COPT Reports Second Quarter 2019 Results

Corporate Office Properties Trust (“COPT” or the “Company”) (NYSE: OFC) announced financial and operating results for the second quarter ended June 30, 2019.

Management Comments

Stephen E. Budorick, COPT’s President & Chief Executive Officer, commented, “Second quarter FFO per share exceeded the high-end of our guidance, driven in part by stronger-than-anticipated growth in same-property cash NOI of 4.5%. The strength of demand recovery throughout our Defense/IT locations continues to support record-levels of lease achievement, and we have already exceeded our previously elevated full-year goal of leasing 1.4 million square feet in development projects, setting a new corporate record for annual development leasing volume. Based on the pipeline of opportunities before us, we are increasing our development leasing target to 2.0 million square feet.” He continued, “As important, in June we created a strategic joint venture with a world class investment group. Proceeds from this venture fund our 2019 development investment needs, as well as most of our expected 2020 development investment.”

Financial Highlights

2^nd Quarter Financial Results:

• Diluted earnings per share (“EPS”) was $0.95 for the quarter ended June 30, 2019 as compared to $0.19 for the second quarter of 2018. Second quarter 2019 EPS included a $0.75 per share gain on sale from contributing a 90% interest in seven data center shells to a joint venture with Blackstone Real Estate Income Trust, Inc. (“BREIT”).
• Diluted funds from operations per share (“FFOPS”), as calculated in accordance with Nareit’s definition and as adjusted for comparability, was $0.52 for the second quarter of 2019 as compared to $0.51 for second quarter 2018 results.

Operating Performance Highlights

Operating Portfolio Summary:

• At June 30, 2019, the Company’s core portfolio of 167 operating office properties was 92.9% occupied and 94.1% leased.
• During the quarter, the Company placed all or portions of five developments aggregating 606,000 square feet into service that were 100% leased. During the six months ended June 30, 2019, the Company placed 787,000 square feet into service in properties that were 100% leased.

Same-Property Performance:

• At June 30, 2019, COPT’s same-property portfolio of 150 buildings was 92.0% occupied and 93.3% leased.
• For the quarter ended June 30, 2019, the Company’s total same-property cash NOI increased 4.5% over the prior year’s comparable period, driven by a 5.4% increase in same-property cash NOI from Defense/IT locations.

Leasing:

• Total Square Feet Leased―For the quarter ended June 30, 2019, the Company leased 1.6 million total square feet, including 659,000 square feet of renewing leases, 245,000 square feet of new leases on vacant space, and 652,000 square feet in development projects.
  
  For the six months ended June 30, 2019, the Company leased 2.5 million total square feet, including 950,000 square feet of renewing leases, 371,000 square feet of new leases on vacant space, and 1.2 million square feet in development projects.
• Renewal Rates―During the quarter and six months ended June 30, 2019, the Company respectively renewed 81.1% and 77.8% of total expiring leases.
• Cash Rent Spreads & Average Escalations on Renewing Leases―For the quarter and six months ended June 30, 2019, cash rents on renewed space decreased 3.3% and 4.6%, respectively. For the same time periods, average annual escalations on renewing leases were 2.6%.
• Lease Terms―In the second quarter, lease terms averaged 2.8 years on renewing leases, 6.4 years on new leasing of vacant space, and 11.0 years on development leasing. For the six months, lease terms averaged 3.1 years on renewing leases, 6.1 years on new leasing of vacant space, and 12.0 years on development leasing.

Investment Activity Highlights

Development & Redevelopment Projects:

• Construction Pipeline. At July 29, 2019, the Company’s construction pipeline consisted of 13 properties totaling 2.1 million square feet that were 83% leased. These projects have a total estimated cost of $579.3 million, of which $236.3 million has been incurred.
• Redevelopment. At June 30, 2019, one project was under redevelopment totaling 106,000 square feet that was 67% leased. The Company has invested $18.1 million of the $25.5 million anticipated total cost.

Balance Sheet and Capital Transaction Highlights

• On June 20, 2019, the Company raised $238.5 million of proceeds to fund development by contributing a 90% interest in seven data center shell properties to a joint venture with BREIT. The Company owns a 10% interest in the joint venture.
• As of June 30, 2019, the Company’s net debt plus preferred equity to adjusted book ratio was 36.2% and its net debt plus preferred equity to in-place adjusted EBITDA ratio was 5.7x. For the same period, the Company’s adjusted EBITDA fixed charge coverage ratio was 3.7x.
• As of June 30, 2019, and including the effect of interest rate swaps, the Company’s weighted average effective interest rate was 4.15%; additionally, 95.1% of the Company’s debt was subject to fixed interest rates and the consolidated debt portfolio had a weighted average maturity of 4.0 years.

2019 Guidance

Management is increasing its previously issued guidance range of $1.34―$1.38 for full year EPS to include the gain on sale from contributing two more data center shell properties in the fourth quarter. The new range for full year EPS is $1.52─$1.56. The Company is reiterating its previously issued guidance range for full year FFOPS, as adjusted for comparability, of $2.01―$2.05.

Management also is establishing EPS and FFOPS, as adjusted for comparability, guidance for the third quarter ending September 30, 2019 at ranges of $0.14―$0.16 and $0.49―$0.51, respectively. Reconciliations of projected diluted EPS to projected FFOPS are as follows:

Reconciliation of EPS to FFOPS, per Nareit and		Quarter ending						Year ending
As Adjusted for Comparability		September 30, 2019						December 31, 2019
		Low			High			Low				High
EPS		$	0.14		$	0.16		$	1.52			$	1.56
Real estate depreciation and amortization			0.35			0.35			1.40				1.40
Gain on sales of real estate			-			-			(0.91	)			(0.91	)
FFOPS, Nareit definition and as adjusted for comparability		$	0.49		$	0.51		$	2.01			$	2.05

Updated Full-Year Guidance Assumptions—Management is updating the following assumptions for its full-year guidance:

• Development Leasing Objective. Management is increasing its development leasing goal for the year, from the previously elevated target of 1.4 million square feet, to a new target of 2.0 million square feet.
• Development Spend. Due to its expanded set of development opportunities, the Company is increasing its development investment guidance by $75 million, from the prior elevated range of $325─$375 million, to a new range of $400─$450 million.
• Proceeds from Asset Sales. To fund its value-added developments, the Company is increasing its disposition guidance for the year from the previously elevated range of $200─$225 million, to $300 million.
• Same Property Cash NOI Growth. The Company’s initial guidance assumes cash NOI from same-properties would increase 1.5%-3% for the year; the Company is increasing its assumption to growth of between 2.75%─3.25%.
• Renewal Rates. The Company is increasing its tenant retention guidance for the full year from its original range of 70%─75% to a new range of 75%─80%.
• Cash Rent Spreads on Renewing Leases. To incorporate the impact of executing sizeable early renewals that will be incremental to its original forecast, the Company is lowering its full-year guidance for cash rents on renewing leases, from the prior range of flat to down 2%, to a new range of (5%)─(4%).

Associated Supplemental Presentation

Prior to the call, the Company will post a slide presentation to accompany management’s prepared remarks for its second quarter 2019 conference call, the details of which are provided below. The accompanying slide presentation can be viewed on and downloaded from the ‘Latest Updates’ section of COPT’s Investors website: https://investors.copt.com/

Conference Call Information

Management will discuss second quarter 2019 results on its conference call tomorrow at 12:00 p.m. Eastern Time, details of which are listed below:

		Conference Call Date:		Tuesday, July 30, 2019
		Time:		12:00 p.m. Eastern Time
		Telephone Number: (within the U.S.)		855-463-9057
		Telephone Number: (outside the U.S.)		661-378-9894
		Passcode:		9254219

The conference call will also be available via live webcast in the ‘Latest Updates’ section of COPT’s Investors website: https://investors.copt.com/

Replay Information

A replay of the conference call will be available immediately via webcast on COPT’s Investors website. Additionally, a telephonic replay of this call will be available beginning at 3:00 p.m. Eastern Time on Tuesday, July 30 through 3:00 p.m. Eastern Time on Tuesday, August 13. To access the replay within the United States, please call 855-859-2056; to access it from outside the United States, please call 404-537-3406. In either case, use passcode 9254219.

Definitions

For definitions of certain terms used in this press release, please refer to the information furnished in the Company’s Supplemental Information Package furnished on a Form 8-K which can be found on its website (www.copt.com). Reconciliations of non-GAAP measures to the most directly comparable GAAP measures are included in the attached tables.

Company Information

COPT is a REIT that owns, manages, leases, develops and selectively acquires office and data center properties in locations that support the United States Government and its contractors, most of whom are engaged in national security, defense and information technology (“IT”) related activities servicing what it believes are growing, durable, priority missions (“Defense/IT Locations”). The Company also owns a portfolio of office properties located in select urban/urban-like submarkets in the Greater Washington, DC/Baltimore region with durable Class-A office fundamentals and characteristics (“Regional Office Properties”). As of June 30, 2019, the Company derived 88% of its core portfolio annualized revenue from Defense/IT Locations and 12% from its Regional Office Properties. As of the same date and including 13 buildings owned through unconsolidated joint ventures, COPT’s core portfolio of 167 office and data center shell properties encompassed 18.8 million square feet and was 94.1% leased; the Company also owned one wholesale data center with a critical load of 19.25 megawatts.

Forward-Looking Information

This press release may contain “forward-looking” statements, as defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that are based on the Company’s current expectations, estimates and projections about future events and financial trends affecting the Company. 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 the Company cannot predict with accuracy and some of which the Company might not even anticipate. Although the Company believes that the expectations, estimates and projections reflected in such forward-looking statements are based on reasonable assumptions at the time made, the Company can give no assurance that these expectations, estimates and projections will be achieved. Future events and actual results may differ materially from those discussed in the forward-looking statements.

Important factors that may affect these expectations, estimates, and projections include, but are not limited to:

• general economic and business conditions, which will, among other things, affect office property and data center demand and rents, tenant creditworthiness, interest rates, financing availability and property values;
• adverse changes in the real estate markets including, among other things, increased competition with other companies;
• governmental actions and initiatives, including risks associated with the impact of a prolonged government shutdown or budgetary reductions or impasses, such as a reduction in rental revenues, non-renewal of leases, and/or reduced or delayed demand for additional space by the Company's strategic customers;
• the Company’s 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 the Company’s joint venture partners may not fulfill their financial obligations as investors or may take actions that are inconsistent with the Company’s objectives;
• changes in the Company’s 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;
• the Company’s 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;
• the Company's ability to achieve projected results;
• security breaches relating to cyber attacks, cyber intrusions or other factors; and
• environmental requirements.

The Company undertakes no obligation to update or supplement any forward-looking statements. For further information, please refer to the Company’s filings with the Securities and Exchange Commission, particularly the section entitled “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Corporate Office Properties Trust Summary Financial Data (unaudited) (in thousands, except per share data)
		For the Three Months Ended June 30,								For the Six Months Ended June 30,
		2019				2018				2019				2018
Revenues
Revenues from real estate operations		$	132,771			$	129,162			$	264,761			$	257,440
Construction contract and other service revenues		42,299				17,581				59,249				44,779
Total revenues		175,070				146,743				324,010				302,219
Operating expenses
Property operating expenses		47,886				49,446				97,331				100,397
Depreciation and amortization associated with real estate operations		34,802				33,190				69,598				66,702
Construction contract and other service expenses		41,002				16,941				57,328				43,157
General and administrative expenses		7,650				6,067				14,369				11,928
Leasing expenses		1,736				1,561				3,768				2,992
Business development expenses and land carry costs		870				1,234				1,983				2,848
Total operating expenses		133,946				108,439				244,377				228,024
Interest expense		(18,475		)		(18,945		)		(37,149		)		(37,729		)
Interest and other income		1,849				1,439				4,135				2,798
Gain on sales of real estate		84,469				(23		)		84,469				(27		)
Income before equity in income of unconsolidated entities and income taxes		108,967				20,775				131,088				39,237
Equity in income of unconsolidated entities		420				373				811				746
Income tax benefit (expense)		176				(63		)		(18		)		(118		)
Net income		109,563				21,085				131,881				39,865
Net income attributable to noncontrolling interests:
Common units in the Operating Partnership (“OP”)		(1,339		)		(608		)		(1,596		)		(1,152		)
Preferred units in the OP		(165		)		(165		)		(330		)		(330		)
Other consolidated entities		(1,268		)		(878		)		(2,305		)		(1,799		)
Net income attributable to COPT common shareholders		$	106,791			$	19,434			$	127,650			$	36,584
Earnings per share (“EPS”) computation:
Numerator for diluted EPS:
Net income attributable to COPT common shareholders		$	106,791			$	19,434			$	127,650			$	36,584
Distributions on dilutive convertible preferred units		165				—				—				—
Redeemable noncontrolling interests		902				—				66				—
Common units in the OP		—				—				1,515				—
Amount allocable to share-based compensation awards		(346		)		(117		)		(391		)		(234		)
Numerator for diluted EPS		$	107,512			$	19,317			$	128,840			$	36,350
Denominator:
Weighted average common shares - basic		111,557				101,789				110,759				101,397
Dilutive effect of share-based compensation awards		310				119				289				131
Dilutive effect of redeemable noncontrolling interests		1,062				—				130				—
Dilutive convertible preferred units		176				—				—				—
Common units in the OP		—				—				1,329				—
Weighted average common shares - diluted		113,105				101,908				112,507				101,528
Diluted EPS		$	0.95			$	0.19			$	1.15			$	0.36

Corporate Office Properties Trust Summary Financial Data (unaudited) (in thousands, except per share data)
		For the Three Months Ended June 30,								For the Six Months Ended June 30,
		2019				2018				2019				2018
Net income		$	109,563			$	21,085			$	131,881			$	39,865
Real estate-related depreciation and amortization		34,802				33,190				69,598				66,702
Gain on sales of real estate		(84,469		)		23				(84,469		)		27
Depreciation and amortization on unconsolidated real estate JVs		566				564				1,132				1,127
Funds from operations (“FFO”)		60,462				54,862				118,142				107,721
Noncontrolling interests - preferred units in the OP		(165		)		(165		)		(330		)		(330		)
FFO allocable to other noncontrolling interests		(1,188		)		(753		)		(2,159		)		(1,697		)
Basic and diluted FFO allocable to share-based compensation awards		(229		)		(224		)		(414		)		(437		)
Basic FFO available to common share and common unit holders (“Basic FFO”)		58,880				53,720				115,239				105,257
Redeemable noncontrolling interests		33				—				942				—
Diluted FFO available to common share and common unit holders (“Diluted FFO”)		58,913				53,720				116,181				105,257
Demolition costs on redevelopment and nonrecurring improvements		—				9				44				48
Executive transition costs		—				213				4				376
Non-comparable professional and legal expenses		311				—				311				—
Diluted FFO comparability adjustments allocable to share-based compensation awards		(2		)		(1		)		(2		)		(2		)
Diluted FFO available to common share and common unit holders, as adjusted for comparability		59,222				53,941				116,538				105,679
Straight line rent adjustments and lease incentive amortization		1,051				(1,195		)		(616		)		(2,023		)
Amortization of intangibles included in net operating income		(50		)		231				12				587
Share-based compensation, net of amounts capitalized		1,623				1,550				3,296				3,035
Amortization of deferred financing costs		529				468				1,057				936
Amortization of net debt discounts, net of amounts capitalized		374				358				744				712
Accum. other comprehensive loss on derivatives amortized to expense		33				34				67				68
Replacement capital expenditures		(16,002		)		(15,613		)		(27,175		)		(31,133		)
Other diluted AFFO adjustments associated with real estate JVs		181				(32		)		214				99
Diluted adjusted funds from operations available to common share and common unit holders (“Diluted AFFO”)		$	46,961			$	39,742			$	94,137			$	77,960
Diluted FFO per share		$	0.52			$	0.51			$	1.02			$	1.00
Diluted FFO per share, as adjusted for comparability		$	0.52			$	0.51			$	1.03			$	1.01
Dividends/distributions per common share/unit		$	0.275			$	0.275			$	0.550			$	0.550

Corporate Office Properties Trust Summary Financial Data (unaudited) (Dollars and shares in thousands, except per share data)
	June 30, 2019				December 31, 2018
Balance Sheet Data
Properties, net of accumulated depreciation	$	3,194,372			$	3,250,626
Total assets		3,803,469				3,656,005
Debt, per balance sheet		1,784,362				1,823,909
Total liabilities		2,054,555				2,002,697
Redeemable noncontrolling interest		29,803				26,260
Equity		1,719,111				1,627,048
Net debt to adjusted book		36.1	%			38.9	%
Core Portfolio Data (as of period end) (1)
Number of operating properties		167				161
Total net rentable square feet owned (in thousands)		18,788				17,937
Occupancy %		92.9	%			93.1	%
Leased %		94.1	%			94.0	%

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2019			2018			2019			2018
Payout ratios
Diluted FFO	52.7	%		54.3	%		53.5	%		55.1	%
Diluted FFO, as adjusted for comparability	52.4	%		54.1	%		53.3	%		54.9	%
Diluted AFFO	66.1	%		73.4	%		66.0	%		74.4	%
Adjusted EBITDA fixed charge coverage ratio	3.7x			3.6x			3.7x			3.6x
Net debt to in-place adjusted EBITDA ratio (2)	5.7x			6.3x			N/A			N/A
Net debt plus preferred equity to in-place adjusted EBITDA ratio (3)	5.7x			6.3x			N/A			N/A
Reconciliation of denominators for per share measures
Denominator for diluted EPS	113,105			101,908			112,507			101,528
Weighted average common units	1,327			3,197			—			3,208
Redeemable noncontrolling interests	(926	)		—			907			—
Dilutive convertible preferred units	(176	)		—			—			—
Denominator for diluted FFO per share and as adjusted for comparability	113,330			105,105			113,414			104,736

(1)	Represents Defense/IT Locations and Regional Office properties.
(2)	Represents net debt as of period end divided by in-place adjusted EBITDA for the period, as annualized (i.e. three month periods are multiplied by four).
(3)	Represents net debt plus the total liquidation preference of preferred equity as of period end divided by in-place adjusted EBITDA for the period, as annualized (i.e. three month periods are multiplied by four).

Corporate Office Properties Trust Summary Financial Data (unaudited) (Dollars in thousands)
	For the Three Months Ended June 30,								For the Six Months Ended June 30,
	2019				2018				2019				2018
Reconciliation of common share dividends to dividends and distributions for payout ratios
Common share dividends - unrestricted shares and deferred shares	$	30,693			$	28,284			$	61,378			$	56,258
Common unit distributions - unrestricted units	365				879				730				1,758
Dividends and distributions for payout ratios	$	31,058			$	29,163			$	62,108			$	58,016
Reconciliation of GAAP net income to earnings before interest, income taxes, depreciation and amortization for real estate (“EBITDAre”), adjusted EBITDA and in-place adjusted EBITDA
Net income	$	109,563			$	21,085			$	131,881			$	39,865
Interest expense	18,475				18,945				37,149				37,729
Income tax (benefit) expense	(176		)		63				18				118
Depreciation of furniture, fixtures and equipment	496				459				929				982
Real estate-related depreciation and amortization	34,802				33,190				69,598				66,702
Gain on sales of real estate	(84,469		)		23				(84,469		)		27
Adjustments from unconsolidated real estate JVs	830				828				1,657				1,652
EBITDAre	79,521				74,593				156,763				147,075
Net gain on other investments	(12		)		—				(400		)		—
Business development expenses	460				757				1,008				1,780
Non-comparable professional and legal expenses	311				—				311				—
Demolition costs on redevelopment and nonrecurring improvements	—				9				44				48
Executive transition costs	—				213				4				376
Adjusted EBITDA	80,280				75,572				$	157,730			$	149,279
Proforma net operating income adjustment for property changes within period	(1,981		)		418
In-place adjusted EBITDA	$	78,299			$	75,990
Reconciliation of interest expense to the denominators for fixed charge coverage-Adjusted EBITDA
Interest expense	$	18,475			$	18,945			$	37,149			$	37,729
Less: Amortization of deferred financing costs	(529		)		(468		)		(1,057		)		(936		)
Less: Amortization of net debt discounts, net of amounts capitalized	(374		)		(358		)		(744		)		(712		)
Less: Accum. other comprehensive loss on derivatives amortized to expense	(33		)		(34		)		(67		)		(68		)
COPT’s share of interest expense of unconsolidated real estate JVs, excluding deferred financing costs	258				258				513				513
Scheduled principal amortization	1,095				1,049				2,193				2,101
Capitalized interest	2,388				1,397				4,392				2,771
Preferred unit distributions	165				165				330				330
Denominator for fixed charge coverage-Adjusted EBITDA	$	21,445			$	20,954			$	42,709			$	41,728

Corporate Office Properties Trust Summary Financial Data (unaudited) (Dollars in thousands)
	For the Three Months Ended June 30,								For the Six Months Ended June 30,
	2019				2018				2019				2018
Reconciliations of tenant improvements and incentives, building improvements and leasing costs for operating properties to replacement capital expenditures
Tenant improvements and incentives	$	8,568			$	8,117			$	15,720			$	16,732
Building improvements	4,333				5,775				8,864				7,696
Leasing costs	2,761				1,822				5,943				3,102
Net additions to tenant improvements and incentives	1,759				1,315				290				4,604
Excluded building improvements	(1,419		)		(1,370		)		(3,642		)		(955		)
Excluded leasing costs	—				(46		)		—				(46		)
Replacement capital expenditures	$	16,002			$	15,613			$	27,175			$	31,133
Same Properties cash NOI	$	73,436			$	70,304			$	144,322			$	138,062
Straight line rent adjustments and lease incentive amortization	(1,071		)		447				(1,136		)		16
Amortization of acquired above- and below-market rents	73				(176		)		33				(476		)
Amortization of below-market cost arrangements	(23		)		(55		)		(46		)		(110		)
Lease termination fees, gross	285				558				806				1,566
Tenant funded landlord assets and lease incentives	522				831				910				2,694
Cash NOI adjustments in unconsolidated real estate JV	46				68				105				135
Same Properties NOI	$	73,268			$	71,977			$	144,994			$	141,887

	June 30, 2019				December 31, 2018
Reconciliation of total assets to adjusted book
Total assets	$	3,803,469			$	3,656,005
Accumulated depreciation	949,111				897,903
Accumulated depreciation included in assets held for sale	1,397				—
Accumulated amortization of real estate intangibles and deferred leasing costs	210,183				204,882
Accumulated amortization of real estate intangibles and deferred leasing costs included in assets held for sale	4				—
COPT’s share of liabilities of unconsolidated real estate JVs	30,588				29,917
COPT’s share of accumulated depreciation and amortization of unconsolidated real estate JVs	6,578				5,446
Less: Property - operating lease liabilities	(16,640		)		—
Less: Property - finance lease liabilities	(712		)		(660		)
Less: Cash and cash equivalents	(46,282		)		(8,066		)
Less: COPT’s share of cash of unconsolidated real estate JVs	(406		)		(293		)
Adjusted book	$	4,937,290			$	4,785,134
Reconciliation of debt outstanding to net debt and net debt plus preferred equity
Debt outstanding (excluding net debt discounts and deferred financing costs)	$	1,827,304			$	1,868,504
Less: Cash and cash equivalents	(46,282		)		(8,066		)
Less: COPT’s share of cash of unconsolidated real estate JVs	(406		)		(293		)
Net debt	$	1,780,616			$	1,860,145
Preferred equity	8,800				8,800
Net debt plus preferred equity	$	1,789,416			$	1,868,945

 

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