive at fair value of redeemable noncontrolling interests | — |
| | — |
| | (516 | ) | | — |
| | — |
| | — |
| | (516 | ) |
Tax loss from share-based compensation | — |
| | — |
| | (319 | ) | | — |
| | — |
| | — |
| | (319 | ) |
Balance at September 30, 2016 (94,764,786 common shares outstanding) | $ | 199,083 |
| | $ | 948 |
| | $ | 2,008,787 |
| | $ | (759,262 | ) | | $ | (16,314 | ) | | $ | 67,545 |
| | $ | 1,500,787 |
|
| | | | | | | | | | | | | |
Balance at December 31, 2016 (98,498,651 common shares outstanding) | $ | 172,500 |
| | $ | 985 |
| | $ | 2,116,581 |
| | $ | (765,276 | ) | | $ | (1,731 | ) | | $ | 71,605 |
| | $ | 1,594,664 |
|
Redemption of preferred shares (6,900,000 shares) | (172,500 | ) | | — |
| | 6,847 |
| | (6,847 | ) | | — |
| | — |
| | (172,500 | ) |
Conversion of common units to common shares (337,000 shares) | — |
| | 3 |
| | 4,599 |
| | — |
| | — |
| | (4,602 | ) | | — |
|
Common shares issued under at-the-market program (591,042 shares) | — |
| | 6 |
| | 19,662 |
| | — |
| | — |
| | — |
| | 19,668 |
|
Exercise of share options (5,000 shares) | — |
| | — |
| | 150 |
| | — |
| | — |
| | — |
| | 150 |
|
Share-based compensation (176,477 shares issued, net of redemptions) | — |
| | 2 |
| | 4,442 |
| | — |
| | — |
| | — |
| | 4,444 |
|
Redemption of vested equity awards | — |
| | — |
| | (1,869 | ) | | — |
| | — |
| | — |
| | (1,869 | ) |
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP | — |
| | — |
| | (589 | ) | | — |
| | — |
| | 589 |
| | — |
|
Comprehensive income | — |
| | — |
| | — |
| | 60,133 |
| | 872 |
| | 3,154 |
| | 64,159 |
|
Dividends | — |
| | — |
| | — |
| | (88,300 | ) | | — |
| | — |
| | (88,300 | ) |
Distributions to owners of common and preferred units in COPLP | — |
| | — |
| | — |
| | — |
| | — |
| | (3,262 | ) | | (3,262 | ) |
Distributions to noncontrolling interests in other consolidated entities | — |
| | — |
| | — |
| | — |
| | — |
| | (2,614 | ) | | (2,614 | ) |
Adjustment to arrive at fair value of redeemable noncontrolling interests | — |
| | — |
| | 244 |
| | — |
| | — |
| | — |
| | 244 |
|
Balance at September 30, 2017 (99,608,170 common shares outstanding) | $ | — |
| | $ | 996 |
| | $ | 2,150,067 |
| | $ | (800,290 | ) | | $ | (859 | ) | | $ | 64,870 |
| | $ | 1,414,784 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
| | — |
| | — |
|
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 (53,817 shares) | 1 |
| | 760 |
| | — |
| | — |
| | (761 | ) | | — |
|
Common shares issued under forward equity sale agreements (677,000 shares) | 7 |
| | 19,969 |
| | — |
| | — |
| | — |
| | 19,976 |
|
Share-based compensation (127,242 shares issued, net of redemptions) | 1 |
| | 1,679 |
| | — |
| | — |
| | — |
| | 1,680 |
|
Redemption of vested equity awards | — |
| | (1,327 | ) | | — |
| | — |
| | — |
| | (1,327 | ) |
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP | — |
| | (164 | ) | | — |
| | — |
| | 164 |
| | — |
|
Comprehensive income | — |
| | — |
| | 17,150 |
| | 4,761 |
| | 1,152 |
| | 23,063 |
|
Dividends | — |
| | — |
| | (28,091 | ) | | — |
| | — |
| | (28,091 | ) |
Distributions to owners of common and preferred units in COPLP | — |
| | — |
| | — |
| | — |
| | (1,044 | ) | | (1,044 | ) |
Distributions to noncontrolling interests in other consolidated entities | — |
| | — |
| | — |
| | — |
| | (3 | ) | | (3 | ) |
Adjustment to arrive at fair value of redeemable noncontrolling interests | — |
| | (537 | ) | | — |
| | — |
| | — |
| | (537 | ) |
Balance at March 31, 2018 (102,150,358 common shares outstanding) | $ | 1,022 |
| | $ | 2,221,427 |
| | $ | (813,302 | ) | | $ | 7,204 |
|
| $ | 65,673 |
| | $ | 1,482,024 |
|
| | | | | | | | | | | |
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 (5,500 shares) | — |
| | 80 |
| | — |
| | — |
| | (80 | ) | | — |
|
Common shares issued under forward equity sale agreements (1,614,087 shares) | 16 |
| | 46,438 |
| | — |
| | — |
| | — |
| | 46,454 |
|
Share-based compensation (78,335 shares issued, net of redemptions) | 1 |
| | 1,562 |
| | — |
| | — |
| | 239 |
| | 1,802 |
|
Redemption of vested equity awards | — |
| | (1,817 | ) | | — |
| | — |
| | — |
| | (1,817 | ) |
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP | — |
| | (1,322 | ) | | — |
| | — |
| | 1,322 |
| | — |
|
Comprehensive income | — |
| | — |
| | 20,859 |
| | (9,300 | ) | | 669 |
| | 12,228 |
|
Dividends | — |
| | — |
| | (30,754 | ) | | — |
| | — |
| | (30,754 | ) |
Distributions to owners of common and preferred units in COPLP | — |
| | — |
| | — |
| | — |
| | (550 | ) | | (550 | ) |
Contributions from noncontrolling interests in other consolidated entities | — |
| | — |
| | — |
| | — |
| | 2,570 |
| | 2,570 |
|
Distributions to noncontrolling interests in other consolidated entities | — |
| | — |
| | — |
| | — |
| | (4 | ) | | (4 | ) |
Adjustment to arrive at fair value of redeemable noncontrolling interests | — |
| | (799 | ) | | — |
| | — |
| | — |
| | (799 | ) |
Balance at March 31, 2019 (111,939,790 common shares outstanding) | $ | 1,119 |
| | $ | 2,475,497 |
| | $ | (856,703 | ) | | $ | (9,538 | ) | | $ | 45,803 |
| | $ | 1,656,178 |
|
See accompanying notes to consolidated financial statements.
Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
| | | For the Nine Months Ended September 30, | For the Three Months Ended March 31, |
| 2017 | | 2016 | 2019 | | 2018 |
Cash flows from operating activities | |
| | |
| |
| | |
|
Revenues from real estate operations received | $ | 390,116 |
| | $ | 393,300 |
| $ | 126,569 |
| | $ | 135,027 |
|
Construction contract and other service revenues received | 72,682 |
| | 54,399 |
| 5,904 |
| | 9,268 |
|
Property operating expenses paid | (144,187 | ) | | (154,203 | ) | (42,974 | ) | | (43,212 | ) |
Construction contract and other service expenses paid | (57,189 | ) | | (33,169 | ) | (4,614 | ) | | (41,128 | ) |
General, administrative, leasing, business development and land carry costs paid | (27,066 | ) | | (27,879 | ) | (11,703 | ) | | (10,900 | ) |
Interest expense paid | (55,637 | ) | | (61,662 | ) | (18,282 | ) | | (19,092 | ) |
Lease incentives | (9,414 | ) | | (1,789 | ) | |
Lease incentives paid | | (1,158 | ) | | (4,204 | ) |
Other | 1,373 |
| | 976 |
| 910 |
| | 436 |
|
Net cash provided by operating activities | 170,678 |
| | 169,973 |
| 54,652 |
| | 26,195 |
|
Cash flows from investing activities | |
| | |
| |
| | |
|
Construction, development and redevelopment | (113,678 | ) | | (121,297 | ) | (100,212 | ) | | (17,540 | ) |
Tenant improvements on operating properties | (19,876 | ) | | (26,055 | ) | (4,174 | ) | | (9,077 | ) |
Other capital improvements on operating properties | (15,174 | ) | | (22,063 | ) | (4,476 | ) | | (5,198 | ) |
Proceeds from dispositions of properties | 101,107 |
| | 210,661 |
| |
Proceeds from partial sale of properties, net of related debt | — |
| | 43,686 |
| |
Investing receivables funded | | (11,051 | ) | | — |
|
Leasing costs paid | (6,468 | ) | | (6,024 | ) | (2,539 | ) | | (2,015 | ) |
Other | 1,359 |
| | (991 | ) | 1,297 |
| | (974 | ) |
Net cash (used in) provided by investing activities | (52,730 | ) | | 77,917 |
| |
Net cash used in investing activities | | (121,155 | ) | | (34,804 | ) |
Cash flows from financing activities | |
| | |
| |
| | |
|
Proceeds from debt | | | | | | |
Revolving Credit Facility | 268,000 |
| | 362,500 |
| 123,000 |
| | 82,000 |
|
Other debt proceeds | — |
| | 105,000 |
| 3,350 |
| | — |
|
Repayments of debt | | | | | | |
Revolving Credit Facility | (98,000 | ) | | (406,000 | ) | (74,000 | ) | | (55,000 | ) |
Scheduled principal amortization | (2,878 | ) | | (4,454 | ) | (1,098 | ) | | (1,052 | ) |
Other debt repayments | (200,150 | ) | | (203,056 | ) | |
Deferred financing costs paid | — |
| | (825 | ) | |
Payments on finance lease liabilities | | (52 | ) | | (4,202 | ) |
Net proceeds from issuance of common shares | 19,834 |
| | (46 | ) | 46,415 |
| | 19,989 |
|
Redemption of preferred shares | (199,083 | ) | | — |
| |
Common share dividends paid | (81,779 | ) | | (78,072 | ) | (30,287 | ) | | (27,855 | ) |
Preferred share dividends paid | (9,305 | ) | | (10,657 | ) | |
Distributions paid to noncontrolling interests in COPLP | (3,371 | ) | | (3,476 | ) | (553 | ) | | (1,059 | ) |
Distributions paid to redeemable noncontrolling interests | (7,860 | ) | | (14,329 | ) | |
Redemption of vested equity awards | (1,869 | ) | | (2,179 | ) | (1,817 | ) | | (1,327 | ) |
Other | (492 | ) | | (5,032 | ) | 1,370 |
| | (5,183 | ) |
Net cash used in financing activities | (316,953 | ) | | (260,626 | ) | |
Net decrease in cash and cash equivalents | (199,005 | ) | | (12,736 | ) | |
Cash and cash equivalents | |
| | |
| |
Net cash provided by financing activities | | 66,328 |
| | 6,311 |
|
Net decrease in cash and cash equivalents and restricted cash | | (175 | ) | | (2,298 | ) |
Cash and cash equivalents and restricted cash | | |
| | |
|
Beginning of period | 209,863 |
| | 60,310 |
| 11,950 |
| | 14,831 |
|
End of period | $ | 10,858 |
| | $ | 47,574 |
| $ | 11,775 |
| | $ | 12,533 |
|
See accompanying notes to consolidated financial statements.
Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(in thousands)
(unaudited)
|
| | | | | | | |
| For the Nine Months Ended September 30, |
| 2017 | | 2016 |
Reconciliation of net income (loss) to net cash provided by operating activities: | |
| | |
|
Net income (loss) | $ | 64,977 |
| | $ | (10,948 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |
| | |
|
Depreciation and amortization | 101,963 |
| | 101,429 |
|
Impairment losses | 1,457 |
| | 99,797 |
|
(Gain) loss on interest rate derivatives | (43 | ) | | 347 |
|
Amortization of deferred financing costs and net debt discounts | 3,514 |
| | 4,456 |
|
Increase in deferred rent receivable | (545 | ) | | (930 | ) |
Gain on sales of real estate | (5,438 | ) | | (34,101 | ) |
Share-based compensation | 4,092 |
| | 5,637 |
|
Other | (3,970 | ) | | (2,727 | ) |
Operating changes in assets and liabilities: | |
| | |
Decrease in accounts receivable | 7,498 |
| | 3,658 |
|
Decrease in restricted cash and marketable securities | 2,778 |
| | 18 |
|
Decrease (increase) in prepaid expenses and other assets, net | 3,190 |
| | (19,778 | ) |
(Decrease) increase in accounts payable, accrued expenses and other liabilities | (5,220 | ) | | 31,523 |
|
Decrease in rents received in advance and security deposits | (3,575 | ) | | (8,408 | ) |
Net cash provided by operating activities | $ | 170,678 |
| | $ | 169,973 |
|
Supplemental schedule of non-cash investing and financing activities: | |
| | |
|
Increase in accrued capital improvements, leasing and other investing activity costs | $ | 17,129 |
| | $ | 9,963 |
|
Increase in property in connection with capital lease obligation | $ | 16,127 |
| | $ | — |
|
Increase in property and redeemable noncontrolling interests in connection with property contributed in a joint venture | $ | — |
| | $ | 22,600 |
|
Decrease in redeemable noncontrolling interests and increase in other liabilities in connection with distribution payable to redeemable noncontrolling interest | $ | — |
| | $ | 6,683 |
|
Non-cash changes from partial sale of properties, net of debt: | | | |
Decrease in properties, net | $ | — |
| | $ | (114,597 | ) |
Increase in investment in unconsolidated real estate joint venture | $ | — |
| | $ | 25,680 |
|
Decrease in debt | $ | — |
| | $ | 59,534 |
|
Other net decreases in assets and liabilities | $ | — |
| | $ | 3,619 |
|
Increase (decrease) in fair value of derivatives applied to accumulated other comprehensive loss and noncontrolling interests | $ | 774 |
| | $ | (13,817 | ) |
Equity in other comprehensive income (loss) of an equity method investee | $ | 39 |
| | $ | (184 | ) |
Dividends/distribution payable | $ | 28,462 |
| | $ | 30,225 |
|
Decrease in noncontrolling interests and increase in shareholders’ equity in connection with the conversion of common units into common shares | $ | 4,602 |
| | $ | 1,167 |
|
Adjustments to noncontrolling interests resulting from changes in COPLP ownership | $ | 589 |
| | $ | 42 |
|
(Decrease) increase in redeemable noncontrolling interest and (increase) decrease in equity to carry redeemable noncontrolling interest at fair value | $ | (244 | ) | | $ | 516 |
|
|
| | | | | | | |
| For the Three Months Ended March 31, |
| 2019 | | 2018 |
Reconciliation of net income to net cash provided by operating activities: | |
| | |
|
Net income | $ | 22,318 |
| | $ | 18,780 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
|
Depreciation and other amortization | 35,229 |
| | 34,035 |
|
Amortization of deferred financing costs and net debt discounts | 898 |
| | 822 |
|
Increase in deferred rent receivable | (2,539 | ) | | (1,512 | ) |
Gain on sales of real estate | — |
| | 4 |
|
Share-based compensation | 1,659 |
| | 1,545 |
|
Other | (1,572 | ) | | (907 | ) |
Changes in operating assets and liabilities: | |
| | |
Decrease in accounts receivable | 1,033 |
| | 7,877 |
|
(Increase) decrease in prepaid expenses and other assets, net | (6,752 | ) | | 8,533 |
|
Increase (decrease) in accounts payable, accrued expenses and other liabilities | 8,822 |
| | (43,903 | ) |
(Decrease) increase in rents received in advance and security deposits | (4,444 | ) | | 921 |
|
Net cash provided by operating activities | $ | 54,652 |
| | $ | 26,195 |
|
Reconciliation of cash and cash equivalents and restricted cash: | | | |
Cash and cash equivalents at beginning of period | $ | 8,066 |
| | $ | 12,261 |
|
Restricted cash at beginning of period | 3,884 |
| | 2,570 |
|
Cash and cash equivalents and restricted cash at beginning of period | $ | 11,950 |
| | $ | 14,831 |
|
| | | |
Cash and cash equivalents at end of period | $ | 7,780 |
| | $ | 8,888 |
|
Restricted cash at end of period | 3,995 |
| | 3,645 |
|
Cash and cash equivalents and restricted cash at end of period | $ | 11,775 |
| | $ | 12,533 |
|
Supplemental schedule of non-cash investing and financing activities: | |
| | |
|
Increase in accrued capital improvements, leasing and other investing activity costs | $ | 11,329 |
| | $ | 12,232 |
|
Finance right-of-use asset contributed by noncontrolling interest in joint venture | $ | 2,570 |
| | $ | — |
|
Operating right-of-use assets obtained in exchange for operating lease liabilities | $ | 276 |
| | $ | — |
|
(Decrease) increase in fair value of derivatives applied to accumulated other comprehensive income and noncontrolling interests | $ | (9,450 | ) | | $ | 4,887 |
|
Dividends/distributions payable | $ | 31,346 |
| | $ | 29,146 |
|
Decrease in noncontrolling interests and increase in shareholders’ equity in connection with the conversion of common units into common shares | $ | 80 |
| | $ | 761 |
|
Adjustments to noncontrolling interests resulting from changes in COPLP ownership | $ | 1,322 |
| | $ | 164 |
|
Increase in redeemable noncontrolling interests and decrease in equity to carry redeemable noncontrolling interests at fair value | $ | 799 |
| | $ | 537 |
|
See accompanying notes to consolidated financial statements.
Corporate Office Properties, L.P. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except unit data)
(unaudited)
| | | September 30, 2017 | | December 31, 2016 | March 31, 2019 | | December 31, 2018 |
Assets | |
| | |
| |
| | |
|
Properties, net: | |
| | |
| |
| | |
|
Operating properties, net | $ | 2,690,712 |
| | $ | 2,671,831 |
| $ | 2,865,829 |
| | $ | 2,847,265 |
|
Projects in development or held for future development | 406,319 |
| | 401,531 |
| 437,173 |
| | 403,361 |
|
Total properties, net | 3,097,031 |
| | 3,073,362 |
| 3,303,002 |
| | 3,250,626 |
|
Assets held for sale, net | 74,415 |
| | 94,654 |
| |
Property - operating right-of-use assets | | 27,569 |
| | — |
|
Property - finance right-of-use assets | | 40,488 |
| | — |
|
Cash and cash equivalents | 10,858 |
| | 209,863 |
| 7,780 |
| | 8,066 |
|
Restricted cash and marketable securities | 1,766 |
| | 2,756 |
| |
Investment in unconsolidated real estate joint venture | 25,194 |
| | 25,548 |
| 39,359 |
| | 39,845 |
|
Accounts receivable (net of allowance for doubtful accounts of $639 and $603, respectively) | 27,624 |
| | 34,438 |
| |
Deferred rent receivable (net of allowance of $255 and $373, respectively) | 84,743 |
| | 90,219 |
| |
Accounts receivable | | 25,261 |
| | 26,277 |
|
Deferred rent receivable | | 91,304 |
| | 89,350 |
|
Intangible assets on real estate acquisitions, net | 64,055 |
| | 78,351 |
| 33,172 |
| | 43,470 |
|
Deferred leasing costs (net of accumulated amortization of $28,590 and $65,988, respectively) | 47,033 |
| | 41,214 |
| |
Deferred leasing costs (net of accumulated amortization of $34,666 and $31,994, respectively) | | 51,736 |
| | 50,191 |
|
Investing receivables | 56,108 |
| | 52,279 |
| 69,390 |
| | 56,982 |
|
Interest rate derivatives | | 2,602 |
| | 5,617 |
|
Prepaid expenses and other assets, net | 66,538 |
| | 72,764 |
| 79,982 |
| | 81,713 |
|
Total assets | $ | 3,555,365 |
| | $ | 3,775,448 |
| $ | 3,771,645 |
| | $ | 3,652,137 |
|
Liabilities and equity | |
| | |
| |
| | |
|
Liabilities: | |
| | |
| |
| | |
|
Debt, net | $ | 1,873,291 |
| | $ | 1,904,001 |
| $ | 1,876,149 |
| | $ | 1,823,909 |
|
Accounts payable and accrued expenses | 121,483 |
| | 108,682 |
| 112,076 |
| | 92,855 |
|
Rents received in advance and security deposits | 26,223 |
| | 29,798 |
| 25,635 |
| | 30,079 |
|
Distributions payable | 28,462 |
| | 31,335 |
| 31,346 |
| | 30,856 |
|
Deferred revenue associated with operating leases | 12,047 |
| | 12,666 |
| 8,415 |
| | 9,125 |
|
Redeemable preferred units of general partner, 531,667 units outstanding at December 31, 2016 and none at September 30, 2017 | — |
| | 26,583 |
| |
Capital lease obligation | 16,347 |
| — |
| — |
| |
Property - operating lease liabilities | | 16,619 |
| | — |
|
Interest rate derivatives | | 11,894 |
| | 5,459 |
|
Other liabilities | 39,459 |
| | 44,740 |
| 5,948 |
| | 6,546 |
|
Total liabilities | 2,117,312 |
| | 2,157,805 |
| 2,088,082 |
| | 1,998,829 |
|
Commitments and contingencies (Note 15) |
|
| |
|
| |
Commitments and contingencies (Note 17) | |
|
| |
|
|
Redeemable noncontrolling interests | 23,269 |
| | 22,979 |
| 27,385 |
| | 26,260 |
|
Equity: | |
| | |
| |
| | |
|
Corporate Office Properties, L.P.’s equity: | |
| | |
| |
| | |
|
Preferred units | | | | |
General partner, 6,900,000 preferred units outstanding at December 31, 2016 and none at September 30, 2017 | — |
| | 172,500 |
| |
Limited partner, 352,000 preferred units outstanding at September 30, 2017 and December 31, 2016 | 8,800 |
| | 8,800 |
| |
Common units, 99,608,170 and 98,498,651 held by the general partner and 3,253,391 and 3,590,391 held by limited partners at September 30, 2017 and December 31, 2016, respectively | 1,394,911 |
| | 1,401,597 |
| |
Preferred units held by limited partner, 352,000 preferred units outstanding at March 31, 2019 and December 31, 2018 | | 8,800 |
| | 8,800 |
|
Common units, 111,939,790 and 110,241,868 held by the general partner and 1,576,024 and 1,332,886 held by limited partners at March 31, 2019 and December 31, 2018, respectively | | 1,640,272 |
| | 1,604,655 |
|
Accumulated other comprehensive loss | (952 | ) | | (1,854 | ) | (9,536 | ) | | (121 | ) |
Total Corporate Office Properties, L.P.’s equity | 1,402,759 |
| | 1,581,043 |
| 1,639,536 |
| | 1,613,334 |
|
Noncontrolling interests in subsidiaries | 12,025 |
| | 13,621 |
| 16,642 |
| | 13,714 |
|
Total equity | 1,414,784 |
| | 1,594,664 |
| 1,656,178 |
| | 1,627,048 |
|
Total liabilities, redeemable noncontrolling interest and equity | $ | 3,555,365 |
| | $ | 3,775,448 |
| |
Total liabilities, redeemable noncontrolling interests and equity | | $ | 3,771,645 |
| | $ | 3,652,137 |
|
See accompanying notes to consolidated financial statements.
Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per unit data)
(unaudited)
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Revenues | |
| | |
| | | | |
Rental revenue | $ | 102,275 |
| | $ | 103,956 |
| | $ | 304,237 |
| | $ | 316,862 |
|
Tenant recoveries and other real estate operations revenue | 24,956 |
| | 26,998 |
| | 78,058 |
| | 81,103 |
|
Construction contract and other service revenues | 29,786 |
| | 11,149 |
| | 65,958 |
| | 34,372 |
|
Total revenues | 157,017 |
| | 142,103 |
| | 448,253 |
| | 432,337 |
|
Expenses | |
| | |
| | |
| | |
|
Property operating expenses | 46,368 |
| | 49,952 |
| | 143,515 |
| | 149,968 |
|
Depreciation and amortization associated with real estate operations | 34,438 |
| | 32,015 |
| | 100,290 |
| | 99,790 |
|
Construction contract and other service expenses | 28,788 |
| | 10,341 |
| | 63,589 |
| | 32,513 |
|
Impairment (recoveries) losses | (161 | ) | | 27,699 |
| | 1,464 |
| | 99,837 |
|
General, administrative and leasing expenses | 7,368 |
| | 8,855 |
| | 23,838 |
| | 28,764 |
|
Business development expenses and land carry costs | 1,277 |
| | 1,716 |
| | 4,567 |
| | 6,497 |
|
Total operating expenses | 118,078 |
| | 130,578 |
| | 337,263 |
| | 417,369 |
|
Operating income | 38,939 |
| | 11,525 |
| | 110,990 |
| | 14,968 |
|
Interest expense | (19,615 | ) | | (18,301 | ) | | (57,772 | ) | | (64,499 | ) |
Interest and other income | 1,508 |
| | 1,391 |
| | 4,817 |
| | 3,877 |
|
Loss on early extinguishment of debt | — |
| | (59 | ) | | (513 | ) | | (37 | ) |
Income (loss) before equity in income of unconsolidated entities and income taxes | 20,832 |
| | (5,444 | ) | | 57,522 |
| | (45,691 | ) |
Equity in income of unconsolidated entities | 719 |
| | 594 |
| | 2,162 |
| | 614 |
|
Income tax (expense) benefit | (57 | ) | | 21 |
| | (145 | ) | | 28 |
|
Income (loss) before gain on sales of real estate | 21,494 |
| | (4,829 | ) | | 59,539 |
| | (45,049 | ) |
Gain on sales of real estate | 1,188 |
| | 34,101 |
| | 5,438 |
| | 34,101 |
|
Net income (loss) | 22,682 |
| | 29,272 |
| | 64,977 |
| | (10,948 | ) |
Net income attributable to noncontrolling interests in consolidated entities | (897 | ) | | (913 | ) | | (2,738 | ) | | (2,803 | ) |
Net income (loss) attributable to COPLP | 21,785 |
| | 28,359 |
| | 62,239 |
| | (13,751 | ) |
Preferred unit distributions | (165 | ) | | (3,717 | ) | | (6,714 | ) | | (11,152 | ) |
Issuance costs associated with redeemed preferred units | — |
| | — |
| | (6,847 | ) | | — |
|
Net income (loss) attributable to COPLP common unitholders | $ | 21,620 |
| | $ | 24,642 |
| | $ | 48,678 |
| | $ | (24,903 | ) |
Earnings per common unit: | |
| | |
| | |
| | |
|
Net income (loss) attributable to COPLP common unitholders - basic | $ | 0.21 |
| | $ | 0.25 |
| | $ | 0.47 |
| | $ | (0.26 | ) |
Net income (loss) attributable to COPLP common unitholders - diluted | $ | 0.21 |
| | $ | 0.25 |
| | $ | 0.47 |
| | $ | (0.26 | ) |
Distributions declared per common unit | $ | 0.275 |
| | $ | 0.275 |
| | $ | 0.825 |
| | $ | 0.825 |
|
|
| | | | | | | |
| For the Three Months Ended March 31, |
| 2019 | | 2018 |
Revenues | |
| | |
|
Lease revenue | $ | 130,903 |
| | $ | 127,133 |
|
Other property revenue | 1,087 |
| | 1,145 |
|
Construction contract and other service revenues | 16,950 |
| | 27,198 |
|
Total revenues | 148,940 |
| | 155,476 |
|
Operating expenses | |
| | |
|
Property operating expenses | 49,445 |
| | 50,951 |
|
Depreciation and amortization associated with real estate operations | 34,796 |
| | 33,512 |
|
Construction contract and other service expenses | 16,326 |
| | 26,216 |
|
General, administrative and leasing expenses | 8,751 |
| | 7,292 |
|
Business development expenses and land carry costs | 1,113 |
| | 1,614 |
|
Total operating expenses | 110,431 |
| | 119,585 |
|
Interest expense | (18,674 | ) | | (18,784 | ) |
Interest and other income | 2,286 |
| | 1,359 |
|
Gain on sales of real estate | — |
| | (4 | ) |
Income before equity in income of unconsolidated entities and income taxes | 22,121 |
| | 18,462 |
|
Equity in income of unconsolidated entities | 391 |
| | 373 |
|
Income tax expense | (194 | ) | | (55 | ) |
Net income | 22,318 |
| | 18,780 |
|
Net income attributable to noncontrolling interests in consolidated entities | (1,037 | ) | | (921 | ) |
Net income attributable to COPLP | 21,281 |
| | 17,859 |
|
Preferred unit distributions | (165 | ) | | (165 | ) |
Net income attributable to COPLP common unitholders | $ | 21,116 |
| | $ | 17,694 |
|
| | | |
Earnings per common unit: (1) | |
| | |
|
Net income attributable to COPLP common unitholders - basic | $ | 0.19 |
| | $ | 0.17 |
|
Net income attributable to COPLP common unitholders - diluted | $ | 0.19 |
| | $ | 0.17 |
|
(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)
(unaudited)
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net income (loss) | $ | 22,682 |
| | $ | 29,272 |
| | $ | 64,977 |
| | $ | (10,948 | ) |
Other comprehensive income (loss) | |
| | |
| | | | |
Unrealized (loss) gain on interest rate derivatives | (301 | ) | | 407 |
| | (1,877 | ) | | (16,581 | ) |
Loss on interest rate derivatives recognized in interest expense (effective portion) | 615 |
| | 1,043 |
| | 2,652 |
| | 2,763 |
|
Loss on interest rate derivatives recognized in interest expense (ineffective portion) | — |
| | — |
| | 88 |
| | — |
|
Equity in other comprehensive income (loss) of equity method investee | — |
| | — |
| | 39 |
| | (184 | ) |
Other comprehensive income (loss) | 314 |
| | 1,450 |
| | 902 |
| | (14,002 | ) |
Comprehensive income (loss) | 22,996 |
| | 30,722 |
| | 65,879 |
| | (24,950 | ) |
Comprehensive income attributable to noncontrolling interests | (897 | ) | | (913 | ) | | (2,738 | ) | | (2,803 | ) |
Comprehensive income (loss) attributable to COPLP | $ | 22,099 |
| | $ | 29,809 |
| | $ | 63,141 |
| | $ | (27,753 | ) |
|
| | | | | | | |
| For the Three Months Ended March 31, |
| 2019 | | 2018 |
Net income | $ | 22,318 |
| | $ | 18,780 |
|
Other comprehensive (loss) income | | | |
Unrealized (loss) gain on interest rate derivatives | (8,845 | ) | | 4,676 |
|
(Gain) loss on interest rate derivatives recognized in interest expense | (570 | ) | | 245 |
|
Other comprehensive (loss) income | (9,415 | ) | | 4,921 |
|
Comprehensive income | 12,903 |
| | 23,701 |
|
Comprehensive income attributable to noncontrolling interests | (1,037 | ) | | (921 | ) |
Comprehensive income attributable to COPLP | $ | 11,866 |
| | $ | 22,780 |
|
See accompanying notes to consolidated financial statements.
Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Equity
(Dollars in thousands)
(unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Limited Partner Preferred Units | | General Partner Preferred Units | | Common Units | | Accumulated Other Comprehensive Income (Loss) | | Noncontrolling Interests in Subsidiaries | | |
| Units | | Amount | | Units | | Amount | | Units | | Amount | | | | Total Equity |
Balance at December 31, 2015 | 352,000 |
| | $ | 8,800 |
| | 7,431,667 |
| | $ | 199,083 |
| | 98,208,903 |
| | $ | 1,400,745 |
| | $ | (2,985 | ) | | $ | 10,921 |
| | $ | 1,616,564 |
|
Costs associated with common shares issued to the public | — |
| | — |
| | — |
| | — |
| | — |
| | (5 | ) | | — |
| | — |
| | (5 | ) |
Share-based compensation (units net of redemption) | — |
| | — |
| | — |
| | — |
| | 146,274 |
| | 6,177 |
| | — |
| | — |
| | 6,177 |
|
Redemptions of vested equity awards | — |
| | — |
| | — |
| | — |
| | — |
| | (2,179 | ) | | — |
| | — |
| | (2,179 | ) |
Comprehensive loss | — |
| | 495 |
| | — |
| | 10,657 |
| | — |
| | (24,903 | ) | | (14,002 | ) | | 1,124 |
| | (26,629 | ) |
Distributions to owners of common and preferred units | — |
| | (495 | ) | | — |
| | (10,657 | ) | | — |
| | (81,142 | ) | | — |
| | — |
| | (92,294 | ) |
Distributions to noncontrolling interests in subsidiaries | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (12 | ) | | (12 | ) |
Adjustment to arrive at fair value of redeemable noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | (516 | ) | | — |
| | — |
| | (516 | ) |
Tax loss from share-based compensation | — |
| | — |
| | — |
| | — |
| | — |
| | (319 | ) | | — |
| | — |
| | (319 | ) |
Balance at September 30, 2016 | 352,000 |
| | $ | 8,800 |
| | 7,431,667 |
| | $ | 199,083 |
| | 98,355,177 |
| | $ | 1,297,858 |
| | $ | (16,987 | ) | | $ | 12,033 |
| | $ | 1,500,787 |
|
| | | | | | | | | | | | | | | | | |
Balance at December 31, 2016 | 352,000 |
| | $ | 8,800 |
| | 6,900,000 |
| | $ | 172,500 |
| | 102,089,042 |
| | $ | 1,401,597 |
| | $ | (1,854 | ) | | $ | 13,621 |
| | $ | 1,594,664 |
|
Redemption of preferred units resulting from redemption of preferred shares | — |
| | — |
| | (6,900,000 | ) | | (172,500 | ) | | — |
| | — |
| | — |
| | — |
| | (172,500 | ) |
Issuance of common units resulting from common shares issued under COPT at-the-market program | — |
| | — |
| | — |
| | — |
| | 591,042 |
| | 19,668 |
| | — |
| | — |
| | 19,668 |
|
Issuance of common units resulting from exercise of share options | — |
| | — |
| | — |
| | — |
| | 5,000 |
| | 150 |
| | — |
| | — |
| | 150 |
|
Share-based compensation (units net of redemption) | — |
| | — |
| | — |
| | — |
| | 176,477 |
| | 4,444 |
| | — |
| | — |
| | 4,444 |
|
Redemptions of vested equity awards | — |
| | — |
| | — |
| | — |
| | — |
| | (1,869 | ) | | — |
| | — |
| | (1,869 | ) |
Comprehensive income | — |
| | 495 |
| | — |
| | 6,219 |
| | — |
| | 55,525 |
| | 902 |
| | 1,018 |
| | 64,159 |
|
Distributions to owners of common and preferred units | — |
| | (495 | ) | | — |
| | (6,219 | ) | | — |
| | (84,848 | ) | | — |
| | — |
| | (91,562 | ) |
Distributions to noncontrolling interests in subsidiaries | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,614 | ) | | (2,614 | ) |
Adjustment to arrive at fair value of redeemable noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | 244 |
| | — |
| | — |
| | 244 |
|
Balance at September 30, 2017 | 352,000 |
| | $ | 8,800 |
| | — |
| | $ | — |
| | 102,861,561 |
| | $ | 1,394,911 |
| | $ | (952 | ) | | $ | 12,025 |
| | $ | 1,414,784 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Limited Partner Preferred Units | | Common Units | | Accumulated Other Comprehensive Income (Loss) | | Noncontrolling Interests in Subsidiaries | | |
| Units | | Amount | | Units | | Amount | | | | Total Equity |
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 |
| | — |
| | — |
|
Balance at December 31, 2017, as adjusted | 352,000 |
| | 8,800 |
| | 104,543,177 |
| | 1,444,746 |
| | 2,449 |
| | 12,312 |
| | 1,468,307 |
|
Issuance of common units resulting from common shares issued under COPT forward equity sale agreements | — |
| | — |
| | 677,000 |
| | 19,976 |
| | — |
| | — |
| | 19,976 |
|
Share-based compensation (units net of redemption) | — |
| | — |
| | 127,242 |
| | 1,680 |
| | — |
| | — |
| | 1,680 |
|
Redemptions of vested equity awards | — |
| | — |
| | — |
| | (1,327 | ) | | — |
| | — |
| | (1,327 | ) |
Comprehensive income | — |
| | 165 |
| | — |
| | 17,694 |
| | 4,921 |
| | 283 |
| | 23,063 |
|
Distributions to owners of common and preferred units | — |
| | (165 | ) | | — |
| | (28,970 | ) | | — |
| | — |
| | (29,135 | ) |
Distributions to noncontrolling interests in subsidiaries | — |
| | — |
| | — |
| | — |
| | — |
| | (3 | ) | | (3 | ) |
Adjustment to arrive at fair value of redeemable noncontrolling interests | — |
| | — |
| | — |
| | (537 | ) | | — |
| | — |
| | (537 | ) |
Balance at March 31, 2018 | 352,000 |
| | $ | 8,800 |
| | 105,347,419 |
| | $ | 1,453,262 |
| | $ | 7,370 |
| | $ | 12,592 |
| | $ | 1,482,024 |
|
| | | | | | | | | | | | | |
Balance at December 31, 2018 | 352,000 |
| | $ | 8,800 |
| | 111,574,754 |
| | $ | 1,604,655 |
| | $ | (121 | ) | | $ | 13,714 |
| | $ | 1,627,048 |
|
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) | — |
| | — |
| | 326,973 |
| | 1,802 |
| | — |
| | — |
| | 1,802 |
|
Redemptions of vested equity awards | — |
| | — |
| | — |
| | (1,817 | ) | | — |
| | — |
| | (1,817 | ) |
Comprehensive income | — |
| | 165 |
| | — |
| | 21,116 |
| | (9,415 | ) | | 362 |
| | 12,228 |
|
Distributions to owners of common and preferred units | — |
| | (165 | ) | | — |
| | (31,139 | ) | | — |
| | — |
| | (31,304 | ) |
Contributions from noncontrolling interests in subsidiaries | — |
| | — |
| | — |
| | — |
| | — |
| | 2,570 |
| | 2,570 |
|
Distributions to noncontrolling interests in subsidiaries | — |
| | — |
| | — |
| | — |
| | — |
| | (4 | ) | | (4 | ) |
Adjustment to arrive at fair value of redeemable noncontrolling interests | — |
| | — |
| | — |
| | (799 | ) | | — |
| | — |
| | (799 | ) |
Balance at March 31, 2019 | 352,000 |
| | $ | 8,800 |
| | 113,515,814 |
| | $ | 1,640,272 |
| | $ | (9,536 | ) | | $ | 16,642 |
| | $ | 1,656,178 |
|
See accompanying notes to consolidated financial statements.
Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| | | For the Nine Months Ended September 30, | For the Three Months Ended March 31, |
| 2017 | | 2016 | 2019 | | 2018 |
Cash flows from operating activities | |
| | |
| |
| | |
|
Revenues from real estate operations received | $ | 390,116 |
| | $ | 393,300 |
| $ | 126,569 |
| | $ | 135,027 |
|
Construction contract and other service revenues received | 72,682 |
| | 54,399 |
| 5,904 |
| | 9,268 |
|
Property operating expenses paid | (144,187 | ) | | (154,203 | ) | (42,974 | ) | | (43,212 | ) |
Construction contract and other service expenses paid | (57,189 | ) | | (33,169 | ) | (4,614 | ) | | (41,128 | ) |
General, administrative, leasing, business development and land carry costs paid | (27,066 | ) | | (27,879 | ) | (11,703 | ) | | (10,900 | ) |
Interest expense paid | (55,637 | ) | | (61,662 | ) | (18,282 | ) | | (19,092 | ) |
Lease incentives | (9,414 | ) | | (1,789 | ) | |
Lease incentives paid | | (1,158 | ) | | (4,204 | ) |
Other | 1,373 |
| | 976 |
| 910 |
| | 436 |
|
Net cash provided by operating activities | 170,678 |
| | 169,973 |
| 54,652 |
| | 26,195 |
|
Cash flows from investing activities | |
| | |
| |
| | |
|
Construction, development and redevelopment | (113,678 | ) | | (121,297 | ) | (100,212 | ) | | (17,540 | ) |
Tenant improvements on operating properties | (19,876 | ) | | (26,055 | ) | (4,174 | ) | | (9,077 | ) |
Other capital improvements on operating properties | (15,174 | ) | | (22,063 | ) | (4,476 | ) | | (5,198 | ) |
Proceeds from dispositions of properties | 101,107 |
| | 210,661 |
| |
Proceeds from partial sale of properties, net of related debt | — |
| | 43,686 |
| |
Investing receivables funded | | (11,051 | ) | | — |
|
Leasing costs paid | (6,468 | ) | | (6,024 | ) | (2,539 | ) | | (2,015 | ) |
Other | 1,359 |
| | (991 | ) | 1,297 |
| | (974 | ) |
Net cash (used in) provided by investing activities | (52,730 | ) | | 77,917 |
| |
Net cash used in investing activities | | (121,155 | ) | | (34,804 | ) |
Cash flows from financing activities | |
| | |
| |
| | |
|
Proceeds from debt | | | | | | |
Revolving Credit Facility | 268,000 |
| | 362,500 |
| 123,000 |
| | 82,000 |
|
Other debt proceeds | — |
| | 105,000 |
| 3,350 |
| | — |
|
Repayments of debt | | | | | | |
Revolving Credit Facility | (98,000 | ) | | (406,000 | ) | (74,000 | ) | | (55,000 | ) |
Scheduled principal amortization | (2,878 | ) | | (4,454 | ) | (1,098 | ) | | (1,052 | ) |
Other debt repayments | (200,150 | ) | | (203,056 | ) | |
Deferred financing costs paid | — |
| | (825 | ) | |
Payments on finance lease liabilities | | (52 | ) | | (4,202 | ) |
Net proceeds from issuance of common units | 19,834 |
| | (46 | ) | 46,415 |
| | 19,989 |
|
Redemption of preferred units | (199,083 | ) | | — |
| |
Common unit distributions paid | (84,655 | ) | | (81,053 | ) | (30,675 | ) | | (28,749 | ) |
Preferred unit distributions paid | (9,800 | ) | | (11,152 | ) | (165 | ) | | (165 | ) |
Distributions paid to redeemable noncontrolling interests | (7,860 | ) | | (14,329 | ) | |
Redemption of vested equity awards | (1,869 | ) | | (2,179 | ) | (1,817 | ) | | (1,327 | ) |
Other | (492 | ) | | (5,032 | ) | 1,370 |
| | (5,183 | ) |
Net cash used in financing activities | (316,953 | ) | | (260,626 | ) | |
Net decrease in cash and cash equivalents | (199,005 | ) | | (12,736 | ) | |
Cash and cash equivalents | |
| | |
| |
Net cash provided by financing activities | | 66,328 |
| | 6,311 |
|
Net decrease in cash and cash equivalents and restricted cash | | (175 | ) | | (2,298 | ) |
Cash and cash equivalents and restricted cash | | |
| | |
|
Beginning of period | 209,863 |
| | 60,310 |
| 11,950 |
| | 14,831 |
|
End of period | $ | 10,858 |
| | $ | 47,574 |
| $ | 11,775 |
| | $ | 12,533 |
|
See accompanying notes to consolidated financial statements.
Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(in thousands)
(unaudited)
|
| | | | | | | |
| For the Nine Months Ended September 30, |
| 2017 | | 2016 |
Reconciliation of net income (loss) to net cash provided by operating activities: | |
| | |
|
Net income (loss) | $ | 64,977 |
| | $ | (10,948 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |
| | |
|
Depreciation and amortization | 101,963 |
| | 101,429 |
|
Impairment losses | 1,457 |
| �� | 99,797 |
|
(Gain) loss on interest rate derivatives | (43 | ) | | 347 |
|
Amortization of deferred financing costs and net debt discounts | 3,514 |
| | 4,456 |
|
Increase in deferred rent receivable | (545 | ) | | (930 | ) |
Gain on sales of real estate | (5,438 | ) | | (34,101 | ) |
Share-based compensation | 4,092 |
| | 5,637 |
|
Other | (3,970 | ) | | (2,727 | ) |
Operating changes in assets and liabilities: | |
| | |
Decrease in accounts receivable | 7,498 |
| | 3,658 |
|
Decrease (increase) in restricted cash and marketable securities | 1,748 |
| | (495 | ) |
Decrease (increase) in prepaid expenses and other assets, net | 3,190 |
| | (19,778 | ) |
(Decrease) increase in accounts payable, accrued expenses and other liabilities | (4,190 | ) | | 32,036 |
|
Decrease in rents received in advance and security deposits | (3,575 | ) | | (8,408 | ) |
Net cash provided by operating activities | $ | 170,678 |
| | $ | 169,973 |
|
Supplemental schedule of non-cash investing and financing activities: | |
| | |
|
Increase in accrued capital improvements, leasing and other investing activity costs | $ | 17,129 |
| | $ | 9,963 |
|
Increase in property in connection with capital lease obligation | $ | 16,127 |
| | $ | — |
|
Increase in property and redeemable noncontrolling interests in connection with property contributed in a joint venture | $ | — |
| | $ | 22,600 |
|
Decrease in redeemable noncontrolling interests and increase in other liabilities in connection with distribution payable to redeemable noncontrolling interest | $ | — |
| | $ | 6,683 |
|
Non-cash changes from partial sale of properties, net of debt: | | | |
Decrease in properties, net | $ | — |
| | $ | (114,597 | ) |
Increase in investment in unconsolidated real estate joint venture | $ | — |
| | $ | 25,680 |
|
Decrease in debt | $ | — |
| | $ | 59,534 |
|
Other net decreases in assets and liabilities | $ | — |
| | $ | 3,619 |
|
Increase (decrease) in fair value of derivatives applied to accumulated other comprehensive loss and noncontrolling interests | $ | 774 |
| | $ | (13,817 | ) |
Equity in other comprehensive income (loss) of an equity method investee | $ | 39 |
| | $ | (184 | ) |
Distributions payable | $ | 28,462 |
| | $ | 30,225 |
|
(Decrease) increase in redeemable noncontrolling interest and (increase) decrease in equity to carry redeemable noncontrolling interest at fair value | $ | (244 | ) | | $ | 516 |
|
|
| | | | | | | |
| For the Three Months Ended March 31, |
| 2019 | | 2018 |
Reconciliation of net income to net cash provided by operating activities: | |
| | |
|
Net income | $ | 22,318 |
| | $ | 18,780 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
|
Depreciation and other amortization | 35,229 |
| | 34,035 |
|
Amortization of deferred financing costs and net debt discounts | 898 |
| | 822 |
|
Increase in deferred rent receivable | (2,539 | ) | | (1,512 | ) |
Gain on sales of real estate | — |
| | 4 |
|
Share-based compensation | 1,659 |
| | 1,545 |
|
Other | (1,572 | ) | | (907 | ) |
Changes in operating assets and liabilities: | |
| | |
Decrease in accounts receivable | 1,033 |
| | 7,877 |
|
(Increase) decrease in prepaid expenses and other assets, net | (6,406 | ) | | 8,398 |
|
Increase (decrease) in accounts payable, accrued expenses and other liabilities | 8,476 |
| | (43,768 | ) |
(Decrease) increase in rents received in advance and security deposits | (4,444 | ) | | 921 |
|
Net cash provided by operating activities | $ | 54,652 |
| | $ | 26,195 |
|
Reconciliation of cash and cash equivalents and restricted cash: | | | |
Cash and cash equivalents at beginning of period | $ | 8,066 |
| | $ | 12,261 |
|
Restricted cash at beginning of period | 3,884 |
| | 2,570 |
|
Cash and cash equivalents and restricted cash at beginning of period | $ | 11,950 |
| | $ | 14,831 |
|
| | | |
Cash and cash equivalents at end of period | $ | 7,780 |
| | $ | 8,888 |
|
Restricted cash at end of period | 3,995 |
| | 3,645 |
|
Cash and cash equivalents and restricted cash at end of period | $ | 11,775 |
| | $ | 12,533 |
|
Supplemental schedule of non-cash investing and financing activities: | |
| | |
|
Increase in accrued capital improvements, leasing and other investing activity costs | $ | 11,329 |
| | $ | 12,232 |
|
Finance right-of-use asset contributed by noncontrolling interest in joint venture | $ | 2,570 |
| | $ | — |
|
Operating right-of-use assets obtained in exchange for operating lease liabilities | $ | 276 |
| | $ | — |
|
(Decrease) increase in fair value of derivatives applied to accumulated other comprehensive income and noncontrolling interests | $ | (9,450 | ) | | $ | 4,887 |
|
Distributions payable | $ | 31,346 |
| | $ | 29,146 |
|
Increase in redeemable noncontrolling interests and decrease in equity to carry redeemable noncontrolling interests at fair value | $ | 799 |
| | $ | 537 |
|
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
(unaudited)
1. Organization
Corporate Office Properties Trust (“COPT”) and subsidiaries (collectively, the “Company”) is a fully-integrated and self-managed real estate investment trust (“REIT”). Corporate Office Properties, L.P. (“COPLP”) and subsidiaries (collectively, the “Operating Partnership”) is the entity through which 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 refer to each of the Company and the Operating Partnership. We own, manage, lease, develop and selectively acquire office and data center properties. The majority of our portfolio is in locations that support the United States Government and its contractors, most of whom are engaged in national security, 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 within our regional footprint in the Greater Washington, DC/Baltimore region
with durable Class-A office fundamentals and characteristics as well as other properties supporting general commercial office tenants (“Regional Office”). As of September 30, 2017March 31, 2019, our properties included the following:
159 operating office165 properties totaling 17.418.3 million square feet including 15 triple-net leased,comprised of 15.2 million square feet in 146 office properties and 3.1 million square feet in 19 single-tenant data center properties.shell properties (“data center shells”). We owned six of these propertiesdata center shells through an unconsolidated real estate joint venture;
ten officea wholesale data center with a critical load of 19.25 megawatts;
15 properties under construction or redevelopment (ten office properties and five data center shells) that we estimate will total approximately 1.12.0 million square feet upon completion, including three triple-net leased, single-tenant data center properties, three partially operational propertiestwo partially-operational properties; and two properties completed but held for future lease to the United States Government;
984approximately 900 acres of land we controlled for future development that we believe could be developed into approximately 12.311.6 million square feet and an additional 152150 acres of other land; and
a wholesale data center with a critical load of 19.25 megawatts.land.
COPLP owns real estate directly and through subsidiary partnerships and limited liability companies (“LLCs”). In addition to owning real estate, COPLP also owns subsidiaries that provide real estate services such as property management and construction and development services primarily for our properties but also for third parties. Some of these services are performed by a taxable REIT subsidiary (“TRS”).
Equity interests in COPLP are in the form of common and preferred units. As of September 30, 2017,March 31, 2019, COPT owned 96.8%98.6% of the outstanding COPLP common units (“common units”); the remaining common units and noneall of the outstanding COPLP preferred units (“preferred units”); the remaining common and preferred units in COPLP were owned by third parties. Common units in COPLP not owned by COPT carry certain redemption rights. The number of common units in COPLP owned by COPT is equivalent to the number of outstanding common shares of beneficial interest (“common shares”) of COPT, and the entitlement of all COPLP common units to quarterly distributions and payments in liquidation is substantially the same as those of COPT common shareholders. Similarly,However, COPLP’s common units include a special class of unit referred to as profit interest units (“PIUs”) originating from certain share-based compensation awards issued to executives (described further in the case of any series of preferred units in COPLP held by COPT, there is a series of preferred shares of beneficial interest (“preferred shares”) in COPTNote 15) that is equivalent in numberare subject to vesting and carries substantially the same terms as such series of COPLP preferredcertain tax event criteria, and accordingly may carry different rights to redemption and distributions than non-PIU common units. COPT’s common shares are publicly traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “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, andofficers; similarly, although as a partnership, COPLP does not have a board of trustees, we refer to COPT’s Board of Trustees as COPLP’s Board of Trustees.
2. Summary of Significant Accounting Policies
Basis of Presentation
The COPT consolidated financial statements include the accounts of COPT, 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 COPLP 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.
We use the cost method of accounting whenWhen we own an interestequity investment in an entity and cannot exert significant influence over its operations.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.
These interim financial statements should be read together with the consolidated financial statements and notes thereto as of and for the year ended December 31, 20162018 included in our 20162018 Annual Report on Form 10-K. The unaudited consolidated financial statements include all adjustments that are necessary, in the opinion of management, to fairly state our financial position and results of operations. All adjustments are of a normal recurring nature. The consolidated financial statements have been prepared using the accounting policies described in our 20162018 Annual Report on Form 10-K.10-K as updated for our adoption of recent accounting pronouncements discussed below.
Reclassification
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
We adopted guidance issued by the Financial Accounting Standards Board (“FASB”) effective January 1, 2017 intended to simplify various aspects related to the accounting and presentation for employee share-based payment transactions,equity, including the income tax consequences, classificationreclassifications of awards as either equity or liabilities and classification on the consolidated statement of cash flows. Inour revenue from real estate operations in connection with our adoption of this policy, we made an entity-wide accounting policy election to continue to account for potential future award forfeitures by estimating the number of awards that are expected to vest. Our adoption of thisnew lease guidance did not have a material impact on our consolidated financial statements.described below.
We adopted guidance issued by the FASB prospectively effective January 1, 2017 that clarifies the definition of a business used by entities in determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. Under the new guidance, we expect that the majority of our future operating property acquisitions will be accounted for as asset acquisitions, whereas under the previous guidance our recent acquisitions were accounted for as business combinations; we believe that the primary effect of this change will be that transaction costs associated with future acquisitions will be capitalized rather than expensed as incurred. This guidance had no effect on our consolidated financial statements upon adoption.
In May 2014, the FASB issued guidance regarding the recognition of revenue from contracts with customers. Under this guidance, an entity will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires improved disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. We will adopt this guidance for our annual and interim periods beginning January 1, 2018 and expect to use the modified retrospective method, under which the cumulative effect of initially applying the guidance is recognized at the date of initial application. We do not believe that our adoption of this guidance beginning on January 1, 2018 will have a material effect on our consolidated financial statements. However, as discussed further below, once the new guidance setting forth principles for the recognition, measurement, presentation and disclosure of leases goes into effect on January 1, 2019, we believe that the new revenue standard will apply to executory costs and other components of revenue due under leases that are deemed to be non-lease components (such as common area maintenance and provision of utilities), which could affect our recognition pattern for such revenue.Recent Accounting Pronouncements
In February 2016, the FASB issued guidance that setssetting forth principles for the recognition, measurement, presentation and disclosure of leases. This guidance requires lessees to apply a dual approach, classifying leases as either finance or 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 based on an effective interest method or straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. TheThis guidance requires lessors of real estate to account for leases using an approach that is substantially equivalent to existing guidance previously in place for sales-typeoperating leases, direct financing leases and operatingsales-type leases. ThisWe adopted this guidance is effective for reporting periods beginningon January 1, 2019 using a modified retrospective transition approach at
the time of adoption. Early adoption is also permitted for this guidance. In addition,under which we elected to apply the guidance permits lesseeseffective January 1, 2019 and lessors to electnot adjust prior comparative reporting periods (except for our presentation of lease revenue discussed below). We elected to apply a package of practical expedients that allow them notenabled us to reassesscarry forward upon adoption: the lease classification for anyadoption our historical assessments of: expired or existing leases;leases regarding their lease classification and deferred recognition of incrementalnon-incremental direct costs of leasing for any expired or existing leases;costs; and whether any expired or existing contracts are, or contain, leases. WhileWe 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 are still completingelected a practical expedient for our assessmentrental properties (as lessor) to avoid separating non-lease components that otherwise would need to be accounted for under the recently-adopted 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 impactlease component and non-lease components as an operating lease since the lease component is the predominant component of this guidance, belowthe combined components. Below is a summary of the anticipated primary effects of this guidance onchanges in our accounting and reporting.reporting that resulted from our adoption of this guidance:
Real estateProperty leases in which we are the lessor:
| |
◦ | Balance sheet reporting: We believeDeferral of non-incremental leasing costs: For new or extended tenant leases, we no longer defer recognition of non-incremental leasing costs that we will apply an approachwould have deferred under the newprior accounting guidance that is similar(refer to the current accounting for operating leases,our 2018 Annual Report on Form 10-K in which we will continue to recognize the underlying leased asset as property on our balance sheet.reported amounts deferred in 2018, 2017 and 2016). |
| |
◦ | DeferralChange in presentation of non-incremental lease costs: Under the new lease guidance, we will no longer be ablerevenue: Due to defer the recognition of non-incremental costs in connection with new or extended tenant leases (refer to amounts reported in our 2016 Annual Report on Form 10-K for amounts deferred in 2014, 2015 and 2016). Upon adoption of the new guidance,practical expedient discussed above to not separate non-lease component revenue from the associated lease component, we wouldare aggregating revenue from our lease components and non-lease components (comprised predominantly of tenant operating expense previously deferred non-incremental lease costsreimbursements) into the line entitled “lease revenue.” We are reporting other revenue from our properties in the line entitled “other property revenue.” We recast prior periods for existing leases unless we elect the package of practical expedients,these changes in which case such costs would remain deferred and amortized over the remaining lease terms.presentation. |
| |
◦ | LeaseChanges in assessment of lease revenue reporting: We believecollectability: Changes in our assessment of lease revenue collectability that previously would have resulted in charges to bad debt expense under prior guidance are being recognized as an |
adjustment to rental revenue under the new guidance. Such amounts recognized by us in prior periods were not significant.
| |
◦ | Operating expenses paid directly by tenants to third parties: Operating expenses paid directly by tenants to third parties (primarily for real estate taxes) and revenue standard will apply to executory costs and other components of revenue deemed to be non-lease components (such as common area maintenance and provision of utilities), even when the revenue forassociated with such activities is not separately stipulated in the lease. Intenant payments that case, we would need to separate the lease components of revenue due under leases from the non-lease components and the revenue from these items previously recognized on a straight-line basis under current lease guidance would behave been recognized under the new revenueprior guidance as the related services are delivered. As a result, while the total revenuewill no longer be reported on our Statement of Operations. Such amounts recognized over time wouldby us in prior periods were not differ under the new guidance, the recognition pattern could be different. We are in the process of evaluating the significance of the difference in the recognition pattern that would result from this change.significant. |
Leases (the most significant of which are ground leases) in which we are the lessee:
| |
◦ | Our most significantBalance sheet presentation of property operating lease right-of-use assets: Upon adoption on January 1, 2019, we recognized property right-of-use assets and offsetting lease liabilities for existing operating leases as lessee are ground leases we have for certain properties; as of September 30, 2017, our future minimum rental payments under these leases totaled $90.2totaling $16 million with various expiration dates extending to the year 2100. While we are still in the process of evaluating these leases under the new guidance, we believe that we will be required to recognize a right-of-use asset and a lease liability for the present value of these minimum lease payments.payments under these leases, and also reclassified an additional $11 million in amounts previously presented elsewhere on our balance sheet in connection with these leases to the right-of-use assets. We also believewill recognize additional right-of-use assets and lease liabilities as we enter into new operating leases. |
| |
◦ | Balance sheet presentation of property finance lease right-of-use assets: Property right-of-use assets of finance leases that these types of leases most likely would be classifiedpreviously were presented as properties under prior guidance are being presented as property finance leasesright-of-use assets under the new guidance, which wouldguidance. As a result, we reclassified $38 million in the interest componentassets from properties to property finance right-of-use assets upon adoption on January 1, 2019. |
| |
◦ | Segment assets: We changed our definition of each lease payment being recorded as interest expense and the right-of-use asset being amortized into expense using the straight-line method over the life of the lease; however, if we elect to apply the package of practical expedients, we will continue to accountsegment assets used for our existing ground leases asreportable segments to include property right-of-use assets associated with operating leases upon adoptionproperties, net of the guidance.related lease liabilities. |
In June 2016, the FASB issued guidance that changes how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The guidance replaces the current incurred loss model with an expected loss approach, resulting in a more timely recognition of such losses. The guidance will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit exposures (e.g. loan commitments). Under the new guidance, an entity will recognize its estimate of expected credit losses as an allowance, as the guidance requires that financial assets be measured on an amortized cost basis and to be presented at the net amount expected to be collected. The guidance is effective for us beginning January 1, 2020, with early adoption permitted after December 2018. We are currently assessing the financial impact of this guidance on our consolidated financial statements.
In August 2016,2018, the FASB issued guidance that clarifies howmodifies disclosure requirements for fair value measurements. This guidance is effective for us beginning January 1, 2020. Early adoption is permitted for this guidance, and entities should classify certain cash receipts and cash paymentsare permitted to early adopt with respect to any removed or modified disclosures while delaying adoption of additional disclosure requirements until the effective date. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In August 2018, the statement of cash flowsFASB issued guidance that aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the objective of reducingrequirements for capitalizing implementation costs incurred to develop or obtain internal-use software. FASB guidance did not previously address the existing diversity in practice related to eight specific cash flow issues. The areas addressed in the new guidance relate to debt prepayment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned and bank-owned life insurance policies, distributions received from equity method investments, beneficial interest in securitization transactions and separately identifiable cash flows and application of the predominance principle.accounting for such implementation costs. The guidance is effective for us beginning January 1, 2018,2020, with early adoption permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In November 2016, the FASB issued guidance that requires the statement of cash flows to explain the change during the period in the total of cash, cash equivalents and amounts described as restricted cash or restricted cash equivalents. Under the new guidance, amounts described as restricted cash and restricted cash equivalents will be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the statement of cash flows.
The guidance is effective for us beginning January 1, 2018, with early adoption permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In February 2017, the FASB issued guidance clarifying the scope of asset derecognition provisions and accounting for partial sales of nonfinancial assets. The new guidance requires recognition of a sale of real estate and resulting gain or loss when control transfers and the buyer has the ability to direct use of, or obtain substantially all of the remaining benefit from, the asset (which generally will occur on the closing date); the factor of continuing involvement is no longer a specific consideration for the timing of recognition. The new guidance eliminates the need to consider adequacy of buyer investment, which was replaced by additional judgments regarding collectability and intent and/or ability to pay. The new guidance also requires an entity to derecognize nonfinancial assets and in substance non financial assets once it transfers control of such assets. When an entity transfers its controlling interest in a nonfinancial asset, but retains a noncontrolling ownership interest, the entity is required to measure any non-controlling interest it receives or retains at fair value and recognize a full gain or loss on the transaction; as a result, sales and partial sales of real estate assets will now be subject to the same derecognition model as all other nonfinancial assets. As discussed further in our 2016 Annual Report on Form 10-K, we had a transaction in July 2016 accounted for as a partial sale under existing guidance that would meet the criteria for immediate full gain recognition under the new guidance; this would result in an additional $18 million in income being recognized in 2016 that is currently being amortized into income in subsequent periods under existing guidance. We do not believe that the recognition pattern for our other sales of real estate will be changed by the new guidance. We will adopt this guidance for our annual and interim periods beginning January 1, 2018 and expect to use the the full retrospective method, under which we would retrospectively restate each reporting period presented at the time of adoption.
In August 2017, the FASB issued guidance that makes targeted improvements to hedge accounting. This new guidance simplifies the application of hedge accounting and better aligns financial reporting for hedging activities with companies’ economic objectives in undertaking those activities. Under the new guidance, all changes in the fair value of highly effective cash flow hedges will be recorded in other comprehensive income instead of income. The new guidance also eases the administrative burden of hedge documentation requirements and assessing hedge effectiveness. The guidance is effective for us beginning January 1, 2019, with early adoption permitted. We are currently evaluating the impact of this guidance, including transition elections and required disclosures, on our financial statements and the timing of adoption.
3. Fair Value Measurements
Recurring Fair Value Measurements
COPT has a non-qualified elective deferred compensation plan for Trustees and certain members of our management team that permits participants to defer up to 100% of their compensation on a pre-tax basis and receive a tax-deferred return on such deferrals. The assets held in the plan (comprised primarily of mutual funds and equity securities) and the corresponding liability to the participants are measured at fair value on a recurring basis on COPT’s consolidated balance sheetsheets using quoted market prices, as are other marketable securities that we hold. The balance of the plan, which was fully funded, totaled $4.4$4.2 million as of September 30, 2017,March 31, 2019, and is included in the accompanying COPTline entitled “prepaid expenses and other assets, net” on COPT’s consolidated balance sheets in the line entitled restricted cash and 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’s consolidated balance sheets. The assets of the plan and other marketable securities that we hold are classified in Level 1 of the fair value hierarchy. Thehierarchy, while the offsetting liability associated with the plan 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 September 30, 2017,March 31, 2019, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivatives and determined that these adjustments are 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. As discussed in Note 6, we estimated theThe fair values of our investing receivables, as disclosed in Note 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 8,9, we estimated the fair valuevalues of our unsecured senior notes based on quoted market rates for publicly-traded debt (categorized within Level 2 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. Settlement at such fair value amounts may not be possible and may not be a prudent management decision.
For additional fair value information, please refer to Note 67 for investing receivables, Note 89 for debt and Note 910 for interest rate derivatives.
COPT and Subsidiaries
The table below sets forth financial assets and liabilities of COPT and its subsidiaries that are accounted for at fair value on a recurring basis as of September 30, 2017March 31, 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 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
Assets: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Marketable securities in deferred compensation plan (1) | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Mutual funds | | $ | 4,336 |
| | $ | — |
| | $ | — |
| | $ | 4,336 |
| | $ | 4,171 |
| | $ | — |
| | $ | — |
| | $ | 4,171 |
|
Other | | 71 |
| | — |
| | — |
| | 71 |
| | 43 |
| | — |
| | — |
| | 43 |
|
Interest rate derivatives (2) | | — |
| | 126 |
| | — |
| | 126 |
| | — |
| | 2,602 |
| | — |
| | 2,602 |
|
Total assets | | $ | 4,407 |
| | $ | 126 |
| | $ | — |
| | $ | 4,533 |
| | $ | 4,214 |
| | $ | 2,602 |
| | $ | — |
| | $ | 6,816 |
|
Liabilities: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Deferred compensation plan liability (3)(2) | | $ | — |
| | $ | 4,407 |
| | $ | — |
| | $ | 4,407 |
| | $ | — |
| | $ | 4,214 |
| | $ | — |
| | $ | 4,214 |
|
Interest rate derivatives (3) | | — |
| | 316 |
| | — |
| | 316 |
| | — |
| | 11,894 |
| | — |
| | 11,894 |
|
Total liabilities | | $ | — |
| | $ | 4,723 |
| | $ | — |
| | $ | 4,723 |
| | $ | — |
| | $ | 16,108 |
| | $ | — |
| | $ | 16,108 |
|
(1) Included in the line entitled “restricted cash and marketable securities” on COPT’s consolidated balance sheet.
(2) Included in the line entitled “prepaid expenses and other assets”assets, net” on COPT’sCOPT’s consolidated balance sheet.
(3)(2) Included in the line entitled “other liabilities” on COPT’s consolidated balance sheet.
COPLP and Subsidiaries
The table below sets forth financial assets and liabilities of COPLP and its subsidiaries that are accounted for at fair value on a recurring basis as of September 30, 2017March 31, 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 |
Assets: | | |
| | |
| | |
| | |
|
Interest rate derivatives (1) | | $ | — |
| | $ | 126 |
| | $ | — |
| | $ | 126 |
|
Liabilities: | | |
| | |
| | |
| | |
|
Interest rate derivatives (2) | | $ | — |
| | $ | 316 |
| | $ | — |
| | $ | 316 |
|
(1) Included in the line entitled “prepaid expenses and other assets” on COPLP’s consolidated balance sheet.
(2) Included in the line entitled “other liabilities” on COPLP’s consolidated balance sheet.
Nonrecurring Fair Value Measurements
As part of our closing process for the first, second and third quarters of 2017, we conducted our quarterly review of our portfolio of long-lived assets to be held and used for indicators of impairment and found there to be no impairment losses. Further, for the respective quarters in 2017, we performed recoverability analyses for our properties classified as held for sale, which resulted in impairment losses of $1.6 million in the second quarter of 2017. These impairment losses were primarily on
properties in White Marsh, Maryland (“White Marsh”) (included in our Regional Office and Other segments) that we reclassified to held for sale during the period and adjusted to fair value less costs to sell. These properties were sold in the third quarter.
Changes in the expected future cash flows due to changes in our plans for specific properties (especially our expected holding period) could result in the recognition of impairment losses. In addition, because properties held for sale are carried at the lower of carrying value or estimated fair values less costs to sell, declines in their estimated fair values due to market conditions and other factors could result in the recognition of impairment losses. |
| | | | | | | | | | | | | | | | |
Description | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs(Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
Assets: | | |
| | |
| | |
| | |
|
Interest rate derivatives | | $ | — |
| | $ | 2,602 |
| | $ | — |
| | $ | 2,602 |
|
Liabilities: | | |
| | |
| | |
| | |
|
Interest rate derivatives | | $ | — |
| | $ | 11,894 |
| | $ | — |
| | $ | 11,894 |
|
4. Properties, Net
Operating properties, net consisted of the following (in thousands):
| | | September 30, 2017 | | December 31, 2016 | March 31, 2019 | | December 31, 2018 |
Land | $ | 440,771 |
| | $ | 433,311 |
| $ | 505,062 |
| | $ | 503,274 |
|
Buildings and improvements | 3,009,203 |
| | 2,944,905 |
| 3,288,033 |
| | 3,241,894 |
|
Less: Accumulated depreciation | (759,262 | ) | | (706,385 | ) | (927,266 | ) | | (897,903 | ) |
Operating properties, net | $ | 2,690,712 |
| | $ | 2,671,831 |
| $ | 2,865,829 |
| | $ | 2,847,265 |
|
ProjectsProperties we had in development or held for future development consisted of the following (in thousands):
| | | September 30, 2017 | | December 31, 2016 | March 31, 2019 | | December 31, 2018 |
Land | $ | 216,108 |
| | $ | 195,521 |
| $ | 227,852 |
| | $ | 207,760 |
|
Development in progress, excluding land | 190,211 |
| | 206,010 |
| 209,321 |
| | 195,601 |
|
Projects in development or held for future development | $ | 406,319 |
| | $ | 401,531 |
| $ | 437,173 |
| | $ | 403,361 |
|
Our properties held for sale included:
as of September 30, 2017: two operating properties in our Data Center Shells sub-segment and one in our Fort Meade/BW Corridor sub-segment; and
as of December 31, 2016: eight operating properties in White Marsh (included primarily in our Regional Office segment); one operating property in our Northern Virginia Defense/IT sub-segment; and land in White Marsh and Northern Virginia.
The table below sets forth the components of assets held for sale on our consolidated balance sheet for these properties (in thousands):
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Properties, net | $ | 68,081 |
| | $ | 85,402 |
|
Deferred rent receivable | 5,582 |
| | 4,241 |
|
Intangible assets on real estate acquisitions, net | — |
| | 338 |
|
Deferred leasing costs, net | 742 |
| | 3,636 |
|
Lease incentives, net | 10 |
| | 1,037 |
|
Assets held for sale, net | $ | 74,415 |
| | $ | 94,654 |
|
2017 Dispositions
During the nine months ended September 30, 2017, we sold the following operating properties (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
Project Name | | City, State | | Segment | | Date of Sale | | Number of Buildings | | Total Rentable Square Feet | | Transaction Value | | Gain on Sale |
3120 Fairview Park Drive | | Falls Church, VA | | Northern Virginia Defense/IT | | 2/15/2017 | | 1 |
| | 190,000 |
| | $ | 39,000 |
| | $ | — |
|
1334 Ashton Road | | Hanover, MD | | Fort Meade/BW Corridor | | 6/9/2017 | | 1 |
| | 37,000 |
| | 2,300 |
| | — |
|
Remaining White Marsh Properties (1) | | White Marsh, MD | | Regional Office and Other | | 7/28/2017 | | 8 |
| | 412,000 |
| | 47,500 |
| | 1,180 |
|
Dispositions through 9/30/2017 | | | | 10 |
| | 639,000 |
| | $ | 88,800 |
| | $ | 1,180 |
|
(1) This sale also included land.
We also sold other land in the nine months ended September 30, 2017 for $14.3 million and recognized a gain on sale of $4.2 million.
On October 27, 2017, we sold:
201 Technology Drive, an operating property totaling 103,000 square feet in Lebanon, Virginia (in our Data Center Shells sub-segment), for $29.2 million; and
11751 Meadowville Lane, an operating property totaling 193,000 square feet in Chester, Virginia (in our Data Center Shells sub-segment), for $44.3 million. We provided a financial guaranty to the buyer under which we would indemnify it for up to $20 million in losses it could incur related to a potential defined capital event occurring on the property by June 30, 2019. Accordingly, we will not recognize the sale of this property for accounting purposes, and will reflect the sale price of the property as a liability, until the guaranty expires. We do not expect to incur any losses under this financial guaranty.
20172019 Construction Activities
During the ninethree months endedSeptember 30, 2017, March 31, 2019, we placed into service 751,000 square feet in five newly constructed properties (including a partially operational property) and 88,000181,000 square feet in three redevelopednewly-constructed properties (including a partially operationalone partially-operational property). As of September 30, 2017,March 31, 2019, we had eight office14 properties under construction (including two partially-operational properties), or for which we were contractually committed to construct, that we estimate will total 1.11.9 million square feet upon completion (including two properties completed but held for future lease to the United States Government) and two office propertiesone property under redevelopment that we estimate will total 36,000106,000 square feet upon completion.
5. Leases
Lessor arrangements
We lease real estate properties, comprised primarily of office properties and data center shells, to third parties. As of March 31, 2019, these leases, which may encompass all, or a portion of, a property, had remaining lease terms spanning from one month to 15 years and averaging approximately five years. 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. While a significant portion of our portfolio is leased to the United States Government, and the majority of those leases consist of a series of one-year renewal options, 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 assured for virtually all of these leases.
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 expense 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, and are usually equal to a defined percentage of the remaining rents due under the lease and/or the remaining unamortized lease origination costs (including tenant improvements and lease commissions).
The table below sets forth our allocation of lease revenue recognized between fixed contractual payments and variable lease payments (in thousands):
|
| | | | |
Lease revenue | | For the Three Months Ended March 31, 2019 |
Fixed contractual payments | | $ | 105,335 |
|
Variable lease payments | | 25,568 |
|
| | $ | 130,903 |
|
Fixed contractual payments due under our property leases were as follows (in thousands):
|
| | | | | | | | |
Year Ending December 31, | | March 31, 2019 | | December 31, 2018 |
2019 (1) | | $ | 305,864 |
| | $ | 400,617 |
|
2020 | | 347,477 |
| | 337,646 |
|
2021 | | 293,546 |
| | 280,369 |
|
2022 | | 258,502 |
| | 246,329 |
|
2023 | | 206,833 |
| | 194,888 |
|
Thereafter | | 562,614 |
| | 523,932 |
|
| | $ | 1,974,836 |
| | $ | 1,983,781 |
|
(1) As of March 31, 2019, represents the nine months ending December 31, 2019.
Lessee arrangements
We lease from third parties land underlying properties that we are operating or developing. These ground leases have long durations with remaining terms ranging from 30 years (excluding extension options) to 97 years. As of March 31, 2019, our balance sheet included $68.1 million in right-of-use assets associated with ground leases that included:
$37.8 million for land on which we are developing an office property in Washington, DC through our Stevens Investors, LLC joint venture, virtually all of the rent on which was previously paid. This lease has a 97-year remaining lease term, and we possess a bargain purchase option that we expect to exercise in 2020;
$10.4 million for land underlying office properties in Washington, DC under two leases with remaining terms of approximately 80 years;
$6.5 million for land underlying a parking garage in Baltimore, Maryland under a lease with a remaining term of 30 years and an option to renew for an additional 49 years that was included in the lease term used in determining the asset balance;
$6.7 million for land in a research park in College Park, Maryland under four 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 64 to 75 years;
$4.3 million for land in a business park in Huntsville, Alabama under nine leases through our LW Redstone Company, LLC joint venture, with remaining terms ranging from 44 to 50 years and options to renew for an additional 25 years that were not included in the lease term used in determining the asset balance; and
$2.3 million for other land in our Fort Meade/BW Corridor sub-segment under two leases with remaining terms of approximately 49 years all of the rent on which was previously paid.
As of March 31, 2019, our balance sheet also included right-of-use lease assets totaling $1.2 million in connection with vehicles and office equipment that we lease from third parties.
In determining operating right-of-use assets and lease liabilities for our existing operating leases upon our adoption of the new lease guidance discussed further in Note 2, as well as for new operating leases in the current period, we were required to
estimate an appropriate incremental borrowing rate on a fully-collateralized basis for the terms of the leases. Since the terms under our ground leases are significantly longer than the terms of borrowings available to us on a fully-collateralized basis, our estimate of this rate required significant judgment, and considered factors such as interest rates available to us on a fully-collateralized basis for shorter-termed debt and U.S. Treasury rates.
5.Our right-of-use assets consisted of the following (in thousands): |
| | | | | | |
Leases | | Balance Sheet Location | | March 31, 2019 |
Right-of-use assets | | | | |
Operating leases - Property | | Property - operating right-of-use assets | | $ | 27,569 |
|
Finance leases | | | | |
Property | | Property - finance right-of-use assets | | 40,488 |
|
Vehicles and office equipment | | Prepaid expenses and other assets, net | | 1,197 |
|
Total finance lease right-of-use assets | | | | 41,685 |
|
| | | | |
Total right-of-use assets | | | | $ | 69,254 |
|
Lease liabilities consisted of the following (in thousands): |
| | | | | | |
Leases | | Balance Sheet Location | | March 31, 2019 |
Lease liabilities | | | | |
Operating leases - Property | | Property - operating lease liabilities | | $ | 16,619 |
|
Finance leases | | Other liabilities | | 1,275 |
|
| | | | |
Total lease liabilities | | | | $ | 17,894 |
|
The table below sets forth the weighted average lease terms and discount rates of our leases as of March 31, 2019:
|
| | | |
Weighted average remaining lease term | | |
Operating leases | | 70 years |
|
Finance leases | | 2 years |
|
Weighted average discount rate | | |
Operating leases | | 7.35 | % |
Finance leases | | 3.10 | % |
The table below presents our total lease cost (in thousands):
|
| | | | | | |
Lease cost | | Statement of Operations Location | | For the Three Months Ended March 31, 2019 |
Operating lease cost | | | | |
Property leases | | Property operating expense | | $ | 413 |
|
Vehicles and office equipment | | General, administrative and leasing expense | | 17 |
|
Finance lease cost | | | | |
Amortization of vehicles and office equipment right-of-use assets | | General, administrative and leasing expense | | 113 |
|
Interest on lease liabilities | | Interest expense | | 4 |
|
| | | | $ | 547 |
|
The table below presents the effect of lease payments on our consolidated statement of cash flows (in thousands):
|
| | | | |
Supplemental cash flow information | | For the Three Months Ended March 31, 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | | |
Operating cash flows for operating leases | | $ | 228 |
|
Operating cash flows for financing leases | | $ | 4 |
|
Financing cash flows for financing leases | | $ | 52 |
|
Payments on leases as of March 31, 2019 were due as follows (in thousands):
|
| | | | | | | | | | | | |
Year Ending December 31, | | Operating leases | | Finance leases | | Total |
2019 (1) | | $ | 830 |
| | $ | 179 |
| | $ | 1,009 |
|
2020 | | 1,128 |
| | 862 |
| | 1,990 |
|
2021 | | 1,111 |
| | 202 |
| | 1,313 |
|
2022 | | 1,129 |
| | 64 |
| | 1,193 |
|
2023 | | 1,135 |
| | — |
| | 1,135 |
|
Thereafter | | 99,185 |
| | — |
| | 99,185 |
|
Total lease payments | | 104,518 |
| �� | 1,307 |
| | 105,825 |
|
Less: Amount representing interest | | (87,899 | ) | | (32 | ) | | (87,931 | ) |
Lease liability | | $ | 16,619 |
| | $ | 1,275 |
| | $ | 17,894 |
|
(1) Represents the nine months ending December 31, 2019.
Future minimum rental payments on leases as of December 31, 2018 were due as follows (in thousands):
|
| | | | | | | | | | | | |
Year Ending December 31, | | Operating leases | | Finance leases | | Total |
2019 | | $ | 1,101 |
| | $ | 219 |
| | $ | 1,320 |
|
2020 | | 1,110 |
| | 844 |
| | 1,954 |
|
2021 | | 1,094 |
| | 184 |
| | 1,278 |
|
2022 | | 1,115 |
| | 49 |
| | 1,164 |
|
2023 | | 1,119 |
| | — |
| | 1,119 |
|
Thereafter | | 83,373 |
| | — |
| | 83,373 |
|
Total lease payments | | $ | 88,912 |
| | 1,296 |
| | 90,208 |
|
Less: Amount representing interest | | N/A |
| | (24 | ) | | (24 | ) |
Total | | N/A |
| | $ | 1,272 |
| | $ | 90,184 |
|
6. Real Estate Joint Ventures
Consolidated Real Estate Joint Ventures
The table below sets forth information pertaining to our investments in consolidated real estate joint ventures as of September 30, 2017March 31, 2019 (dollars in thousands):
| | | | Nominal | | | | | | | | | | | | | | | | | | | |
| | | | Ownership | | | | September 30, 2017 (1) | | | | Nominal ownership % as of 3/31/19 | | | | March 31, 2019 (1) |
| | Date | | % as of | | Total | | Encumbered | | Total | | Date Acquired | | Total Assets | | Encumbered Assets | | Total Liabilities |
| | Acquired | | 9/30/2017 | | Nature of Activity | | Assets | | Assets | | Liabilities | | Nominal ownership % as of 3/31/19 | Nature of Activity | |
LW Redstone Company, LLC | | 3/23/2010 | | 85% | | Development and operation of real estate (2) | | $ | 158,937 |
| | $ | 76,374 |
| | $ | 50,344 |
| | 3/23/2010 | | 85% | Development and operation of real estate (2) | | $ | 178,227 |
| | $ | 75,542 |
| | $ | 55,472 |
|
M Square Associates, LLC | | 6/26/2007 | | 50% | | Development and operation of real estate (3) | | 70,767 |
| | 45,813 |
| | 46,895 |
| | 6/26/2007 | | 50% | Development and operation of real estate (3) | | 79,257 |
| | 46,180 |
| | 44,554 |
|
Stevens Investors, LLC | | 8/11/2015 | | 95% | | Development of real estate (4) | | 70,383 |
| | — |
| | 23,566 |
| | 8/11/2015 | | 95% | | Development of real estate (4) | | 88,628 |
| | 88,073 |
| | 20,742 |
|
| | | | $ | 300,087 |
| | $ | 122,187 |
| | $ | 120,805 |
| | | | $ | 346,112 |
| | $ | 209,795 |
| | $ | 120,768 |
|
| |
(1) | Excludes amounts eliminated in consolidation. |
| |
(2) | This joint venture’s properties are in Huntsville, Alabama. |
| |
(3) | This joint venture’s properties are in College Park, Maryland. |
| |
(4) | This joint venture’s property is in Washington, DC. Our partner in this joint venture received an additional distribution from the joint venture of $6.7 million in July 2017 that was reported in other liabilities on our consolidated balance sheet as of December 31, 2016. |
Unconsolidated Real Estate Joint Venture
As of September 30, 2017,March 31, 2019, we owned a 50% interest in GI-COPT DC Partnership LLC (“GI-COPT”), a joint venture owning six triple-net leased, single-tenant data center shell properties in Virginia, that we account for using the equity method of accounting. As of September 30, 2017,March 31, 2019, we had an investment balance in GI-COPT of $25.2$39.4 million. Our balance was $17.1 million lower than our share of the joint venture’s equity due to a difference between our cost basis and our share of the underlying equity in the net assets upon formation of the joint venture; we are amortizing this basis difference into equity in income from unconsolidated entities over the lives of the underlying assets.
6.7. Investing Receivables
Investing receivables, including accrued interest thereon, consisted of the following (in thousands):
| | | September 30, 2017 | | December 31, 2016 | March 31, 2019 | | December 31, 2018 |
Notes receivable from the City of Huntsville | $ | 53,088 |
| | $ | 49,258 |
| $ | 55,293 |
| | $ | 53,961 |
|
Other investing loans receivable | 3,020 |
| | 3,021 |
| 14,097 |
| | 3,021 |
|
| $ | 56,108 |
| | $ | 52,279 |
| $ | 69,390 |
| | $ | 56,982 |
|
Our notes receivable from the City of Huntsville funded infrastructure costs in connection with our LW Redstone Company, LLC joint venture (see Note 5)6) and carry an interest rate of 9.95%. Our other investing loans receivable carry an interest rate of 8.0%.
We did not have an allowance for credit losses in connection with our investing receivables as of September 30, 2017March 31, 2019 or December 31, 20162018. The fair value of these receivables approximated their carrying amountswas approximately $74 million as of September 30, 2017March 31, 2019 and $58 million as of December 31, 2016.2018.
7.8. Prepaid Expenses and Other Assets, Net
Prepaid expenses and other assets, net consisted of the following (in thousands):
| | | September 30, 2017 | | December 31, 2016 | March 31, 2019 | | December 31, 2018 |
Lease incentives, net | | $ | 22,981 |
| | $ | 21,258 |
|
Construction contract costs incurred in excess of billings | | 14,834 |
| | 3,189 |
|
Prepaid expenses | $ | 30,932 |
| | $ | 24,432 |
| 10,749 |
| | 25,658 |
|
Lease incentives, net | 17,202 |
| | 18,276 |
| |
Furniture, fixtures and equipment, net | 5,422 |
| | 5,204 |
| |
Deferred tax asset, net (1) | 2,851 |
| | 3,036 |
| |
Non-real estate equity method investments | 2,413 |
| | 2,355 |
| |
Construction contract costs incurred in excess of billings | 2,005 |
| | 10,350 |
| |
Furniture, fixtures and equipment, net (1) | | 8,453 |
| | 8,630 |
|
Non-real estate equity investments | | 5,792 |
| | 5,940 |
|
Deferred financing costs, net (2) | 1,419 |
| | 3,128 |
| 4,473 |
| | 4,733 |
|
Restricted cash | | 3,995 |
| | 3,884 |
|
Deferred tax asset, net (3) | | 1,890 |
| | 2,084 |
|
Other assets | 4,294 |
| | 5,983 |
| 6,815 |
| | 6,337 |
|
Prepaid expenses and other assets, net | $ | 66,538 |
| | $ | 72,764 |
| |
Total for COPLP and subsidiaries | | 79,982 |
| | 81,713 |
|
Marketable securities in deferred compensation plan | | 4,214 |
| | 3,868 |
|
Total for COPT and subsidiaries | | $ | 84,196 |
| | $ | 85,581 |
|
(1) Includes a valuation allowance$1.2 million in finance right-of-use assets as of $2.1 million.March 31, 2019.
(2) Represents deferred costs, net of accumulated amortization, attributable to our Revolving Credit Facility and interest rate derivatives.
(3) Includes a valuation allowance of $2.4 million as of March 31, 2019 and $2.7 million as of December 31, 2018.
8.9. Debt, Net
Our debt consisted of the following (dollars in thousands):
| | | | Carrying Value (1) as of | | | Carrying Value (1) as of | |
| | September 30, 2017 | | December 31, 2016 | | Stated Interest Rates as of | | Scheduled Maturity as of | | March 31, 2019 | | December 31, 2018 | | March 31, 2019 |
| | September 30, 2017 | | September 30, 2017 | | Stated Interest Rates | | Scheduled Maturity |
Mortgage and Other Secured Debt: | | |
| | |
| | | | | | |
| | |
| | | | |
Fixed rate mortgage debt (2) | | $ | 151,594 |
| | $ | 154,143 |
| | 3.82% - 7.87% (3) | | 2019-2026 | | $ | 146,212 |
| | $ | 147,141 |
| | 3.82% - 7.87% (3) | | 2019-2026 |
Variable rate secured debt(4) | | 13,200 |
| | 13,448 |
| | LIBOR + 1.85% (4) | | October 2020 | | 26,915 |
| | 23,282 |
| | LIBOR + 1.85% to 2.35% (5) | | 2020-2022 |
Total mortgage and other secured debt | | 164,794 |
| | 167,591 |
| | | | | | 173,127 |
| | 170,423 |
| | | | |
Revolving Credit Facility | | 170,000 |
| | — |
| | LIBOR + 0.875% to 1.60% (5) | | May 2019 (6) | | 262,000 |
| | 213,000 |
| | LIBOR + 0.775% to 1.45% (6) | | March 2023 (7) |
Term Loan Facilities (7) | | 348,371 |
| | 547,494 |
| | LIBOR + 0.90% to 2.40% (8) | | 2020-2022 | |
Term Loan Facility (8) | | | 248,381 |
| | 248,273 |
| | LIBOR + 0.85% to 1.65% (9) | | 2022 |
Unsecured Senior Notes | | | | | | | | | | |
3.600%, $350,000 aggregate principal | | 347,445 |
| | 347,128 |
| | 3.60% (9) | | May 2023 | | 348,096 |
| | 347,986 |
| | 3.60% (10) | | May 2023 |
5.250%, $250,000 aggregate principal | | 246,525 |
| | 246,176 |
| | 5.25% (10) | | February 2024 | | 247,263 |
| | 247,136 |
| | 5.25% (11) | | February 2024 |
3.700%, $300,000 aggregate principal | | 298,200 |
| | 297,843 |
| | 3.70% (11) | | June 2021 | | 298,941 |
| | 298,815 |
| | 3.70% (12) | | June 2021 |
5.000%, $300,000 aggregate principal | | 296,639 |
| | 296,368 |
| | 5.00% (12) | | July 2025 | | 297,206 |
| | 297,109 |
| | 5.00% (13) | | July 2025 |
Unsecured notes payable | | 1,317 |
| | 1,401 |
| | 0% (13) | | 2026 | |
Unsecured note payable | | | 1,135 |
| | 1,167 |
| | 0% (14) | | May 2026 |
Total debt, net | | $ | 1,873,291 |
| | $ | 1,904,001 |
| | | | | | $ | 1,876,149 |
| | $ | 1,823,909 |
| | | | |
| |
(1) | The carrying values of our debt other than the Revolving Credit Facility reflect net deferred financing costs of $4.8$6.8 million as of September 30, 2017March 31, 2019 and $6.1$7.2 million as of December 31, 2016.2018. |
| |
(2) | Certain of the fixed rate mortgages carry interest rates that, upon assumption, were above or below market rates upon assumption 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 $367,000$264,000 as of September 30, 2017March 31, 2019 and $422,000$281,000 as of December 31, 2016.2018. |
| |
(3) | The weighted average interest rate on our fixed rate mortgage debt was 4.19%4.17% as of September 30, 2017.March 31, 2019. |
| |
(4) | Includes a construction loan with $94.9 million in remaining borrowing capacity as of March 31, 2019. |
| |
(5) | The weighted average interest rate on our variable rate secured debt was 4.63% as of September 30, 2017 was 3.09%.March 31, 2019. |
| |
(5)(6) | The weighted average interest rate on the Revolving Credit Facility was 2.40%3.54% as of September 30, 2017.March 31, 2019. |
| |
(6)(7) | The facility matures in May 2019,March 2023, with the ability for us to further extend such maturity by two six-month periods at our option, provided that there is no default under the facility and we pay an extension fee of 0.075% of the total availability under the facility for each extension period. |
| |
(7)(8) | As of September 30, 2017,March 31, 2019, we have the ability to borrow an additional $350.0$150.0 million in the aggregate under these term loan facilities,this facility, provided that there is no default under the facilitiesfacility and subject to the approval of the lenders. On May 1, 2017,In addition, in connection with our Revolving Credit Facility, we repaid $200.0have the ability 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 loan balance on a term loan scheduled to mature in 2020.lenders. |
| |
(8)(9) | The weighted average interest rate on these loansthis loan was 2.93%3.74% as of September 30, 2017March 31, 2019. |
| |
(9)(10) | The carrying value of these notes reflects an unamortized discount totaling $1.8$1.3 million as of September 30, 2017March 31, 2019 and $2.0$1.4 million as of December 31, 20162018. The effective interest rate under the notes, including amortization of the issuance costs, was 3.70%. |
| |
(10)(11) | The carrying value of these notes reflects an unamortized discount totaling $3.1$2.5 million as of September 30, 2017March 31, 2019 and $3.4$2.6 million as of December 31, 20162018. The effective interest rate under the notes, including amortization of the issuance costs, was 5.49%. |
| |
(11)(12) | The carrying value of these notes reflects an unamortized discount totaling $1.4 million$842,000 as of September 30, 2017March 31, 2019 and $1.7 million$943,000 as of December 31, 20162018. The effective interest rate under the notes, including amortization of the issuance costs, was 3.85%. |
(12)(13) The carrying value of these notes reflects an unamortized discount totaling $2.8$2.3 million as of September 30, 2017March 31, 2019 and $3.0$2.4 million as of December 31, 2016.2018. The effective interest rate under the notes, including amortization of the issuance costs, was 5.15%.
| |
(13)(14) | These notes carryThis note carries an interest ratesrate that, wereupon assumption, was below market rates upon assumption and it therefore werewas recorded at theirits fair value based on applicable effective interest rates. The carrying value of these notesthis note reflects an unamortized discount totaling $394,000276,000 as of September 30, 2017March 31, 2019 and $460,000294,000 as of December 31, 20162018.
|
All debt is owed by the Operating Partnership.COPLP. While COPT is not directly obligated by any debt, it has guaranteed the Operating Partnership’sCOPLP’s Revolving Credit Facility, Term Loan Facilities and Unsecured Senior Notes.
Certain of our debt instruments require that we comply with a number of restrictive financial covenants. As of September 30, 2017,March 31, 2019, we were compliant withwithin the compliance requirements of these financial covenants.
We capitalized interest costs of $1.1$2.0 million in the three months ended September 30, 2017, $1.2March 31, 2019 and $1.4 million in the three months ended September 30, 2016, $4.2 million in the nine months ended September 30, 2017 and $4.3 million in the nine months ended September 30, 2016.March 31, 2018.
The following table sets forth information pertaining to the fair value of our debt (in thousands):
| | | September 30, 2017 | | December 31, 2016 | | | | | | | | | |
| Carrying | | Fair | | Carrying | | Fair | March 31, 2019 | | December 31, 2018 |
| Amount | | Value | | Amount | | Value | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Fixed-rate debt | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
Unsecured Senior Notes | $ | 1,188,809 |
| | $ | 1,231,222 |
| | $ | 1,187,515 |
| | $ | 1,220,282 |
| $ | 1,191,506 |
| | $ | 1,222,637 |
| | $ | 1,191,046 |
| | $ | 1,219,603 |
|
Other fixed-rate debt | 152,911 |
| | 154,781 |
| | 155,544 |
| | 156,887 |
| 147,347 |
| | 146,585 |
| | 148,308 |
| | 147,106 |
|
Variable-rate debt | 531,571 |
| | 531,520 |
| | 560,942 |
| | 558,437 |
| 537,296 |
| | 540,915 |
| | 484,555 |
| | 486,497 |
|
| $ | 1,873,291 |
| | $ | 1,917,523 |
| | $ | 1,904,001 |
| | $ | 1,935,606 |
| $ | 1,876,149 |
| | $ | 1,910,137 |
| | $ | 1,823,909 |
| | $ | 1,853,206 |
|
9.10. 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):
| | | | | |
| |
| |
| Fair Value at | | | |
| |
| |
| Fair Value at |
Notional Amount | Notional Amount | | Fixed Rate |
| Floating Rate Index |
| Effective Date |
| Expiration Date |
| September 30, 2017 |
| December 31, 2016 | Notional Amount | | Fixed Rate |
| Floating Rate Index |
| Effective Date |
| Expiration Date |
| March 31, 2019 |
| December 31, 2018 |
$ | 100,000 |
|
| 1.7300% |
| One-Month LIBOR |
| 9/1/2015 |
| 8/1/2019 |
| $ | (237 | ) |
| $ | (848 | ) | 100,000 |
|
| 1.7300% |
| One-Month LIBOR |
| 9/1/2015 |
| 8/1/2019 |
| $ | 255 |
|
| $ | 472 |
|
13,311 |
| (1) | 1.3900% | | One-Month LIBOR | | 10/13/2015 | | 10/1/2020 | | 126 |
| | 100 |
| |
12,735 | | 12,735 |
| (1) | 1.3900% | | One-Month LIBOR | | 10/13/2015 | | 10/1/2020 | | 170 |
| | 239 |
|
100,000 | 100,000 |
| | 1.9013% | | One-Month LIBOR | | 9/1/2016 | | 12/1/2022 | | (27 | ) | | (23 | ) | 100,000 |
| | 1.9013% | | One-Month LIBOR | | 9/1/2016 | | 12/1/2022 | | 879 |
| | 1,968 |
|
100,000 | 100,000 |
| | 1.9050% | | One-Month LIBOR | | 9/1/2016 | | 12/1/2022 | | (22 | ) | | 48 |
| 100,000 |
| | 1.9050% | | One-Month LIBOR | | 9/1/2016 | | 12/1/2022 | | 871 |
| | 1,967 |
|
50,000 | 50,000 |
| | 1.9079% | | One-Month LIBOR | | 9/1/2016 | | 12/1/2022 | | (30 | ) | | 10 |
| 50,000 |
| | 1.9079% | | One-Month LIBOR | | 9/1/2016 | | 12/1/2022 | | 427 |
| | 971 |
|
100,000 |
| (2) | 1.6730% |
| One-Month LIBOR |
| 9/1/2015 |
| 8/1/2019 |
| — |
|
| (701 | ) | |
75,000 | | 75,000 |
| | 3.1760% | | Three-Month LIBOR | | 6/30/2020 | | 6/30/2030 | | (4,869 | ) | | (2,676 | ) |
75,000 | | 75,000 |
| | 3.1920% | | Three-Month LIBOR | | 6/30/2020 | | 6/30/2030 | | (4,974 | ) | | (2,783 | ) |
75,000 | | 75,000 |
| | 2.7440% | | Three-Month LIBOR | | 6/30/2020 | | 6/30/2030 | | (2,051 | ) | | — |
|
| |
| | |
| |
| |
| |
| $ | (190 | ) |
| $ | (1,414 | ) | |
| | |
| |
| |
| |
| $ | (9,292 | ) |
| $ | 158 |
|
(1) The notional amount of this instrument is scheduled to amortize to $12.1 million.
| |
(2)(1) | We cash settledThe notional amount of this derivative and interest accrued thereon for $460,000 on May 1, 2017. Since the hedged transactions associated with this derivative were still probableinstrument is scheduled to occur as of the settlement date, amounts in accumulated other comprehensive loss (“AOCL”) associated with this derivative will be reclassifiedamortize to interest expense through August 2019. $12.1 million. |
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 | | Fair Value at |
Derivatives | | Balance Sheet Location | | September 30, 2017 | | December 31, 2016 | | Balance Sheet Location | | March 31, 2019 | | December 31, 2018 |
Interest rate swaps designated as cash flow hedges | | Prepaid expenses and other assets | | $ | 126 |
| | $ | 158 |
| | Interest rate derivatives (assets) | | $ | 2,602 |
| | $ | 5,617 |
|
Interest rate swaps designated as cash flow hedges | | Other liabilities | | (316 | ) | | (1,572 | ) | | Interest rate derivatives (liabilities) | | $ | (11,894 | ) | | $ | (5,459 | ) |
The table below presents the effect of our interest rate derivatives on our consolidated statements of operations and comprehensive income (in thousands):
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Unrealized (loss) gain recognized in AOCL (effective portion) | | $ | (301 | ) | | $ | 407 |
| | $ | (1,877 | ) | | $ | (16,581 | ) |
Loss reclassified from AOCL into interest expense (effective portion) | | (615 | ) | | (1,043 | ) | | (2,652 | ) | | (2,763 | ) |
Gain (loss) on derivatives recognized in interest expense (ineffective portion) | | 34 |
| | 1,523 |
| | 132 |
| | (347 | ) |
Loss reclassified from AOCL into interest expense (ineffective portion) (1) | | — |
| | — |
| | (88 | ) | | — |
|
| |
(1) | Represents a loss recognized on certain interest rate swaps from the accelerated reclassification of amounts in AOCL on May 1, 2017, when we concluded that hedged forecasted transactions were probable not to occur. |
|
| | | | | | | | | | | | | | | | |
| | Amount of (Loss) Gain Recognized in AOCL on Derivatives | | Amount of Gain (Loss) Reclassified from AOCL into Interest Expense on Statement of Operations |
| | For the Three Months Ended March 31, | | For the Three Months Ended March 31, |
Derivatives in Hedging Relationships | | 2019 | | 2018 | | 2019 | | 2018 |
Interest rate derivatives | | $ | (8,845 | ) | | $ | 4,676 |
| | $ | 570 |
| | $ | (245 | ) |
Over the next 12 months, we estimate that approximately $1.6 million$817,000 of lossesgains will be reclassified from AOCLaccumulated other comprehensive loss (“AOCL”) as an increasea decrease to interest expense.
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 September 30, 2017,March 31, 2019, we are not in default with any of these provisions. As of March 31, 2019, the fair value of interest rate derivatives in a liability position related to these agreements was $305,000,$12.0 million, excluding the effects of accrued interest and credit valuation adjustments. As of September 30, 2017,March 31, 2019, we had
not posted any collateral related to these agreements. We are not in default with any of these provisions. If we breachedbreach any of these provisions, we could be required to settle our obligations under the agreements at their termination value, which was $12.0 million as of $484,000.March 31, 2019.
10.11. Redeemable Noncontrolling Interests
Our partners in two real estate joint ventures, LW Redstone Company, LLC and Stevens Investors, LLC (discussed further in Note 5)6), have the right to require us to acquire their respective interests at fair value; accordingly, we classify the fair value of our partners’ interests as redeemable noncontrolling interests in the mezzanine section of our consolidated balance sheet. sheets. The table below sets forth the activity for these redeemable noncontrolling interests (in thousands):
|
| | | | | | | | |
| | For the Three Months Ended March 31, |
| | 2019 | | 2018 |
Beginning balance | | $ | 26,260 |
| | $ | 23,125 |
|
Distributions to noncontrolling interests | | (349 | ) | | (452 | ) |
Net income attributable to noncontrolling interests | | 675 |
| | 638 |
|
Adjustment to arrive at fair value of interests | | 799 |
| | 537 |
|
Ending balance | | $ | 27,385 |
| | $ | 23,848 |
|
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, occupancies for the properties and comparable propertiesoccupancy projections and estimated operating and capitaldevelopment expenditures. The table below sets forth the activity for these redeemable noncontrolling interests (in thousands):
|
| | | | | | | | |
| | For the Nine Months Ended September 30, |
| | 2017 | | 2016 |
Beginning balance | | $ | 22,979 |
| | $ | 19,218 |
|
Contributions from noncontrolling interests | | — |
| | 22,779 |
|
Distributions to noncontrolling interests | | (1,186 | ) | | (21,344 | ) |
Net income attributable to noncontrolling interests | | 1,720 |
| | 1,679 |
|
Adjustment to arrive at fair value of interests | | (244 | ) | | 516 |
|
Ending balance | | $ | 23,269 |
| | $ | 22,848 |
|
11.12. Equity
During the nine months ended September 30, 2017, COPT redeemed all of the outstanding shares of its following series of preferred shares:
the 5.600% Series K Cumulative Redeemable Preferred Shares (the “Series K Preferred Shares”), redeemed effective January 21, 2017 at a price of $50.00 per share, or $26.6 million in the aggregate, plus accrued and unpaid dividends thereon through the date of redemption. Concurrently with this redemption, COPLP redeemed its Series K Preferred Units on the same terms. Since we made an irrevocable notification to holders of the Series K Preferred Shares in December 2016 of our intention to redeem such shares, we presented the liquidation preference of the shares/units as a liability on the consolidated balance sheets of COPT and COPLP as of December 31, 2016; we also recognized a $17,000 decrease to net income available to common shareholders/unitholders in the three months ended DecemberMarch 31, 2016 pertaining to the original issuance costs incurred on the shares/units; and
the 7.375% Series L Cumulative Preferred Shares (the “Series L Preferred Shares”), redeemed effective June 27, 2017 at a price of $25.00 per share, or $172.5 million in the aggregate, plus accrued and unpaid dividends thereon up to but not including the date of redemption. Concurrently with this redemption, COPLP redeemed its Series L Preferred Units on the same terms. We also recognized a $6.8 million decrease to net income available to common shareholders/unitholders in the nine months ended September 30, 2017 pertaining to the original issuance costs incurred on the shares/units.
During the nine months ended September 30, 2017,2019, COPT issued 591,0421.6 million common shares at a weighted average price of $33.84 per share under its existing at-the-market (“ATM”) stock offering program. Netforward equity sale agreements for net proceeds from the shares issued totaled $19.7 million, after payment of $300,000 in commissions to sales agents.$46.5 million. COPT contributed the net proceeds from these issuances to COPLP in exchange for an equal number of units in COPLP. COPT’sCOPT has no remaining capacity under this ATMthe forward equity sale agreements as of March 31, 2019.
As of March 31, 2019, COPT had remaining capacity under its at-the-market stock offering program isequal to an aggregate gross sales price of $70.0$300 million in common share sales.
During the ninethree months ended September 30, 2017,March 31, 2019, certain COPLP limited partners converted 337,0005,500 common units in COPLP for an equal number of common shares in COPT.
We declared dividends per COPT common share and COPLP common unit of $0.275 in the three months ended March 31, 2019 and 2018.
See Note 1315 for disclosure of COPT common share and COPLP common unit activity pertaining to our share-based compensation plans.
12.13. Information by Business Segment
We have the following reportable segments: Defense/IT Locations; Regional Office; our operating wholesale data center;Wholesale Data Center; and other.Other. We also report on Defense/IT Locations sub-segments, which include the following: Fort George G. Meade and the Baltimore/Washington Corridor (referred to herein as “Fort Meade/BW Corridor”); Northern Virginia Defense/IT Locations; Lackland Air Force Base (in San Antonio); locations serving the U.S. Navy (“Navy Support Locations”), 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 generally fund the costs for the power, fiber connectivity and data center infrastructure).
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’s ownership interest (“UJV NOI allocable to COPT”). 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.
The table below reports segment financial information for our reportable segments (in thousands):
| | | Operating Office Property Segments | | | | | | | Operating Property Segments | | | | | | |
| Defense/Information Technology Locations | | | | | | | | | Defense/Information Technology Locations | | | | | | | | |
| 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 | 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 | | Wholesale Data Center | | Other | | Total |
Three Months Ended September 30, 2017 | |
| | |
| | |
| | | | |
| | |
| | | | |
| | |
| | |
| | |
| |
Three Months Ended March 31, 2019 | | |
| | |
| | |
| | | | |
| | |
| | | | |
| | |
| | |
| | |
|
Revenues from real estate operations | $ | 61,254 |
| | $ | 12,190 |
| | $ | 11,024 |
| | $ | 7,494 |
| | $ | 3,532 |
| | $ | 6,676 |
| | $ | 102,170 |
| | $ | 16,656 |
| | $ | 7,398 |
| | $ | 1,007 |
| | $ | 127,231 |
| $ | 62,683 |
| | $ | 14,831 |
| | $ | 11,561 |
| | $ | 8,155 |
| | $ | 3,939 |
| | $ | 7,354 |
| | $ | 108,523 |
| | $ | 14,833 |
| | $ | 7,871 |
| | $ | 763 |
| | $ | 131,990 |
|
Property operating expenses | (19,708 | ) | | (4,343 | ) | | (6,193 | ) | | (3,157 | ) | | (1,432 | ) | | (637 | ) | | (35,470 | ) | | (7,406 | ) | | (3,175 | ) | | (317 | ) | | (46,368 | ) | (22,335 | ) | | (5,292 | ) | | (5,959 | ) | | (3,404 | ) | | (1,539 | ) | | (353 | ) | | (38,882 | ) | | (7,416 | ) | | (2,838 | ) | | (309 | ) | | (49,445 | ) |
UJV NOI allocable to COPT | — |
| | — |
| | — |
| | — |
| | — |
| | 1,297 |
| | 1,297 |
| | — |
| | — |
| | — |
| | 1,297 |
| — |
| | — |
| | — |
| | — |
| | — |
| | 1,219 |
| | 1,219 |
| | — |
| | — |
| | — |
| | 1,219 |
|
NOI from real estate operations | $ | 41,546 |
| | $ | 7,847 |
| | $ | 4,831 |
| | $ | 4,337 |
| | $ | 2,100 |
| | $ | 7,336 |
| | $ | 67,997 |
| | $ | 9,250 |
| | $ | 4,223 |
| | $ | 690 |
| | $ | 82,160 |
| $ | 40,348 |
| | $ | 9,539 |
| | $ | 5,602 |
| | $ | 4,751 |
| | $ | 2,400 |
| | $ | 8,220 |
| | $ | 70,860 |
| | $ | 7,417 |
| | $ | 5,033 |
| | $ | 454 |
| | $ | 83,764 |
|
Additions to long-lived assets | $ | 5,810 |
| | $ | 2,587 |
| | $ | 55 |
| | $ | 1,910 |
| | $ | 843 |
| | $ | — |
| | $ | 11,205 |
| | $ | 5,338 |
| | $ | 9 |
| | $ | 76 |
| | $ | 16,628 |
| $ | 3,935 |
| | $ | 1,447 |
| | $ | — |
| | $ | 5,017 |
| | $ | 300 |
| | $ | — |
| | $ | 10,699 |
| | $ | 3,989 |
| | $ | 156 |
| | $ | 10 |
| | $ | 14,854 |
|
Transfers from non-operating properties | $ | 5,519 |
| | $ | 45,554 |
| | $ | — |
| | $ | 8 |
| | $ | (62 | ) | | $ | 29,803 |
| | $ | 80,822 |
| | $ | 25 |
| | $ | — |
| | $ | — |
| | $ | 80,847 |
| $ | 5,040 |
| | $ | 4,509 |
| | $ | 6,503 |
| | $ | — |
| | $ | 3,635 |
| | $ | 19,788 |
| | $ | 39,475 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 39,475 |
|
Three Months Ended September 30 2016 | |
| | |
| | |
| | |
| | |
| | |
| | | | |
| | |
| | |
| | |
| |
Segment assets at March 31, 2019 | | $ | 1,279,983 |
| | $ | 400,741 |
| | $ | 145,697 |
| | $ | 189,192 |
| | $ | 110,195 |
| | $ | 370,447 |
| | $ | 2,496,255 |
| | $ | 394,001 |
| | $ | 213,993 |
| | $ | 3,904 |
| | $ | 3,108,153 |
|
Three Months Ended March 31, 2018 | | |
| | |
| | |
| | | | |
| | |
| | | | |
| | |
| | |
| | |
|
Revenues from real estate operations | $ | 61,460 |
| | $ | 12,231 |
| | $ | 12,532 |
| | $ | 7,232 |
| | $ | 3,189 |
| | $ | 5,175 |
| | $ | 101,819 |
| | $ | 20,499 |
| | $ | 6,809 |
| | $ | 1,827 |
| | $ | 130,954 |
| $ | 62,782 |
| | $ | 12,561 |
| | $ | 11,443 |
| | $ | 7,870 |
| | $ | 3,633 |
| | $ | 5,831 |
| | $ | 104,120 |
| | $ | 15,284 |
| | $ | 8,077 |
| | $ | 797 |
| | $ | 128,278 |
|
Property operating expenses | (20,598 | ) | | (4,462 | ) | | (7,599 | ) | | (3,374 | ) | | (1,112 | ) | | (528 | ) | | (37,673 | ) | | (8,155 | ) | | (3,317 | ) | | (807 | ) | | (49,952 | ) | (21,604 | ) | | (4,723 | ) | | (6,598 | ) | | (3,304 | ) | | (1,440 | ) | | (794 | ) | | (38,463 | ) | | (7,878 | ) | | (4,258 | ) | | (352 | ) | | (50,951 | ) |
UJV NOI allocable to COPT | — |
| | — |
| | — |
| | — |
| | — |
| | 1,008 |
| | 1,008 |
| | — |
| | — |
| | — |
| | 1,008 |
| — |
| | — |
| | — |
| | — |
| | — |
| | 1,199 |
| | 1,199 |
| | — |
| | — |
| | — |
| | 1,199 |
|
NOI from real estate operations | $ | 40,862 |
| | $ | 7,769 |
| | $ | 4,933 |
| | $ | 3,858 |
| | $ | 2,077 |
| | $ | 5,655 |
| | $ | 65,154 |
| | $ | 12,344 |
| | $ | 3,492 |
| | $ | 1,020 |
| | $ | 82,010 |
| $ | 41,178 |
| | $ | 7,838 |
| | $ | 4,845 |
| | $ | 4,566 |
| | $ | 2,193 |
| | $ | 6,236 |
| | $ | 66,856 |
| | $ | 7,406 |
| | $ | 3,819 |
| | $ | 445 |
| | $ | 78,526 |
|
Additions to long-lived assets | $ | 5,901 |
| | $ | 7,153 |
| | $ | — |
| | $ | 2,207 |
| | $ | 2,642 |
| | $ | — |
| | $ | 17,903 |
| | $ | 4,168 |
| | $ | 108 |
| | $ | 53 |
| | $ | 22,232 |
| $ | 7,121 |
| | $ | 1,940 |
| | $ | — |
| | $ | 1,108 |
| | $ | 79 |
| | $ | — |
| | $ | 10,248 |
| | $ | 3,884 |
| | $ | 36 |
| | $ | 127 |
| | $ | 14,295 |
|
Transfers from non-operating properties | $ | 5,331 |
| | $ | 308 |
| | $ | 3 |
| | $ | — |
| | $ | 3,100 |
| | $ | 25,513 |
| | $ | 34,255 |
| | $ | (4 | ) | | $ | 40 |
| | $ | — |
| | $ | 34,291 |
| $ | 17,186 |
| | $ | 341 |
| | $ | — |
| | $ | (3 | ) | | $ | 444 |
| | $ | 1,114 |
| | $ | 19,082 |
| | $ | — |
| | $ | 1,012 |
| | $ | — |
| | $ | 20,094 |
|
Nine Months Ended September 30, 2017 | |
| | |
| | |
| | | | |
| | |
| | | | |
| | |
| | |
| | |
| |
Revenues from real estate operations | $ | 183,393 |
| | $ | 34,992 |
| | $ | 35,687 |
| | $ | 21,953 |
| | $ | 10,616 |
| | $ | 17,998 |
| | $ | 304,639 |
| | $ | 52,394 |
| | $ | 21,201 |
| | $ | 4,061 |
| | $ | 382,295 |
| |
Property operating expenses | (60,357 | ) | | (13,014 | ) | | (21,125 | ) | | (9,391 | ) | | (4,294 | ) | | (1,873 | ) | | (110,054 | ) | | (21,974 | ) | | (10,041 | ) | | (1,446 | ) | | (143,515 | ) | |
UJV NOI allocable to COPT | — |
| | — |
| | — |
| | — |
| | — |
| | 3,889 |
| | 3,889 |
| | — |
| | — |
| | — |
| | 3,889 |
| |
NOI from real estate operations | $ | 123,036 |
| | $ | 21,978 |
| | $ | 14,562 |
| | $ | 12,562 |
| | $ | 6,322 |
| | $ | 20,014 |
| | $ | 198,474 |
| | $ | 30,420 |
| | $ | 11,160 |
| | $ | 2,615 |
| | $ | 242,669 |
| |
Additions to long-lived assets | $ | 15,085 |
| | $ | 6,032 |
| | $ | 71 |
| | $ | 6,309 |
| | $ | 1,059 |
| | $ | — |
| | $ | 28,556 |
| | $ | 16,476 |
| | $ | 3,588 |
| | $ | 203 |
| | $ | 48,823 |
| |
Transfers from non-operating properties | $ | 37,094 |
| | $ | 45,994 |
| | $ | — |
| | $ | 474 |
| | $ | 1,643 |
| | $ | 55,003 |
| | $ | 140,208 |
| | $ | — |
| | $ | 8 |
| | $ | 18 |
| | $ | 140,234 |
| |
Segment assets at September 30, 2017 | $ | 1,265,569 |
| | $ | 400,855 |
| | $ | 129,657 |
| | $ | 194,801 |
| | $ | 108,884 |
| | $ | 258,611 |
| | $ | 2,358,377 |
| | $ | 398,579 |
| | $ | 226,909 |
| | $ | 13,347 |
| | $ | 2,997,212 |
| |
Nine Months Ended September 30, 2016 | |
| | |
| | |
| | | | |
| | |
| | | | |
| | |
| | |
| | |
| |
Revenues from real estate operations | $ | 184,881 |
| | $ | 36,404 |
| | $ | 34,408 |
| | $ | 21,164 |
| | $ | 9,496 |
| | $ | 18,793 |
| | $ | 305,146 |
| | $ | 67,284 |
| | $ | 20,106 |
| | $ | 5,429 |
| | $ | 397,965 |
| |
Property operating expenses | (64,222 | ) | | (13,310 | ) | | (19,863 | ) | | (9,573 | ) | | (3,050 | ) | | (2,164 | ) | | (112,182 | ) | | (26,707 | ) | | (8,629 | ) | | (2,450 | ) | | (149,968 | ) | |
UJV NOI allocable to COPT | — |
| | — |
| | — |
| | — |
| | — |
| | 1,008 |
| | 1,008 |
| | — |
| | — |
| | — |
| | 1,008 |
| |
NOI from real estate operations | $ | 120,659 |
| | $ | 23,094 |
| | $ | 14,545 |
| | $ | 11,591 |
| | $ | 6,446 |
| | $ | 17,637 |
| | $ | 193,972 |
| | $ | 40,577 |
| | $ | 11,477 |
| | $ | 2,979 |
| | $ | 249,005 |
| |
Additions to long-lived assets | $ | 19,516 |
| | $ | 13,290 |
| | $ | — |
| | $ | 5,710 |
| | $ | 3,561 |
| | $ | — |
| | $ | 42,077 |
| | $ | 9,107 |
| | $ | 108 |
| | $ | 363 |
| | $ | 51,655 |
| |
Transfers from non-operating properties | $ | 41,850 |
| | $ | 28,158 |
| | $ | 240 |
| | $ | — |
| | $ | 3,315 |
| | $ | 81,467 |
| | $ | 155,030 |
| | $ | 104 |
| | $ | (391 | ) | | $ | (11 | ) | | $ | 154,732 |
| |
Segment assets at September 30, 2016 | $ | 1,261,337 |
| | $ | 416,886 |
| | $ | 132,722 |
| | $ | 195,244 |
| | $ | 111,310 |
| | $ | 189,746 |
| | $ | 2,307,245 |
| | $ | 453,766 |
| | $ | 234,551 |
| | $ | 31,563 |
| | $ | 3,027,125 |
| |
Segment assets at March 31, 2018 | | $ | 1,273,359 |
| | $ | 399,202 |
| | $ | 127,855 |
| | $ | 192,116 |
| | $ | 107,096 |
| | $ | 302,120 |
| | $ | 2,401,748 |
| | $ | 397,355 |
| | $ | 222,738 |
| | $ | 4,125 |
| | $ | 3,025,966 |
|
The following table reconciles our segment revenues to total revenues as reported on our consolidated statements of operations (in thousands):
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | For the Three Months Ended March 31, |
| 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 |
Segment revenues from real estate operations | $ | 127,231 |
| | $ | 130,954 |
| | $ | 382,295 |
| | $ | 397,965 |
| $ | 131,990 |
| | $ | 128,278 |
|
Construction contract and other service revenues | 29,786 |
| | 11,149 |
| | 65,958 |
| | 34,372 |
| 16,950 |
| | 27,198 |
|
Total revenues | $ | 157,017 |
| | $ | 142,103 |
| | $ | 448,253 |
| | $ | 432,337 |
| $ | 148,940 |
| | $ | 155,476 |
|
The following table reconciles UJV NOI allocable to COPT to equity in income of unconsolidated entities as reported on our consolidated statements of operations (in thousands):
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | For the Three Months Ended March 31, |
| 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 |
UJV NOI allocable to COPT | $ | 1,297 |
| | $ | 1,008 |
| | $ | 3,889 |
| | $ | 1,008 |
| $ | 1,219 |
| | $ | 1,199 |
|
Less: Income from UJV allocable to COPT attributable to depreciation and amortization expense and interest expense | (577 | ) | | (415 | ) | | (1,724 | ) | | (415 | ) | (827 | ) | | (824 | ) |
Add: Equity in (loss) income of unconsolidated non-real estate entities | (1 | ) | | 1 |
| | (3 | ) | | 21 |
| |
Add: Equity in loss of unconsolidated non-real estate entities | | (1 | ) | | (2 | ) |
Equity in income of unconsolidated entities | $ | 719 |
| | $ | 594 |
| | $ | 2,162 |
| | $ | 614 |
| $ | 391 |
| | $ | 373 |
|
As previously discussed, we provide real estate services such as property management and construction and development 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 Three Months Ended September 30, | | For the Nine Months Ended September 30, | For the Three Months Ended March 31, |
| 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 |
Construction contract and other service revenues | $ | 29,786 |
| | $ | 11,149 |
| | $ | 65,958 |
| | $ | 34,372 |
| $ | 16,950 |
| | $ | 27,198 |
|
Construction contract and other service expenses | (28,788 | ) | | (10,341 | ) | | (63,589 | ) | | (32,513 | ) | (16,326 | ) | | (26,216 | ) |
NOI from service operations | $ | 998 |
| | $ | 808 |
| | $ | 2,369 |
| | $ | 1,859 |
| $ | 624 |
| | $ | 982 |
|
The following table reconciles our NOI from real estate operations for reportable segments and NOI from service operations to net income from before gain on sales of real estate as reported on our consolidated statements of operations (in thousands):
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | For the Three Months Ended March 31, |
| 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 |
NOI from real estate operations | $ | 82,160 |
| | $ | 82,010 |
| | $ | 242,669 |
| | $ | 249,005 |
| $ | 83,764 |
| | $ | 78,526 |
|
NOI from service operations | 998 |
| | 808 |
| | 2,369 |
| | 1,859 |
| 624 |
| | 982 |
|
Interest and other income | 1,508 |
| | 1,391 |
| | 4,817 |
| | 3,877 |
| 2,286 |
| | 1,359 |
|
Gain on sales of real estate | | — |
| | (4 | ) |
Equity in income of unconsolidated entities | 719 |
| | 594 |
| | 2,162 |
| | 614 |
| 391 |
| | 373 |
|
Income tax (expense) benefit | (57 | ) | | 21 |
| | (145 | ) | | 28 |
| |
Income tax expense | | (194 | ) | | (55 | ) |
Depreciation and other amortization associated with real estate operations | (34,438 | ) | | (32,015 | ) | | (100,290 | ) | | (99,790 | ) | (34,796 | ) | | (33,512 | ) |
Impairment recoveries (losses) | 161 |
| | (27,699 | ) | | (1,464 | ) | | (99,837 | ) | |
General, administrative and leasing expenses | (7,368 | ) | | (8,855 | ) | | (23,838 | ) | | (28,764 | ) | (8,751 | ) | | (7,292 | ) |
Business development expenses and land carry costs | (1,277 | ) | | (1,716 | ) | | (4,567 | ) | | (6,497 | ) | (1,113 | ) | | (1,614 | ) |
Interest expense | (19,615 | ) | | (18,301 | ) | | (57,772 | ) | | (64,499 | ) | (18,674 | ) | | (18,784 | ) |
Less: UJV NOI allocable to COPT included in equity in income of unconsolidated entities | (1,297 | ) | | (1,008 | ) | | (3,889 | ) | | (1,008 | ) | (1,219 | ) | | (1,199 | ) |
Loss on early extinguishment of debt | — |
| | (59 | ) | | (513 | ) | | (37 | ) | |
Income (loss) before gain on sales of real estate | $ | 21,494 |
| | $ | (4,829 | ) | | $ | 59,539 |
| | $ | (45,049 | ) | |
Net income | | $ | 22,318 |
| | $ | 18,780 |
|
The following table reconciles our segment assets to the consolidated total assets of COPT and subsidiaries (in thousands):
| | | September 30, 2017 | | September 30, 2016 | March 31, 2019 | | March 31, 2018 |
Segment assets | $ | 2,997,212 |
| | $ | 3,027,125 |
| $ | 3,108,153 |
| | $ | 3,025,966 |
|
Operating properties lease liabilities included in segment assets | | 16,342 |
| | — |
|
Non-operating property assets | 413,255 |
| | 421,364 |
| 485,911 |
| | 425,951 |
|
Other assets | 149,305 |
| | 185,705 |
| 165,453 |
| | 144,321 |
|
Total COPT consolidated assets | $ | 3,559,772 |
| | $ | 3,634,194 |
| $ | 3,775,859 |
| | $ | 3,596,238 |
|
The accounting policies of the segments are the same as those used to prepare our consolidated financial statements, except that discontinued operations and UJV NOI allocable to COPT are not presented separately for segment purposes.statements. In the segment reporting presented above, we did not allocate interest expense, depreciation and amortization, impairment (recoveries) losses, loss on early extinguishment of debt, gain on sales of real estate and equity in 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 and leasing expenses, business development expenses and land carry costs, interest and other income, income taxes and noncontrolling interests because these items represent general corporate or non-operating property items not attributable to segments.
13.14.Construction Contract and Other Service Revenues
We disaggregate 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 arrangement (in thousands):
|
| | | | | | | |
| For the Three Months Ended March 31, |
| 2019 | | 2018 |
Construction contract revenues: | | | |
Guaranteed maximum price | $ | 12,356 |
| | $ | 20,486 |
|
Firm fixed price | 2,325 |
| | 6,435 |
|
Cost-plus fee | 2,060 |
| | 58 |
|
Other | 209 |
| | 219 |
|
| $ | 16,950 |
| | $ | 27,198 |
|
The table below reports construction contract and other service revenues by service type (in thousands):
|
| | | | | | | |
| For the Three Months Ended March 31, |
| 2019 | | 2018 |
Construction contract revenues: | | | |
Construction | $ | 16,489 |
| | $ | 25,915 |
|
Design | 252 |
| | 1,064 |
|
Other | 209 |
| | 219 |
|
| $ | 16,950 |
| | $ | 27,198 |
|
We recognized revenue of $32,000 and $309,000 in the three months ended March 31, 2019 and 2018, respectively, from performance obligations satisfied (or partially satisfied) in previous periods.
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 Three Months Ended March 31, |
| 2019 | | 2018 |
Beginning balance | $ | 6,701 |
| | $ | 4,577 |
|
Ending balance | $ | 6,569 |
| | $ | 4,021 |
|
Contract assets, which we refer to herein as construction 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 Three Months Ended March 31, |
| 2019 | | 2018 |
Beginning balance | $ | 3,189 |
| | $ | 4,884 |
|
Ending balance | $ | 14,834 |
| | $ | 4,250 |
|
Contract liabilities are included in other liabilities reported on our consolidated balance sheets. Changes in contract liabilities were as follows (in thousands):
|
| | | | | | | |
| For the Three Months Ended March 31, |
| 2019 | | 2018 |
Beginning balance | $ | 568 |
| | $ | 27,402 |
|
Ending balance | $ | 1,005 |
| | $ | 8,279 |
|
Revenue recognized included in beginning balance | $ | 439 |
| | $ | 19,297 |
|
The change in the contract liabilities balance reported above for the three months ended March 31, 2018 was due primarily to our satisfaction of performance obligations during the period on a contract on which we previously received advance payments from a customer.
Revenue allocated to the remaining performance obligations under existing contracts as of March 31, 2019 that will be recognized as revenue in future periods was $51.6 million, approximately $45 million of which we expect to recognize during the remainder of 2019.
We have no deferred incremental costs incurred to obtain or fulfill our construction contracts or other service revenues and had no impairment losses on construction contracts receivable or unbilled construction revenue for the three months ended March 31, 2019 and 2018.
15. Share-Based Compensation and Other Compensation Matters
Performance-Based Share Units (“PSUs”)Restricted Shares
On January 1, 2017, our BoardDuring the three months ended March 31, 2019, certain employees were granted a total of Trustees granted 36,525 PSUs135,396 restricted common shares with an aggregate grant date fair value of $3.5 million ($25.81 per share). 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. During the $1.4 millionthree months ended March 31, 2019, forfeiture restrictions lapsed on 151,252 previously issued common shares; these shares had a weighted average grant date fair value of $27.94 per share, and the aggregate intrinsic value of the shares on the vesting dates was $3.9 million.
Performance Share Awards (“PSUs”)
We issued 44,757 common shares on January 18, 2019 to executives in settlement of PSUs granted in 2016, representing 157% of the target award for those PSUs.
PIUs
Commencing in 2019, we offered our three executives (the “January Grants”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 and PSUs). PIUs are a special class of common unit structured to qualify as “profit interests” for tax purposes. Our executives selected PIUs as their form of share-based compensation for their 2019 grants. We granted the executives two forms of PIUs: time-based PIUs (“TB-PIUs”); and performance-based PIUs (“PB-PIUs”). The PSUs haveTB-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 carry substantially the same rights to redemption and distributions as non-PIU common units.
TB-PIUs
During the three months ended March 31, 2019, our executives were granted a total of 54,956 TB-PIUs with an aggregate grant date fair value of $1.4 million ($25.81 per TB-PIU). TB-PIUs granted to executives vest in equal one-third increments over a three-year period beginning on the first anniversary of the date of grant. Prior to vesting, TB-PIUs carry substantially the same rights to distributions as non-PIU common units but carry no redemption rights.
PB-PIUs
On January 1, 2017 and2019, we granted our executives 193,682 PB-PIUs with a three-year performance period concluding on the earlier of December 31, 20192021 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”)awards at the end of the performance period will be determined based on the percentile rank of COPT’s total shareholder return relative to a peer group of companies, as set forth in the following schedule:
|
| | |
Percentile Rank | | Earned PSUsAwards Payout % |
75th or greater | | 200%100% of PSUsPB-PIUs granted |
50th or greater(target) | | 100%50% of PSUsPB-PIUs granted |
25th | | 50%25% of PSUsPB-PIUs granted |
Below 25th | | 0% of PSUsPB-PIUs granted |
If the percentile rank exceeds the 25th percentile and is between two of the percentile ranks set forth in the table above, then the percentage of the earned PSUsawards will be interpolated between the ranges set forth in the table above to reflect any performance between the listed percentiles. During the performance period, PB-PIUs carry rights to 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 will issue a number of fully-vested COPT common sharesplan and paying cash equal to the sumexcess, if any, of:
the number of earned PSUs in settlement of the award plan; plus
the aggregate dividendsdistributions that would have been paid with respect to the common sharesvested PIUs issued in settlement of the earned PSUsawards through the date of settlement had such sharesvested PIUs been issued on the grant date, divided bydate; over the share priceaggregate distributions made on such settlement date, as defined under the terms ofPB-PIUs during the agreement.
performance period. If a performance period ends due to a sale event or qualified termination, the number of earned PSUsawards 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 PSUsPB-PIUs are forfeited. PSUs do not carry voting rights.
On August 23, 2017, the January Grants were modified to include a provision that limits the earned PSUs payout percentage to 100% of the PSUs granted if COPT’s total shareholder return is negative during the performance period irrespective of its percentile rank in the peer group (the “Negative TSR Modifier”). In addition, as a result of the modification to the January Grants, on August 23, 2017, we augmented the January Grants by issuingThese PB-PIUs had an aggregate of 2,826 additional PSUs to the executives. Each of the PSU Certificates also includes the Negative TSR Modifier. The incremental award to the executives on August 23, 2017 resulting from these modifications totaled $12,000.
For the January Grants, we computed a grant date fair value of $38.43$2.4 million ($12.47 per PSUPB-PIU) which is being recognized over the performance period. The grant date fair value was computed using a Monte Carlo model whichthat included assumptions of, among other things, the following:following
assumptions: baseline common share value of $31.22;$21.03; expected volatility for COPT common shares of 19.0%21.0%; and a risk-free interest rate of 1.47%. For the award modification on August 23, 2017, we computed a pre-modification fair value of $49.66 per PSU and a post-modification fair value of $46.39 per PSU using a Monte Carlo model, which included assumptions of, among other things, the following: baseline common share value of $33.40; expected volatility for COPT common shares of 18.7%; and a risk-free interest rate of 1.36%2.51%.
We issued 9,763 common shares on February 7, 2017 to Mr. Stephen E. Budorick, our Chief Executive Officer, in settlement of PSUs issued in 2014, representing 100% of the target award for those PSUs.
Restricted Shares
During the nine months endedSeptember 30, 2017, certain employees and non-employee members of our Board of Trustees were granted a total of 230,635 restricted common shares with an aggregate grant date fair value of $7.8 million (weighted average of $33.96 per share). 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 employees remain 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. During the nine months endedSeptember 30, 2017, forfeiture restrictions lapsed on 148,401 previously issued common shares; these shares had a weighted average grant date fair value of $26.18 per share, and the aggregate intrinsic value of the shares on the vesting dates was $5.0 million.
Deferred Share Awards
During the nine months ended September 30, 2017, nonemployee members of our Board of Trustees were granted a total of 10,032 deferred share awards with an aggregate grant date fair value of $326,000 ($32.47 per share). 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). During the nine months ended September 30, 2017, we issued 15,590 common shares in settlement of deferred share awards granted in 2016; these shares had a grant date fair value of $26.89 per share, and the aggregate intrinsic value of the shares on the settlement date was $508,000.
Options
During the nine months ended September 30, 2017, 5,000 options to purchase common shares (“options”) were exercised. The weighted average exercise price of these options was $29.98 per share, and the aggregate intrinsic value of the options exercised was $18,000.
14.16. 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 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. 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 COPT 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 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 shares that we addedadd to the denominator.
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 Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Numerator: | |
| | |
| | | | |
Net income (loss) attributable to COPT | $ | 20,916 |
| | $ | 27,299 |
| | $ | 60,133 |
| | $ | (13,294 | ) |
Preferred share dividends | — |
| | (3,552 | ) | | (6,219 | ) | | (10,657 | ) |
Issuance costs associated with redeemed preferred shares | — |
| | — |
| | (6,847 | ) | | — |
|
Income attributable to share-based compensation awards | (95 | ) | | (105 | ) | | (337 | ) | | (319 | ) |
Numerator for basic and diluted EPS on net income (loss) attributable to COPT common shareholders | $ | 20,821 |
| | $ | 23,642 |
| | $ | 46,730 |
| | $ | (24,270 | ) |
Denominator (all weighted averages): | |
| | |
| | | | |
Denominator for basic EPS (common shares) | 99,112 |
| | 94,433 |
| | 98,855 |
| | 94,312 |
|
Dilutive effect of share-based compensation awards | 146 |
| | 81 |
| | 154 |
| | — |
|
Denominator for diluted EPS (common shares) | 99,258 |
| | 94,514 |
| | 99,009 |
| | 94,312 |
|
Basic EPS: | |
| | |
| | | | |
Net income (loss) attributable to COPT common shareholders | $ | 0.21 |
| | $ | 0.25 |
| | $ | 0.47 |
| | $ | (0.26 | ) |
Diluted EPS: | |
| | |
| | | | |
Net income (loss) attributable to COPT common shareholders | $ | 0.21 |
| | $ | 0.25 |
| | $ | 0.47 |
| | $ | (0.26 | ) |
|
| | | | | | | |
| For the Three Months Ended March 31, |
| 2019 | | 2018 |
Numerator: | |
| | |
|
Net income attributable to COPT | $ | 20,859 |
| | $ | 17,150 |
|
Income attributable to share-based compensation awards | (86 | ) | | (117 | ) |
Numerator for basic and diluted EPS on net income attributable to COPT common shareholders | $ | 20,773 |
| | $ | 17,033 |
|
Denominator (all weighted averages): | |
| | |
|
Denominator for basic EPS (common shares) | 109,951 |
| | 100,999 |
|
Dilutive effect of share-based compensation awards | 267 |
| | 144 |
|
Denominator for diluted EPS (common shares) | 110,218 |
| | 101,143 |
|
Basic EPS | $ | 0.19 |
| | $ | 0.17 |
|
Diluted EPS | $ | 0.19 |
| | $ | 0.17 |
|
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 Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Conversion of common units | 3,350 |
| | 3,591 |
| | 3,400 |
| | 3,648 |
|
Conversion of Series I Preferred Units | 176 |
| | 176 |
| | 176 |
| | 176 |
|
Conversion of Series K Preferred Shares | — |
| | 434 |
| | — |
| | 434 |
|
|
| | | | | |
| Weighted Average Shares Excluded from Denominator For the Three Months Ended March 31, |
| 2019 | | 2018 |
Conversion of common units | 1,331 |
| | 3,221 |
|
Conversion of redeemable noncontrolling interests | 1,013 |
| | — |
|
Conversion of Series I preferred units | 176 |
| | 176 |
|
The following share-based compensation securities were also excluded from the computation of diluted EPS because their effects wereeffect was antidilutive:
weighted average shares related to COPT’s forward equity sale agreements for the three months ended March 31, 2019 and 2018 of 1.5 million and 7.5 million, respectively;
weighted average restricted shares and deferred share awards for the three months ended September 30, 2017March 31, 2019 and 20162018 of 445,000463,000 and 375,000, respectively, and for the nine months ended September 30, 2017 and 2016 of 431,000 and 394,000,444,000, respectively; and
weighted average options for the three months ended September 30, 2017March 31, 2019 and 20162018 of 40,00030,000 and 233,000, respectively,60,000, respectively; and
weighted average unvested PIUs of 19,000 for the ninethree months ended September 30, 2017 and 2016 of 80,000 and 307,000, respectively.March 31, 2019.
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 units under the two-class method by 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 addedadd to the denominator.
Summaries of the numerator and denominator for purposes of basic and diluted EPU calculations are set forth below (in thousands, except per unit data):
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | For the Three Months Ended March 31, |
| 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 |
Numerator: | |
| | |
| | | | | |
| | |
|
Net income (loss) attributable to COPLP common unitholders | $ | 21,785 |
| | $ | 28,359 |
| | $ | 62,239 |
| | $ | (13,751 | ) | |
Net income attributable to COPLP | | $ | 21,281 |
| | $ | 17,859 |
|
Preferred unit distributions | (165 | ) | | (3,717 | ) | | (6,714 | ) | | (11,152 | ) | (165 | ) | | (165 | ) |
Issuance costs associated with redeemed preferred units | — |
| | — |
| | (6,847 | ) | | — |
| |
Income attributable to share-based compensation awards | (95 | ) | | (105 | ) | | (337 | ) | | (319 | ) | (93 | ) | | (117 | ) |
Numerator for basic and diluted EPU on net income (loss) attributable to COPLP common unitholders | $ | 21,525 |
| | $ | 24,537 |
| | $ | 48,341 |
| | $ | (25,222 | ) | |
Numerator for basic and diluted EPU on net income attributable to COPLP common unitholders | | $ | 21,023 |
| | $ | 17,577 |
|
Denominator (all weighted averages): | |
| | |
| | | | | |
| | |
|
Denominator for basic EPU (common units) | 102,462 |
| | 98,024 |
| | 102,255 |
| | 97,960 |
| 111,282 |
| | 104,220 |
|
Dilutive effect of share-based compensation awards | 146 |
| | 81 |
| | 154 |
| | — |
| 267 |
| | 144 |
|
Denominator for diluted EPU (common units) | 102,608 |
| | 98,105 |
| | 102,409 |
| | 97,960 |
| 111,549 |
| | 104,364 |
|
Basic EPU: | |
| | |
| | | | | |
Net income (loss) attributable to COPLP common unitholders | $ | 0.21 |
| | $ | 0.25 |
| | $ | 0.47 |
| | $ | (0.26 | ) | |
Diluted EPU: | |
| | |
| | | | | |
Net income (loss) attributable to COPLP common unitholders | $ | 0.21 |
| | $ | 0.25 |
| | $ | 0.47 |
| | $ | (0.26 | ) | |
Basic EPU | | $ | 0.19 |
| | $ | 0.17 |
|
Diluted EPU | | $ | 0.19 |
| | $ | 0.17 |
|
Our diluted EPU computations do not include the effects of the following securities since the conversions of such securities would increase diluted EPU for the respective periods (in thousands):
| | | Weighted Average Units Excluded from Denominator | Weighted Average Units Excluded from Denominator For the Three Months Ended March 31, |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | 2019 | | 2018 |
| 2017 | | 2016 | | 2017 | | 2016 | |
Conversion of redeemable noncontrolling interests | | 1,013 |
| | — |
|
Conversion of Series I preferred units | 176 |
| | 176 |
| | 176 |
| | 176 |
| 176 |
| | 176 |
|
Conversion of Series K preferred units | — |
| | 434 |
| | — |
| | 434 |
| |
The following share-based compensation securities were also excluded from the computation of diluted EPU because their effects wereeffect was antidilutive:
weighted average shares related to COPT’s forward equity sale agreements for the three months ended March 31, 2019 and 2018 of 1.5 million and 7.5 million, respectively;
weighted average restricted units and deferred share awards for the three months ended September 30, 2017March 31, 2019 and 20162018 of 445,000463,000 and 375,000, respectively, and for the nine months ended September 30, 2017 and 2016 of 431,000 and 394,000,444,000, respectively; and
weighted average options for the three months ended September 30, 2017March 31, 2019 and 20162018 of 40,00030,000 and 233,00060,000, respectively,respectively; and
weighted average unvested PIUs of 19,000 for the ninethree months ended September 30, 2017 and 2016 of 80,000 and 307,000, respectively.
March 31, 2019.
15.17. Commitments and Contingencies
Litigation and Claims
In the normal course of business, we are involved insubject to legal actions arising from our ownership and administration of properties.other claims. We establish reservesrecord losses for specific legal proceedings and claims when we determine that the likelihood of an unfavorable outcomea loss is probable and the amount of loss can be reasonably estimated. Management doesbelieves that it is reasonably possible that we could incur losses pursuant to such claims but do not anticipate that any liabilities that may result frombelieve such proceedings will have alosses would materially adverse effect onaffect our financial position, operationsliquidity or liquidity.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, state and local environmental regulations related to our property ownership and operation. 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 three 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 much of any potential future losses that may result from these indemnification agreements.
Tax Incremental Financing Obligation
In August 2010, Anne Arundel County, Maryland issued $30 million in tax incremental financing bonds to third-party investors in order to finance public improvements needed in connection with our project known as National Business Park North. The real estate taxes on increases in assessed value of a development district encompassing National Business Park North are to be transferred to a special fund pledged to the repayment of the bonds. We recognized a $685,000 liability through September 30, 2017 representing our estimated obligationWhile we are obligated to fund, through a special tax, any future shortfalls between debt service onof the bonds and real estate taxes available to repay the bonds.
Operating Leases
We are obligated as lessee under operating leases (mostly ground leases) with various expiration dates extending to the year 2100. Future minimum rental payments due under the terms of these operating leasesbonds, as of September 30, 2017 follow (in thousands):
|
| | | | |
Year Ending December 31, | | |
2017 (1) | | $ | 320 |
|
2018 | | 1,275 |
|
2019 | | 1,263 |
|
2020 | | 1,257 |
|
2021 | | 1,260 |
|
Thereafter | | 85,761 |
|
| | $ | 91,136 |
|
(1) Represents the three months ending DecemberMarch 31, 2017.
Capital Lease
On May 25, 2017,2019, we entered into a ground lease on land under development in Washington, D.C. for our Stevens Investors, LLC joint venture. The lease has a 99-year term, and we possess an option to purchase the property for one dollar (estimated to occur between 2019 and 2020). Upon inception of the lease, we recorded a $16.1 million capital lease liability on our consolidated balance sheets based on the present value of thedo not expect any such future minimum rental payments. Future minimum rental payments due under the term of this lease as of September 30, 2017 follow (in thousands):
|
| | | | |
Year Ending December 31, | | |
2017 (1) | | $ | 700 |
|
2018 | | 15,775 |
|
2020 | | 135 |
|
Thereafter | | 75 |
|
Total minimum rental payments | | $ | 16,685 |
|
Less: Amount representing interest | | (338 | ) |
Capital lease obligation | | $ | 16,347 |
|
(1) Represents the three months ending December 31, 2017.fundings will be required.
Contractual Obligations
We had amounts remaining to be incurred under various contractual obligations as of September 30, 2017March 31, 2019 that included the following (excluding amounts incurred and therefore reflected as liabilities reported on our consolidated balance sheet)sheets):
new development and redevelopment obligations of $35.1$184.3 million;
tenant and other capital expenditures for operating propertiesimprovements of $45.8$45.3 million;
third party construction and developmentobligations of $67.4$32.6 million; and
other obligations of $1.1$1.7 million.
Environmental Indemnity Agreement
In connection with a lease and subsequent sale in 2008 and 2010 of three 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 much of any potential future losses that may result from these indemnification agreements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
During the ninethree months ended September 30, 2017March 31, 2019:
we finished the period with occupancy of our office and data center shell portfolio of operating office properties at 93.4%, including six properties owned through an unconsolidated real estate joint venture;92.6% occupied;
we placed into service an aggregate of 839,000181,000 square feet in eight newly constructed or redevelopedthree newly-constructed properties that were 89%100.0% leased as of September 30, 2017;March 31, 2019; and
we sold ten operating properties totaling 639,000 square feet that were 89.4% occupiedCOPT issued 1.6 million common shares under its forward equity sale agreements for $88.8 million and other land for $14.3net proceeds of $46.5 million. TheCOPT contributed the net proceeds from these salesissuances to COPLP in exchange for an equal number of units in COPLP. The proceeds were used primarily to repay borrowings under our Revolving Credit Facility and to fund cash reserves;
we repaid $200.0 million of the loan balance on a term loan scheduled to mature in 2020 using available cash;
COPT redeemed all of the outstanding shares of its:
Series K Preferred Shares effective January 21, 2017 at a price of $50.00 per share, or $26.6 million in the aggregate, plus accrued and unpaid dividends thereon through the date of redemption using available cash. Concurrently with this redemption, COPLP redeemed its Series K Preferred Units on the same terms; and
Series L Preferred Shares effective June 27, 2017 at a price of $25.00 per share, or $172.5 million in the aggregate, plus accrued and unpaid dividends thereon through the date of redemption using borrowings from our Revolving Credit Facility. Concurrently with this redemption, COPLP redeemed its Series L Preferred Units on the same terms; and
COPT issued 591,042 common shares at a weighted average price of $33.84 per share under its ATM stock offering program. Net proceeds from the shares issued totaled $19.7 million, which were used primarily to fund cash reserves.that funded development costs.
On October 27, 2017, we sold:
201 Technology Drive,With regard to our operating portfolio square footage, occupancy and leasing statistics included below and elsewhere in this Quarterly Report on Form 10-Q, amounts disclosed include information pertaining to six properties owned through an operating property totaling 103,000 square feet in Lebanon, Virginia (inunconsolidated real estate joint venture except for amounts reported for Annualized Rental Revenue, which represent the portion attributable to our Data Center Shells sub-segment), for $29.2 million; and
11751 Meadowville Lane, an operating property totaling 193,000 square feet in Chester, Virginia (in our Data Center Shells sub-segment), for $44.3 million. We provided a financial guaranty to the buyer under which we would indemnify it for up to $20 million in losses it could incur related to a potential defined capital event occurring on the property by June 30, 2019. Accordingly, we will not recognize the sale of this property for accounting purposes, and will reflect the sale price of the property as a liability, until the guaranty expires. We do not expect to incur any losses under this financial guaranty.
The net proceeds from these sales were used primarily to repay borrowings under our Revolving Credit Facilityownership interest.
We discuss significant factors contributing to changes in our net income 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 cash for short and long-term capital needs; and
our commitments and contingencies.
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 and property values;
adverse changes in the real estate markets, including, among other things, increased competition with other companies;
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 a curtailment ofreduced or delayed demand for additional space by our strategic customers;
our ability to borrow on favorable terms;
risks of real estate 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;
our ability to satisfy and operate effectively under Federal 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;
our ability to achieve projected results;
security breaches relating to cyber attacks, cyber intrusions or other factors; and
environmental requirements.
We undertake no obligation to publicly update or supplement forward-looking statements.
Occupancy and Leasing
Office Propertiesand Data Center Shell Portfolio
The tables below set forth occupancy information pertaining to our portfolio of operating office properties, which included six properties owned through an unconsolidated real estate joint venture:and data center shell properties:
| | | September 30, 2017 | | December 31, 2016 | March 31, 2019 | | December 31, 2018 |
Occupancy rates at period end | |
| | |
| |
| | |
|
Total | 93.4 | % | | 92.1 | % | 92.6 | % | | 93.0 | % |
Defense/IT Locations: | | | | | | |
Fort Meade/BW Corridor | 95.6 | % | | 94.3 | % | 90.4 | % | | 91.1 | % |
Northern Virginia Defense/IT | 88.7 | % | | 85.0 | % | 91.7 | % | | 91.3 | % |
Lackland Air Force Base | 100.0 | % | | 100.0 | % | 100.0 | % | | 100.0 | % |
Navy Support Locations | 82.5 | % | | 72.7 | % | 90.9 | % | | 90.5 | % |
Redstone Arsenal | 97.9 | % | | 96.4 | % | 98.4 | % | | 99.0 | % |
Data Center Shells | 100.0 | % | | 100.0 | % | 100.0 | % | | 100.0 | % |
Total Defense/IT Locations | 94.7 | % | | 92.6 | % | 93.4 | % | | 93.6 | % |
Regional Office | 92.4 | % | | 95.2 | % | 88.3 | % | | 89.2 | % |
Other | 29.4 | % | | 52.9 | % | 73.7 | % | | 77.2 | % |
Average contractual annual rental rate per square foot at period end (1) | $ | 29.94 |
| | $ | 30.16 |
| $ | 29.71 |
| | $ | 30.04 |
|
| |
(1) | Includes estimated expense reimbursements. Amounts reported include the portion of six properties owned through an unconsolidated real estate joint venture that was allocable to our ownership interest. |
|
| | | | | |
| Rentable Square Feet | | Occupied Square Feet |
| (in thousands) |
December 31, 2016 | 17,190 |
| | 15,831 |
|
Square feet vacated | — |
| | (316 | ) |
Occupancy of previously vacated space in connection with new leases (1) | — |
| | 412 |
|
Square feet constructed or redeveloped | 839 |
| | 866 |
|
Dispositions | (639 | ) | | (572 | ) |
Square feet removed from operations for redevelopment | (22 | ) | | — |
|
Other changes | 8 |
| | 5 |
|
September 30, 2017 | 17,376 |
| | 16,226 |
|
|
| | | | | |
| Rentable Square Feet | | Occupied Square Feet |
| (in thousands) |
December 31, 2018 | 18,094 |
| | 16,821 |
|
Vacated upon lease expiration (1) | — |
| | (301 | ) |
Occupancy for new leases (2) | — |
| | 326 |
|
Constructed or redeveloped | 181 |
| | 181 |
|
Other changes | 63 |
| | (37 | ) |
March 31, 2019 | 18,338 |
| | 16,990 |
|
| |
(1) | Includes lease terminations and space reductions occurring in connection with lease renewals. |
| |
(2) | Excludes occupancy of vacant square feet acquired or developed. |
During the ninethree months ended September 30, 2017,March 31, 2019, we completed 2.2 million956,000 square feet of leasing, including 482,000 of construction and redevelopment space, andincluding: renewed 82.4%leases on 291,000 square feet, representing 71.3% of the square footage of our lease expirations (including the effect of early renewals).
Occupancy; 539,000 square feet of our Same Office Properties increased from 91.8% asdevelopment and redevelopment space; and 126,000 square feet of December 31, 2016 to 92.6% as of September 30, 2017.vacant space.
Wholesale Data Center Property
Our 19.25 megawatt wholesale data center property had 16.9 megawattswas 87.6% leased as of September 30, 2017, a 2.0 megawatt increase relative toMarch 31, 2019 and December 31, 2016.2018.
Results of Operations
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; 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’s ownership interest (“UJV NOI allocable to COPT”). We view our NOI from real estate operations as comprising the following primary categories of operatingcategories:
office and data center shell properties:
office properties continually owned and 100% operational throughout the current and prior year reporting periods, excluding properties held for sale. We define these as changes from “Same Office Properties”;
constructed or redeveloped office propertiesand placed into service that were not 100% operational throughout the current and prior year reporting periods; and
disposed; and
our wholesale data center;
properties held for sale as of September 30, 2017; and
property dispositions.center.
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, before gain on sales of real estate, 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 income before gain on sales of real estate reported on the consolidated statements of operations of COPT and subsidiaries is provided in Note 1213 to our consolidated financial statements.
Comparison of Statements of Operations for the Three Months Ended September 30, 2017March 31, 2019 and 20162018
| | | For the Three Months Ended September 30, | For the Three Months Ended March 31, |
| 2017 | | 2016 | | Variance | 2019 | | 2018 | | Variance |
| (in thousands) | (in thousands) |
Revenues | |
| | |
| | |
| |
| | |
| | |
|
Revenues from real estate operations | $ | 127,231 |
| | $ | 130,954 |
| | $ | (3,723 | ) | $ | 131,990 |
| | $ | 128,278 |
| | $ | 3,712 |
|
Construction contract and other service revenues | 29,786 |
| | 11,149 |
| | 18,637 |
| 16,950 |
| | 27,198 |
| | (10,248 | ) |
Total revenues | 157,017 |
| | 142,103 |
| | 14,914 |
| 148,940 |
| | 155,476 |
| | (6,536 | ) |
Expenses | |
| | |
| | |
| |
Operating expenses | | |
| | |
| | |
|
Property operating expenses | 46,368 |
| | 49,952 |
| | (3,584 | ) | 49,445 |
| | 50,951 |
| | (1,506 | ) |
Depreciation and amortization associated with real estate operations | 34,438 |
| | 32,015 |
| | 2,423 |
| 34,796 |
| | 33,512 |
| | 1,284 |
|
Construction contract and other service expenses | 28,788 |
| | 10,341 |
| | 18,447 |
| 16,326 |
| | 26,216 |
| | (9,890 | ) |
Impairment (recoveries) losses | (161 | ) | | 27,699 |
| | (27,860 | ) | |
General, administrative and leasing expenses | 7,368 |
| | 8,855 |
| | (1,487 | ) | 8,751 |
| | 7,292 |
| | 1,459 |
|
Business development expenses and land carry costs | 1,277 |
| | 1,716 |
| | (439 | ) | 1,113 |
| | 1,614 |
| | (501 | ) |
Total operating expenses | 118,078 |
| | 130,578 |
| | (12,500 | ) | 110,431 |
| | 119,585 |
| | (9,154 | ) |
Operating income | 38,939 |
| | 11,525 |
| | 27,414 |
| |
Interest expense | (19,615 | ) | | (18,301 | ) | | (1,314 | ) | (18,674 | ) | | (18,784 | ) | | 110 |
|
Interest and other income | 1,508 |
| | 1,391 |
| | 117 |
| 2,286 |
| | 1,359 |
| | 927 |
|
Loss on early extinguishment of debt | — |
| | (59 | ) | | 59 |
| |
Gain on sales of real estate | | — |
| | (4 | ) | | 4 |
|
Equity in income of unconsolidated entities | 719 |
| | 594 |
| | 125 |
| 391 |
| | 373 |
| | 18 |
|
Income tax (expense) benefit | (57 | ) | | 21 |
| | (78 | ) | |
Income (loss) before gain on sales of real estate | 21,494 |
| | (4,829 | ) | | 26,323 |
| |
Gain on sales of real estate | 1,188 |
| | 34,101 |
| | (32,913 | ) | |
Income tax expense | | (194 | ) | | (55 | ) | | (139 | ) |
Net income | $ | 22,682 |
| | $ | 29,272 |
| | $ | (6,590 | ) | $ | 22,318 |
| | $ | 18,780 |
| | $ | 3,538 |
|
NOI from Real Estate Operations
| | | For the Three Months Ended September 30, | For the Three Months Ended March 31, |
| 2017 | | 2016 | | Variance | 2019 | | 2018 | | Variance |
| (Dollars in thousands, except per square foot data) | (Dollars in thousands, except per square foot data) |
Revenues | | | | | | | | | | |
Same Office Properties revenues | | | | | | |
Rental revenue, excluding lease termination revenue | $ | 86,226 |
| | $ | 84,889 |
| | $ | 1,337 |
| |
Same Properties revenues | | | | | | |
Lease revenue, excluding lease termination revenue | | $ | 117,899 |
| | $ | 116,064 |
| | $ | 1,835 |
|
Lease termination revenue | 860 |
| | 389 |
| | 471 |
| 521 |
| | 1,008 |
| | (487 | ) |
Tenant recoveries and other real estate operations revenue | 22,258 |
| | 24,312 |
| | (2,054 | ) | |
Same Office Properties total revenues | 109,344 |
| | 109,590 |
| | (246 | ) | |
Other property revenue | | 1,042 |
| | 1,112 |
| | (70 | ) |
Same Properties total revenues | | 119,462 |
| | 118,184 |
| | 1,278 |
|
Constructed and redeveloped properties placed in service | 6,969 |
| | 2,094 |
| | 4,875 |
| 4,445 |
| | 914 |
| | 3,531 |
|
Wholesale data center | 7,398 |
| | 6,809 |
| | 589 |
| 7,871 |
| | 8,077 |
| | (206 | ) |
Properties held for sale | 2,723 |
| | 2,700 |
| | 23 |
| |
Dispositions | 538 |
| | 9,506 |
| | (8,968 | ) | — |
| | 135 |
| | (135 | ) |
Other | 259 |
| | 255 |
| | 4 |
| 212 |
| | 968 |
| | (756 | ) |
| 127,231 |
| | 130,954 |
| | (3,723 | ) | 131,990 |
| | 128,278 |
| | 3,712 |
|
Property operating expenses | | | | | | | | | | |
Same Office Properties | (40,981 | ) | | (42,745 | ) | | 1,764 |
| |
Same Properties | | (45,785 | ) | | (46,219 | ) | | 434 |
|
Constructed and redeveloped properties placed in service | (1,555 | ) | | (513 | ) | | (1,042 | ) | (859 | ) | | (228 | ) | | (631 | ) |
Wholesale data center | (3,175 | ) | | (3,317 | ) | | 142 |
| (2,838 | ) | | (4,258 | ) | | 1,420 |
|
Properties held for sale | (299 | ) | | (283 | ) | | (16 | ) | |
Dispositions | (124 | ) | | (2,743 | ) | | 2,619 |
| — |
| | (21 | ) | | 21 |
|
Other | (234 | ) | | (351 | ) | | 117 |
| 37 |
| | (225 | ) | | 262 |
|
| (46,368 | ) | | (49,952 | ) | | 3,584 |
| (49,445 | ) | | (50,951 | ) | | 1,506 |
|
| | | | | | | | | | |
UJV NOI allocable to COPT | 1,297 |
| | 1,008 |
| | 289 |
| |
Same Properties UJV NOI allocable to COPT | | 1,219 |
| | 1,199 |
| | 20 |
|
| | | | | | | | | | |
NOI from real estate operations | | | | | | | | | | |
Same Office Properties | 68,363 |
| | 66,845 |
| | 1,518 |
| |
Same Properties | | 74,896 |
| | 73,164 |
| | 1,732 |
|
Constructed and redeveloped properties placed in service | 5,414 |
| | 1,581 |
| | 3,833 |
| 3,586 |
| | 686 |
| | 2,900 |
|
Wholesale data center | 4,223 |
| | 3,492 |
| | 731 |
| 5,033 |
| | 3,819 |
| | 1,214 |
|
Properties held for sale | 2,424 |
| | 2,417 |
| | 7 |
| |
Dispositions | 414 |
| | 6,763 |
| | (6,349 | ) | — |
| | 114 |
| | (114 | ) |
Other | 1,322 |
| | 912 |
| | 410 |
| 249 |
| | 743 |
| | (494 | ) |
| $ | 82,160 |
| | $ | 82,010 |
| | $ | 150 |
| $ | 83,764 |
| | $ | 78,526 |
| | $ | 5,238 |
|
Same Office Properties rent statistics | | | | | | |
| | | | | | |
Same Properties NOI from real estate operations by segment | | | | | | |
Defense/IT Locations | | $ | 67,068 |
| | $ | 65,425 |
| | $ | 1,643 |
|
Regional Office | | 7,417 |
| | 7,313 |
| | 104 |
|
Other | | 411 |
| | 426 |
| | (15 | ) |
| | $ | 74,896 |
| | $ | 73,164 |
| | $ | 1,732 |
|
| | | | | | |
Same Properties rent statistics | | | | | | |
Average occupancy rate | 92.6 | % | | 91.6 | % | | 1.0 | % | 92.6 | % | | 91.4 | % | | 1.2 | % |
Average straight-line rent per occupied square foot (1) | $ | 6.46 |
| | $ | 6.43 |
| | $ | 0.03 |
| $ | 6.26 |
| | $ | 6.20 |
| | $ | 0.06 |
|
| |
(1) | Includes minimum base rents, net of abatements, and lease incentives on a straight-line basis for the three-month periods set forth above. |
Our Same Office Properties pool consisted of 135 office156 properties, comprising 82.9%94.7% of our total operating office and data center shell portfolio’s square footage as of September 30, 2017 (84.7% excluding the effect of properties held for sale).March 31, 2019. This pool of properties included the following changeschanged from the pool used for purposes of comparing 20162018 and 20152017 in our 20162018 Annual Report on Form 10-K:10-K due to the addition of fournine properties placed in service that wereand 100% operational on or before January 1, 2016 and three properties acquired in 2015; and the removal of two properties disposed, two properties reclassified to held for sale and one property reclassified as redevelopment in 2017. The decrease in tenant recoveries and other real estate operations revenue and property operating expenses from our Same Office Properties was due primarily to a decrease in operating expenses directly reimbursable from tenants.
2018.
Our NOI from constructed and redeveloped properties placed in service included 14nine properties and land under a long-term contract placed in service in 20162018 and 2017.2019.
NOI from Service Operations
| | | | For the Three Months Ended September 30, | | For the Three Months Ended March 31, |
| | 2017 | | 2016 | | Variance | | 2019 | | 2018 | | Variance |
| | (in thousands) | | (in thousands) |
Construction contract and other service revenues | | $ | 29,786 |
| | $ | 11,149 |
| | $ | 18,637 |
| | $ | 16,950 |
| | $ | 27,198 |
| | $ | (10,248 | ) |
Construction contract and other service expenses | | 28,788 |
| | 10,341 |
| | 18,447 |
| | 16,326 |
| | 26,216 |
| | (9,890 | ) |
NOI from service operations | | $ | 998 |
| | $ | 808 |
| | $ | 190 |
| | $ | 624 |
| | $ | 982 |
| | $ | (358 | ) |
Construction contract and other service revenue and expenses increaseddecreased due primarily to a greaterlower volume of construction activity in connection with several 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 operating income relative to our real estate operations.
Impairment (Recoveries) LossesGeneral, administrative and leasing expenses
The decrease in impairment losses was attributable primarily to the losses described below in our explanation for the nine-month period ended September 30, 2016.
General, Administrative and Leasing Expenses
General, administrative and leasing expenses decreasedincreased in large part due primarily to our recognition in the prior periodadoption of $1.6 million in executive transition costs, representing mostly severance and termination benefits primarily in connection with executive departures.
Gain on Sales of Real Estate
We recognized gain on sales of real estate of $1.2 millionlease accounting guidance in the current period in connection with a land sale in White Marsh (discussed further in Note 4 to our consolidated financial statements). We recognized gain on sales of real estate in the prior period of $17.9 million on our sale of a 50% interest in six triple-net leased, single-tenant data center properties and $16.2 million in connection with other operating property dispositions.
Comparison of Statements of Operations for the Nine Months Ended September 30, 2017 and 2016
|
| | | | | | | | | | | |
| For the Nine Months Ended September 30, |
| 2017 | | 2016 | | Variance |
| (in thousands) |
Revenues | |
| | |
| | |
|
Revenues from real estate operations | $ | 382,295 |
| | $ | 397,965 |
| | $ | (15,670 | ) |
Construction contract and other service revenues | 65,958 |
| | 34,372 |
| | 31,586 |
|
Total revenues | 448,253 |
| | 432,337 |
| | 15,916 |
|
Expenses | |
| | |
| | |
|
Property operating expenses | 143,515 |
| | 149,968 |
| | (6,453 | ) |
Depreciation and amortization associated with real estate operations | 100,290 |
| | 99,790 |
| | 500 |
|
Construction contract and other service expenses | 63,589 |
| | 32,513 |
| | 31,076 |
|
Impairment losses | 1,464 |
| | 99,837 |
| | (98,373 | ) |
General, administrative and leasing expenses | 23,838 |
| | 28,764 |
| | (4,926 | ) |
Business development expenses and land carry costs | 4,567 |
| | 6,497 |
| | (1,930 | ) |
Total operating expenses | 337,263 |
| | 417,369 |
| | (80,106 | ) |
Operating income | 110,990 |
| | 14,968 |
| | 96,022 |
|
Interest expense | (57,772 | ) | | (64,499 | ) | | 6,727 |
|
Interest and other income | 4,817 |
| | 3,877 |
| | 940 |
|
Loss on early extinguishment of debt | (513 | ) | | (37 | ) | | (476 | ) |
Equity in income of unconsolidated entities | 2,162 |
| | 614 |
| | 1,548 |
|
Income tax (expense) benefit | (145 | ) | | 28 |
| | (173 | ) |
Income (loss) before gain on sales of real estate | 59,539 |
| | (45,049 | ) | | 104,588 |
|
Gain on sales of real estate | 5,438 |
| | 34,101 |
| | (28,663 | ) |
Net income (loss) | $ | 64,977 |
| | $ | (10,948 | ) | | $ | 75,925 |
|
NOI from Real Estate Operations
|
| | | | | | | | | | | |
| For the Nine Months Ended September 30, |
| 2017 | | 2016 | | Variance |
| (Dollars in thousands, except per square foot data) |
Revenues | | | | | |
Same Office Properties revenues | | | | | |
Rental revenue, excluding lease termination revenue | $ | 259,141 |
| | $ | 252,914 |
| | $ | 6,227 |
|
Lease termination revenue | 2,083 |
| | 1,678 |
| | 405 |
|
Tenant recoveries and other real estate operations revenue | 69,995 |
| | 70,509 |
| | (514 | ) |
Same Office Properties total revenues | 331,219 |
| | 325,101 |
| | 6,118 |
|
Constructed and redeveloped properties placed in service | 15,357 |
| | 4,780 |
| | 10,577 |
|
Wholesale data center | 21,201 |
| | 20,106 |
| | 1,095 |
|
Properties held for sale | 8,182 |
| | 8,211 |
| | (29 | ) |
Dispositions | 5,522 |
| | 38,998 |
| | (33,476 | ) |
Other | 814 |
| | 769 |
| | 45 |
|
| 382,295 |
| | 397,965 |
| | (15,670 | ) |
Property operating expenses | | | | | |
Same Office Properties | (125,651 | ) | | (125,872 | ) | | 221 |
|
Constructed and redeveloped properties placed in service | (4,206 | ) | | (1,016 | ) | | (3,190 | ) |
Wholesale data center | (10,041 | ) | | (8,629 | ) | | (1,412 | ) |
Properties held for sale | (918 | ) | | (930 | ) | | 12 |
|
Dispositions | (1,695 | ) | | (12,743 | ) | | 11,048 |
|
Other | (1,004 | ) | | (778 | ) | | (226 | ) |
| (143,515 | ) | | (149,968 | ) | | 6,453 |
|
| | | | | |
UJV NOI allocable to COPT | 3,889 |
| | 1,008 |
| | 2,881 |
|
| | | | | |
NOI from real estate operations | | | | | |
Same Office Properties | 205,568 |
| | 199,229 |
| | 6,339 |
|
Constructed and redeveloped properties placed in service | 11,151 |
| | 3,764 |
| | 7,387 |
|
Wholesale data center | 11,160 |
| | 11,477 |
| | (317 | ) |
Properties held for sale | 7,264 |
| | 7,281 |
| | (17 | ) |
Dispositions | 3,827 |
| | 26,255 |
| | (22,428 | ) |
Other | 3,699 |
| | 999 |
| | 2,700 |
|
| $ | 242,669 |
| | $ | 249,005 |
| | $ | (6,336 | ) |
Same Office Properties rent statistics | | | | | |
Average occupancy rate | 92.5 | % | | 91.4 | % | | 1.1 | % |
Average straight-line rent per occupied square foot (1) | $ | 19.46 |
| | $ | 19.22 |
| | $ | 0.24 |
|
| |
(1) | Includes minimum base rents, net of abatements, and lease incentives on a straight-line basis for the nine-month periods set forth above. |
Our NOI from constructed and redeveloped properties placed in service included 14 properties placed in service in 2016 and 2017.
NOI from Service Operations
|
| | | | | | | | | | | | |
| | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | Variance |
| | (in thousands) |
Construction contract and other service revenues | | $ | 65,958 |
| | $ | 34,372 |
| | $ | 31,586 |
|
Construction contract and other service expenses | | 63,589 |
| | 32,513 |
| | 31,076 |
|
NOI from service operations | | $ | 2,369 |
| | $ | 1,859 |
| | $ | 510 |
|
Construction contract and other service revenue and expenses increased due primarily to a greater volume of construction activity in connection with several of our tenants.
Impairment Losses
In the first quarter of 2016,under which we set a goal to raise cash from sales of properties in 2016 considerably in excess of our assets held for sale at December 31, 2015. The specific properties we would sell to achieve this goal had not been identified when the goal was established. Throughout 2016, we engaged in the process of identifying properties we would sell.
In the first quarter of 2016, we reclassified: most of our properties in Greater Philadelphia (included in our Regional Office segment); two properties in the Fort Meade/BW Corridor sub-segment; and our remaining land holdings in Colorado Springs, Colorado (“Colorado Springs”) to held for sale and recognized $2.4 million of impairment losses. As of March 31, 2016, we had $225.9 million of assets held for sale.
During the second quarter of 2016, as part of our closing process, we conducted our quarterly review of our portfolio for indicators of impairment considering the refined investment strategy of our then newly-appointed Chief Executive Officer and the goals of the asset sales program and concluded that we would: (1) not hold our operating properties in Aberdeen, Maryland (“Aberdeen”) for the long-term; (2) not develop commercial properties on land in Frederick, Maryland; (3) sell specific properties in our Northern Virginia Defense/IT and Fort Meade/BW Corridor sub-segments; and (4) sell the remaining operating property in Greater Philadelphia that had not previously been classified as held for sale. Accordingly, we performed recoverability analyses for each of these properties and recorded the following impairment losses:
$34.4 million on operating properties in Aberdeen (included in our Other segment). After shortening our estimated holding period for these properties, we determined that the carrying amount of the properties would not likely be recovered from the operation and eventual dispositions of the properties during the shortened holding period. Accordingly, we adjusted the properties to their estimated fair values;
$4.4 million on land in Aberdeen. In performing our analysis related to the operating properties in Aberdeen, we determined that the weakening leasing and overall commercial real estate conditions in that market indicated that our land holdings in the market may be impaired. As a result, we determined that the carrying amount of the land was not recoverable and adjusted the land to its estimated fair value;
$8.2 million on land in Frederick, Maryland. We determined that the carrying amount of the land would not likely be recovered from its sale and adjusted the land to its estimated fair value;
$14.1 million on operating properties in our Northern Virginia and Fort Meade/BW Corridor sub-segments that we reclassified to held for sale during the period whose carrying amounts exceeded their estimated fair values less costs to sell;
$6.2 million on the property in Greater Philadelphia (included in our Regional Office segment) that we reclassified to held for sale during the period and adjusted to fair value less costs to sell; and
$2.4 million primarily on land in Colorado Springs and operating properties in White Marsh (included in our Regional Office Segment) classified as held for sale whose carrying amounts exceeded their estimated fair values less costs to sell based on updated negotiations with prospective buyers.
There were no property sales in the second quarter of 2016 and as of June 30, 2016, we had $300.6 million of assets held for sale.
During the third quarter of 2016, as part of our closing process, we conducted our quarterly review of our portfolio for indicators of impairment considering refinements to our disposition strategy made during the third quarter of 2016 to sell an additional operating property in our Northern Virginia Defense/IT sub-segment, an additional operating property in our Fort Meade/BW Corridor sub-segment and our remaining operating properties and land in White Marsh that had not previously been classified as held for sale. In connection with our determinations that we planned to sell these properties, we performed recoverability analyses for each of these properties and recorded the following impairment losses:
$13.3 million on the operating property in our Northern Virginia Defense/IT sub-segment. Communication with a major tenant in the building during the quarter led us to conclude that there was significant uncertainty with respect to the tenant renewing its lease expiring in 2019. As a result of this information and continuing sub-market weakness, we determined that this property no longer met our long-term hold strategy and we placed it into our asset sales program. Accordingly, we adjusted the carrying amountdefer recognition of the property to its estimated fair value less costs to sell; andnon-incremental leasing costs.
$2.9 million on the other properties that we reclassified as held for sale, primarily associated with a land parcel in White Marsh. As of June 30, 2016, this land was under a sales contract subject to a re-zoning contingency. During the third quarter, we were denied favorable re-zoning and the contract was canceled. As a result, we determined this property will be sold as is, reclassified it to held for sale and adjusted its carrying value to its estimated fair value less costs to sell.
During our review we also recognized additional impairment losses of $11.5 million on properties previously classified as held for sale. Approximately $10 million of these losses pertained to properties in White Marsh due to our assessment that certain significant tenants will likely exercise lease termination rights and to reflect market conditions. The remainder of these losses pertained primarily to properties in San Antonio, Texas (in our Other segment), where prospective purchasers reduced offering prices late in the third quarter. We executed property sales of $210.7 million in the third quarter of 2016 and had $161.5 million of assets held for sale as of September 30, 2016.
Refer to Note 3 to our consolidated financial statements for disclosure regarding impairment losses recognized in the current period.
General, Administrative and Leasing Expenses
General, administrative and leasing expenses decreased due primarily to our recognition in the prior period of $6.0 million in executive transition costs, representing mostly severance and termination benefits primarily in connection with executive departures, compared to $732,000 in such costs recognized in the current period.
Interest Expense
The decrease in interest expense included the effect of a 10% decrease in our average outstanding debt in the current period relative to the prior period.
Gain on Sales of Real Estate
We recognized gain on sales of real estate of $5.4 million in the current period in connection with land sales (discussed further in Note 4 to our consolidated financial statements). We recognized gain on sales of real estate in the prior period of $17.9 million on our sale of a 50% interest in six triple-net leased, single-tenant data center properties and $16.2 million in connection with other operating property dispositions.
Funds from Operations
Funds from operations (“FFO”) is defined as net income computed using GAAP, excluding gains on sales of, and impairment losses on, previously depreciated operating properties, plusof real estate and real estate-related depreciation and amortization. When multiple properties consisting of both operating and non-operating properties exist on a single tax parcel, we classify all of the gains on sales of, and impairment losses on, the tax parcel as all being for previously depreciated operating properties when most of the value of the parcel is associated with operating properties on the parcel. FFO also includes adjustments to net income 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 National Association of Real Estate Investment Trusts (“NAREIT”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 related toon sales of, and impairment losses on, previously depreciated operating properties,of real estate, net of related tax benefit, and excluding 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 is the most directly comparable GAAP measure to FFO.
Since FFO excludes certain items includable in net income, 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. 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 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) issuance costs associated with redeemed preferred shares, (3) income attributable to noncontrolling interests through ownership of preferred units in the Operating Partnership or interests in other consolidated entities not owned by us, (4) depreciation and amortization allocable to noncontrolling interests in other consolidated entities and (5) Basic FFO allocable to restricted shares.share-based compensation 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 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 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 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 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 exclude operating property acquisition costs; gains on sales of, and impairment losses on, properties other than previously depreciated operating properties, net of associated income tax; gain or loss on early extinguishment of debt; FFO associated with properties securing non-recourse debt on which we have defaulted and which we have extinguished, or expect to extinguish, via conveyance of such properties, including property NOI, interest expense and interest expense;gains on debt extinguishment; loss on interest rate derivatives; demolition costs on redevelopment properties;and nonrecurring improvements; executive transition costs (including separation related compensation and replacement recruitment for Vice President level positions and above);costs; and issuance costs associated with redeemed preferred shares. 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 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 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 COPLP 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 measuresadopted, retrospectively effective January 1, 2019, Nareit’s 2018 Whitepaper Restatement, which changed the prior definition of FFO to also exclude gains on sales and impairment losses of properties other than previously depreciated operating properties, net of associated income tax. This adoption affected our ability to make distributions to investors based on each of the following: FFO;reporting for FFO, Basic FFO, Diluted FFO;FFO and Diluted FFO adjusted for comparability. These measures are defined as (1) theper share.
sum of (a) dividends on common shares and (b) distributions to holders of interests in COPLP 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 appearing below sets forth the computation of the above stated measures for the three and nine months ended September 30, 2017March 31, 2019 and 2016,2018, and provides reconciliations to the GAAP measures of COPT and subsidiaries associated with such measures: | | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | For the Three Months Ended March 31, |
| 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 |
| (Dollars and shares in thousands, except per share data) | (Dollars and shares in thousands, except per share data) |
Net income (loss) | $ | 22,682 |
| | $ | 29,272 |
| | $ | 64,977 |
| | $ | (10,948 | ) | |
Add Real estate-related depreciation and amortization | 34,438 |
| | 32,015 |
| | 100,290 |
| | 99,790 |
| |
Net income | | $ | 22,318 |
| | $ | 18,780 |
|
Add: Real estate-related depreciation and amortization | | 34,796 |
| | 33,512 |
|
Add: Depreciation and amortization on UJV allocable to COPT | 310 |
| | 207 |
| | 932 |
| | 207 |
| 566 |
| | 563 |
|
Add: Impairment (recoveries) losses on previously depreciated operating properties | (159 | ) | | 25,857 |
| | 1,451 |
| | 81,828 |
| |
Add: Gain on sales of previously depreciated operating properties | (8 | ) | | (34,101 | ) | | (39 | ) | | (34,101 | ) | |
Less: Gain on sales of real estate | | — |
| | 4 |
|
FFO | 57,263 |
| | 53,250 |
| | 167,611 |
| | 136,776 |
| 57,680 |
| | 52,859 |
|
Less: Preferred share dividends | — |
| | (3,552 | ) | | (6,219 | ) | | (10,657 | ) | |
Less: Noncontrolling interests-preferred units in the Operating Partnership | (165 | ) | | (165 | ) | | (495 | ) | | (495 | ) | (165 | ) | | (165 | ) |
Less: FFO allocable to other noncontrolling interests | (917 | ) | | (894 | ) | | (2,801 | ) | | (2,935 | ) | (971 | ) | | (944 | ) |
Less: Issuance costs associated with redeemed preferred shares | — |
| | — |
| | (6,847 | ) | | — |
| |
Basic and diluted FFO allocable to share-based compensation awards | (215 | ) | | (190 | ) | | (616 | ) | | (486 | ) | (185 | ) | | (213 | ) |
Basic and diluted FFO available to common share and common unit holders | 55,966 |
| | 48,449 |
| | 150,633 |
| | 122,203 |
| |
Gain on sales of non-operating properties | (1,180 | ) | | — |
| | (5,399 | ) | | — |
| |
Impairment (recoveries) losses on non-operating properties | (2 | ) | | 1,842 |
| | 13 |
| | 18,009 |
| |
(Gain) loss on interest rate derivatives | (34 | ) | | (1,523 | ) | | (43 | ) | | 347 |
| |
Loss on early extinguishment of debt | — |
| | 59 |
| | 513 |
| | 37 |
| |
Issuance costs associated with redeemed preferred shares | — |
| | — |
| | 6,847 |
| | — |
| |
Basic FFO available to common share and common unit holders | | 56,359 |
| | 51,537 |
|
Redeemable noncontrolling interests | | 381 |
| | — |
|
Diluted FFO available to common share and common unit holders | | 56,740 |
| | 51,537 |
|
Executive transition costs | 2 |
| | 1,639 |
| | 732 |
| | 6,023 |
| 4 |
| | 163 |
|
Demolition costs on redevelopment properties | — |
| | — |
| | 294 |
| | 578 |
| |
Demolition costs on redevelopment and nonrecurring improvements | | 44 |
| | 39 |
|
Diluted FFO comparability adjustments allocable to share-based compensation awards | 5 |
| | (5 | ) | | (12 | ) | | (99 | ) | — |
| | (1 | ) |
Diluted FFO available to common share and common unit holders, as adjusted for comparability | $ | 54,757 |
| | $ | 50,461 |
| | $ | 153,578 |
| | $ | 147,098 |
| $ | 56,788 |
| | $ | 51,738 |
|
| | | | | | | | | | |
Weighted average common shares | 99,112 |
| | 94,433 |
| | 98,855 |
| | 94,312 |
| 109,951 |
| | 100,999 |
|
Conversion of weighted average common units | 3,350 |
| | 3,591 |
| | 3,400 |
| | 3,648 |
| 1,331 |
| | 3,221 |
|
Weighted average common shares/units - Basic FFO | 102,462 |
| | 98,024 |
| | 102,255 |
| | 97,960 |
| 111,282 |
| | 104,220 |
|
Dilutive effect of share-based compensation awards | 146 |
| | 81 |
| | 154 |
| | 98 |
| 302 |
| | 144 |
|
Redeemable noncontrolling interests | | 1,013 |
| | — |
|
Weighted average common shares/units - Diluted FFO | 102,608 |
| | 98,105 |
| | 102,409 |
| | 98,058 |
| 112,597 |
| | 104,364 |
|
| | | | | | | | | | |
Diluted FFO per share | $ | 0.55 |
| | $ | 0.49 |
| | $ | 1.47 |
| | $ | 1.25 |
| $ | 0.50 |
| | $ | 0.49 |
|
Diluted FFO per share, as adjusted for comparability | $ | 0.53 |
| | $ | 0.51 |
| | $ | 1.50 |
| | $ | 1.50 |
| $ | 0.50 |
| | $ | 0.50 |
|
| | | | | | | | | | |
| | | | | | | | | | |
Denominator for diluted EPS | 99,258 |
| | 94,514 |
| | 99,009 |
| | 94,312 |
| 110,218 |
| | 101,143 |
|
Weighted average common units | 3,350 |
| | 3,591 |
| | 3,400 |
| | 3,648 |
| 1,331 |
| | 3,221 |
|
Redeemable noncontrolling interests | | 1,013 |
| | — |
|
Anti-dilutive EPS effect of share-based compensation awards | — |
| | — |
| | — |
| | 98 |
| 35 |
| | — |
|
Denominator for diluted FFO per share measures | 102,608 |
| | 98,105 |
| | 102,409 |
| | 98,058 |
| 112,597 |
| | 104,364 |
|
Property Additions
The table below sets forth the major components of our additions to properties for the ninethree months ended September 30, 2017March 31, 2019 (in thousands):
| | Construction, development and redevelopment | $ | 140,666 |
| | | $ | 110,479 |
|
Tenant improvements on operating properties(1) | 21,056 |
| | (1) | 4,504 |
|
Capital improvements on operating properties | 13,051 |
| | | 4,531 |
|
| $ | 174,773 |
| | | $ | 119,514 |
|
(1) Tenant improvement costs incurred on newly-constructed properties are classified in this table as construction, development and redevelopment.
Cash Flows
Net cash flow from operating activities increased $28.5 million when comparing the three months ended March 31, 2019 and 2018 due primarily to our payment in 2018 of construction costs on a contract that the customer pre-funded to us in prior years.
Net cash flow used in investing activities increased $86.4 million when comparing the three months ended March 31, 2019 and 2018 due primarily to increased cash outlays for construction, development and redevelopment.
Net cash flow provided by operating activities increased by $0.7 million when comparing the nine months ended September 30, 2017 and 2016 due primarily to lower interest expense payments in the current period due to lower outstanding debt balances, partially offset by lower net cash flows from construction contract and other services.
Net cash flow provided by investing activities decreased $130.6 million when comparing the nine months ended September 30, 2017 and 2016 due primarily to a decrease in property sales in 2017 relative to 2016.
Net cash flow used in financing activities in the ninethree months ended September 30, 2017March 31, 2019 was $317.0$66.3 million, and included the following:
redemption of preferred shares (or units) of $199.1 million;
dividends and/or distributions to equity holders of $94.5 million; and
net repayments ofproceeds from debt borrowings of $33.0$51.3 million; offset in part byand
net proceeds from the issuance of common shares (or units) of $19.8 million.
Net cash flow used$46.4 million; offset in financing activities in the nine months ended September 30, 2016 was $260.6 million, and included the following:
part by
dividends and/or distributions to equity holders of $92.2 million;$30.8 million.
Net cash flow provided by financing activities in the three months ended March 31, 2018 was $6.3 million, and included the following:
distributions to redeemable noncontrolling interests of $14.3 million related primarily to distributions to our partner in Stevens Investors, LLC, as discussed in our 2016 Annual Report on Form 10-K; offset in part by
net proceeds from debt borrowings of $146.0$25.9 million; and
net proceeds from the issuance of common shares (or units) of $20.0 million; offset in part by
dividends and/or distributions to equity holders of $28.9 million.
Liquidity and Capital Resources of COPT
COPLP is the entity through which COPT, the sole general partner of COPLP, conducts almost all of its operations and owns almost all of its assets. COPT occasionally issues public equity from time to time, but does not otherwise generate any capital itself or conduct any business itself, other than incurring certain expenses in operating as a public company which are fully reimbursed by COPLP. COPT itself does not hold any indebtedness, and its only material asset is its ownership of partnership interests of COPLP. COPT’s principal funding requirement is the payment of dividends on its common and preferred shares. COPT’s principal source of funding for its dividend payments is distributions it receives from COPLP.
As of September 30, 2017March 31, 2019, COPT owned 96.8%98.6% of the outstanding common units in COPLP; the remaining common units and noneall of the outstanding preferred units in COPLP; the remaining common and preferred units in COPLP were owned by third parties. 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 89 of the notes to consolidated financial statements included elsewhere 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, we believe that the Operating Partnership’s sources of working capital, specifically its cash flow from operations, and borrowings available under its unsecured line of credit,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 working capital needs, acquisitionsdevelopment activities and developments.acquisitions.
Liquidity and Capital Resources of COPLP
OurCOPLP’s primary cash requirements are for operating expenses, debt service, development of new properties, improvements to existing properties and acquisitions, to the extent they are pursued in the future. We expect COPLP to continue to use cash flow provided by operations as the primary source to meet ourits short-term capital needs, including property operating expenses, general and administrative expenses, interest expense, scheduled principal amortization of debt, distributions to ourits security holders and improvements to existing properties. As of September 30, 2017, weMarch 31, 2019, COPLP had $10.9$7.8 million in cash and cash equivalents.
OurCOPLP’s senior unsecured debt is currently rated investment grade by the three major rating agencies. We aim to maintain an investment grade rating to enable usCOPLP to use debt comprised of unsecured, primarily fixed-rate debt (including the effect of interest rate swaps) from public markets and banks. WeCOPLP also useuses secured nonrecourse debt from institutional lenders and banks when appropriate.for joint venture financing. In addition, weCOPLP periodically accessraises equity from COPT when COPT accesses the public equity markets to raise capital by issuing common and/or preferred shares.
We use ourCOPLP uses its Revolving Credit Facility to initially finance much of ourits investing activities. WeCOPLP subsequently paypays down the facility using cash available from operations and proceeds from long-term borrowings, equity issuances and property sales.sales of interests in properties. The lenders’ aggregate commitment under the facility is $800.0$800.0 million,, with the ability for usCOPLP to increase the lenders’ aggregate commitment to $1.3$1.25 billion,, provided that there is no default under the facility and subject to the approval of the lenders. Amounts available under theThe facility are computed based on 60% of our unencumbered asset value, as defined in the loan agreement. The Revolving Credit Facility matures in May 2019,March 2023, and may be extended by two six-month periods at ourCOPLP’s option, provided that there is no default under the facility and we payCOPLP pays an extension fee of 0.075% of the total availability ofunder the facility.facility for each extension period. As of September 30, 2017,March 31, 2019, the maximum borrowing capacity under this facility totaled $800.0$800.0 million,, of which $630.0$538.0 million was available.
COPT has an equity program in place under which it 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, COPT may also, at its 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 receiving the proceeds from the sale until a later date.
We believe that ourCOPLP’s liquidity and capital resources are adequate for ourits near-term and longer-term requirements without necessitating property sales.
We do, however, expect to raise at least $200 million from sales of interests in properties during the remainder of 2019 and use the proceeds to repay borrowings and fund construction and development costs.
The following table summarizes our contractual obligations as of September 30, 2017March 31, 2019 (in thousands):
| | | For the Periods Ending December 31, | | | For the Periods Ending December 31, | | |
| 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | Thereafter | | Total | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | Thereafter | | Total |
Contractual obligations (1) | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
|
Debt (2) | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
|
Balloon payments due upon maturity | $ | — |
| | $ | — |
| | $ | 170,000 |
| | $ | 112,132 |
| | $ | 300,000 |
| | $ | 1,276,829 |
| | $ | 1,858,961 |
| $ | — |
| | $ | 12,133 |
| | $ | 300,000 |
| | $ | 267,092 |
| | $ | 675,578 |
| | $ | 613,252 |
| | $ | 1,868,055 |
|
Scheduled principal payments(3) | 1,033 |
| | 4,241 |
| | 4,387 |
| | 4,024 |
| | 3,875 |
| | 10,680 |
| | 28,240 |
| 3,290 |
| | 4,023 |
| | 3,875 |
| | 4,032 |
| | 3,012 |
| | 3,633 |
| | 21,865 |
|
Interest on debt (3)(4) | 18,318 |
| | 73,020 |
| | 70,114 |
| | 66,708 |
| | 58,846 |
| | 117,338 |
| | 404,344 |
| 58,706 |
| | 77,950 |
| | 70,864 |
| | 65,411 |
| | 37,804 |
| | 27,566 |
| | 338,301 |
|
New development and redevelopment obligations (4)(5) | 23,932 |
| | 10,269 |
| | 856 |
| | — |
| | — |
| | — |
| | 35,057 |
| |
Third-party construction and development obligations (5)(6) | 30,083 |
| | 37,270 |
| | — |
| | — |
| | — |
| | — |
| | 67,353 |
| |
Capital expenditures for operating properties (5)(7) | 5,509 |
| | 27,314 |
| | 12,985 |
| | — |
| | — |
| | — |
| | 45,808 |
| |
Capital lease obligation (principal and interest) | 700 |
| | 15,775 |
| | — |
| | 135 |
| | — |
| | 75 |
| | 16,685 |
| |
Development and redevelopment obligations (5)(6) | | 168,968 |
| | 14,643 |
| | 703 |
| | — |
| | — |
| | — |
| | 184,314 |
|
Third-party construction obligations (6)(7) | | 24,579 |
| | 8,010 |
| | — |
| | — |
| | — |
| | — |
| | 32,589 |
|
Tenant and other capital improvements (3)(6)(8) | | 13,894 |
| | 23,470 |
| | 7,945 |
| | — |
| | — |
| | — |
| | 45,309 |
|
Finance leases (principal and interest) (3) | | 179 |
| | 862 |
| | 202 |
| | 64 |
| | — |
| | — |
| | 1,307 |
|
Operating leases (8)(3) | 320 |
| | 1,275 |
| | 1,263 |
| | 1,257 |
| | 1,260 |
| | 85,761 |
| | 91,136 |
| 830 |
| | 1,128 |
| | 1,111 |
| | 1,129 |
| | 1,135 |
| | 99,185 |
| | 104,518 |
|
Other obligations (8)(3) | 172 |
| | 380 |
| | 342 |
| | 153 |
| | 39 |
| | 9 |
| | 1,095 |
| 191 |
| | 195 |
| | 178 |
| | 178 |
| | 178 |
| | 800 |
| | 1,720 |
|
Total contractual cash obligations | $ | 80,067 |
| | $ | 169,544 |
| | $ | 259,947 |
| | $ | 184,409 |
| | $ | 364,020 |
| | $ | 1,490,692 |
| | $ | 2,548,679 |
| $ | 270,637 |
| | $ | 142,414 |
| | $ | 384,878 |
| | $ | 337,906 |
| | $ | 717,707 |
| | $ | 744,436 |
| | $ | 2,597,978 |
|
| |
(1) | The contractual obligations set forth in this table exclude property operations contracts that may be terminated with notice of one month or less and also exclude accruals and payables incurred (with the exclusion of debt) and therefore reflected in our reported liabilities. |
| |
(2) | Represents scheduled principal amortization payments and maturities only and therefore excludes net debt discounts and deferred financing costs of $13.9$13.8 million. As of September 30, 2017,March 31, 2019, maturities included $170.0$262.0 million in 20192023 that may be extended to 2020,2024, subject to certain conditions. |
| |
(3) | We expect to pay these items using cash flow from operations. |
| |
(4) | Represents interest costs for our outstanding debt as of September 30, 2017March 31, 2019 for the terms of such debt. For variable rate debt, the amounts reflected above used September 30, 2017March 31, 2019 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. |
| |
(4)(5) | Represents contractual obligations pertaining to new development and redevelopment activities. |
| |
(5)(6) | Due to the long-term nature of certain construction and development 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. |
| |
(6)(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. |
| |
(7)(8) | Represents contractual obligations pertaining to capital expenditures for our operating properties. We expect to pay these costs primarily using cash flow from operations. |
| |
(8) | We expect to pay these items using cash flow from operations.operating activities. |
We expect to spend approximately $60$240 million on construction and development costs and approximately $20$55 million on improvements toand leasing costs for operating properties (including the commitments set forth in the table above) during the remainder of 2017.2019. We expect to fund the construction and development costs initially using primarily borrowings under our Revolving Credit Facility. We expect to fund improvements to existing operating properties using cash flow from operations.operating activities. We expect to use proceeds from sales of property interests to repay borrowings under our Revolving Credit Facility.
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 September 30, 2017March 31, 2019, we were compliant with these covenants.
Off-Balance Sheet Arrangements
We had no material off-balance sheet arrangements during the ninethree months ended September 30, 2017.March 31, 2019.
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 3. 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 variable rate debt. Increases in interest rates can also result in increased interest expense when our fixed rate debt matures and needs to be refinanced.
The following table sets forth as of September 30, 2017March 31, 2019 our debt obligations and weighted average interest rates on debt maturing each year (dollars in thousands):
| | | For the Periods Ending December 31, | | | For the Periods Ending December 31, | | |
| 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | Thereafter | | Total | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | Thereafter | | Total |
Debt: | |
| | |
| | | | |
| | |
| | |
| | |
| |
| | |
| | | | |
| | |
| | |
| | |
|
Fixed rate debt (1) | $ | 939 |
| | $ | 3,858 |
| | $ | 3,991 |
| | $ | 3,718 |
| | $ | 303,875 |
| | $ | 1,037,509 |
| | $ | 1,353,890 |
| $ | 2,992 |
| | $ | 3,718 |
| | $ | 303,875 |
| | $ | 4,033 |
| | $ | 416,590 |
| | $ | 616,885 |
| | $ | 1,348,093 |
|
Weighted average interest rate | 4.35 | % | | 4.37 | % | | 4.36 | % | | 3.96 | % | | 3.70 | % | | 4.47 | % | | 4.30 | % | 4.35 | % | | 3.96 | % | | 3.70 | % | | 3.98 | % | | 3.70 | % | | 5.00 | % | | 4.30 | % |
Variable rate debt (2) | $ | 94 |
| | $ | 383 |
| | $ | 170,396 |
| | $ | 112,438 |
| | $ | — |
| | $ | 250,000 |
| | $ | 533,311 |
| $ | 298 |
| | $ | 12,438 |
| | $ | — |
| | $ | 267,091 |
| | $ | 262,000 |
| | $ | — |
| | $ | 541,827 |
|
Weighted average interest rate (3) | 3.09 | % | | 3.09 | % | | 2.40 | % | | 2.69 | % | | — | % | | 3.04 | % | | 2.76 | % | 4.34 | % | | 4.34 | % | | — | % | | 3.81 | % | | 3.54 | % | | — | % | | 3.69 | % |
| |
(1) | Represents principal maturities only and therefore excludes net discounts and deferred financing costs of $13.9$13.8 million. |
| |
(2) | As of September 30, 2017,March 31, 2019, maturities included $170.0$262.0 million in 20192023 that may be extended to 2020,2024, subject to certain conditions. |
| |
(3) | The amounts reflected above used interest rates as of September 30, 2017March 31, 2019 for variable rate debt. |
The fair value of our debt was $1.9 billion as of September 30, 2017March 31, 2019. If interest rates had been 1% lower, the fair value of our fixed-rate debt would have increased by approximately $7153 million as of September 30, 2017March 31, 2019.
See Note 910 to our consolidated financial statements for information pertaining to interest rate swap contracts in place as of September 30, 2017March 31, 2019 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 $892,000$481,000 in the ninethree months ended September 30, 2017March 31, 2019 if the applicable LIBOR rate was 1% higher.
Item 4. Controls and Procedures
COPT
(a) Evaluation of Disclosure Controls and Procedures
The Company’sOur management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of itsCOPT’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of September 30, 2017.March 31, 2019. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’sCOPT’s disclosure controls and procedures as of September 30, 2017March 31, 2019 were functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company 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.
(b)Change in Internal Control over Financial Reporting
No change in the Company’sCOPT’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.
COPLP
(a)Evaluation of Disclosure Controls and Procedures
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 March 31, 2019. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that COPLP’s disclosure controls and procedures as of March 31, 2019 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.
(b) Change in Internal Control over Financial Reporting
No change in the Company’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.
COPLP
(a)Evaluation of Disclosure Controls and Procedures
The Operating Partnership’s management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of its disclosure controls and procedures (as defined in Rule 15d-15(e) under the Exchange Act) as of September 30, 2017. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Operating Partnership’s disclosure controls and procedures as of September 30, 2017 were functioning effectively to provide reasonable assurance that the information required to be disclosed by the Operating Partnership 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 the Operating Partnership’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
(b)Change in Internal Control over Financial Reporting
No change in the Operating Partnership’sCOPLP’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.
PART II: OTHER INFORMATION
Item 1. 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 Partnership (other than routine litigation arising in the ordinary course of business, substantially all of which is expected to be covered by liability insurance).
Item 1A. Risk Factors
There have been no material changes to the risk factors included in our 20162018 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
| |
(a) | During the three months ended September 30, 2017, 150,000March 31, 2019, 5,500 of COPLP’s common units were exchanged for 150,0005,500 COPT common shares in accordance with COPLP’s Second 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. |
(b) Not applicable
(c) Not applicable
Item 3. Defaults Upon Senior Securities
(a) Not applicable
(b) Not applicable
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
None
Item 6. Exhibits
(a) Exhibits:
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EXHIBIT NO. | | DESCRIPTION |
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101.INS | | XBRL Instance Document (filed herewith). |
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101.SCH | | XBRL Taxonomy Extension Schema Document (filed herewith). |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith). |
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101.LAB | | XBRL Extension Labels Linkbase (filed herewith). |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith). |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document (filed herewith). |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the undersigned Registrants have duly caused this report to be signed on itstheir behalf by the undersigned thereunto duly authorized.
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| CORPORATE OFFICE PROPERTIES TRUST | | CORPORATE OFFICE PROPERTIES, L.P. |
| | | By: Corporate Office Properties Trust, |
| | | its General Partner |
| | | |
| /s/ Stephen E. Budorick | | /s/ Stephen E. Budorick |
| Stephen E. Budorick | | Stephen E. Budorick |
| President and Chief Executive Officer | | President and Chief Executive Officer |
| | | |
| | | |
| /s/ Anthony Mifsud | | /s/ Anthony Mifsud |
| Anthony Mifsud | | Anthony Mifsud |
| Executive Vice President and Chief Financial Officer | | Executive Vice President and Chief Financial Officer |
| | | |
Dated: | October 27, 2017May 7, 2019 | Dated: | October 27, 2017May 7, 2019 |