COPT(US:CDP)2021-10-31 16:00PART I: FINANCIAL INFORMATION This section presents the company's unaudited consolidated financial statements and management's analysis of financial condition Item 1. Financial Statements Presents COPT's unaudited consolidated financial statements for Q3 2021, covering Balance Sheets, Operations, and Cash Flows Note 1: Organization COPT is a REIT specializing in office and data center properties, primarily serving U.S. Government and defense contractors - The company's core business is owning and operating office and data center properties, with a strategic focus on locations supporting the U.S. Government and its contractors, particularly in defense and IT20 Portfolio Summary as of September 30, 2021 | Asset Type | Quantity/Size | | :--- | :--- | | Operating Properties | 186 properties (21.7M sq ft) | | - Office Properties | 160 properties (16.9M sq ft) | | - Data Center Shells | 26 properties (4.7M sq ft) | | Wholesale Data Center | 19.25 megawatts capacity | | Properties Under Development | 13 properties (1.8M sq ft estimated) | | Land for Future Development | ~720 acres (~8.9M sq ft potential) | Note 4: Properties, Net Details the company's real estate assets, including new developments and a significant data center shell sale - On June 2, 2021, the company sold a 90% interest in two data center shell properties in Northern Virginia for $106.9 million, recognizing a gain of $40.2 million35 - In the first nine months of 2021, the company placed six newly-developed properties, totaling 709,000 square feet, into service36 Note 9: Debt, Net Discusses the company's debt structure, including an increase in net debt and significant refinancing activities - Issued $600.0 million of 2.75% Senior Notes due 2031 and $400.0 million of 2.00% Senior Notes due 20296263 - Purchased and redeemed all outstanding 3.60% Senior Notes and 5.25% Senior Notes, resulting in a loss on early extinguishment of debt of $58.4 million in the first nine months of 202165 Debt Composition (in thousands) | Debt Type | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Mortgage and Other Secured Debt | $171,008 | $255,110 | | Revolving Credit Facility | $10,000 | $143,000 | | Term Loan Facility | $299,274 | $398,447 | | Unsecured Senior Notes | $1,678,659 | $1,289,461 | | Total debt, net | $2,159,732 | $2,086,918 | Note 14: Information by Business Segment Outlines the company's operational segments, with Defense/IT Locations as the primary NOI contributor NOI from Real Estate Operations by Segment (Q3 2021 vs Q3 2020, in thousands) | Segment | Q3 2021 NOI | Q3 2020 NOI | | :--- | :--- | :--- | | Defense/IT Locations | $78,529 | $74,629 | | Regional Office | $8,415 | $7,131 | | Wholesale Data Center | $3,292 | $2,426 | | Other | $224 | $457 | | Total | $90,460 | $84,643 | - The Defense/IT Locations segment is the primary driver of the company's performance, accounting for approximately 87% of the total NOI from real estate operations in Q3 202184 Note 18: Commitments and Contingencies Addresses legal actions, potential tax claims, and the company's resilience to COVID-19 impacts - Management believes the company is less susceptible to the impacts of the COVID-19 pandemic due to its portfolio's significant concentration in Defense/IT Locations120 - A potential loss of up to $3.4 million is considered reasonably possible for certain municipal tax claims, which could be material to results of operations but not to financial position or liquidity117 Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Assets | $4,151,138 | $4,077,023 | | Total properties, net | $3,607,122 | $3,562,549 | | Cash and cash equivalents | $14,570 | $18,369 | | Total Liabilities | $2,454,353 | $2,357,881 | | Debt, net | $2,159,732 | $2,086,918 | | Total Equity | $1,670,779 | $1,693,712 | Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $174,636 | $154,766 | $500,769 | $445,337 | | Lease revenue | $145,749 | $133,875 | $434,031 | $397,034 | | Net Income (Loss) | $28,794 | ($31,342) | $66,613 | $19,329 | | Net income (loss) attributable to COPT common shareholders | $27,101 | ($31,845) | $62,833 | $15,706 | | Diluted EPS | $0.24 | ($0.29) | $0.56 | $0.14 | Consolidated Statements of Cash Flows Highlights (Nine Months Ended Sep 30, in thousands) | Cash Flow Category | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $199,903 | $159,041 | | Net cash used in investing activities | ($111,992) | ($396,209) | | Net cash (used in) provided by financing activities | ($91,799) | $233,713 | | Net decrease in cash and cash equivalents | ($3,888) | ($3,455) | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, operational achievements, COVID-19 impact, and liquidity for the first nine months of 2021 Overview and COVID-19 Impact Highlights key operational achievements and the company's resilience to the COVID-19 pandemic due to its Defense/IT focus - Key activities in the first nine months of 2021 included placing 709,000 sq. ft. of newly-developed properties into service and achieving a 94.6% leased rate for the office and data center shell portfolio124 - The company executed a major debt refinancing, issuing $600 million of 2.75% Notes and $400 million of 2.00% Notes to redeem higher-cost debt, resulting in a $58.4 million loss on early extinguishment124 - Management believes the company has been less susceptible to the impact of the COVID-19 pandemic due to its portfolio's concentration in Defense/IT Locations, with no significant effect on results of operations130 Occupancy and Leasing Details portfolio occupancy rates and leasing activity, including renewals and development space leasing Portfolio Occupancy Rates | Portfolio | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total | 93.3% | 94.1% | | Defense/IT Locations | 94.1% | 94.5% | | Regional Office | 87.8% | 92.5% | - Completed 2.7 million square feet of leasing in the first nine months of 2021, including 1.4 million sq. ft. of renewals (capturing 74.6% of expirations) and 915,000 sq. ft. in development projects137 Results of Operations Analyzes net income performance, highlighting the impact of derivative losses and real estate sales Net Income (Loss) Comparison (in thousands) | Period | 2021 | 2020 | Variance | | :--- | :--- | :--- | :--- | | Three Months Ended Sep 30 | $28,794 | ($31,342) | $60,136 | | Nine Months Ended Sep 30 | $66,613 | $19,329 | $47,284 | - The Q3 2021 net income improvement was largely due to the absence of a $53.2 million loss on interest rate derivatives that was recognized in Q3 2020142149 - The nine-month 2021 net income was driven by a $39.7 million gain on the sale of real estate, partially offset by a $59.6 million loss on early extinguishment of debt from refinancing activities152158 Funds from Operations (FFO) Presents FFO as a key performance metric, showing growth driven by operating performance and development projects Diluted FFO Per Share, As Adjusted for Comparability | Period | 2021 | 2020 | | :--- | :--- | :--- | | Three Months Ended Sep 30 | $0.57 | $0.54 | | Nine Months Ended Sep 30 | $1.71 | $1.56 | - The increase in FFO per share reflects underlying growth in the property portfolio's operating performance, partially offset by comparability adjustments such as the loss on early extinguishment of debt170 Liquidity and Capital Resources Discusses the company's liquidity sources, credit rating objectives, and expected capital spending for the remainder of 2021 - As of September 30, 2021, the company had $14.6 million in cash and $790 million of availability under its $800 million Revolving Credit Facility179181 - The company aims to maintain its investment grade credit rating to ensure access to unsecured debt from public markets and banks180 - Expected capital spending for the remainder of 2021 includes approximately $85 million for development and $40 million for improvements and leasing costs on operating properties186 Item 3. Quantitative and Qualitative Disclosures About Market Risk Identifies interest rate changes as the primary market risk, detailing its potential impact on interest expense - The company's main market risk is interest rate changes. A 1% increase in LIBOR would have increased interest expense by $2.5 million in the first nine months of 2021, based on variable-rate debt balances and interest rate swaps192 - The total fair value of the company's debt was estimated at $2.2 billion as of September 30, 2021, compared to a carrying value of $2.16 billion19267 Item 4. Controls and Procedures Confirms the effectiveness of disclosure controls and procedures, with no material changes to internal controls - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2021193 - No material changes to internal control over financial reporting occurred during the third quarter of 2021194 PART II: OTHER INFORMATION This section covers legal proceedings, risk factors, and other significant corporate information Item 1. Legal Proceedings States that the company is not involved in any material litigation or threatened legal actions - There is no material litigation currently pending or threatened against the company195 Item 1A. Risk Factors Confirms no material changes to the risk factors previously disclosed in the company's 2020 Annual Report - No material changes to risk factors from the 2020 Annual Report on Form 10-K were reported196 Item 5. Other Information Details new Letter Agreements with the COO and CFO regarding their participation in the Executive Change in Control and Severance Plan - New 5-year Letter Agreements were established with the COO and CFO regarding their participation in the Executive Change in Control and Severance Plan197 Item 6. Exhibits Lists the exhibits filed with the Form 10-Q, including executive agreements and financial data files - Exhibits filed include executive letter agreements, CEO/CFO certifications, and financial data files in XBRL format201