COPT Reports Strong Second Quarter 2020 Results

Corporate Office Properties Trust (“COPT” or the “Company”) (NYSE: OFC) announced financial and operating results for the second quarter ended June 30, 2020.

Management Comments

Stephen E. Budorick, COPT’s President & Chief Executive Officer, commented, “The Company delivered strong second quarter results, with FFO per share exceeding the high-end of our guidance range by 1-cent. Cost savings and the timing of repair and maintenance costs more than offset the reserves we took on tenants impacted by the shutdowns and drove same-property cash NOI growth of 1.7%.” He continued, “Our operations and ability to execute development and renewal leasing continue to be minimally impacted by the pandemic due to the high concentration of U.S. Government national security activity in our portfolio. Accordingly, we affirm the $2.07 mid-point of our updated 2020 guidance for FFO per share, as adjusted for comparability.”

Financial Highlights

2^nd Quarter Financial Results:

• Diluted earnings per share (“EPS”) was $0.21 for the quarter ended June 30, 2020 as compared to $0.95 for the second quarter of 2019.

• Diluted funds from operations per share (“FFOPS”), as calculated in accordance with Nareit’s definition and as adjusted for comparability, was $0.51 for the second quarter of 2020 as compared to $0.52 for second quarter 2019 results.

Operating Performance Highlights

Operating Portfolio Summary:

• At June 30, 2020, the Company’s core portfolio of 172 operating office and data center shell properties was 93.6% occupied and 94.7% leased.

• During the quarter, the Company placed into service 412,000 square feet that were 97.5% leased.

Same-Property Performance:

• At June 30, 2020, COPT’s same-property portfolio of 152 buildings was 92.3% occupied and 93.5% leased.

• For the quarter and six months ended June 30, 2020, the Company’s same-property cash NOI increased 1.7% and 3.3%, respectively, over the prior year’s comparable periods.

Leasing:

• Total Square Feet Leased: For the quarter ended June 30, 2020, the Company leased 959,000 total square feet, including 613,000 square feet of renewals, 70,000 square feet of new leases on vacant space, and 276,000 square feet in development projects. For the six months ended June 30, 2020, the Company executed 1.6 million square feet of total leasing.

• Renewal Rates: During the quarter and six months ended June 30, 2020, the Company respectively renewed 75.6% and 81.0% of total expiring square feet.

• Cash Rent Spreads & Average Escalations on Renewing Leases: For the quarter and six months ended June 30, 2020, cash rents on renewed space decreased 3.2% and 2.0%, respectively. For the same time periods, annual escalations on renewing leases averaged 2.4%.

• Lease Terms: In the second quarter, lease terms averaged 5.2 years on renewing leases, 4.9 years on new leasing of vacant space, and 16.3 years on development leasing. For the first six months, lease terms averaged 5.1 years on renewing leases, 6.7 years on vacancy leasing, and 16.3 years on development leasing.

• DC-6: At the Company’s wholesale data center, COPT executed a new, 3.1 megawatt lease with a defense contractor in April, increasing DC-6 to 90.6% leased.

Investment Activity Highlights

Development & Redevelopment Projects:

• Development Pipeline: At July 7, 2020, the Company’s development pipeline consisted of 11 properties and expansions in three fully-operational properties totaling 1.9 million square feet that were 84% leased. These projects have a total estimated cost of $612.2 million, of which $379.1 million had been incurred as of June 30, 2020.

Balance Sheet and Capital Transaction Highlights

• As of June 30, 2020, the Company’s net debt plus preferred equity to adjusted book ratio was 38.8% and its net debt plus preferred equity to in-place adjusted EBITDA ratio was 6.4x. For the quarter ended June 30, 2020, the Company’s adjusted EBITDA fixed charge coverage ratio was 3.8x.

• As of June 30, 2020, and including the effect of interest rate swaps, the Company’s weighted average effective interest rate on its consolidated debt portfolio was 3.66% with a weighted average maturity of 3.0 years; additionally, 88.5% of the Company’s debt was subject to fixed interest rates.

2020 Guidance

Management is increasing its prior full-year guidance ranges of $0.65-$0.69 for EPS to a new range of $0.76-$0.80. Management is maintaining its full-year guidance ranges for FFOPS per Nareit and FFOPS, as adjusted for comparability, at $1.95-$1.99 and $2.05-$2.09, respectively.

Management also is establishing guidance for EPS and FFOPS, per Nareit and as adjusted for comparability, for the third quarter ending September 30, 2020 at ranges of $0.16-$0.18 and $0.51-$0.53, respectively; and for the fourth quarter ending December 31, 2020, management is establishing guidance ranges for EPS and FFOPS, per Nareit and as adjusted for comparability, at $0.17-$0.19 and $0.52-$0.54, respectively. Reconciliations of projected diluted EPS to projected FFOPS are as follows:

Table 1: Reconciliation of EPS to FFOPS, per Nareit and		Quarter ending						Quarter ending							Year ending
As Adjusted for Comparability		September 30, 2020						December 31, 2020							December 31, 2020
		Low			High			Low			High				Low				High
EPS		$	0.16		$	0.18		$	0.17		$	0.19			$	0.76			$	0.80
Real estate-related depreciation and amortization			0.35			0.35			0.35			0.35				1.29				1.29
FFO allocation to other noncontrolling interests resulting from capital event			-			-			-			-				(0.10	)			(0.10	)
FFOPS, Nareit definition			0.51			0.53			0.52			0.54				1.95				1.99
FFO allocation to other noncontrolling interests resulting from capital event			-			-			-			-				0.10				0.10
FFOPS, as adjusted for comparability		$	0.51		$	0.53		$	0.52		$	0.54			$	2.05			$	2.09

Associated Supplemental Presentation

Prior to the call, the Company will post a slide presentation to accompany management’s prepared remarks for its second quarter 2020 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 2020 results on its conference call tomorrow at 12:00 p.m. Eastern Time, details of which are listed below:

Conference Call Date:					Friday, July 31, 2020
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:					4686936

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 immediately available via webcast on the Investors website. Additionally, a telephonic replay of this call will be available beginning at 3:00 p.m. Eastern Time on Friday, July 31, through 3:00 p.m. Eastern Time on Friday, August 14. 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 4686936.

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.

About COPT

COPT is a REIT that owns, manages, leases, develops and selectively acquires office and data center properties. The majority of its portfolio is 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, 2020, the Company derived 88% of its core portfolio annualized rental revenue from Defense/IT Locations and 12% from its Regional Office Properties. As of the same date and including 15 properties owned through unconsolidated joint ventures, COPT’s core portfolio of 172 office and data center shell properties encompassed 19.6 million square feet and was 94.7% leased; the Company also owned one wholesale data center with a critical load of 19.25 megawatts that was 90.6% leased.

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 and the Company undertakes no obligation to update or supplement any forward-looking statements.

The areas of risk that may affect these expectations, estimates and projections include, but are not limited to, those risks described in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 and Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.

Category: Quarterly Results 

Source: Corporate Office Properties Trust

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,
		2020				2019				2020				2019
Revenues
Revenues from real estate operations		$	132,538			$	132,771			$	264,654			$	264,761
Construction contract and other service revenues		12,236				42,299				25,917				59,249
Total revenues		144,774				175,070				290,571				324,010
Operating expenses
Property operating expenses		50,204				47,886				100,203				97,331
Depreciation and amortization associated with real estate operations		33,612				34,802				66,208				69,598
Construction contract and other service expenses		11,711				41,002				24,832				57,328
General and administrative expenses		6,511				7,650				11,814				14,369
Leasing expenses		1,647				1,736				3,830				3,768
Business development expenses and land carry costs		1,262				870				2,380				1,983
Total operating expenses		104,947				133,946				209,267				244,377
Interest expense		(16,797		)		(18,475		)		(33,637		)		(37,149		)
Interest and other income		2,282				1,849				3,487				4,135
Credit loss expense		(615		)		—				(1,304		)		—
Gain on sales of real estate		—				84,469				5				84,469
Income before equity in income of unconsolidated entities and income taxes		24,697				108,967				49,855				131,088
Equity in income of unconsolidated entities		454				420				895				811
Income tax (expense) benefit		(30		)		176				(79		)		(18		)
Net income		25,121				109,563				50,671				131,881
Net income attributable to noncontrolling interests:
Common units in the Operating Partnership (“OP”)		(284		)		(1,339		)		(571		)		(1,596		)
Preferred units in the OP		(77		)		(165		)		(154		)		(330		)
Other consolidated entities		(1,263		)		(1,268		)		(2,395		)		(2,305		)
Net income attributable to COPT common shareholders		$	23,497			$	106,791			$	47,551			$	127,650
Earnings per share (“EPS”) computation:
Numerator for diluted EPS:
Net income attributable to COPT common shareholders		$	23,497			$	106,791			$	47,551			$	127,650
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		(109		)		(346		)		(206		)		(391		)
Numerator for diluted EPS		$	23,388			$	107,512			$	47,345			$	128,840
Denominator:
Weighted average common shares - basic		111,800				111,557				111,762				110,759
Dilutive convertible preferred units		—				176				—				—
Dilutive effect of redeemable noncontrolling interests		—				1,062				—				130
Common units in the OP		—				—				—				1,329
Dilutive effect of share-based compensation awards		321				310				280				289
Weighted average common shares - diluted		112,121				113,105				112,042				112,507
Diluted EPS		$	0.21			$	0.95			$	0.42			$	1.15

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,
		2020				2019				2020				2019
Net income		$	25,121			$	109,563			$	50,671			$	131,881
Real estate-related depreciation and amortization		33,612				34,802				66,208				69,598
Gain on sales of real estate		—				(84,469		)		(5		)		(84,469		)
Depreciation and amortization on unconsolidated real estate JVs		818				566				1,636				1,132
Funds from operations (“FFO”)		59,551				60,462				118,510				118,142
Noncontrolling interests - preferred units in the OP		(77		)		(165		)		(154		)		(330		)
FFO allocable to other noncontrolling interests		(1,525		)		(1,188		)		(13,540		)		(2,159		)
Basic FFO allocable to share-based compensation awards		(254		)		(229		)		(447		)		(414		)
Basic FFO available to common share and common unit holders (“Basic FFO”)		57,695				58,880				104,369				115,239
Dilutive preferred units in the OP		77				—				154				—
Redeemable noncontrolling interests		37				33				69				942
Diluted FFO available to common share and common unit holders (“Diluted FFO”)		57,809				58,913				104,592				116,181
Demolition costs on redevelopment and nonrecurring improvements		9				—				52				44
Executive transition costs		—				—				—				4
Non-comparable professional and legal expenses		—				311				—				311
FFO allocation to other noncontrolling interests resulting from capital event		—				—				11,090				—
Diluted FFO comparability adjustments allocable to share-based compensation awards		(1		)		(2		)		(51		)		(2		)
Diluted FFO available to common share and common unit holders, as adjusted for comparability		57,817				59,222				115,683				116,538
Straight line rent adjustments and lease incentive amortization		2,523				1,051				1,671				(616		)
Amortization of intangibles included in net operating income		(73		)		(50		)		(147		)		12
Share-based compensation, net of amounts capitalized		1,638				1,623				3,027				3,296
Amortization of deferred financing costs		642				529				1,217				1,057
Amortization of net debt discounts, net of amounts capitalized		390				374				776				744
Accum. other comprehensive loss on derivatives amortized to expense		—				33				—				67
Replacement capital expenditures		(16,132		)		(16,002		)		(33,886		)		(27,175		)
Other diluted AFFO adjustments associated with real estate JVs		(115		)		181				(156		)		214
Diluted adjusted funds from operations available to common share and common unit holders (“Diluted AFFO”)		$	46,690			$	46,961			$	88,185			$	94,137
Diluted FFO per share		$	0.51			$	0.52			$	0.92			$	1.02
Diluted FFO per share, as adjusted for comparability		$	0.51			$	0.52			$	1.02			$	1.03
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, 2020				December 31, 2019
Balance Sheet Data
Properties, net of accumulated depreciation								$	3,513,099			$	3,340,886
Total assets									4,011,325				3,854,453
Debt, per balance sheet									2,012,019				1,831,139
Total liabilities									2,331,253				2,105,777
Redeemable noncontrolling interests									23,148				29,431
Equity									1,656,924				1,719,245
Net debt to adjusted book									38.6	%			36.8	%
Core Portfolio Data (as of period end) (1)
Number of operating properties									172				168
Total operational square feet (in thousands)									19,624				19,016
% Occupied									93.6	%			93.1	%
% Leased									94.7	%			94.6	%
		For the Three Months Ended June 30,						For the Six Months Ended June 30,
		2020			2019			2020				2019
Payout ratios
Diluted FFO		53.9	%		52.7	%			59.6	%			53.5	%
Diluted FFO, as adjusted for comparability		53.9	%		52.4	%			53.9	%			53.3	%
Diluted AFFO		66.8	%		66.1	%			70.7	%			66.0	%
Adjusted EBITDA fixed charge coverage ratio		3.8x			3.7x			3.8x				3.7x
Net debt to in-place adjusted EBITDA ratio (2)		6.4x			5.7x				N/A				N/A
Net debt plus preferred equity to in-place adjusted EBITDA ratio (3)		6.4x			5.7x				N/A				N/A
Reconciliation of denominators for per share measures
Denominator for diluted EPS		112,121			113,105				112,042				112,507
Weighted average common units		1,237			1,327				1,232				—
Redeemable noncontrolling interests		157			(926	)			133				907
Dilutive convertible preferred units		176			(176	)			176				—
Denominator for diluted FFO per share and as adjusted for comparability		113,691			113,330				113,583				113,414

(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,
		2020				2019				2020				2019
Reconciliation of common share dividends to dividends and distributions for payout ratios
Common share dividends - unrestricted shares and deferred shares		$	30,761			$	30,693			$	61,515			$	61,378
Common unit distributions - unrestricted units		341				365				680				730
Distributions on dilutive preferred units		77				—				154				—
Dividends and distributions for payout ratios		$	31,179			$	31,058			$	62,349			$	62,108
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		$	25,121			$	109,563			$	50,671			$	131,881
Interest expense		16,797				18,475				33,637				37,149
Income tax expense (benefit)		30				(176		)		79				18
Depreciation of furniture, fixtures and equipment		448				496				867				929
Real estate-related depreciation and amortization		33,612				34,802				66,208				69,598
Gain on sales of real estate		—				(84,469		)		(5		)		(84,469		)
Adjustments from unconsolidated real estate JVs		1,270				830				2,540				1,657
EBITDAre		77,278				79,521				153,997				156,763
Net loss (gain) on other investments		2				(12		)		2				(400		)
Credit loss expense		615				—				1,304				—
Business development expenses		678				460				1,216				1,008
Non-comparable professional and legal expenses		—				311				—				311
Demolition costs on redevelopment and nonrecurring improvements		9				—				52				44
Executive transition costs		—				—				—				4
Adjusted EBITDA		78,582				80,280				$	156,571			$	157,730
Proforma net operating income adjustment for property changes within period		959				(1,981		)
Change in collectability of deferred rental revenue		1,007				—
In-place adjusted EBITDA		$	80,548			$	78,299
Reconciliation of interest expense to the denominators for fixed charge coverage-Adjusted EBITDA
Interest expense		$	16,797			$	18,475			$	33,637			$	37,149
Less: Amortization of deferred financing costs		(642		)		(529		)		(1,217		)		(1,057		)
Less: Amortization of net debt discounts, net of amounts capitalized		(390		)		(374		)		(776		)		(744		)
Less: Accum. other comprehensive loss on derivatives amortized to expense		—				(33		)		—				(67		)
COPT’s share of interest expense of unconsolidated real estate JVs, excluding deferred financing costs		442				258				883				513
Scheduled principal amortization		1,023				1,095				2,044				2,193
Capitalized interest		3,174				2,388				6,532				4,392
Preferred unit distributions		77				165				154				330
Denominator for fixed charge coverage-Adjusted EBITDA		$	20,481			$	21,445			$	41,257			$	42,709

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,
		2020				2019				2020				2019
Reconciliations of tenant improvements and incentives, building improvements and leasing costs for operating properties to replacement capital expenditures
Tenant improvements and incentives		$	8,870			$	8,568			$	20,227			$	15,720
Building improvements		13,662				4,333				16,137				8,864
Leasing costs		2,222				2,761				4,984				5,943
Net additions to tenant improvements and incentives		329				1,759				2,355				290
Excluded building improvements and leasing costs		(8,951		)		(1,419		)		(9,817		)		(3,642		)
Replacement capital expenditures		$	16,132			$	16,002			$	33,886			$	27,175
Same Properties cash NOI		$	75,837			$	74,584			$	150,799			$	145,992
Straight line rent adjustments and lease incentive amortization		(1,513		)		(701		)		(2,080		)		(15		)
Amortization of acquired above- and below-market rents		97				73				193				33
Amortization of below-market cost arrangements		(23		)		(23		)		(46		)		(46		)
Lease termination fees, gross		358				285				443				806
Tenant funded landlord assets and lease incentives		(147		)		530				222				926
Cash NOI adjustments in unconsolidated real estate JV		35				46				63				105
Same Properties NOI		$	74,644			$	74,794			$	149,594			$	147,801

		June 30, 2020				December 31, 2019
Reconciliation of total assets to adjusted book
Total assets		$	4,011,325			$	3,854,453
Accumulated depreciation		1,065,094				1,007,120
Accumulated amortization of real estate intangibles and deferred leasing costs		216,267				212,547
COPT’s share of liabilities of unconsolidated real estate JVs		50,984				50,734
COPT’s share of accumulated depreciation and amortization of unconsolidated real estate JVs		9,815				8,164
Less: Property - operating lease liabilities		(20,796		)		(17,317		)
Less: Property - finance lease liabilities		(688		)		(702		)
Less: Cash and cash equivalents		(21,596		)		(14,733		)
Less: COPT’s share of cash of unconsolidated real estate JVs		(627		)		(498		)
Adjusted book		$	5,309,778			$	5,099,768
Reconciliation of debt outstanding to net debt and net debt plus preferred equity
Debt outstanding (excluding net debt discounts and deferred financing costs)		$	2,073,351			$	1,893,057
Less: Cash and cash equivalents		(21,596		)		(14,733		)
Less: COPT’s share of cash of unconsolidated real estate JVs		(627		)		(498		)
Net debt		$	2,051,128			$	1,877,826
Preferred equity		8,800				8,800
Net debt plus preferred equity		$	2,059,928			$	1,886,626

 

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