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, |
| 2020 | | 2019 |
Net income | $ | 25,550 |
| | $ | 22,318 |
|
Other comprehensive loss: | |
| | |
|
Unrealized loss on interest rate derivatives | (37,705 | ) | | (8,845 | ) |
Loss (gain) on interest rate derivatives recognized in interest expense | 131 |
| | (570 | ) |
Total other comprehensive loss | (37,574 | ) | | (9,415 | ) |
Comprehensive (loss) income | (12,024 | ) | | 12,903 |
|
Comprehensive income attributable to noncontrolling interests | (679 | ) | | (1,344 | ) |
Comprehensive (loss) income attributable to COPT | $ | (12,703 | ) | | $ | 11,559 |
|
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 | | 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 |
| |
For the Three Months Ended March 31, 2019 | | | | | | | | | | | | | |
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 |
|
| | | | | | | | | | | | | |
For the Three Months Ended March 31, 2020 | | | | | | | | | | | | | |
Balance at December 31, 2019 (112,068,705 common shares outstanding) | | | $ | 1,121 |
| | $ | 2,481,558 |
| | $ | (778,275 | ) | | $ | (25,444 | ) | | $ | 40,285 |
| | $ | 1,719,245 |
|
Cumulative effect of accounting change for adoption of credit loss guidance | | | — |
| | — |
| | (5,541 | ) | | — |
| | — |
| | (5,541 | ) |
Balance at December 31, 2019, as adjusted | | | 1,121 |
| | 2,481,558 |
| | (783,816 | ) | | (25,444 | ) | | 40,285 |
| | 1,713,704 |
|
Conversion of common units to common shares (12,009 shares) | | | — |
| | 182 |
| | — |
| | — |
| | (182 | ) | | — |
|
Share-based compensation (88,749 shares issued, net of redemptions) | | | 1 |
| | 983 |
| | — |
| | — |
| | 226 |
| | 1,210 |
|
Redemption of vested equity awards | — |
| | — |
| | (2,179 | ) | | — |
| | — |
| | — |
| | (2,179 | ) | | — |
| | (1,492 | ) | | — |
| | — |
| | — |
| | (1,492 | ) |
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP | — |
| | — |
| | (42 | ) | | — |
| | — |
| | 42 |
| | — |
| | — |
| | (453 | ) | | — |
| | — |
| | 453 |
| | — |
|
Comprehensive loss | — |
| | — |
| | — |
| | (13,294 | ) | | (13,476 | ) | | 141 |
| | (26,629 | ) | | — |
| | — |
| | 24,054 |
| | (36,757 | ) | | (279 | ) | | (12,982 | ) |
Dividends | — |
| | — |
| | — |
| | (88,796 | ) | | — |
| | — |
| | (88,796 | ) | | — |
| | — |
| | (30,838 | ) | | — |
| | — |
| | (30,838 | ) |
Distributions to owners of common and preferred units in COPLP | — |
| | — |
| | — |
| | — |
| | — |
| | (3,498 | ) | | (3,498 | ) | | — |
| | — |
| | — |
| | — |
| | (420 | ) | | (420 | ) |
Contributions from noncontrolling interests in other consolidated entities | | | — |
| | — |
| | — |
| | — |
| | 112 |
| | 112 |
|
Distributions to noncontrolling interests in other consolidated entities | — |
| | — |
| | — |
| | — |
| | — |
| | (12 | ) | | (12 | ) | | — |
| | — |
| | — |
| | — |
| | (7 | ) | | (7 | ) |
Adjustment to arrive at fair value of redeemable noncontrolling interests | — |
| | — |
| | (516 | ) | | — |
| | — |
| | — |
| | (516 | ) | | — |
| | (4,101 | ) | | — |
| | — |
| | — |
| | (4,101 | ) |
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 |
| |
Balance at March 31, 2020 (112,169,463 common shares outstanding) | | | $ | 1,122 |
| | $ | 2,476,677 |
| | $ | (790,600 | ) | | $ | (62,201 | ) | | $ | 40,188 |
| | $ | 1,665,186 |
|
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 | 2020 | | 2019 |
Cash flows from operating activities | |
| | |
| |
| | |
|
Revenues from real estate operations received | $ | 390,116 |
| | $ | 393,300 |
| $ | 133,092 |
| | $ | 126,569 |
|
Construction contract and other service revenues received | 72,682 |
| | 54,399 |
| 24,925 |
| | 5,904 |
|
Property operating expenses paid | (144,187 | ) | | (154,203 | ) | (46,330 | ) | | (42,974 | ) |
Construction contract and other service expenses paid | (57,189 | ) | | (33,169 | ) | (17,631 | ) | | (4,614 | ) |
General, administrative, leasing, business development and land carry costs paid | (27,066 | ) | | (27,879 | ) | (12,371 | ) | | (11,703 | ) |
Interest expense paid | (55,637 | ) | | (61,662 | ) | (16,767 | ) | | (18,282 | ) |
Lease incentives | (9,414 | ) | | (1,789 | ) | |
Lease incentives paid | | (3,628 | ) | | (1,158 | ) |
Other | 1,373 |
| | 976 |
| 928 |
| | 910 |
|
Net cash provided by operating activities | 170,678 |
| | 169,973 |
| 62,218 |
| | 54,652 |
|
Cash flows from investing activities | |
| | |
| |
| | |
|
Construction, development and redevelopment | (113,678 | ) | | (121,297 | ) | |
Development and redevelopment of properties | | (92,802 | ) | | (100,212 | ) |
Tenant improvements on operating properties | (19,876 | ) | | (26,055 | ) | (10,446 | ) | | (4,174 | ) |
Other capital improvements on operating properties | (15,174 | ) | | (22,063 | ) | (5,457 | ) | | (4,476 | ) |
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 | ) | (5,950 | ) | | (2,539 | ) |
Other | 1,359 |
| | (991 | ) | 192 |
| | 1,297 |
|
Net cash (used in) provided by investing activities | (52,730 | ) | | 77,917 |
| |
Net cash used in investing activities | | (114,463 | ) | | (121,155 | ) |
Cash flows from financing activities | |
| | |
| |
| | |
|
Proceeds from debt | | | | | | |
Revolving Credit Facility | 268,000 |
| | 362,500 |
| 251,000 |
| | 123,000 |
|
Other debt proceeds | — |
| | 105,000 |
| 181,595 |
| | 3,350 |
|
Repayments of debt | | | | | | |
Revolving Credit Facility | (98,000 | ) | | (406,000 | ) | (186,000 | ) | | (74,000 | ) |
Scheduled principal amortization | (2,878 | ) | | (4,454 | ) | (1,021 | ) | | (1,098 | ) |
Other debt repayments | (200,150 | ) | | (203,056 | ) | |
Deferred financing costs paid | — |
| | (825 | ) | (1,261 | ) | | — |
|
Net proceeds from issuance of common shares | 19,834 |
| | (46 | ) | — |
| | 46,415 |
|
Redemption of preferred shares | (199,083 | ) | | — |
| |
Common share dividends paid | (81,779 | ) | | (78,072 | ) | (30,817 | ) | | (30,287 | ) |
Preferred share dividends paid | (9,305 | ) | | (10,657 | ) | |
Distributions paid to noncontrolling interests in COPLP | (3,371 | ) | | (3,476 | ) | (403 | ) | | (553 | ) |
Distributions paid to redeemable noncontrolling interests | (7,860 | ) | | (14,329 | ) | (11,870 | ) | | — |
|
Redemption of vested equity awards | (1,869 | ) | | (2,179 | ) | (1,492 | ) | | (1,817 | ) |
Other | (492 | ) | | (5,032 | ) | (2,729 | ) | | 1,318 |
|
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 | | 197,002 |
| | 66,328 |
|
Net increase (decrease) in cash and cash equivalents and restricted cash | | 144,757 |
| | (175 | ) |
Cash and cash equivalents and restricted cash | | |
| | |
|
Beginning of period | 209,863 |
| | 60,310 |
| 18,130 |
| | 11,950 |
|
End of period | $ | 10,858 |
| | $ | 47,574 |
| $ | 162,887 |
| | $ | 11,775 |
|
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, |
| 2020 | | 2019 |
Reconciliation of net income to net cash provided by operating activities: | |
| | |
|
Net income | $ | 25,550 |
| | $ | 22,318 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
|
Depreciation and other amortization | 33,015 |
| | 35,229 |
|
Amortization of deferred financing costs and net debt discounts | 961 |
| | 898 |
|
Increase in deferred rent receivable | (2,230 | ) | | (2,539 | ) |
Share-based compensation | 1,389 |
| | 1,659 |
|
Other | (52 | ) | | (1,572 | ) |
Changes in operating assets and liabilities: | |
| | |
Decrease in accounts receivable | 4,547 |
| | 1,033 |
|
Decrease (increase) in prepaid expenses and other assets, net | 15,548 |
| | (6,752 | ) |
(Decrease) increase in accounts payable, accrued expenses and other liabilities | (16,213 | ) | | 8,822 |
|
Decrease in rents received in advance and security deposits | (297 | ) | | (4,444 | ) |
Net cash provided by operating activities | $ | 62,218 |
| | $ | 54,652 |
|
Reconciliation of cash and cash equivalents and restricted cash: | | | |
Cash and cash equivalents at beginning of period | $ | 14,733 |
| | $ | 8,066 |
|
Restricted cash at beginning of period | 3,397 |
| | 3,884 |
|
Cash and cash equivalents and restricted cash at beginning of period | $ | 18,130 |
| | $ | 11,950 |
|
| | | |
Cash and cash equivalents at end of period | $ | 159,061 |
| | $ | 7,780 |
|
Restricted cash at end of period | 3,826 |
| | 3,995 |
|
Cash and cash equivalents and restricted cash at end of period | $ | 162,887 |
| | $ | 11,775 |
|
Supplemental schedule of non-cash investing and financing activities: | |
| | |
|
(Decrease) increase in accrued capital improvements, leasing and other investing activity costs | $ | (4,795 | ) | | $ | 11,329 |
|
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 in fair value of derivatives applied to accumulated other comprehensive loss and noncontrolling interests | $ | (37,573 | ) | | $ | (9,450 | ) |
Dividends/distributions payable | $ | 31,301 |
| | $ | 31,346 |
|
Decrease in noncontrolling interests and increase in shareholders’ equity in connection with the conversion of common units into common shares | $ | 182 |
| | $ | 80 |
|
Adjustments to noncontrolling interests resulting from changes in COPLP ownership | $ | 453 |
| | $ | 1,322 |
|
Increase in redeemable noncontrolling interests and decrease in equity to carry redeemable noncontrolling interests at fair value | $ | 4,101 |
| | $ | 799 |
|
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, 2020 | | December 31, 2019 |
Assets | |
| | |
| |
| | |
|
Properties, net: | |
| | |
| |
| | |
|
Operating properties, net | $ | 2,690,712 |
| | $ | 2,671,831 |
| $ | 2,813,949 |
| | $ | 2,772,647 |
|
Projects in development or held for future development | 406,319 |
| | 401,531 |
| 605,679 |
| | 568,239 |
|
Total properties, net | 3,097,031 |
| | 3,073,362 |
| 3,419,628 |
| | 3,340,886 |
|
Assets held for sale, net | 74,415 |
| | 94,654 |
| |
Property - operating right-of-use assets | | 27,793 |
| | 27,864 |
|
Property - finance right-of-use assets | | 40,450 |
| | 40,458 |
|
Cash and cash equivalents | 10,858 |
| | 209,863 |
| 159,061 |
| | 14,733 |
|
Restricted cash and marketable securities | 1,766 |
| | 2,756 |
| |
Investment in unconsolidated real estate joint venture | 25,194 |
| | 25,548 |
| |
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 |
| |
Investment in unconsolidated real estate joint ventures | | 51,220 |
| | 51,949 |
|
Accounts receivable, net | | 30,317 |
| | 35,444 |
|
Deferred rent receivable | | 89,690 |
| | 87,736 |
|
Intangible assets on real estate acquisitions, net | 64,055 |
| | 78,351 |
| 26,078 |
| | 27,392 |
|
Deferred leasing costs (net of accumulated amortization of $28,590 and $65,988, respectively) | 47,033 |
| | 41,214 |
| |
Investing receivables | 56,108 |
| | 52,279 |
| |
Deferred leasing costs (net of accumulated amortization of $34,613 and $33,782, respectively) | | 58,608 |
| | 58,392 |
|
Investing receivables (net of allowance for credit losses of $3,598 at March 31, 2020) | | 71,197 |
| | 73,523 |
|
Prepaid expenses and other assets, net | 66,538 |
| | 72,764 |
| 78,136 |
| | 93,016 |
|
Total assets | $ | 3,555,365 |
| | $ | 3,775,448 |
| $ | 4,052,178 |
| | $ | 3,851,393 |
|
Liabilities and equity | |
| | |
| |
| | |
|
Liabilities: | |
| | |
| |
| | |
|
Debt, net | $ | 1,873,291 |
| | $ | 1,904,001 |
| $ | 2,076,839 |
| | $ | 1,831,139 |
|
Accounts payable and accrued expenses | 121,483 |
| | 108,682 |
| 128,441 |
| | 148,746 |
|
Rents received in advance and security deposits | 26,223 |
| | 29,798 |
| 33,323 |
| | 33,620 |
|
Distributions payable | 28,462 |
| | 31,335 |
| 31,301 |
| | 31,263 |
|
Deferred revenue associated with operating leases | 12,047 |
| | 12,666 |
| 6,972 |
| | 7,361 |
|
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 | | 17,365 |
| | 17,317 |
|
Interest rate derivatives | | 63,232 |
| | 25,682 |
|
Other liabilities | 39,459 |
| | 44,740 |
| 6,607 |
| | 7,589 |
|
Total liabilities | 2,117,312 |
| | 2,157,805 |
| 2,364,080 |
| | 2,102,717 |
|
Commitments and contingencies (Note 15) |
|
| |
|
| |
Commitments and contingencies (Note 17) | |
|
| |
|
|
Redeemable noncontrolling interests | 23,269 |
| | 22,979 |
| 22,912 |
| | 29,431 |
|
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, 2020 and December 31, 2019 | | 8,800 |
| | 8,800 |
|
Common units, 112,169,463 and 112,068,705 held by the general partner and 1,620,449 and 1,482,425 held by limited partners at March 31, 2020 and December 31, 2019, respectively | | 1,707,395 |
| | 1,724,159 |
|
Accumulated other comprehensive loss | (952 | ) | | (1,854 | ) | (62,843 | ) | | (25,648 | ) |
Total Corporate Office Properties, L.P.’s equity | 1,402,759 |
| | 1,581,043 |
| 1,653,352 |
| | 1,707,311 |
|
Noncontrolling interests in subsidiaries | 12,025 |
| | 13,621 |
| 11,834 |
| | 11,934 |
|
Total equity | 1,414,784 |
| | 1,594,664 |
| 1,665,186 |
| | 1,719,245 |
|
Total liabilities, redeemable noncontrolling interest and equity | $ | 3,555,365 |
| | $ | 3,775,448 |
| |
Total liabilities, redeemable noncontrolling interests and equity | | $ | 4,052,178 |
| | $ | 3,851,393 |
|
See accompanying notes to consolidated financial statements.
Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per unit data)
(unaudited)
|
| | | | | | | |
| For the Three Months Ended March 31, |
| 2020 | | 2019 |
Revenues | |
| | |
|
Lease revenue | $ | 131,012 |
| | $ | 130,903 |
|
Other property revenue | 1,104 |
| | 1,087 |
|
Construction contract and other service revenues | 13,681 |
| | 16,950 |
|
Total revenues | 145,797 |
| | 148,940 |
|
Operating expenses | |
| | |
|
Property operating expenses | 49,999 |
| | 49,445 |
|
Depreciation and amortization associated with real estate operations | 32,596 |
| | 34,796 |
|
Construction contract and other service expenses | 13,121 |
| | 16,326 |
|
General, administrative and leasing expenses | 7,486 |
| | 8,751 |
|
Business development expenses and land carry costs | 1,118 |
| | 1,113 |
|
Total operating expenses | 104,320 |
| | 110,431 |
|
Interest expense | (16,840 | ) | | (18,674 | ) |
Interest and other income | 1,205 |
| | 2,286 |
|
Credit loss expense | (689 | ) | | — |
|
Gain on sales of real estate | 5 |
| | — |
|
Income before equity in income of unconsolidated entities and income taxes | 25,158 |
| | 22,121 |
|
Equity in income of unconsolidated entities | 441 |
| | 391 |
|
Income tax expense | (49 | ) | | (194 | ) |
Net income | 25,550 |
| | 22,318 |
|
Net income attributable to noncontrolling interests in consolidated entities | (1,132 | ) | | (1,037 | ) |
Net income attributable to COPLP | 24,418 |
| | 21,281 |
|
Preferred unit distributions | (77 | ) | | (165 | ) |
Net income attributable to COPLP common unitholders | $ | 24,341 |
| | $ | 21,116 |
|
| | | |
Earnings per common unit: (1) | |
| | |
|
Net income attributable to COPLP common unitholders - basic | $ | 0.21 |
| | $ | 0.19 |
|
Net income attributable to COPLP common unitholders - diluted | $ | 0.21 |
| | $ | 0.19 |
|
|
| | | | | | | | | | | | | | | |
| 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 |
|
(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, |
| 2020 | | 2019 |
Net income | $ | 25,550 |
| | $ | 22,318 |
|
Other comprehensive loss: | |
| | |
|
Unrealized loss on interest rate derivatives | (37,705 | ) | | (8,845 | ) |
Loss (gain) on interest rate derivatives recognized in interest expense | 131 |
| | (570 | ) |
Total other comprehensive loss | (37,574 | ) | | (9,415 | ) |
Comprehensive (loss) income | (12,024 | ) | | 12,903 |
|
Comprehensive income attributable to noncontrolling interests | (753 | ) | | (1,037 | ) |
Comprehensive (loss) income attributable to COPLP | $ | (12,777 | ) | | $ | 11,866 |
|
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 Loss | | Noncontrolling Interests in Subsidiaries | | |
| Units | | Amount | | Units | | Amount | | | | Total Equity |
For the Three Months Ended March 31, 2019 | | | | | | | | | | | | | |
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 |
|
| | | | | | | | | | | | | |
For the Three Months Ended March 31, 2020 | | | | | | | | | | | | | |
Balance at December 31, 2019 | 352,000 |
| | $ | 8,800 |
| | 113,551,130 |
| | $ | 1,724,159 |
| | $ | (25,648 | ) | | $ | 11,934 |
| | $ | 1,719,245 |
|
Cumulative effect of accounting change for adoption of credit loss guidance | — |
| | — |
| | — |
| | (5,541 | ) | | — |
| | — |
| | (5,541 | ) |
Balance at December 31, 2019, as adjusted | 352,000 |
| | 8,800 |
| | 113,551,130 |
| | 1,718,618 |
| | (25,648 | ) | | 11,934 |
| | 1,713,704 |
|
Share-based compensation (units net of redemption) | — |
| | — |
| | 238,782 |
| | 1,210 |
| | — |
| | — |
| | 1,210 |
|
Redemptions of vested equity awards | — |
| | — |
| | — |
| | (1,492 | ) | | — |
| | — |
| | (1,492 | ) |
Comprehensive loss | — |
| | 77 |
| | — |
| | 24,341 |
| | (37,195 | ) | | (205 | ) | | (12,982 | ) |
Distributions to owners of common and preferred units | — |
| | (77 | ) | | — |
| | (31,181 | ) | | — |
| | — |
| | (31,258 | ) |
Contributions from noncontrolling interests in subsidiaries | — |
| | — |
| | — |
| | — |
| | — |
| | 112 |
| | 112 |
|
Distributions to noncontrolling interests in subsidiaries | — |
| | — |
| | — |
| | — |
| | — |
| | (7 | ) | | (7 | ) |
Adjustment to arrive at fair value of redeemable noncontrolling interests | — |
| | — |
| | — |
| | (4,101 | ) | | — |
| | — |
| | (4,101 | ) |
Balance at March 31, 2020 | 352,000 |
| | $ | 8,800 |
| | 113,789,912 |
| | $ | 1,707,395 |
| | $ | (62,843 | ) | | $ | 11,834 |
| | $ | 1,665,186 |
|
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 | 2020 | | 2019 |
Cash flows from operating activities | |
| | |
| |
| | |
|
Revenues from real estate operations received | $ | 390,116 |
| | $ | 393,300 |
| $ | 133,092 |
| | $ | 126,569 |
|
Construction contract and other service revenues received | 72,682 |
| | 54,399 |
| 24,925 |
| | 5,904 |
|
Property operating expenses paid | (144,187 | ) | | (154,203 | ) | (46,330 | ) | | (42,974 | ) |
Construction contract and other service expenses paid | (57,189 | ) | | (33,169 | ) | (17,631 | ) | | (4,614 | ) |
General, administrative, leasing, business development and land carry costs paid | (27,066 | ) | | (27,879 | ) | (12,371 | ) | | (11,703 | ) |
Interest expense paid | (55,637 | ) | | (61,662 | ) | (16,767 | ) | | (18,282 | ) |
Lease incentives | (9,414 | ) | | (1,789 | ) | |
Lease incentives paid | | (3,628 | ) | | (1,158 | ) |
Other | 1,373 |
| | 976 |
| 928 |
| | 910 |
|
Net cash provided by operating activities | 170,678 |
| | 169,973 |
| 62,218 |
| | 54,652 |
|
Cash flows from investing activities | |
| | |
| |
| | |
|
Construction, development and redevelopment | (113,678 | ) | | (121,297 | ) | |
Development and redevelopment of properties | | (92,802 | ) | | (100,212 | ) |
Tenant improvements on operating properties | (19,876 | ) | | (26,055 | ) | (10,446 | ) | | (4,174 | ) |
Other capital improvements on operating properties | (15,174 | ) | | (22,063 | ) | (5,457 | ) | | (4,476 | ) |
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 | ) | (5,950 | ) | | (2,539 | ) |
Other | 1,359 |
| | (991 | ) | 192 |
| | 1,297 |
|
Net cash (used in) provided by investing activities | (52,730 | ) | | 77,917 |
| |
Net cash used in investing activities | | (114,463 | ) | | (121,155 | ) |
Cash flows from financing activities | |
| | |
| |
| | |
|
Proceeds from debt | | | | | | |
Revolving Credit Facility | 268,000 |
| | 362,500 |
| 251,000 |
| | 123,000 |
|
Other debt proceeds | — |
| | 105,000 |
| 181,595 |
| | 3,350 |
|
Repayments of debt | | | | | | |
Revolving Credit Facility | (98,000 | ) | | (406,000 | ) | (186,000 | ) | | (74,000 | ) |
Scheduled principal amortization | (2,878 | ) | | (4,454 | ) | (1,021 | ) | | (1,098 | ) |
Other debt repayments | (200,150 | ) | | (203,056 | ) | |
Deferred financing costs paid | — |
| | (825 | ) | (1,261 | ) | | — |
|
Net proceeds from issuance of common units | 19,834 |
| | (46 | ) | — |
| | 46,415 |
|
Redemption of preferred units | (199,083 | ) | | — |
| |
Common unit distributions paid | (84,655 | ) | | (81,053 | ) | (31,143 | ) | | (30,675 | ) |
Preferred unit distributions paid | (9,800 | ) | | (11,152 | ) | |
Distributions paid to redeemable noncontrolling interests | (7,860 | ) | | (14,329 | ) | (11,870 | ) | | — |
|
Redemption of vested equity awards | (1,869 | ) | | (2,179 | ) | (1,492 | ) | | (1,817 | ) |
Other | (492 | ) | | (5,032 | ) | (2,806 | ) | | 1,153 |
|
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 | | 197,002 |
| | 66,328 |
|
Net increase (decrease) in cash and cash equivalents and restricted cash | | 144,757 |
| | (175 | ) |
Cash and cash equivalents and restricted cash | | |
| | |
|
Beginning of period | 209,863 |
| | 60,310 |
| 18,130 |
| | 11,950 |
|
End of period | $ | 10,858 |
| | $ | 47,574 |
| $ | 162,887 |
| | $ | 11,775 |
|
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, |
| 2020 | | 2019 |
Reconciliation of net income to net cash provided by operating activities: | |
| | |
|
Net income | $ | 25,550 |
| | $ | 22,318 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
|
Depreciation and other amortization | 33,015 |
| | 35,229 |
|
Amortization of deferred financing costs and net debt discounts | 961 |
| | 898 |
|
Increase in deferred rent receivable | (2,230 | ) | | (2,539 | ) |
Share-based compensation | 1,389 |
| | 1,659 |
|
Other | (52 | ) | | (1,572 | ) |
Changes in operating assets and liabilities: | |
| | |
Decrease in accounts receivable | 4,547 |
| | 1,033 |
|
Decrease (increase) in prepaid expenses and other assets, net | 14,768 |
| | (6,406 | ) |
(Decrease) increase in accounts payable, accrued expenses and other liabilities | (15,433 | ) | | 8,476 |
|
Decrease in rents received in advance and security deposits | (297 | ) | | (4,444 | ) |
Net cash provided by operating activities | $ | 62,218 |
| | $ | 54,652 |
|
Reconciliation of cash and cash equivalents and restricted cash: | | | |
Cash and cash equivalents at beginning of period | $ | 14,733 |
| | $ | 8,066 |
|
Restricted cash at beginning of period | 3,397 |
| | 3,884 |
|
Cash and cash equivalents and restricted cash at beginning of period | $ | 18,130 |
| | $ | 11,950 |
|
| | | |
Cash and cash equivalents at end of period | $ | 159,061 |
| | $ | 7,780 |
|
Restricted cash at end of period | 3,826 |
| | 3,995 |
|
Cash and cash equivalents and restricted cash at end of period | $ | 162,887 |
| | $ | 11,775 |
|
Supplemental schedule of non-cash investing and financing activities: | |
| | |
|
(Decrease) increase in accrued capital improvements, leasing and other investing activity costs | $ | (4,795 | ) | | $ | 11,329 |
|
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 in fair value of derivatives applied to accumulated other comprehensive loss and noncontrolling interests | $ | (37,573 | ) | | $ | (9,450 | ) |
Distributions payable | $ | 31,301 |
| | $ | 31,346 |
|
Increase in redeemable noncontrolling interests and decrease in equity to carry redeemable noncontrolling interests at fair value | $ | 4,101 |
| | $ | 799 |
|
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 (“USG”) 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 footprintin 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, 2020, our properties included the following:
159 operating office171 properties totaling 17.419.4 million square feet including 15 triple-net leased,comprised of 15.4 million square feet in 148 office properties and 4.0 million square feet in 23 single-tenant data center properties.shell properties (“data center shells”). We owned six15 of these propertiesdata center shells through an unconsolidated real estate joint venture;ventures;
tena wholesale data center with a critical load of 19.25 megawatts;
14 properties under development or redevelopment (11 office properties under construction or redevelopmentand 3 data center shells) that we estimate will total approximately 1.12.3 million square feet upon completion, including three triple-net leased, single-tenant data center properties, three partially operational properties1 partially-operational property; 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 12.311.2 million square feet and an additional 15243 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, development 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, 2020, 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 thosethat of COPT common shareholders. Similarly, inIn the case of any series of preferred units in COPLP held by COPT, there iswould be a series of preferred shares of beneficial interest (“preferred shares”) in COPT that is equivalent in number and carries substantially the same terms as such series of COPLP preferred 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, 20162019 included in our 20162019 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 20162019 Annual Report on Form 10-K.10-K as updated for our adoption of recent accounting pronouncements discussed below.
ReclassificationReclassifications
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
WeEffective January 1, 2020, 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, including the income tax consequences, classification of awards as either equity or liabilities and classification on the consolidated statement of cash flows. 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 this guidance did not have a material impact on our consolidated financial statements.
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.
In February 2016, the FASB issued guidance that sets 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. The guidance requires lessors of real estate to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. This guidance is effective for reporting periods beginning January 1, 2019 using a modified retrospective transition approach at
the time of adoption. Early adoption is also permitted for this guidance. In addition, the guidance permits lessees and lessors to elect to apply a package of practical expedients that allow them not to reassess upon adoption: the lease classification for any expired or existing leases; their deferred recognition of incremental direct costs of leasing for any expired or existing leases; and whether any expired or existing contracts are, or contain, leases. While we are still completing our assessment of the impact of this guidance, below is a summary of the anticipated primary effects of this guidance on our accounting and reporting.
Real estate leases in which we are the lessor:
| |
◦ | Balance sheet reporting: We believe that we will apply an approach under the new guidance that is similar to the current accounting for operating leases, in which we will continue to recognize the underlying leased asset as property on our balance sheet. |
| |
◦ | Deferral of non-incremental lease costs: Under the new lease guidance, we will no longer be able 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, we would expense previously deferred non-incremental lease costs for existing leases unless we elect the package of practical expedients, in which case such costs would remain deferred and amortized over the remaining lease terms. |
| |
◦ | Lease revenue reporting: We believe that the new 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 for such activities is not separately stipulated in the lease. In 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 be recognized under the new revenue guidance as the related services are delivered. As a result, while the total revenue recognized over time would 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. |
Leases in which we are the lessee:
| |
◦ | Our most significant 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 $90.2 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. We also believe that these types of leases most likely would be classified as finance leases under the new guidance, which would result in the interest component 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 account for our existing ground leases as operating leases upon adoption of the guidance. |
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 applyapplies to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables (excluding those arising from operating leases), loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit exposures (e.g. loan commitments)commitments and guarantees). Under the newthis guidance, an entity willwe recognize itsan estimate of our expected credit losses on these asset types 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. TheWe adopted this guidance is effective for us beginning January 1, 2020 with early adoption permitted after December 2018. We are currently assessingusing the financial impactmodified retrospective transition method under which we recognized a $5.5 million allowance for credit losses by means of this guidance on our consolidated financial statements.
In August 2016, the FASB issued guidance that clarifies how entities should classify certain cash receipts and cash payments on the statementa cumulative-effect adjustment to cumulative distributions in excess of cash flows with the objective of reducing 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 applicationnet income of the predominance principle. The guidance is effectiveCompany (or common units of the Operating Partnership), and did not adjust prior comparative reporting periods. Our consolidated statements of operations reflect adjustments for us beginning January 1, 2018, with early adoption permitted. We do not expect thechanges in our expected credit losses occurring subsequent to adoption of this guidance.
Effective January 1, 2020, we adopted guidance toissued by the FASB that modifies disclosure requirements for fair value measurements. The resulting changes in disclosure did not have a material impact on our consolidated financial statements.
In November 2016,Effective January 1, 2020, we adopted guidance issued by the FASB issuedthat aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. FASB guidance that requiresdid not previously address 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 effectiveaccounting for us beginning January 1, 2018, with early adoption permitted. We do not expect thesuch implementation costs. Our adoption of this guidance todid not have a material impact on our consolidated financial statements.
In February 2017,Credit Losses, Financial Assets and Other Instruments
As discussed above, effective January 1, 2020, we adopted guidance issued by the FASB issued guidance clarifyingthat changed how we measure credit losses for most financial assets and certain other instruments not measured at fair value through net income from an incurred loss model to an expected loss approach. Our items within the scope of asset derecognition provisionsthis guidance included the following:
investing receivables, as disclosed in Note 7;
tenant notes receivable;
other assets comprised of non-lease revenue related accounts receivable (primarily from construction contract services) and accountingcontract assets from unbilled construction contract revenue; and
off-balance sheet credit exposures, which included $4.8 million in unfunded commitments to fund tenant loans and a tax incremental financing obligation disclosed in Note 17.
Under this guidance, we recognize an estimate of our expected credit losses on these items as an allowance, as the guidance requires that financial assets be measured on an amortized cost basis and be presented at the net amount expected to be collected (or as a separate liability in the case of off-balance sheet credit exposures). The allowance represents the portion of the amortized cost basis that we do not expect to collect (or loss we expect to incur in the case of off-balance sheet credit exposures) due to credit over the contractual life based on available information relevant to assessing the collectability of cash flows, which includes consideration of past events, current conditions and reasonable and supportable forecasts of future economic conditions (including consideration of asset- or borrower-specific factors). The guidance requires the allowance for partial salesexpected credit losses to reflect the risk of nonfinancial assets. The new guidance requiresloss, even when that risk is remote. An allowance for credit losses is measured and recorded upon the initial recognition of a salefinancial asset (or off-balance sheet credit exposures), regardless of whether it is originated or purchased. Quarterly, the expected losses are re-estimated, considering any cash receipts and changes in risks or assumptions, with resulting adjustments recognized in the line entitled “credit loss expense” on our consolidated statements of operations.
We estimate expected credit losses for in-scope items using historical loss rate information developed for varying classifications of credit risk and contractual lives of such items. Due to our limited quantity of items within the scope of this guidance and the unique risk characteristics of such items, we individually assign each in-scope item a credit risk classification. The credit risk classifications assigned by us are determined based on credit ratings assigned by ratings agencies (as available) or are internally-developed based on available financial information, historical payment experience, credit documentation, other publicly available information and current economic trends. In addition, for certain items in which the risk of credit loss is affected by the economic performance of a real estate development project, we develop probability weighted scenario analyses for varying levels of performance in estimating our credit loss allowance (applicable to our investing receivable from the City of Huntsville disclosed in Note 7 and resulting gaina tax incremental financing obligation disclosed in Note 17).
The table below sets forth the activity for the allowance for credit losses (in thousands): |
| | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended March 31, 2020 |
| Investing Receivables | | Tenant Notes Receivable (1) | | Other Assets (2) | | Off-Balance Sheet Credit Exposures (3) | | Total |
December 31, 2019 | $ | — |
| | $ | (97 | ) | | $ | — |
| | $ | — |
| | $ | (97 | ) |
Cumulative effect of change for adoption of credit loss guidance | (3,732 | ) | | (325 | ) | | (144 | ) | | (1,340 | ) | | (5,541 | ) |
Credit loss expense | 134 |
| | 23 |
| | (77 | ) | | (769 | ) | | (689 | ) |
March 31, 2020 | $ | (3,598 | ) | | $ | (399 | ) | | $ | (221 | ) | | $ | (2,109 | ) | | $ | (6,327 | ) |
| |
(1) | Included in the line entitled “accounts receivable, net” on our consolidated balance sheets. |
(2) The balance as of March 31, 2020 included $181,000 in the line entitled “accounts receivable, net” and $40,000 in the line entitled “prepaid expenses and other assets, net” on our consolidated balance sheets.
(3) Included in the line entitled “other liabilities” on our consolidated balance sheets.
Most of our credit loss expense for the three months ended March 31, 2020 was attributable to a new commitment to fund a tenant note receivable for improvements in a property.
The following table presents the amortized cost basis of our investing receivables and tenants notes receivable by credit risk classification, by origination year as of March 31, 2020 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Origination Year | | |
| 2015 and Earlier | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 | | Total as of March 31, 2020 |
Investing receivables: | | | | | | | | | | | | | |
Credit risk classification: | | | | | | | | | | | | | |
Investment grade | $ | 59,833 |
| | $ | — |
| | $ | 866 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 60,699 |
|
Non-investment grade | 3,020 |
| | — |
| | — |
| | — |
| | 11,076 |
| | — |
| | 14,096 |
|
Total | $ | 62,853 |
| | $ | — |
| | $ | 866 |
| | $ | — |
| | $ | 11,076 |
| | $ | — |
| | $ | 74,795 |
|
| | | | | | | | | | | | | |
Tenant notes receivable: | | | | | | | | | | | | | |
Credit risk classification: | | | | | | | | | | | | | |
Investment grade | $ | 21 |
| | $ | 78 |
| | $ | — |
| | $ | 1,100 |
| | $ | 100 |
| | $ | — |
| | $ | 1,299 |
|
Non-investment grade | 97 |
| | 219 |
| | — |
| | 185 |
| | 2,079 |
| | — |
| | 2,580 |
|
Total | $ | 118 |
| | $ | 297 |
| | $ | — |
| | $ | 1,285 |
| | $ | 2,179 |
| | $ | — |
| | $ | 3,879 |
|
Our investment grade credit risk classification represents entities with investment grade credit ratings from ratings agencies (such as Standard & Poor’s Ratings Services, Moody’s Investors Service, Inc. or loss when control transfers and the buyer has the abilityFitch Ratings Ltd.), meaning that they are considered to direct use of,have at least an adequate capacity to meet their financial commitments, with credit risk ranging from minimal to moderate. Our non-investment grade credit risk classification represents entities with either no credit agency credit ratings or obtain substantially allratings deemed to be sub-investment grade; we believe that there is significantly more credit risk associated with this classification.
An insignificant portion of the remaining benefitinvesting and tenant notes receivables set forth above were past due, which we define as being delinquent by more than three months from the asset (which generally will occurdue date.
When we believe that collection of interest income on an investing or tenant note receivable is not probable, we place the closing date);receivable on nonaccrual status, meaning interest income is recognized when payments are received rather than on an accrual basis. We had a tenant note receivable on nonaccrual status as of March 31, 2020 and December 31, 2019 with an amortized cost basis of $97,000, which was fully reserved as of each date. We did not recognize any interest income during the factorthree months ended March 31, 2020 on receivables on nonaccrual status.
We write off receivables when we believe the facts and circumstances indicate that continued pursuit of continuing involvementcollection is no longer a specific considerationwarranted. When cash is received in connection with receivables 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 andwe have previously recognized credit losses, we 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 furtherreductions 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.credit loss expense.
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, permitsprior to December 31, 2019, permitted participants to defer up to 100% of their compensation on a pre-tax basis and receive a tax-deferred return on such deferrals. The Company froze additional entry into the plan effective December 31, 2019. 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 and totaled $4.4$2.3 million as of September 30, 2017, andMarch 31, 2020, 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 andalong with an insignificant amount of other marketable securities. 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“other liabilities” on COPT’s consolidated balance sheets.sheet. 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, 2020, 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 value 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, 2020 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 |
| | $ | 2,260 |
| | $ | — |
| | $ | — |
| | $ | 2,260 |
|
Other | | 71 |
| | — |
| | — |
| | 71 |
| | 19 |
| | — |
| | — |
| | 19 |
|
Interest rate derivatives (2) | | — |
| | 126 |
| | — |
| | 126 |
| |
Mutual funds (1) | | | 10 |
| | — |
| | — |
| | 10 |
|
Total assets | | $ | 4,407 |
| | $ | 126 |
| | $ | — |
| | $ | 4,533 |
| | $ | 2,289 |
| | $ | — |
| | $ | — |
| | $ | 2,289 |
|
Liabilities: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Deferred compensation plan liability (3)(2) | | $ | — |
| | $ | 4,407 |
| | $ | — |
| | $ | 4,407 |
| | $ | — |
| | $ | 2,279 |
| | $ | — |
| | $ | 2,279 |
|
Interest rate derivatives (3) | | — |
| | 316 |
| | — |
| | 316 |
| | — |
| | 63,232 |
| | — |
| | 63,232 |
|
Total liabilities | | $ | — |
| | $ | 4,723 |
| | $ | — |
| | $ | 4,723 |
| | $ | — |
| | $ | 65,511 |
| | $ | — |
| | $ | 65,511 |
|
(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, 2020 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: | | |
| | |
| | |
| | |
|
Mutual funds (1) | | $ | 10 |
| | $ | — |
| | $ | — |
| | $ | 10 |
|
Liabilities: | | |
| | |
| | |
| | |
|
Interest rate derivatives | | $ | — |
| | $ | 63,232 |
| | $ | — |
| | $ | 63,232 |
|
|
| | | | | | | | | | | | | | | | |
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”assets, net” on COPLP’sCOPLP’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.
4.Properties, Net
Operating properties, net consisted of the following (in thousands):
|
| | | | | | | |
| March 31, 2020 | | December 31, 2019 |
Land | $ | 489,744 |
| | $ | 472,976 |
|
Buildings and improvements | 3,359,908 |
| | 3,306,791 |
|
Less: Accumulated depreciation | (1,035,703 | ) | | (1,007,120 | ) |
Operating properties, net | $ | 2,813,949 |
| | $ | 2,772,647 |
|
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Land | $ | 440,771 |
| | $ | 433,311 |
|
Buildings and improvements | 3,009,203 |
| | 2,944,905 |
|
Less: Accumulated depreciation | (759,262 | ) | | (706,385 | ) |
Operating properties, net | $ | 2,690,712 |
| | $ | 2,671,831 |
|
2020 Development Activities
During the three months ended March 31, 2020, we placed into service 230,000 square feet in 1 newly-developed property. As of March 31, 2020, we had 13 properties under development, or which we were contractually committed to develop, that we estimate will total 2.2 million square feet upon completion and 1 partially-operational property under redevelopment that we estimate will total 106,000 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, 2020, these leases, which may encompass all, or a portion of, a property, had remaining terms spanning from one month to 15 years and averaging approximately five years.
Our lease revenue is comprised of: fixed lease revenue, including contractual rent billings under leases recognized on a straight-line basis over lease terms and amortization of lease incentives and above- and below- market lease intangibles; and variable lease revenue, including tenant expense recoveries, lease termination revenue and other revenue from tenants that is not fixed under the lease. The table below sets forth our allocation of lease revenue recognized between fixed and variable lease revenue (in thousands):
|
| | | | | | | | |
| | For the Three Months Ended March 31, |
Lease revenue | | 2020 | | 2019 |
Fixed | | $ | 104,109 |
| | $ | 104,644 |
|
Variable | | 26,903 |
| | 26,259 |
|
| | $ | 131,012 |
| | $ | 130,903 |
|
Projects
Fixed contractual payments due under our property leases were as follows (in thousands):
|
| | | | | | | | |
Year Ending December 31, | | March 31, 2020 | | December 31, 2019 |
2020 (1) | | $ | 301,914 |
| | $ | 388,310 |
|
2021 | | 357,747 |
| | 336,482 |
|
2022 | | 319,239 |
| | 299,356 |
|
2023 | | 264,865 |
| | 245,661 |
|
2024 | | 214,797 |
| | 195,246 |
|
Thereafter | | 548,049 |
| | 474,741 |
|
| | $ | 2,006,611 |
| | $ | 1,939,796 |
|
(1) As of March 31, 2020, represents the nine months ending December 31, 2020.
Lessee arrangements
We lease land underlying certain properties that we are operating or developing from third parties. These ground leases have long durations with remaining terms ranging from 29 years (excluding extension options) to 96 years. As of March 31, 2020, our balance sheet included $68.2 million in development or heldright-of-use assets associated with ground leases that included:
$37.8 million for future developmentland 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 96-year remaining term, and we possess a bargain purchase option that we expect to exercise in 2020;
$10.3 million for land underlying operating office properties in Washington, DC under 2 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 29 years and an option to renew for an additional 49 years that was included in the term used in determining the asset balance;
$6.6 million for land in a research park in College Park, Maryland under 4 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 63 to 74 years;
$4.8 million for land in a business park in Huntsville, Alabama under 9 leases through our LW Redstone Company, LLC joint venture, with remaining terms ranging from 43 to 50 years and options to renew for an additional 25 years that were not included in the term used in determining the asset balance; and
$2.3 million for other land underlying operating properties in our Fort Meade/BW Corridor sub-segment under 2 leases with remaining terms of approximately 48 years, all of the rent on which was previously paid.
Our right-of-use assets consisted of the following (in thousands):
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Land | $ | 216,108 |
| | $ | 195,521 |
|
Development in progress, excluding land | 190,211 |
| | 206,010 |
|
Projects in development or held for future development | $ | 406,319 |
| | $ | 401,531 |
|
|
| | | | | | | | | | |
Leases | | Balance Sheet Location | | March 31, 2020 | | December 31, 2019 |
Right-of-use assets | | | | | | |
Operating leases - Property | | Property - operating right-of-use assets | | $ | 27,793 |
| | $ | 27,864 |
|
Finance leases - Property | | Property - finance right-of-use assets | | 40,450 |
| | 40,458 |
|
Total right-of-use assets | | | | $ | 68,243 |
| | $ | 68,322 |
|
Lease liabilities consisted of the following (in thousands): |
| | | | | | | | | | |
Leases | | Balance Sheet Location | | March 31, 2020 | | December 31, 2019 |
Lease liabilities | | | | | | |
Operating leases - Property | | Property - operating lease liabilities | | $ | 17,365 |
| | $ | 17,317 |
|
Finance leases - Property | | Other liabilities | | 702 |
| | 702 |
|
Total lease liabilities | | | | $ | 18,067 |
| | $ | 18,019 |
|
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 componentsweighted average terms and discount rates of assets held for sale on our consolidated balance sheet for these propertiesleases as of March 31, 2020:
|
| | | |
Weighted average remaining lease term | | |
Operating leases | | 68 years |
|
Finance leases | | < 1 year |
|
Weighted average discount rate | | |
Operating leases | | 7.33 | % |
Finance leases | | 3.62 | % |
The table below presents our total lease cost (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 |
|
|
| | | | | | | | | | |
| | | | For the Three Months Ended March 31, |
Lease cost | | Statement of Operations Location | | 2020 | | 2019 |
Operating lease cost | | | | | | |
Property leases | | Property operating expenses | | $ | 431 |
| | $ | 413 |
|
Finance lease cost | | | | | | |
Amortization of property right-of-use assets | | Property operating expenses | | 9 |
| | — |
|
| | | | $ | 440 |
| | $ | 413 |
|
The table below presents the effect of lease payments on our consolidated statements of cash flows (in thousands):
|
| | | | | | | | |
| | For the Three Months Ended March 31, |
Supplemental cash flow information | | 2020 | | 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | | | | |
Operating cash flows for operating leases | | $ | 311 |
| | $ | 228 |
|
Financing cash flows for financing leases | | $ | — |
| | $ | 52 |
|
Payments on leases as of March 31, 2020 and December 31, 2019 were due as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2020 | | As of December 31, 2019 |
Year Ending December 31, | | Operating leases | | Finance leases | | Total | | Operating leases | | Finance leases | | Total |
2020 (1) | | $ | 826 |
| | $ | 674 |
| | $ | 1,500 |
| | $ | 1,092 |
| | $ | 674 |
| | $ | 1,766 |
|
2021 | | 1,138 |
| | 14 |
| | 1,152 |
| | 1,138 |
| | 14 |
| | 1,152 |
|
2022 | | 1,162 |
| | 14 |
| | 1,176 |
| | 1,162 |
| | 14 |
| | 1,176 |
|
2023 | | 1,167 |
| | — |
| | 1,167 |
| | 1,167 |
| | — |
| | 1,167 |
|
2024 | | 1,173 |
| | — |
| | 1,173 |
| | 1,173 |
| | — |
| | 1,173 |
|
Thereafter | | 100,609 |
| | — |
| | 100,609 |
| | 100,609 |
| | — |
| | 100,609 |
|
Total lease payments | | 106,075 |
| | 702 |
| | 106,777 |
| | 106,341 |
| | 702 |
| | 107,043 |
|
Less: Amount representing interest | | (88,710 | ) | | — |
| | (88,710 | ) | | (89,024 | ) | | — |
| | (89,024 | ) |
Lease liability | | $ | 17,365 |
| | $ | 702 |
| | $ | 18,067 |
| | $ | 17,317 |
| | $ | 702 |
| | $ | 18,019 |
|
(1) This sale also included land.
We also sold other land inAs of March 31, 2020, represents the nine months ended September 30, 2017 for $14.3 million and recognized a gain on sale of $4.2 million.ending December 31, 2020.
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.
2017 Construction Activities
During the nine months endedSeptember 30, 2017, we placed into service 751,000 square feet in five newly constructed properties (including a partially operational property) and 88,000 square feet in three redeveloped properties (including a partially operational property). As of September 30, 2017, we had eight office properties under construction, or for which we were contractually committed to construct, that we estimate will total 1.1 million square feet upon completion (including two properties completed but held for future lease to the United States Government) and two office properties under redevelopment that we estimate will total 36,000 square feet upon completion.
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, 2020 (dollars in thousands):
| | | | Nominal | | | | | | | | | | | | March 31, 2020 (1) |
| | | | Ownership | | | | September 30, 2017 (1) | | Date Acquired | | Nominal Ownership % | | Total Assets | | Encumbered Assets | | Total Liabilities |
| | Date | | % as of | | Total | | Encumbered | | Total | |
| | Acquired | | 9/30/2017 | | Nature of Activity | | Assets | | Assets | | Liabilities | |
Entity | | | Date Acquired | | Nominal Ownership % | | Location | | Total Assets | | Encumbered Assets | | Total Liabilities |
LW Redstone Company, LLC | | 3/23/2010 | | 85% | | Development and operation of real estate (2) | | $ | 158,937 |
| | $ | 76,374 |
| | $ | 50,344 |
| | Huntsville, Alabama | |
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% | | College Park, Maryland | | 91,205 |
| | 63,318 |
| | 56,396 |
|
Stevens Investors, LLC | | 8/11/2015 | | 95% | | Development of real estate (4) | | 70,383 |
| | — |
| | 23,566 |
| | 8/11/2015 | | 95% | | Washington, DC | | 135,861 |
| | 135,175 |
| | 64,621 |
|
| | | | $ | 300,087 |
| | $ | 122,187 |
| | $ | 120,805 |
| | | | $ | 512,739 |
| | $ | 310,332 |
| | $ | 221,432 |
|
| |
(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. |
In March 2020, the LW Redstone Company, LLC joint venture agreement was amended to change the distribution terms to allow the venture to distribute financing proceeds to satisfy our partner’s cumulative preferred return and to provide our partner a priority preferred return on its invested capital.
Unconsolidated Real Estate Joint VentureVentures
As of September 30, 2017, we owned a 50% interestThe table below sets forth information pertaining to our investments in GI-COPT DC Partnership LLC (“GI-COPT”), aunconsolidated real estate joint venture owning six triple-net leased, single-tenant data center properties in Virginia, that we accountventures accounted for using the equity method of accounting. As of September 30, 2017, we had an investment balanceaccounting (dollars in GI-COPT of $25.2 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 equitythousands):
|
| | | | | | | | | | | | | | | |
| | Date Acquired | | Nominal Ownership % | | Number of Properties | | Carrying Value of Investment (1) |
Entity | | | | | March 31, 2020 | | December 31, 2019 |
GI-COPT DC Partnership LLC | | 7/21/2016 | | 50% | | 6 |
| | $ | 37,275 |
| | $ | 37,816 |
|
BREIT COPT DC JV LLC | | 6/20/2019 | | 10% | | 9 |
| | 13,945 |
| | 14,133 |
|
| | | | | | 15 |
| | $ | 51,220 |
| | $ | 51,949 |
|
(1) Included in the net assets upon formation of theline entitled “investment in unconsolidated real estate joint venture; we are amortizing this basis difference into equity in income from unconsolidated entities over the lives of the underlying assets.ventures” on our consolidated balance sheets.
6.7. Investing Receivables
Investing receivables including accrued interest thereon, consisted of the following (in thousands):
|
| | | | | | | |
| March 31, 2020 | | December 31, 2019 |
Notes receivable from the City of Huntsville | $ | 60,699 |
| | $ | 59,427 |
|
Other investing loans receivable | 14,096 |
| | 14,096 |
|
Amortized cost basis | 74,795 |
| | 73,523 |
|
Allowance for credit losses | (3,598 | ) | | �� |
|
Investing receivables, net | $ | 71,197 |
| | $ | 73,523 |
|
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Notes receivable from the City of Huntsville | $ | 53,088 |
| | $ | 49,258 |
|
Other investing loans receivable | 3,020 |
| | 3,021 |
|
| $ | 56,108 |
| | $ | 52,279 |
|
The balances above include accrued interest receivable, net of allowance for credit losses, of $433,000 as of March 31, 2020 and $4.7 million as of December 31, 2019.
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, 2017 or December 31, 2016. The fair value of these receivables approximated their carrying amountswas approximately $75 million as of September 30, 2017March 31, 2020 and $74 million as of December 31, 2016.2019.
8. Prepaid Expenses and Other Assets, Net
Prepaid expenses and other assets, net consisted of the following (in thousands):
|
| | | | | | | |
| March 31, 2020 | | December 31, 2019 |
Lease incentives, net | $ | 29,026 |
| | $ | 28,433 |
|
Prepaid expenses | 12,482 |
| | 18,835 |
|
Furniture, fixtures and equipment, net | 7,620 |
| | 7,823 |
|
Construction contract costs in excess of billings, net | 7,463 |
| | 17,223 |
|
Non-real estate equity investments | 6,714 |
| | 6,705 |
|
Restricted cash | 3,826 |
| | 3,397 |
|
Deferred financing costs, net (1) | 3,351 |
| | 3,633 |
|
Deferred tax asset, net (2) | 2,279 |
| | 2,328 |
|
Other assets | 5,375 |
| | 4,639 |
|
Total for COPLP and subsidiaries | 78,136 |
| | 93,016 |
|
Marketable securities in deferred compensation plan | 2,279 |
| | 3,060 |
|
Total for COPT and subsidiaries | $ | 80,415 |
| | $ | 96,076 |
|
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Prepaid expenses | $ | 30,932 |
| | $ | 24,432 |
|
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 |
|
Deferred financing costs, net (2) | 1,419 |
| | 3,128 |
|
Other assets | 4,294 |
| | 5,983 |
|
Prepaid expenses and other assets, net | $ | 66,538 |
| | $ | 72,764 |
|
(1) Includes a valuation allowance of $2.1 million.
(2) Represents deferred costs, net of accumulated amortization, attributable to our Revolving Credit Facility and interest rate derivatives.
(2) Includes a valuation allowance of $480,000 as of March 31, 2020 and December 31, 2019.
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, 2020 | | December 31, 2019 | | March 31, 2020 |
| | 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 | | $ | 142,581 |
| | $ | 143,430 |
| | 3.82% - 4.62% (3) | | 2023-2026 |
Variable rate secured debt(4) | | 13,200 |
| | 13,448 |
| | LIBOR + 1.85% (4) | | October 2020 | | 100,003 |
| | 68,055 |
| | LIBOR + 1.45% to 2.35% (5) | | 2020-2026 |
Total mortgage and other secured debt | | 164,794 |
| | 167,591 |
| | | | | | 242,584 |
| | 211,485 |
| | | | |
Revolving Credit Facility(6) | | 170,000 |
| | — |
| | LIBOR + 0.875% to 1.60% (5) | | May 2019 (6) | | 242,000 |
| | 177,000 |
| | LIBOR + 0.775% to 1.45% (7) | | March 2023 (6) |
Term Loan Facilities (7) | | 348,371 |
| | 547,494 |
| | LIBOR + 0.90% to 2.40% (8) | | 2020-2022 | |
Term Loan Facility (8) | | | 397,863 |
| | 248,706 |
| | LIBOR + 1.00% to 1.65% (9) | | 2022 |
Unsecured Senior Notes | | | | | | | | | | |
3.600%, $350,000 aggregate principal | | 347,445 |
| | 347,128 |
| | 3.60% (9) | | May 2023 | |
5.250%, $250,000 aggregate principal | | 246,525 |
| | 246,176 |
| | 5.25% (10) | | February 2024 | |
3.700%, $300,000 aggregate principal | | 298,200 |
| | 297,843 |
| | 3.70% (11) | | June 2021 | |
5.000%, $300,000 aggregate principal | | 296,639 |
| | 296,368 |
| | 5.00% (12) | | July 2025 | |
Unsecured notes payable | | 1,317 |
| | 1,401 |
| | 0% (13) | | 2026 | |
3.60%, $350,000 aggregate principal | | | 348,544 |
| | 348,431 |
| | 3.60% (10) | | May 2023 |
5.25%, $250,000 aggregate principal | | | 247,785 |
| | 247,652 |
| | 5.25% (11) | | February 2024 |
3.70%, $300,000 aggregate principal | | | 299,454 |
| | 299,324 |
| | 3.70% (12) | | June 2021 |
5.00%, $300,000 aggregate principal | | | 297,605 |
| | 297,503 |
| | 5.00% (13) | | July 2025 |
Unsecured note payable | | | 1,004 |
| | 1,038 |
| | 0% (14) | | May 2026 |
Total debt, net | | $ | 1,873,291 |
| | $ | 1,904,001 |
| | | | | | $ | 2,076,839 |
| | $ | 1,831,139 |
| | | | |
| |
(1) | The carrying values of our debt other than the Revolving Credit Facility reflect net deferred financing costs of $4.8$6.6 million as of September 30, 2017March 31, 2020 and $6.1$5.8 million as of December 31, 2016.2019. |
| |
(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$202,000 as of September 30, 2017March 31, 2020 and $422,000$217,000 as of December 31, 2016.2019. |
| |
(3) | The weighted average interest rate on our fixed rate mortgage debt was 4.19%4.16% as of September 30, 2017.March 31, 2020. |
| |
(4) | Includes a construction loan with $55.9 million in remaining borrowing capacity as of March 31, 2020. |
| |
(5) | The weighted average interest rate on our variable rate secured debt was 3.77% as of September 30, 2017 was 3.09%. |
| |
(5) | The weighted average interest rate on the Revolving Credit Facility was 2.40% as of September 30, 2017.March 31, 2020. |
| |
(6) | The facility matures in May 2019,March 2023, with the ability for us to further extend such maturity by two2 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) | As of September 30, 2017, In connection with this facility, we also have the ability to borrow an additional $350.0up to $500.0 million inunder new term loans from the aggregate under these term loan facilities,facility’s lender group provided that there is no default under the facilitiesfacility and subject to the approval of the lenders. On May 1, 2017, we repaid $200.0 million |
| |
(7) | The weighted average interest rate on the Revolving Credit Facility was 1.74% as of March 31, 2020. |
(8) On March 6, 2020, we amended this loan facility to increase the loan amount by $150.0 million and change the interest terms.
| |
(9) | The interest rate on this loan balance on a term loan scheduled to mature inwas 2.37% as of March 31, 2020. |
| |
(8) (10) | The weighted average interest rate on these loans was 2.93% as of September 30, 2017.
|
| |
(9) | The carrying value of these notes reflects an unamortized discount totaling $1.8$1.0 millionas of September 30, 2017March 31, 2020 and $2.0$1.1 million as of December 31, 20162019. The effective interest rate under the notes, including amortization of the issuance costs, was 3.70%. |
| |
(10)(11) | The carrying value of these notes reflectsan unamortized discount totaling $3.1$2.0 millionas of September 30, 2017March 31, 2020 and $3.4$2.1 million as of December 31, 20162019. 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$429,000as of September 30, 2017March 31, 2020 and $1.7 million$534,000 as of December 31, 20162019. 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$2.0 millionas of September 30, 2017March 31, 2020 and $3.0$2.1 million as of December 31, 2016.2019. 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 $394,000207,000 as of September 30, 2017March 31, 2020 and $460,000223,000 as of December 31, 20162019.
|
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, 2020, we were compliant with these financial covenants.
We capitalized interest costs of $1.1$3.4 million in the three months ended September 30, 2017, $1.2March 31, 2020 and $2.0 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, 2019.
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, 2020 | | December 31, 2019 |
| 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 |
| $ | 1,193,388 |
| | $ | 1,223,259 |
| | $ | 1,192,910 |
| | $ | 1,227,441 |
|
Other fixed-rate debt | 152,911 |
| | 154,781 |
| | 155,544 |
| | 156,887 |
| 143,585 |
| | 142,201 |
| | 144,468 |
| | 149,907 |
|
Variable-rate debt | 531,571 |
| | 531,520 |
| | 560,942 |
| | 558,437 |
| 739,866 |
| | 747,039 |
| | 493,761 |
| | 495,962 |
|
| $ | 1,873,291 |
| | $ | 1,917,523 |
| | $ | 1,904,001 |
| | $ | 1,935,606 |
| $ | 2,076,839 |
| | $ | 2,112,499 |
| | $ | 1,831,139 |
| | $ | 1,873,310 |
|
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, 2020 |
| December 31, 2019 |
$ | 100,000 |
|
| 1.7300% |
| One-Month LIBOR |
| 9/1/2015 |
| 8/1/2019 |
| $ | (237 | ) |
| $ | (848 | ) | 12,336 |
| (1) | 1.390% | | One-Month LIBOR | | 10/13/2015 | | 10/1/2020 | | $ | (57 | ) | | $ | 23 |
|
13,311 |
| (1) | 1.3900% | | One-Month LIBOR | | 10/13/2015 | | 10/1/2020 | | 126 |
| | 100 |
| |
100,000 | 100,000 |
| | 1.9013% | | One-Month LIBOR | | 9/1/2016 | | 12/1/2022 | | (27 | ) | | (23 | ) | 100,000 |
| | 1.901% | | One-Month LIBOR | | 9/1/2016 | | 12/1/2022 | | (4,297 | ) | | (1,028 | ) |
100,000 | 100,000 |
| | 1.9050% | | One-Month LIBOR | | 9/1/2016 | | 12/1/2022 | | (22 | ) | | 48 |
| 100,000 |
| | 1.905% | | One-Month LIBOR | | 9/1/2016 | | 12/1/2022 | | (4,307 | ) | | (1,037 | ) |
50,000 | 50,000 |
| | 1.9079% | | One-Month LIBOR | | 9/1/2016 | | 12/1/2022 | | (30 | ) | | 10 |
| 50,000 |
| | 1.908% | | One-Month LIBOR | | 9/1/2016 | | 12/1/2022 | | (2,157 | ) | | (524 | ) |
100,000 |
| (2) | 1.6730% |
| One-Month LIBOR |
| 9/1/2015 |
| 8/1/2019 |
| — |
|
| (701 | ) | |
11,200 | | 11,200 |
| (2) | 1.678% | | One-Month LIBOR | | 8/1/2019 | | 8/1/2026 | | (778 | ) | | (20 | ) |
150,000 | | 150,000 |
| | 0.498% | | One-Month LIBOR | | 4/1/2020 | | 12/31/2020 | | (125 | ) | | — |
|
23,000 | | 23,000 |
| (3) | 0.573% | | One-Month LIBOR | | 4/1/2020 | | 3/26/2025 | | (174 | ) | | — |
|
75,000 | | 75,000 |
| | 3.176% | | Three-Month LIBOR | | 6/30/2020 | | 6/30/2030 | | (18,132 | ) | | (8,640 | ) |
75,000 | | 75,000 |
| | 3.192% | | Three-Month LIBOR | | 6/30/2020 | | 6/30/2030 | | (18,249 | ) | | (8,749 | ) |
75,000 | | 75,000 |
| | 2.744% | | Three-Month LIBOR | | 6/30/2020 | | 6/30/2030 | | (14,956 | ) | | (5,684 | ) |
| |
| | |
| |
| |
| |
| $ | (190 | ) |
| $ | (1,414 | ) | |
| | |
| |
| |
| |
| $ | (63,232 | ) |
| $ | (25,659 | ) |
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 |
Derivatives | | Balance Sheet Location | | March 31, 2020 | | December 31, 2019 |
Interest rate swaps designated as cash flow hedges | | Prepaid expenses and other assets, net | | $ | — |
| | $ | 23 |
|
Interest rate swaps designated as cash flow hedges | | Interest rate derivatives (liabilities) | | $ | (63,232 | ) | | $ | (25,682 | ) |
|
| | | | | | | | | | |
| | | | Fair Value at |
Derivatives | | Balance Sheet Location | | September 30, 2017 | | December 31, 2016 |
Interest rate swaps designated as cash flow hedges | | Prepaid expenses and other assets | | $ | 126 |
| | $ | 158 |
|
Interest rate swaps designated as cash flow hedges | | Other liabilities | | (316 | ) | | (1,572 | ) |
The table below presents the effect of our interest rate derivatives on our consolidated statements of operations and comprehensive income (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Amount of Loss Recognized in AOCL on Derivatives | | Amount of (Loss) Gain Reclassified from AOCL into Interest Expense on Statement of Operations |
| | For the Three Months Ended March 31, | | For the Three Months Ended March 31, |
Derivatives in Hedging Relationships | | 2020 | | 2019 | | 2020 | | 2019 |
Interest rate derivatives | | $ | (37,705 | ) | | $ | (8,845 | ) | | $ | (131 | ) | | $ | 570 |
|
|
| | | | | | | | | | | | | | | | |
| | 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 recognizedBased 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. |
Over the next 12 months,fair value of our derivatives as of March 31, 2020, we estimate that approximately $1.6$6.0 million of losses will be reclassified from AOCLaccumulated other comprehensive loss (“AOCL”) as an increase to interest expense.expense over the next 12 months.
We have agreements with each of our interest rate derivative counterparties that contain provisions under which, if we default or are capable of being declared in default on defined levels of our indebtedness, we could also be declared in default on our derivative obligations. Failure to comply with the loan covenant provisions could result in our being declared in default on any derivative instrument obligations covered by the agreements. As of September 30, 2017,March 31, 2020, we were not in default with any of these provisions. As of March 31, 2020, the fair value of interest rate derivatives in a liability position related to these agreements was $305,000,$63.4 million, excluding the effects of accrued interest and credit valuation adjustments. As of September 30, 2017,March 31, 2020, 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 $63.5 million as of $484,000.March 31, 2020.
10.11. Redeemable Noncontrolling Interests
Our partners in two2 real estate joint ventures, LW Redstone Company, LLC and Stevens Investors, LLC, (discussed further in Note 5), 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, |
| | 2020 | | 2019 |
Beginning balance | | $ | 29,431 |
| | $ | 26,260 |
|
Distributions to noncontrolling interests | | (11,578 | ) | | (349 | ) |
Net income attributable to noncontrolling interests | | 958 |
| | 675 |
|
Adjustment to arrive at fair value of interests | | 4,101 |
| | 799 |
|
Ending balance | | $ | 22,912 |
| | $ | 27,385 |
|
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,Common Shares/Units
As of March 31, 2020, 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 December 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, COPT issued 591,042 common shares at a weighted average price of $33.84 per share under its existing at-the-market (“ATM”) stock offering program. Net proceeds from the shares issued totaled $19.7 million, after payment of $300,000 in commissions to sales agents. COPT contributed the net proceeds from these issuances to COPLP in exchange for an equal number of units in COPLP. COPT’shad remaining capacity under this ATMits 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, 2020, certain COPLP limited partners converted 337,00012,009 common units in COPLP for an equal number of common shares in COPT.
We declared dividends per COPT common share and distributions per COPLP common unit of $0.275 in the three months ended March 31, 2020 and 2019.
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(“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 Property Segments | | | | | | |
| 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 | | Wholesale Data Center | | Other | | Total |
Three Months Ended March 31, 2020 | |
| | |
| | |
| | | | |
| | |
| | | | |
| | |
| | |
| | |
|
Revenues from real estate operations | $ | 64,438 |
| | $ | 13,678 |
| | $ | 12,076 |
| | $ | 8,341 |
| | $ | 4,676 |
| | $ | 5,577 |
| | $ | 108,786 |
| | $ | 15,460 |
| | $ | 7,172 |
| | $ | 698 |
| | $ | 132,116 |
|
Property operating expenses | (21,222 | ) | | (5,185 | ) | | (6,795 | ) | | (3,285 | ) | | (1,847 | ) | | (657 | ) | | (38,991 | ) | | (7,537 | ) | | (3,233 | ) | | (238 | ) | | (49,999 | ) |
UJV NOI allocable to COPT | — |
| | — |
| | — |
| | — |
| | — |
| | 1,713 |
| | 1,713 |
| | — |
| | — |
| | — |
| | 1,713 |
|
NOI from real estate operations | $ | 43,216 |
| | $ | 8,493 |
| | $ | 5,281 |
| | $ | 5,056 |
| | $ | 2,829 |
| | $ | 6,633 |
| | $ | 71,508 |
| | $ | 7,923 |
| | $ | 3,939 |
| | $ | 460 |
| | $ | 83,830 |
|
Additions to long-lived assets | $ | 7,675 |
| | $ | 2,691 |
| | $ | — |
| | $ | 1,758 |
| | $ | 170 |
| | $ | — |
| | $ | 12,294 |
| | $ | 3,357 |
| | $ | 878 |
| | $ | 65 |
| | $ | 16,594 |
|
Transfers from non-operating properties | $ | 538 |
| | $ | 256 |
| | $ | 15 |
| | $ | — |
| | $ | 1,136 |
| | $ | 56,232 |
| | $ | 58,177 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 58,177 |
|
Segment assets at March 31, 2020 | $ | 1,275,601 |
| | $ | 395,108 |
| | $ | 145,363 |
| | $ | 183,054 |
| | $ | 138,797 |
| | $ | 334,102 |
| | $ | 2,472,025 |
| | $ | 390,352 |
| | $ | 200,891 |
| | $ | 3,677 |
| | $ | 3,066,945 |
|
Three Months Ended March 31, 2019 | |
| | |
| | |
| | | | |
| | |
| | | | |
| | |
| | |
| | |
|
Revenues from real estate operations | $ | 62,683 |
| | $ | 14,831 |
| | $ | 11,561 |
| | $ | 8,155 |
| | $ | 3,939 |
| | $ | 7,354 |
| | $ | 108,523 |
| | $ | 14,833 |
| | $ | 7,871 |
| | $ | 763 |
| | $ | 131,990 |
|
Property operating expenses | (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 | — |
| | — |
| | — |
| | — |
| | — |
| | 1,219 |
| | 1,219 |
| | — |
| | — |
| | — |
| | 1,219 |
|
NOI from real estate operations | $ | 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 | $ | 3,935 |
| | $ | 1,447 |
| | $ | — |
| | $ | 5,017 |
| | $ | 300 |
| | $ | — |
| | $ | 10,699 |
| | $ | 3,989 |
| | $ | 156 |
| | $ | 10 |
| | $ | 14,854 |
|
Transfers from non-operating properties | $ | 5,040 |
| | $ | 4,509 |
| | $ | 6,503 |
| | $ | — |
| | $ | 3,635 |
| | $ | 19,788 |
| | $ | 39,475 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 39,475 |
|
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 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating Office Property Segments | | | | | | |
| 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 |
Three Months Ended September 30, 2017 | |
| | |
| | |
| | | | |
| | |
| | | | |
| | |
| | |
| | |
|
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 |
|
Property operating expenses | (19,708 | ) | | (4,343 | ) | | (6,193 | ) | | (3,157 | ) | | (1,432 | ) | | (637 | ) | | (35,470 | ) | | (7,406 | ) | | (3,175 | ) | | (317 | ) | | (46,368 | ) |
UJV NOI allocable to COPT | — |
| | — |
| | — |
| | — |
| | — |
| | 1,297 |
| | 1,297 |
| | — |
| | — |
| | — |
| | 1,297 |
|
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 |
|
Additions to long-lived assets | $ | 5,810 |
| | $ | 2,587 |
| | $ | 55 |
| | $ | 1,910 |
| | $ | 843 |
| | $ | — |
| | $ | 11,205 |
| | $ | 5,338 |
| | $ | 9 |
| | $ | 76 |
| | $ | 16,628 |
|
Transfers from non-operating properties | $ | 5,519 |
| | $ | 45,554 |
| | $ | — |
| | $ | 8 |
| | $ | (62 | ) | | $ | 29,803 |
| | $ | 80,822 |
| | $ | 25 |
| | $ | — |
| | $ | — |
| | $ | 80,847 |
|
Three Months Ended September 30 2016 | |
| | |
| | |
| | |
| | |
| | |
| | | | |
| | |
| | |
| | |
|
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 |
|
Property operating expenses | (20,598 | ) | | (4,462 | ) | | (7,599 | ) | | (3,374 | ) | | (1,112 | ) | | (528 | ) | | (37,673 | ) | | (8,155 | ) | | (3,317 | ) | | (807 | ) | | (49,952 | ) |
UJV NOI allocable to COPT | — |
| | — |
| | — |
| | — |
| | — |
| | 1,008 |
| | 1,008 |
| | — |
| | — |
| | — |
| | 1,008 |
|
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 |
|
Additions to long-lived assets | $ | 5,901 |
| | $ | 7,153 |
| | $ | — |
| | $ | 2,207 |
| | $ | 2,642 |
| | $ | — |
| | $ | 17,903 |
| | $ | 4,168 |
| | $ | 108 |
| | $ | 53 |
| | $ | 22,232 |
|
Transfers from non-operating properties | $ | 5,331 |
| | $ | 308 |
| | $ | 3 |
| | $ | — |
| | $ | 3,100 |
| | $ | 25,513 |
| | $ | 34,255 |
| | $ | (4 | ) | | $ | 40 |
| | $ | — |
| | $ | 34,291 |
|
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 |
|
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 March 31, |
| 2020 | | 2019 |
Segment revenues from real estate operations | $ | 132,116 |
| | $ | 131,990 |
|
Construction contract and other service revenues | 13,681 |
| | 16,950 |
|
Total revenues | $ | 145,797 |
| | $ | 148,940 |
|
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Segment revenues from real estate operations | $ | 127,231 |
| | $ | 130,954 |
| | $ | 382,295 |
| | $ | 397,965 |
|
Construction contract and other service revenues | 29,786 |
| | 11,149 |
| | 65,958 |
| | 34,372 |
|
Total revenues | $ | 157,017 |
| | $ | 142,103 |
| | $ | 448,253 |
| | $ | 432,337 |
|
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 March 31, |
| 2020 | | 2019 |
UJV NOI allocable to COPT | $ | 1,713 |
| | $ | 1,219 |
|
Less: Income from UJV allocable to COPT attributable to depreciation and amortization expense and interest expense | (1,270 | ) | | (827 | ) |
Add: Equity in loss of unconsolidated non-real estate entities | (2 | ) | | (1 | ) |
Equity in income of unconsolidated entities | $ | 441 |
| | $ | 391 |
|
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
UJV NOI allocable to COPT | $ | 1,297 |
| | $ | 1,008 |
| | $ | 3,889 |
| | $ | 1,008 |
|
Less: Income from UJV allocable to COPT attributable to depreciation and amortization expense and interest expense | (577 | ) | | (415 | ) | | (1,724 | ) | | (415 | ) |
Add: Equity in (loss) income of unconsolidated non-real estate entities | (1 | ) | | 1 |
| | (3 | ) | | 21 |
|
Equity in income of unconsolidated entities | $ | 719 |
| | $ | 594 |
| | $ | 2,162 |
| | $ | 614 |
|
As previously discussed, we provide real estate services such as property management, development 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 March 31, |
| 2020 | | 2019 |
Construction contract and other service revenues | $ | 13,681 |
| | $ | 16,950 |
|
Construction contract and other service expenses | (13,121 | ) | | (16,326 | ) |
NOI from service operations | $ | 560 |
| | $ | 624 |
|
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Construction contract and other service revenues | $ | 29,786 |
| | $ | 11,149 |
| | $ | 65,958 |
| | $ | 34,372 |
|
Construction contract and other service expenses | (28,788 | ) | | (10,341 | ) | | (63,589 | ) | | (32,513 | ) |
NOI from service operations | $ | 998 |
| | $ | 808 |
| | $ | 2,369 |
| | $ | 1,859 |
|
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 March 31, |
| 2020 | | 2019 |
NOI from real estate operations | $ | 83,830 |
| | $ | 83,764 |
|
NOI from service operations | 560 |
| | 624 |
|
Interest and other income | 1,205 |
| | 2,286 |
|
Credit loss expense | (689 | ) | | — |
|
Gain on sales of real estate | 5 |
| | — |
|
Equity in income of unconsolidated entities | 441 |
| | 391 |
|
Income tax expense | (49 | ) | | (194 | ) |
Depreciation and other amortization associated with real estate operations | (32,596 | ) | | (34,796 | ) |
General, administrative and leasing expenses | (7,486 | ) | | (8,751 | ) |
Business development expenses and land carry costs | (1,118 | ) | | (1,113 | ) |
Interest expense | (16,840 | ) | | (18,674 | ) |
Less: UJV NOI allocable to COPT included in equity in income of unconsolidated entities | (1,713 | ) | | (1,219 | ) |
Net income | $ | 25,550 |
| | $ | 22,318 |
|
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
NOI from real estate operations | $ | 82,160 |
| | $ | 82,010 |
| | $ | 242,669 |
| | $ | 249,005 |
|
NOI from service operations | 998 |
| | 808 |
| | 2,369 |
| | 1,859 |
|
Interest and other income | 1,508 |
| | 1,391 |
| | 4,817 |
| | 3,877 |
|
Equity in income of unconsolidated entities | 719 |
| | 594 |
| | 2,162 |
| | 614 |
|
Income tax (expense) benefit | (57 | ) | | 21 |
| | (145 | ) | | 28 |
|
Depreciation and other amortization associated with real estate operations | (34,438 | ) | | (32,015 | ) | | (100,290 | ) | | (99,790 | ) |
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 | ) |
Interest expense | (19,615 | ) | | (18,301 | ) | | (57,772 | ) | | (64,499 | ) |
Less: UJV NOI allocable to COPT included in equity in income of unconsolidated entities | (1,297 | ) | | (1,008 | ) | | (3,889 | ) | | (1,008 | ) |
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 | ) |
The following table reconciles our segment assets to the consolidated total assets of COPT and subsidiaries (in thousands):
|
| | | | | | | |
| March 31, 2020 | | March 31, 2019 |
Segment assets | $ | 3,066,945 |
| | $ | 3,108,153 |
|
Operating properties lease liabilities included in segment assets | 17,365 |
| | 16,342 |
|
Non-operating property assets | 658,978 |
| | 485,911 |
|
Other assets | 311,169 |
| | 165,453 |
|
Total COPT consolidated assets | $ | 4,054,457 |
| | $ | 3,775,859 |
|
|
| | | | | | | |
| September 30, 2017 | | September 30, 2016 |
Segment assets | $ | 2,997,212 |
| | $ | 3,027,125 |
|
Non-operating property assets | 413,255 |
| | 421,364 |
|
Other assets | 149,305 |
| | 185,705 |
|
Total COPT consolidated assets | $ | 3,559,772 |
| | $ | 3,634,194 |
|
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, credit loss expense, 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, |
| 2020 | | 2019 |
Construction contract revenue: | | | |
Guaranteed maximum price | $ | 5,044 |
| | $ | 12,356 |
|
Firm fixed price | 5,072 |
| | 2,325 |
|
Cost-plus fee | 3,309 |
| | 2,060 |
|
Other | 256 |
| | 209 |
|
| $ | 13,681 |
| | $ | 16,950 |
|
The table below reports construction contract and other service revenues by service type (in thousands):
|
| | | | | | | |
| For the Three Months Ended March 31, |
| 2020 | | 2019 |
Construction contract revenue: | | | |
Construction | $ | 12,883 |
| | $ | 16,489 |
|
Design | 542 |
| | 252 |
|
Other | 256 |
| | 209 |
|
| $ | 13,681 |
| | $ | 16,950 |
|
We recognized revenue of $32,000 in the three months ended March 31, 2019 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, |
| 2020 | | 2019 |
Beginning balance | $ | 12,378 |
| | $ | 6,701 |
|
Ending balance | $ | 10,852 |
| | $ | 6,569 |
|
Contract assets, which we refer to herein as construction contract costs in excess of billings, net 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, |
| 2020 | | 2019 |
Beginning balance | $ | 17,223 |
| | $ | 3,189 |
|
Ending balance | $ | 7,463 |
| | $ | 14,834 |
|
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, |
| 2020 | | 2019 |
Beginning balance | $ | 1,184 |
| | $ | 568 |
|
Ending balance | $ | 1,417 |
| | $ | 1,005 |
|
Portion of beginning balance recognized in revenue during period | $ | 646 |
| | $ | 439 |
|
Revenue allocated to the remaining performance obligations under existing contracts as of March 31, 2020 that will be recognized as revenue in future periods was $74.1 million, approximately $26 million of which we expect to recognize during the remainder of 2020.
We incurred no deferred incremental costs to obtain or fulfill our construction contracts or other service revenues and had no significant credit loss expense on construction contracts receivable or unbilled construction revenue in the three months ended March 31, 2020 and 2019.
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, 2020, certain employees were granted a total of Trustees granted 36,525 PSUs133,335 restricted common shares with an aggregate grant date fair value of $1.4$3.4 million ($25.34 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 three months ended March 31, 2020, forfeiture restrictions lapsed on 132,703 previously issued common shares; these shares had a weighted average grant date fair value of $28.13 per share, and the aggregate intrinsic value of the shares on the vesting dates was $3.4 million.
Performance Share Awards (“PSUs”)
We issued 23,181 common shares on January 13, 2020 to executives in settlement of PSUs granted in 2017, representing 53% of the target awards for those PSUs.
Profit Interest Units (“PIUs”)
For 2020, 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, deferred share awards and PSUs), and our executives selected PIUs. We granted 2 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, 2020, our executives were granted a total of 67,081 TB-PIUs with an aggregate grant date fair value of $1.7 million ($25.34 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. During the three months ended March 31, 2020, 20,622 TB-PIUs awarded to our former Executive Vice President and Chief Operating Officer were forfeited upon his resignation. During the three months ended March 31, 2020, forfeiture restrictions lapsed on 18,318 previously issued TB-PIUs; these TB-PIUs had a grant date fair value of $25.81 per unit, and the aggregate intrinsic value of the TB-PIUs on the vesting date was $464,000.
PB-PIUs
On January 1, 2017 and2020, we granted our executives 176,758 PB-PIUs with a three-year performance period concluding on the earlier of December 31, 20192022 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 (“TSR”) 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 two2 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. If COPT’s TSR during the measurement period is negative, the maximum number of earned awards will be limited to the target level payout percentage. During the performance period, PB-PIUs carry rights to 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-PIU grants 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$2.9 million ($16.36 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;$29.38; expected volatility for COPT common shares of 19.0%18.0%; 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%1.65%.
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 ninethree months ended September 30, 2017, nonemployee members ofMarch 31, 2020, 73,184 PB-PIUs awarded to our Board of Trusteesformer Executive Vice President and Chief Operating Officer 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 inforfeited upon 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.resignation.
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 March 31, |
| 2020 | | 2019 |
Numerator: | |
| | |
|
Net income attributable to COPT | $ | 24,054 |
| | $ | 20,859 |
|
Income attributable to share-based compensation awards | (105 | ) | | (86 | ) |
Numerator for basic EPS on net income attributable to COPT common shareholders | 23,949 |
| | 20,773 |
|
Income attributable to share-based compensation awards | 8 |
| | — |
|
Numerator for diluted EPS on net income attributable to COPT common shareholders | $ | 23,957 |
| | $ | 20,773 |
|
Denominator (all weighted averages): | |
| | |
|
Denominator for basic EPS (common shares) | 111,724 |
| | 109,951 |
|
Dilutive effect of share-based compensation awards | 239 |
| | 267 |
|
Denominator for diluted EPS (common shares) | 111,963 |
| | 110,218 |
|
Basic EPS | $ | 0.21 |
| | $ | 0.19 |
|
Diluted EPS | $ | 0.21 |
| | $ | 0.19 |
|
|
| | | | | | | | | | | | | | | |
| 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 | ) |
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 March 31, |
| 2020 | | 2019 |
Conversion of common units | 1,226 |
| | 1,331 |
|
Conversion of redeemable noncontrolling interests | 1,011 |
| | 1,013 |
|
Conversion of Series I preferred units | 176 |
| | 176 |
|
|
| | | | | | | | | | | |
| 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 |
|
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 of 1.5 million;
weighted average restricted shares and deferred share awards for the three months ended September 30, 2017March 31, 2020 and 20162019 of 445,000440,000 and 375,000, respectively, and for the nine months ended September 30, 2017 and 2016 of 431,000 and 394,000,463,000, respectively; and
weighted average options for the three months ended September 30, 2017March 31, 2019 of 30,000; and 2016 of 40,000 and 233,000, respectively, and
weighted average unvested TB-PIUs for the ninethree months ended September 30, 2017March 31, 2020 and 20162019 of 80,00075,000 and 307,000,19,000, respectively.
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 March 31, |
| 2020 | | 2019 |
Numerator: | |
| | |
|
Net income attributable to COPLP | $ | 24,418 |
| | $ | 21,281 |
|
Preferred unit distributions | (77 | ) | | (165 | ) |
Income attributable to share-based compensation awards | (121 | ) | | (93 | ) |
Numerator for basic and diluted EPU on net income attributable to COPLP common unitholders | $ | 24,220 |
| | $ | 21,023 |
|
Denominator (all weighted averages): | |
| | |
|
Denominator for basic EPU (common units) | 112,950 |
| | 111,282 |
|
Dilutive effect of share-based compensation awards | 239 |
| | 267 |
|
Denominator for diluted EPU (common units) | 113,189 |
| | 111,549 |
|
Basic EPU | $ | 0.21 |
| | $ | 0.19 |
|
Diluted EPU | $ | 0.21 |
| | $ | 0.19 |
|
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Numerator: | |
| | |
| | | | |
Net income (loss) attributable to COPLP common unitholders | $ | 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 | ) | | — |
|
Income attributable to share-based compensation awards | (95 | ) | | (105 | ) | | (337 | ) | | (319 | ) |
Numerator for basic and diluted EPU on net income (loss) attributable to COPLP common unitholders | $ | 21,525 |
| | $ | 24,537 |
| | $ | 48,341 |
| | $ | (25,222 | ) |
Denominator (all weighted averages): | |
| | |
| | | | |
Denominator for basic EPU (common units) | 102,462 |
| | 98,024 |
| | 102,255 |
| | 97,960 |
|
Dilutive effect of share-based compensation awards | 146 |
| | 81 |
| | 154 |
| | — |
|
Denominator for diluted EPU (common units) | 102,608 |
| | 98,105 |
| | 102,409 |
| | 97,960 |
|
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 | ) |
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 Shares Excluded from Denominator |
| For the Three Months Ended March 31, |
| 2020 | | 2019 |
Conversion of redeemable noncontrolling interests | 1,011 |
| | 1,013 |
|
Conversion of Series I preferred units | 176 |
| | 176 |
|
|
| | | | | | | | | | | |
| Weighted Average Units Excluded from Denominator |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Conversion of Series I preferred units | 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 of 1.5 million;
weighted average restricted units and deferred share awards for the three months ended September 30, 2017March 31, 2020 and 20162019 of 445,000440,000 and 375,000, respectively, and for the nine months ended September 30, 2017 and 2016 of 431,000 and 394,000,463,000, respectively; and
weighted average options for the three months ended September 30, 2017March 31, 2019 of 30,000; and 2016 of 40,000 and 233,000, respectively, and
weighted average unvested TB-PIUs for the ninethree months ended September 30, 2017March 31, 2020 and 20162019 of 80,00075,000 and 307,000,19,000, respectively.
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 doesAs of March 31, 2020, management believes that it is reasonably possible that we could recognize a loss of up to $3.1 million for certain municipal tax claims. While we do not anticipate that any liabilities that may result from such proceedings will have abelieve this loss would materially adverse effect onaffect our financial position operations or liquidity.liquidity, it could be material to our results of operations. Management believes that it is also reasonably possible that we could incur losses pursuant to other such claims but do not believe such losses would materially affect our financial position, liquidity or results of operations. Our assessment of the potential outcomes of these matters involves significant judgment and is subject to change based on future developments.
Environmental
We are subject to various Federal, 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.
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 obligation to fund through a special tax any future shortfalls between debt service on 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 leases 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 December 31, 2017.
Capital Lease
On May 25, 2017, 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 the 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.
Contractual Obligations
We had amounts remaining to be incurred under various contractual obligations as of September 30, 2017 that included the following (excluding amounts incurred and therefore reflected as liabilities reported on our consolidated balance sheet):
new development and redevelopment obligations of $35.1 million;
capital expenditures for operating properties of $45.8 million;
third party construction and development of $67.4 million; and
other obligations of $1.1 million.
Environmental Indemnity Agreement
In connection with a lease and subsequent sale in 2008 and 2010 of three3 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
Anne Arundel County, Maryland issued tax incremental financing bonds to third-party investors in order to finance public improvements needed in connection with our project known as the National Business Park. These bonds had a remaining principal balance of approximately $34 million as of March 31, 2020. The real estate taxes on increases in assessed values post-bond issuance of properties in development districts encompassing the National Business Park are transferred to a special fund pledged to the repayment of the bonds. While we are obligated to fund, through a special tax, any future shortfalls between debt service of the bonds and real estate taxes available to repay the bonds, as of March 31, 2020, we do not expect any such future fundings will be significant.
Effects of COVID-19
Since first being declared a pandemic by the World Health Organization in early March 2020, the coronavirus, or COVID-19, has spread worldwide and throughout the United States. As of May 8, 2020, there continued to be significant uncertainty regarding the duration of COVID-19’s spread, and the potential, once its spread subsides, for the virus to reoccur on
a significant scale in the future. The COVID-19 outbreak has prompted governments and other authorities around the world, including federal, state and local authorities in the United States, to impose measures intended to control its spread, including restrictions on freedom of movement and business operations such as travel bans, border closings, business closures, quarantines and shelter-in-place orders. The outbreak has significantly disrupted economic markets worldwide, as well as in the United States at a national, regional and local level, and created significant volatility in financial markets. Furthermore, conditions could potentially continue to deteriorate as a result of the pandemic.
COVID-19 and measures instituted to prevent spread, may adversely affect us in many ways, including by disrupting:
our tenants’ operations, which could adversely affect their ability, or willingness, to sustain their businesses and/or fulfill their lease obligations;
our ability to maintain occupancy in our properties and obtain new leases for unoccupied and new development space at favorable terms or at all;
access to debt and equity capital on attractive terms or at all. Severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions may affect our or our tenants’ ability to access capital necessary to fund operations, refinance debt or fund planned investments on a timely basis, and may adversely affect the valuation of financial assets and liabilities;
the supply of products or services from our and our tenants’ vendors that are needed for us and our tenants to operate effectively; and
our and our tenants’ ability to continue or complete planned development, including the potential for delays in the supply of materials or labor necessary for development.
The extent of COVID-19’s effect on our operational and financial performance is dependent on future developments, including the duration, spread and intensity of the outbreak, all of which are uncertain and difficult to predict. Due to the speed with which the effects of COVID-19 have developed, we are unable at this time to estimate the magnitude of the effect of these factors on our business, but the adverse impact on our business, results of operations, financial condition and cash flows could be material.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
During the ninethree months endedSeptember 30, 2017: March 31, 2020, we:
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;93.7% occupied and 94.9% leased;
we placed into service an aggregate of 839,000230,000 square feet in eight newly constructed or redeveloped propertiesone newly-developed data center shell property that were 89%was 100.0% leased as of September 30, 2017;March 31, 2020; and
we sold ten operating properties totaling 639,000 square feet that were 89.4% occupied for $88.8amended an existing term loan facility to increase the loan amount by $150.0 million and other land for $14.3 million. The netreduce the LIBOR interest rate spread on the facility. We used the resulting loan proceeds from these sales were used primarily to repay borrowings under our Revolving Credit Facility that funded development costs.
In addition, effective March 16, 2020, Paul R. Adkins resigned from his position as Executive Vice President and Chief Operating Officer. We commenced a search for candidates to fund cash reserves;replace Mr. Adkins and, in the interim, have senior level employees handling his responsibilities.
we repaid $200.0 million
We refer to the measure “annualized rental revenue” in various sections of the loan balanceManagement’s Discussion and Analysis of Financial Condition and Results of Operations section of this Quarterly Report on Form 10-Q. Annualized rental revenue is a term loan scheduledmeasure that we use to matureevaluate the source of our rental revenue as of a point in 2020 using available cash;
COPT redeemed alltime. It is computed by multiplying by 12 the sum of monthly contractual base rents and estimated monthly expense reimbursements under active leases as of a point in time (ignoring free rent then in effect). Our computation of annualized rental revenue excludes the outstanding shareseffect of its:
Series K Preferred Shares effective January 21, 2017 atlease incentives, although the effect of this exclusion is not material. We consider annualized rental revenue to be a price of $50.00 per share, or $26.6 millionuseful measure for analyzing revenue sources because, since it is point-in-time based, it does not contain increases and decreases in revenue associated with periods in which lease terms were not in effect; historical revenue under generally accepted accounting principles in the aggregate, plus accruedUnited States of America (“GAAP”) does contain such fluctuations. We find the measure particularly useful for leasing, tenant, segment and unpaid dividends thereonindustry analysis.
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 properties owned through unconsolidated real estate joint ventures except for amounts reported for annualized rental revenue, which represent the date of redemption using available cash. Concurrently with this redemption, COPLP redeemed its Series K Preferred Units on the same terms; andportion attributable to our ownership interest.
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.
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.
The net proceeds from these sales were used primarily to repay borrowings under our Revolving Credit Facility
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;
risks associated with uncertainties regarding the impact of the COVID-19 pandemic on our business and national, regional and local economic conditions;
governmental actions and initiatives, including risks associated with the impact of a prolonged government shutdown or budgetary reductions or impasses, such as a reduction in rental revenues, non-renewal of leases and/or 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.
Effects of COVID-19
Since first being declared a pandemic by the World Health Organization in early March 2020, the coronavirus, or COVID-19, has spread worldwide and throughout the United States. As of the date of this filing, there continued to be significant uncertainty regarding the duration of COVID-19’s spread, and the potential, once its spread subsides, for the virus to reoccur on a significant scale in the future. The COVID-19 outbreak has prompted governments and other authorities around the world, including federal, state and local authorities in the United States, to impose measures intended to control its spread, including restrictions on freedom of movement and business operations, such as travel bans, border closings, business closures, quarantines and shelter-in-place orders. The outbreak has significantly disrupted economic markets worldwide, as well as in the United States at a national, regional and local level, and created significant volatility in financial markets. Furthermore, conditions could potentially continue to deteriorate as a result of the pandemic.
COVID-19 has significantly affected the operations of much of the commercial real estate industry as tenants’ operations, including the ability to use space and run businesses, has been disrupted, which has adversely affected their ability to sustain their businesses, as well as their ability, or willingness, to fulfill their lease obligations. The industry has also been significantly impacted by the economic disruption that COVID-19 has triggered, which has adversely impacted the ability to lease space in most property types to new and existing tenants at favorable terms. As result, the commercial real estate industry is facing enhanced risk for adverse impacts in its operations, financial conditions and cash flows from COVID-19.
Our office and data center shell portfolio is significantly concentrated in Defense/IT Locations, representing 162 of the portfolio’s 171 properties, or 87.7%, of our annualized rental revenue as of March 31, 2020. These properties are primarily occupied by the USG and contractor tenants engaged in what we believe are high-priority security, defense and IT missions. As a result, most of these properties are designated as “essential businesses,” and are therefore exempt from many of the restrictions that have otherwise affected much of the commercial real estate industry. Furthermore, since the tenants in these properties are mostly the USG, or contractors of the USG who will continue to be compensated by the USG for their services, we believe that their ability, and willingness, to fulfill their lease obligations will not be significantly disrupted. Our Defense/IT Locations do include several tenants serving as amenities to business parks housing our properties (such as restaurant, retail and personal service providers); while these tenants’ operations have been significantly disrupted by COVID-19, our annualized rental revenue from these tenants is not significant.
As of March 31, 2020, we owned seven Regional Office properties, representing 11.8% of our office and data center shell portfolio’s annualized rental revenue; these properties were comprised of: three high-rise Baltimore City properties proximate to the city’s waterfront; and four Northern Virginia properties. While these properties include tenants in the financial services, health care and public health sectors, which, as “essential businesses,” are exempt from restrictions on operations, they also include a number of non essential business tenants. These properties are more subject to traditional office fundamentals than our Defense/IT Locations and therefore face much of the enhanced risk in adverse impacts from COVID-19 described above.
In terms of the effect of COVID-19 on our results of operations for the three months ended March 31, 2020, we:
concluded that the economic disruption resulting from COVID-19 constituted a significant adverse change in the business climate that could affect the value of our Regional Office properties, which are dependent on commercial office tenants and could suffer increased vacancy as a result. Accordingly, we concluded that these circumstances constituted an indicator of impairment. We performed recovery analyses for each Regional Office property’s asset group and concluded that the carrying values of each asset group was recoverable from its respective estimated undiscounted future cash flows. As a result, no impairment loss was recognized; and
maintained operational service level at our properties, with our property-level building technicians and maintenance employees working on site (with personal protective equipment, social distancing and more frequent cleaning), while most of our corporate headquarters-based employees worked from home.
While we do not currently expect that COVID-19 will significantly affect our results of operations, we believe that the effect will ultimately be dependent on future developments, including the duration, spread and intensity of the outbreak, all of which are uncertain and difficult to predict. Nevertheless, we believe at this time that there is more inherent risk associated with the operations of our Regional Office properties than our Defense/IT Locations.
We believe that COVID-19 has delayed our ability to complete several leases that we previously thought were on track for completion by March 31, 2020. The inability for us to physically show space to prospective tenants due to COVID-19 related restrictions also serves as an impediment to initiate new leasing activity. Overall, we believe that COVID-19 could: impede our ability to complete leasing for our Defense/IT Locations at the pace that we were previously expecting, though we still expect such leasing to advance; and potentially create more significant challenges for leasing space in our Regional Office properties.
For our development activity, the 13 properties that were under development as of March 31, 2020 face minimal operational risk as they were 78% leased as of April 30, 2020. However, COVID-19 does enhance the risk of us being able to stay on pace to complete development and begin operations on schedule due to the potential for delays from: factories’ ability to provide materials; possible labor quarantines; and jurisdictional permitting and inspections. These types of issues have not significantly affected us to date but could in the future, depending on future COVID-19 related developments.
COVID-19’s effects on economic and financial markets could impede our ability, or willingness based on terms available, to obtain unsecured, fixed rate debt or raise equity through issuances of COPT common shares. Due to the potential for further financial market instability, we borrowed under our Revolving Credit Facility in late March of 2020 in order to pre-fund our short-term capital needs. While we expect to spend approximately $220 million on development costs and approximately $70 million on improvements and leasing costs for operating properties during the remainder of 2020, as of March 31, 2020, we had $159 million in cash and cash equivalents on hand, $558.0 million in available borrowing capacity under our Revolving Credit Facility and minimal debt maturities for the remainder of 2020. In addition, we believe that we have the ability to raise equity by selling interests in data center shells through joint ventures.
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, 2020 | | December 31, 2019 |
Occupancy rates at period end | |
| | |
| |
| | |
|
Total | 93.4 | % | | 92.1 | % | 93.7 | % | | 92.9 | % |
Defense/IT Locations: | | | | | | |
Fort Meade/BW Corridor | 95.6 | % | | 94.3 | % | 92.4 | % | | 92.4 | % |
Northern Virginia Defense/IT | 88.7 | % | | 85.0 | % | 85.5 | % | | 82.4 | % |
Lackland Air Force Base | 100.0 | % | | 100.0 | % | 100.0 | % | | 100.0 | % |
Navy Support Locations | 82.5 | % | | 72.7 | % | 94.0 | % | | 92.5 | % |
Redstone Arsenal | 97.9 | % | | 96.4 | % | 99.7 | % | | 99.3 | % |
Data Center Shells | 100.0 | % | | 100.0 | % | 100.0 | % | | 100.0 | % |
Total Defense/IT Locations | 94.7 | % | | 92.6 | % | 94.2 | % | | 93.7 | % |
Regional Office | 92.4 | % | | 95.2 | % | 91.4 | % | | 88.1 | % |
Other | 29.4 | % | | 52.9 | % | 64.6 | % | | 73.0 | % |
Average contractual annual rental rate per square foot at period end (1) | $ | 29.94 |
| | $ | 30.16 |
| $ | 31.42 |
| | $ | 31.28 |
|
| |
(1) | Includes estimated expense reimbursements. Amounts reported include the portion of 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, 2019 | 19,173 |
| | 17,816 |
|
Vacated upon lease expiration (1) | — |
| | (62 | ) |
Occupancy for new leases (2) | — |
| | 180 |
|
Developed or redeveloped | 230 |
| | 230 |
|
Other changes | (25 | ) | | (3 | ) |
March 31, 2020 | 19,378 |
| | 18,161 |
|
| |
(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, 2020, we completed 2.2 million631,000 square feet of leasing, including 482,000 of construction and redevelopment space, andincluding: renewed 82.4%leases on 488,000 square feet, representing 89.0% of the square footage of our lease expirations (including the effect of early renewals).; and 143,000 square feet of vacant space.
Occupancy of our Same Office Properties increased from 91.8% as of December 31, 2016 to 92.6% as of September 30, 2017.
Wholesale Data Center Property
OurAs of March 31, 2020 and December 31, 2019, 14.8 megawatts, or 76.9%, of the 19.25 megawattmegawatts in our wholesale data center property had 16.9were leased. While 1.2 megawatts in known tenant downsizing are expected to occur by July 2020, in April 2020, we leased as3.1 megawatts scheduled to commence in phases from April through November 2020. We are negotiating the renewal of September 30, 2017, a 2.0 megawatt increase relativelease for 11.25 megawatts that is scheduled to December 31, 2016.expire in August 2020.
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 continuallystably owned and 100% operational throughout the current and prior year reporting periods, excluding properties held for sale.periods. We define these as changes from “Same Office Properties”;
constructed
developed 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;center.
properties held for sale as of September 30, 2017; and
property dispositions.
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, 2020 and 20162019
| | | For the Three Months Ended September 30, | For the Three Months Ended March 31, |
| 2017 | | 2016 | | Variance | 2020 | | 2019 | | Variance |
| (in thousands) | (in thousands) |
Revenues | |
| | |
| | |
| |
| | |
| | |
|
Revenues from real estate operations | $ | 127,231 |
| | $ | 130,954 |
| | $ | (3,723 | ) | $ | 132,116 |
| | $ | 131,990 |
| | $ | 126 |
|
Construction contract and other service revenues | 29,786 |
| | 11,149 |
| | 18,637 |
| 13,681 |
| | 16,950 |
| | (3,269 | ) |
Total revenues | 157,017 |
| | 142,103 |
| | 14,914 |
| 145,797 |
| | 148,940 |
| | (3,143 | ) |
Expenses | |
| | |
| | |
| |
Operating expenses | | |
| | |
| | |
|
Property operating expenses | 46,368 |
| | 49,952 |
| | (3,584 | ) | 49,999 |
| | 49,445 |
| | 554 |
|
Depreciation and amortization associated with real estate operations | 34,438 |
| | 32,015 |
| | 2,423 |
| 32,596 |
| | 34,796 |
| | (2,200 | ) |
Construction contract and other service expenses | 28,788 |
| | 10,341 |
| | 18,447 |
| 13,121 |
| | 16,326 |
| | (3,205 | ) |
Impairment (recoveries) losses | (161 | ) | | 27,699 |
| | (27,860 | ) | |
General, administrative and leasing expenses | 7,368 |
| | 8,855 |
| | (1,487 | ) | 7,486 |
| | 8,751 |
| | (1,265 | ) |
Business development expenses and land carry costs | 1,277 |
| | 1,716 |
| | (439 | ) | 1,118 |
| | 1,113 |
| | 5 |
|
Total operating expenses | 118,078 |
| | 130,578 |
| | (12,500 | ) | 104,320 |
| | 110,431 |
| | (6,111 | ) |
Operating income | 38,939 |
| | 11,525 |
| | 27,414 |
| |
Interest expense | (19,615 | ) | | (18,301 | ) | | (1,314 | ) | (16,840 | ) | | (18,674 | ) | | 1,834 |
|
Interest and other income | 1,508 |
| | 1,391 |
| | 117 |
| 1,205 |
| | 2,286 |
| | (1,081 | ) |
Loss on early extinguishment of debt | — |
| | (59 | ) | | 59 |
| |
Credit loss expense | | (689 | ) | | — |
| | (689 | ) |
Gain on sales of real estate | | 5 |
| | — |
| | 5 |
|
Equity in income of unconsolidated entities | 719 |
| | 594 |
| | 125 |
| 441 |
| | 391 |
| | 50 |
|
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 | | (49 | ) | | (194 | ) | | 145 |
|
Net income | $ | 22,682 |
| | $ | 29,272 |
| | $ | (6,590 | ) | $ | 25,550 |
| | $ | 22,318 |
| | $ | 3,232 |
|
NOI from Real Estate Operations
| | | For the Three Months Ended September 30, | For the Three Months Ended March 31, |
| 2017 | | 2016 | | Variance | 2020 | | 2019 | | 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 | | $ | 118,259 |
| | $ | 116,390 |
| | $ | 1,869 |
|
Lease termination revenue | 860 |
| | 389 |
| | 471 |
| 85 |
| | 521 |
| | (436 | ) |
Tenant recoveries and other real estate operations revenue | 22,258 |
| | 24,312 |
| | (2,054 | ) | |
Same Office Properties total revenues | 109,344 |
| | 109,590 |
| | (246 | ) | |
Constructed and redeveloped properties placed in service | 6,969 |
| | 2,094 |
| | 4,875 |
| |
Other property revenue | | 1,044 |
| | 1,042 |
| | 2 |
|
Same Properties total revenues | | 119,388 |
| | 117,953 |
| | 1,435 |
|
Developed and redeveloped properties placed in service | | 5,552 |
| | 902 |
| | 4,650 |
|
Wholesale data center | 7,398 |
| | 6,809 |
| | 589 |
| 7,172 |
| | 7,871 |
| | (699 | ) |
Properties held for sale | 2,723 |
| | 2,700 |
| | 23 |
| |
Dispositions | 538 |
| | 9,506 |
| | (8,968 | ) | — |
| | 4,375 |
| | (4,375 | ) |
Other | 259 |
| | 255 |
| | 4 |
| 4 |
| | 889 |
| | (885 | ) |
| 127,231 |
| | 130,954 |
| | (3,723 | ) | 132,116 |
| | 131,990 |
| | 126 |
|
Property operating expenses | | | | | | | | | | |
Same Office Properties | (40,981 | ) | | (42,745 | ) | | 1,764 |
| |
Constructed and redeveloped properties placed in service | (1,555 | ) | | (513 | ) | | (1,042 | ) | |
Same Properties | | (45,645 | ) | | (46,165 | ) | | 520 |
|
Developed and redeveloped properties placed in service | | (1,115 | ) | | (314 | ) | | (801 | ) |
Wholesale data center | (3,175 | ) | | (3,317 | ) | | 142 |
| (3,233 | ) | | (2,838 | ) | | (395 | ) |
Properties held for sale | (299 | ) | | (283 | ) | | (16 | ) | |
Dispositions | (124 | ) | | (2,743 | ) | | 2,619 |
| — |
| | (138 | ) | | 138 |
|
Other | (234 | ) | | (351 | ) | | 117 |
| (6 | ) | | 10 |
| | (16 | ) |
| (46,368 | ) | | (49,952 | ) | | 3,584 |
| (49,999 | ) | | (49,445 | ) | | (554 | ) |
| | | | | | | | | | |
UJV NOI allocable to COPT | 1,297 |
| | 1,008 |
| | 289 |
| | | | | |
Same Properties | | 1,207 |
| | 1,219 |
| | (12 | ) |
Retained interests in UJV formed in 2019 | | 506 |
| | — |
| | 506 |
|
| | 1,713 |
| | 1,219 |
| | 494 |
|
| | | | | | | | | | |
NOI from real estate operations | | | | | | | | | | |
Same Office Properties | 68,363 |
| | 66,845 |
| | 1,518 |
| |
Constructed and redeveloped properties placed in service | 5,414 |
| | 1,581 |
| | 3,833 |
| |
Same Properties | | 74,950 |
| | 73,007 |
| | 1,943 |
|
Developed and redeveloped properties placed in service | | 4,437 |
| | 588 |
| | 3,849 |
|
Wholesale data center | 4,223 |
| | 3,492 |
| | 731 |
| 3,939 |
| | 5,033 |
| | (1,094 | ) |
Properties held for sale | 2,424 |
| | 2,417 |
| | 7 |
| |
Dispositions | 414 |
| | 6,763 |
| | (6,349 | ) | |
Dispositions, net of retained interests in UJV formed in 2019 | | 506 |
| | 4,237 |
| | (3,731 | ) |
Other | 1,322 |
| | 912 |
| | 410 |
| (2 | ) | | 899 |
| | (901 | ) |
| $ | 82,160 |
| | $ | 82,010 |
| | $ | 150 |
| $ | 83,830 |
| | $ | 83,764 |
| | $ | 66 |
|
Same Office Properties rent statistics | | | | | | |
| | | | | | |
Same Properties NOI from real estate operations by segment | | | | | | |
Defense/IT Locations | | $ | 66,566 |
| | $ | 65,179 |
| | $ | 1,387 |
|
Regional Office | | 7,923 |
| | 7,417 |
| | 506 |
|
Other | | 461 |
| | 411 |
| | 50 |
|
| | $ | 74,950 |
| | $ | 73,007 |
| | $ | 1,943 |
|
| | | | | | |
Same Properties rent statistics | | | | | | |
Average occupancy rate | 92.6 | % | | 91.6 | % | | 1.0 | % | 92.3 | % | | 91.6 | % | | 0.7 | % |
Average straight-line rent per occupied square foot (1) | $ | 6.46 |
| | $ | 6.43 |
| | $ | 0.03 |
| $ | 6.54 |
| | $ | 6.55 |
| | $ | (0.01 | ) |