COPT(CDP) - 2020 Q1 - Quarterly Report

PART I: FINANCIAL INFORMATION Financial Statements This section presents the unaudited consolidated financial statements for Corporate Office Properties Trust and Corporate Office Properties, L.P., along with detailed accounting notes Corporate Office Properties Trust and Subsidiaries (COPT) COPT reported total revenues of $145.8 million, net income of $24.1 million, and $4.05 billion in total assets, with $62.2 million in operating cash flow for Q1 2020 COPT Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total assets | $4,054,457 | $3,854,453 | | Total properties, net | $3,419,628 | $3,340,886 | | Cash and cash equivalents | $159,061 | $14,733 | | Total liabilities | $2,366,359 | $2,105,777 | | Debt, net | $2,076,839 | $1,831,139 | | Total equity | $1,665,186 | $1,719,245 | COPT Consolidated Statement of Operations Highlights (in thousands, except per share data) | Account | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Total revenues | $145,797 | $148,940 | | Net income | $25,550 | $22,318 | | Net income attributable to COPT common shareholders | $24,054 | $20,859 | | Diluted EPS | $0.21 | $0.19 | COPT Consolidated Cash Flow Highlights (in thousands) | Cash Flow Activity | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $62,218 | $54,652 | | Net cash used in investing activities | ($114,463) | ($121,155) | | Net cash provided by financing activities | $197,002 | $66,328 | | Net increase in cash | $144,757 | ($175) | Corporate Office Properties, L.P. and Subsidiaries (COPLP) COPLP's financial results largely mirror COPT's, reporting $145.8 million in total revenues and $24.3 million in net income attributable to common unitholders for Q1 2020 COPLP Consolidated Statement of Operations Highlights (in thousands, except per unit data) | Account | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Total revenues | $145,797 | $148,940 | | Net income attributable to COPLP | $24,418 | $21,281 | | Net income attributable to COPLP common unitholders | $24,341 | $21,116 | | Diluted EPU | $0.21 | $0.19 | - The financial statements of COPLP are substantially similar to COPT's, with key differences in the equity section where common units not owned by COPT are treated as partners' capital or noncontrolling interests[9] Notes to Consolidated Financial Statements These notes detail accounting policies, including the adoption of new credit loss guidance, and provide breakdowns of debt structure, leasing activities, and segment performance, emphasizing the company's focus on Defense/IT Locations - The company's portfolio primarily consists of office and data center properties supporting the United States Government (USG) and its contractors, designated as "Defense/IT Locations"[47] - Adoption of new credit loss guidance (CECL) on January 1, 2020, resulted in a $5.5 million allowance for credit losses recognized as a cumulative-effect adjustment to equity[56] Debt Composition as of March 31, 2020 (in thousands) | Debt Type | Carrying Value | | :--- | :--- | | Mortgage and Other Secured Debt | $242,584 | | Revolving Credit Facility | $242,000 | | Term Loan Facility | $397,863 | | Unsecured Senior Notes | $1,193,388 | | Unsecured note payable | $1,004 | | Total debt, net | $2,076,839 | Net Operating Income (NOI) from Real Estate Operations by Segment (Q1 2020, in thousands) | Segment | NOI from Real Estate Operations | | :--- | :--- | | Total Defense/IT Locations | $71,508 | | Regional Office | $7,923 | | Wholesale Data Center | $3,939 | | Other | $460 | | Total | $83,830 | - The company faces potential impacts from the COVID-19 pandemic, including disruptions to tenant operations, leasing, capital markets access, and development projects, with the full effect remaining uncertain[154][155] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses Q1 2020 performance, highlighting 93.7% portfolio occupancy, the impact of COVID-19 on different segments, and analyzing changes in NOI, FFO, and cash flows, affirming adequate liquidity Effects of COVID-19 Management assesses the COVID-19 pandemic's impact, noting the resilience of the Defense/IT portfolio (87.7% of revenue) due to essential tenants, while the Regional Office portfolio (11.8% of revenue) faces enhanced risk - The Defense/IT portfolio, comprising 87.7% of annualized rental revenue, is considered resilient to COVID-19 disruptions as tenants are primarily USG and its contractors, deemed "essential businesses"[168] - The Regional Office properties (11.8% of annualized rental revenue) are more subject to traditional office fundamentals and face enhanced risk from COVID-19's economic impact[169] - In response to potential financial market instability from COVID-19, the company borrowed under its Revolving Credit Facility in late March 2020 to pre-fund short-term capital needs[175] Occupancy and Leasing As of March 31, 2020, the total portfolio occupancy was 93.7%, with 631,000 square feet of leasing completed during Q1 2020, including 488,000 square feet of renewals Portfolio Occupancy Rates | Portfolio | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Portfolio | 93.7% | 92.9% | | Total Defense/IT Locations | 94.2% | 93.7% | | Regional Office | 91.4% | 88.1% | - In Q1 2020, the company completed 631,000 square feet of leasing, including 488,000 square feet of renewals, representing an 89.0% retention rate on expiring leases[179] Results of Operations Net income for Q1 2020 increased to $25.6 million, driven by lower operating and interest expenses, while total NOI from real estate operations remained flat at $83.8 million Comparison of Operations (in thousands) | Account | Q1 2020 | Q1 2019 | Variance | | :--- | :--- | :--- | :--- | | Total revenues | $145,797 | $148,940 | ($3,143) | | Total operating expenses | $104,320 | $110,431 | ($6,111) | | Interest expense | ($16,840) | ($18,674) | $1,834 | | Net income | $25,550 | $22,318 | $3,232 | - NOI from Same Properties increased by $1.9 million (2.7%), driven by a 0.7% increase in average occupancy and stable rental rates[187] - NOI from developed and redeveloped properties increased by $3.8 million, reflecting contributions from 10 properties placed in service during 2019 and 2020[187][189] Funds from Operations (FFO) Diluted FFO per share, as adjusted, was $0.51 for Q1 2020, an increase from $0.50 in Q1 2019, primarily adjusted for noncontrolling interests from capital events FFO Reconciliation and Per Share Data | Metric | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Net income (in thousands) | $25,550 | $22,318 | | Depreciation and amortization (in thousands) | $32,596 | $34,796 | | Basic FFO (in thousands) | $46,674 | $56,359 | | Diluted FFO, as adjusted (in thousands) | $57,866 | $56,788 | | Diluted FFO per share, as adjusted | $0.51 | $0.50 | Liquidity and Capital Resources The company maintains adequate liquidity with $159.1 million in cash and $558.0 million available under its Revolving Credit Facility, expecting to spend $220 million on development and $70 million on property improvements in 2020 - As of March 31, 2020, the company had $159.1 million in cash and $558.0 million available under its Revolving Credit Facility[214][216] - COPT maintains an at-the-market (ATM) stock offering program with $300 million in remaining capacity[217] Contractual Obligations Summary (in thousands) | Obligation | Total | < 1 Year | 1-3 Years | 3-5 Years | > 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Debt (Principal & Interest) | $2,344,004 | $71,741 | $827,178 | $992,844 | $452,241 | | Development & Redevelopment | $160,155 | $141,256 | $18,899 | $0 | $0 | | Operating Leases | $106,075 | $826 | $2,300 | $2,340 | $100,609 | | Total | $2,682,375 | $248,489 | $854,352 | $995,184 | $584,325 | Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate risk, with $2.09 billion in total debt ($1.34 billion fixed, $745 million variable), managed with swaps, where a 1% LIBOR increase would raise Q1 interest expense by $620,000 - The company's main market risk exposure stems from changes in interest rates, affecting its variable rate debt and the refinancing of maturing fixed-rate debt[226] - A 1% increase in the applicable LIBOR rate would have increased interest expense by $620,000 in Q1 2020, based on variable-rate debt balances and interest rate swaps[229] Debt Maturities as of March 31, 2020 (in thousands) | Year | Fixed Rate Debt | Variable Rate Debt | | :--- | :--- | :--- | | 2020 | $2,799 | $12,336 | | 2021 | $303,875 | $80 | | 2022 | $4,033 | $456,627 | | 2023 | $416,590 | $242,540 | | 2024 | $279,443 | $540 | | Thereafter | $337,442 | $32,575 | | Total | $1,344,182 | $744,698 | Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures for both COPT and COPLP were effective as of March 31, 2020, with no material changes to internal controls - The CEO and CFO concluded that as of March 31, 2020, the disclosure controls and procedures for both COPT and COPLP were effective[230][233] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[231][234] PART II: OTHER INFORMATION Legal Proceedings The company is not involved in any material litigation outside the ordinary course of business, with routine litigation expected to be covered by insurance - The company is not involved in any material litigation, and any ordinary course litigation is expected to be covered by insurance[235] Risk Factors A new material risk factor related to the COVID-19 pandemic is introduced, detailing potential adverse effects on tenant operations, leasing, capital access, and development projects, with uncertain but potentially material impact - A new risk factor has been added regarding the COVID-19 pandemic, which could adversely affect tenant operations, leasing, access to capital, and development activities[237][238] Unregistered Sales of Equity Securities and Use of Proceeds In Q1 2020, 12,009 common units of COPLP were exchanged for an equal number of COPT common shares in an unregistered transaction exempt under Section 4(a)(2) of the Securities Act of 1933 - In Q1 2020, 12,009 COPLP common units were exchanged for 12,009 COPT common shares in an unregistered transaction[240] Exhibits This section lists exhibits filed with the Form 10-Q, including an amended term loan agreement, a separation agreement, CEO/CFO certifications, and XBRL data files - Key exhibits filed include an Amended and Restated Term Loan Agreement dated March 6, 2020, and a Separation Agreement with the former COO dated March 16, 2020[242]