COPT Defense Properties (Corporate Office Properties Trust) — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. COPT is a REIT focused largely on office and data-center-shell properties serving U.S. government, defense and information-technology tenants, alongside a regional office portfolio. At quarter-end it reported 188 properties totaling 22.1 million square feet; occupancy was 91.6% and leased occupancy was 93.6%.
Financial results and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $185.8 million | $157.2 million | $381.3 million | $311.6 million |
| Income from continuing operations | $33.6 million | $43.2 million | $64.8 million | $36.3 million |
| Net income attributable to COPT common shareholders | $32.3 million | $42.4 million | $91.6 million | $35.7 million |
| Diluted EPS | $0.29 | $0.38 | $0.81 | $0.32 |
| Diluted FFO per share, as adjusted for comparability | $0.59 | $0.58 | $1.17 | $1.14 |
| Net cash from operating activities | — | $138.7 million | $138.0 million |
- Revenue growth chiefly reflected construction and other service revenues, which rose to $42.6 million in Q2 from $20.0 million and to $95.8 million for six months from $36.5 million. These activities are largely reimbursed subcontracting costs; service NOI was $1.3 million in Q2 and $2.8 million year to date.
- Real-estate NOI was $90.2 million in Q2, down from $90.8 million; six-month NOI was $177.4 million, down from $179.9 million. Same-property NOI declined $2.3 million in Q2 and $4.1 million for six months, mainly due to lower Regional Office occupancy. Average same-property occupancy was 91.6% in Q2 versus 93.7% a year earlier.
- Cash and cash equivalents were $20.7 million at June 30. Debt, net, was $2.18 billion, down from $2.27 billion at year-end 2021. The company reported $1.70 billion of total equity. Common dividends were $0.275 per share for Q2.
- Six-month investing cash flow was positive $34.9 million, including $220.8 million of property-sale proceeds; financing cash flow used $165.3 million, including $96.6 million of net debt repayments and $61.8 million of common dividends.
Material changes and unusual items
- On January 25, 2022, COPT sold its wholesale data center for $222.5 million, recording a $28.6 million gain in discontinued operations. The proceeds helped repay $200 million of term-loan borrowings and reduce revolver borrowings.
- Reported net income and EPS comparisons are affected by prior-period items: 2021 included real-estate sale gains and substantial losses on early debt extinguishment. Thus, six-month 2022 net income includes the data-center sale gain, while adjusted diluted FFO per share was $1.17 versus $1.14.
- During the first half, COPT placed 363,000 square feet in three newly developed properties into service; these properties were 99.0% leased at quarter-end. It had 12 properties under development and one operating-property expansion, expected to total approximately 1.9 million square feet upon completion.
Outlook, liquidity and risks
- No specific earnings or FFO guidance is provided in the filing. Management expected approximately $165 million of development and redevelopment spending during the remainder of 2022, most of which was contractually committed at June 30, and approximately $55 million for tenant improvements, capital improvements and leasing costs.
- Management expected to meet ordinary cash requirements primarily from operating cash flow. It planned to fund development needs and approximately $100 million of December 2022 debt maturities initially with revolver borrowings or new long-term debt, with possible repayment or capacity replenishment from property or data-center-shell interest sales, debt issuance or equity issuance. Management stated liquidity was adequate without requiring property sales.
- The $800 million revolving facility had $619 million available at June 30 and matures in March 2023, with two six-month extension options subject to conditions and fees. The company was compliant with debt covenants. Most debt was fixed-rate; management said interest-rate increases had not significantly affected it to date, with swaps hedging much of variable-rate exposure through 2022.
- Management cited inflation-driven increases in operating, construction, tenant-improvement and capital-improvement costs, which could pressure development yields or affect project and leasing decisions. It also identified interest rates, supply-chain conditions, government budget or shutdown risks, tenant demand and credit, development execution, financing access, cybersecurity and environmental requirements as risks.
- Management considered a loss of up to $3.8 million from certain municipal tax claims reasonably possible; it said this was not expected to materially affect financial position or liquidity, but could be material to results. A potential special-tax obligation related to approximately $31 million of tax-increment financing bonds was disclosed; management did not expect future shortfall funding to be required.
- The 2022 at-the-market equity program permits up to $300 million of common-share sales; no shares had been issued under it as of June 30. Management reported no material change to previously disclosed risk factors and no material litigation beyond ordinary-course matters.
Investor verification priorities
- Review occupancy and leasing trends, particularly Regional Office occupancy, lease expirations, tenant retention (61.9% for first-half renewals) and the 140,000-square-foot space cited as a same-property NOI headwind.
- Assess the quality and repeatability of earnings: separate property operations from construction pass-through revenue, the data-center disposition gain and prior-period debt-extinguishment and property-sale items.
- Verify funding plans and refinancing risk around the December 2022 maturities, March 2023 revolver maturity, development commitments and planned capital spending.
- Monitor whether inflation and construction costs affect development yields, project timing, leasing economics or tenant-improvement requirements.
- Track the municipal tax claims, the tax-increment financing obligation and any changes in the company’s expectation that no shortfall funding will be required.