COPT(US:CDP)2020-07-31 19:29PART I: FINANCIAL INFORMATION Financial Statements This section presents the unaudited consolidated financial statements for COPT and COPLP for the quarterly period ended June 30, 2020 Corporate Office Properties Trust (COPT) and Subsidiaries COPT reported total assets of $4.01 billion and net income of $47.6 million for the six months ended June 30, 2020 COPT Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total properties, net | $3,513,099 | $3,340,886 | | Total assets | $4,011,325 | $3,854,453 | | Debt, net | $2,012,019 | $1,831,139 | | Total liabilities | $2,331,253 | $2,105,777 | | Total equity | $1,656,924 | $1,719,245 | COPT Consolidated Statement of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Total revenues | $144,774 | $290,571 | | Net income attributable to COPT common shareholders | $23,497 | $47,551 | | Diluted EPS | $0.21 | $0.42 | COPT Consolidated Cash Flow Highlights - Six Months Ended June 30 (in thousands) | Cash Flow Category | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $136,537 | $111,815 | | Net cash used in investing activities | ($227,288) | ($13,630) | | Net cash provided by (used in) financing activities | $98,487 | ($59,401) | Corporate Office Properties, L.P. (COPLP) and Subsidiaries COPLP's financial statements reflect total assets of $4.01 billion and net income of $48.1 million for the six months ended June 30, 2020 COPLP Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total properties, net | $3,513,099 | $3,340,886 | | Total assets | $4,008,793 | $3,851,393 | | Debt, net | $2,012,019 | $1,831,139 | | Total liabilities | $2,328,721 | $2,102,717 | | Total equity | $1,656,924 | $1,719,245 | COPLP Consolidated Statement of Operations Highlights (in thousands, except per unit data) | Metric | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Total revenues | $144,774 | $290,571 | | Net income attributable to COPLP common unitholders | $23,781 | $48,122 | | Diluted EPU | $0.21 | $0.42 | Notes to Consolidated Financial Statements This section provides detailed disclosures on accounting policies, segment performance, debt, and the impact of COVID-19 - The company owns, manages, and develops office and data center properties, with a majority of its portfolio supporting the U.S. Government and its contractors in Defense/IT Locations47 - As of June 30, 2020, the portfolio included 174 properties totaling 19.8 million square feet, 11 properties under development, and land for future development47 - Effective January 1, 2020, the company adopted new credit loss guidance, resulting in a $5.5 million cumulative-effect adjustment to equity56 Note 9: Debt, Net Total net debt increased to $2.01 billion as of June 30, 2020, composed of various fixed and variable rate instruments Debt Composition as of June 30, 2020 (in thousands) | Debt Type | Carrying Value | Stated Interest Rates | | :--- | :--- | :--- | | Mortgage and Other Secured Debt | $250,121 | Various (Fixed & Variable) | | Revolving Credit Facility | $169,000 | LIBOR + 0.775% to 1.45% | | Term Loan Facility | $398,058 | LIBOR + 1.00% to 1.65% | | Unsecured Senior Notes | $1,193,870 | 3.60% - 5.25% | | Total debt, net | $2,012,019 | | - On March 6, 2020, the company amended its Term Loan Facility, increasing the loan amount by $150.0 million and changing the interest terms100 Note 13: Information by Business Segment The Defense/IT Locations segment generated the vast majority of NOI and comprised most of the company's total assets NOI from Real Estate Operations by Segment - Six Months Ended June 30, 2020 (in thousands) | Segment | NOI from Real Estate Operations | | :--- | :--- | | Defense/IT Locations | $143,926 | | Regional Office | $16,197 | | Wholesale Data Center | $6,931 | | Other | $835 | | Total | $167,889 | Note 17: Commitments and Contingencies The company faces potential losses from tax claims and significant uncertainty from the COVID-19 pandemic's future impact - Management believes a loss of up to $3.2 million is reasonably possible for certain municipal tax claims, which could be material to results of operations but not to financial position or liquidity151 - The COVID-19 pandemic poses significant risks, including disruption to tenants' operations, ability to maintain occupancy, access to capital, and potential for development delays, with an uncertain long-term impact156158159 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial results, high portfolio occupancy, and the significant future risks posed by COVID-19 Effects of COVID-19 The portfolio's concentration in Defense/IT Locations has mitigated the pandemic's impact, though risks remain - The portfolio is concentrated in Defense/IT Locations (87.8% of annualized rental revenue), which are primarily occupied by the USG and its contractors, designated as "essential businesses," mitigating much of the pandemic's impact174 - As of the filing date, COVID-19 had not significantly affected results, with the company agreeing to defer $2.8 million in lease receivables, primarily for Regional Office and amenity tenants177178 - An impairment analysis was triggered for the Regional Office portfolio due to the economic disruption, but it was concluded that the carrying value of each asset was recoverable178 Results of Operations Net income decreased significantly year-over-year due to a large 2019 gain on sale of real estate that did not recur Comparison of Net Income (in thousands) | Period | 2020 | 2019 | Variance | | :--- | :--- | :--- | :--- | | Three Months Ended June 30 | $25,121 | $109,563 | ($84,442) | | Six Months Ended June 30 | $50,671 | $131,881 | ($81,210) | Change in NOI from Real Estate Operations (in thousands) | Period | 2020 | 2019 | Variance | | :--- | :--- | :--- | :--- | | Three Months Ended June 30 | $84,059 | $86,136 | ($2,077) | | Six Months Ended June 30 | $167,889 | $169,900 | ($2,011) | - The large decrease in net income for both the three and six-month periods was primarily driven by a significant gain on the sale of real estate recognized in 2019 which was absent in 2020199207 Funds from Operations Diluted FFO per share was $0.51 for Q2 2020 and $0.92 for the first six months of 2020 FFO Reconciliation and Per Share Data | Metric (in thousands, except per share) | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Net income | $25,121 | $50,671 | | FFO | $59,551 | $118,510 | | Basic FFO available to common holders | $57,695 | $104,369 | | Diluted FFO available to common holders | $57,809 | $104,592 | | Diluted FFO per share | $0.51 | $0.92 | | Diluted FFO per share, as adjusted | $0.51 | $1.02 | Liquidity and Capital Resources of COPLP COPLP maintained strong liquidity with $21.6 million in cash and $631.0 million available under its credit facility - As of June 30, 2020, COPLP had $21.6 million in cash and $631.0 million available under its $800.0 million Revolving Credit Facility233235 Contractual Obligations Summary as of June 30, 2020 (in thousands) | Period | Total Contractual Cash Obligations | | :--- | :--- | | 2020 (remainder) | $250,372 | | 2021 | $428,400 | | 2022 | $536,827 | | 2023 | $624,468 | | 2024 | $299,977 | | Thereafter | $493,645 | | Total | $2,633,689 | Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate changes affecting its $2.02 billion in total debt Debt Obligations by Rate Type as of June 30, 2020 (in thousands) | Debt Type | Total Amount | Weighted Avg. Interest Rate | | :--- | :--- | :--- | | Fixed rate debt | $1,343,261 | 4.30% | | Variable rate debt | $679,840 | 1.35% | - A 1% increase in the applicable LIBOR rate would have increased interest expense by $1.2 million for the six months ended June 30, 2020248 Controls and Procedures Management concluded that disclosure controls and procedures for both COPT and COPLP were effective as of June 30, 2020 - The CEO and CFO concluded that disclosure controls and procedures for both COPT and COPLP were effective as of June 30, 2020249252 - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, internal controls for either COPT or COPLP250253 PART II: OTHER INFORMATION Legal Proceedings The company is not involved in any material litigation beyond routine matters covered by insurance - There is no material litigation currently involving the company, other than routine matters expected to be covered by insurance254 Risk Factors This section highlights the significant risks and uncertainties associated with the COVID-19 pandemic - The primary update to risk factors relates to the COVID-19 pandemic and the restrictive measures instituted to control its spread256 - Specific risks from the pandemic include: disruption of tenants' operations and ability to fulfill lease obligations; difficulty in maintaining occupancy and leasing new space; potential shortages and increased costs from vendors; constrained access to debt and equity capital; and delays in development projects257259 - A potential long-term increase in remote work arrangements could adversely affect demand for office space259