COPT / Corporate Office Properties Trust — Q1 2015 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2015, with comparisons to Q1 2014. COPT is a REIT that conducts substantially all operations through Corporate Office Properties, L.P. The portfolio focuses on office and data-center properties serving U.S. government agencies and contractors, particularly in the Greater Washington, D.C./Baltimore region.
Key financial metrics
- Revenue: $161.0 million, up 9.8% from $146.7 million. Construction and other service revenue rose to $38.3 million from $21.8 million; rental revenue was nearly flat at $98.2 million.
- Profit: Operating income was $30.6 million versus $25.2 million; net income was $14.7 million versus $5.7 million. Net income attributable to COPT common shareholders was $9.8 million, or $0.10 per diluted share, compared with $0.3 million and reported diluted EPS of $0.00. Q1 2015 included a $4.0 million gain on land sales.
- REIT operating measures: Real-estate NOI was $72.0 million versus $75.1 million. Diluted FFO per share was $0.43 versus $0.48; adjusted diluted FFO per share was $0.45 versus $0.48. Management cautions that FFO is a supplemental, non-GAAP measure and not a measure of cash available for distributions or debt service.
- Cash flow: Operating cash flow was $41.9 million, down from $51.5 million. Investing used $118.4 million, including $56.6 million for acquisitions and $62.1 million for construction, development and redevelopment. Financing provided $74.8 million. Cash and cash equivalents ended the quarter at $4.4 million.
- Debt and liquidity: Debt, net, was $2.00 billion, up from $1.92 billion at year-end 2014. The $800 million revolving facility had $621.2 million available; weighted-average revolver interest was 1.45%. Management reported investment-grade senior unsecured ratings and compliance with debt covenants. Common distributions declared were $0.275 per share, unchanged year over year.
- Portfolio: Operating office occupancy was 91.3%, versus 90.9% at December 31, 2014; same-office occupancy was 90.7%. The wholesale data center had 9.0 MW operating, with 6.56 MW leased, and a further 11.25 MW under development was leased for staged operation during the remainder of 2015.
Material changes and notable activity
- Acquired the 367,000-square-foot, 96.2%-leased 250 W. Pratt Street property in Baltimore for $61.9 million, primarily financed with revolver borrowings.
- Placed 551,000 square feet of new or redeveloped office space into service; the properties were 100% leased at quarter-end. Sold land for $18.1 million and recorded $4.0 million in gains.
- Same-office NOI declined $1.6 million, while NOI from properties placed in service increased $2.7 million. Total real-estate NOI fell $3.1 million. Service-operation NOI decreased to $0.8 million from $3.2 million despite higher service revenue, reflecting the largely reimbursed, low-margin nature and timing variability of that activity.
- Cash from operations declined mainly because of timing of construction-project cash collections and payments. Depreciation and amortization fell by $12.0 million, primarily because the prior-year period included a $12.9 million depreciation charge after a property was removed from service for redevelopment.
- Issued 890,241 common shares through the ATM program at a weighted-average $30.29 per share, generating $26.6 million net proceeds.
Outlook, risks and unusual items
- Management expected to spend more than $180 million on construction and development and approximately $60 million on operating-property improvements during the remainder of 2015. It expected to fund development with cash on hand and revolver borrowings, and property improvements primarily with operating cash flow. Management stated it believed liquidity was adequate without requiring property sales.
- After quarter-end, on April 15, COPT completed the approximately $83 million acquisition of a 240,000-square-foot, fully leased property at 2600 Park Tower Drive in Vienna, Virginia, primarily using revolver borrowings.
- Significant debt issue: A $150 million nonrecourse mortgage loan secured by two Northern Virginia properties was in default. The properties totaled 665,000 square feet and were 36.4% occupied; their estimated fair value was below the loan balance. Since April 1, 2014, property cash flows went to the lender, and COPT expected to extinguish the debt by conveying the properties. The filing includes $2.0 million of incremental default interest for Q1 in its discussion of the defaulted loan.
- Debt maturities and refinancing remain relevant: contractual obligations included $336.8 million in 2015 balloon payments, including the defaulted mortgage, and $418.1 million in 2017. Some maturities may be extended subject to conditions. Interest-rate sensitivity analysis estimated a $611,000 quarterly increase in interest expense if one-month LIBOR were 1% higher, based on quarter-end variable-rate debt and swaps.
- Other risks include government budget reductions or shutdowns affecting tenant demand, development and leasing execution, financing availability and interest rates, joint-venture exposures, environmental requirements, and possible equity dilution. Management reported no material change to the prior annual report’s risk factors. No material litigation or material off-balance-sheet arrangements were reported.
Most important facts for investors to verify
- Progress and final resolution of the $150 million defaulted mortgage and transfer of the two collateral properties.
- Whether leased development space, including the 11.25 MW data-center commitments, enters service on schedule and produces expected occupancy and cash flow.
- Execution and funding of the 2015 construction, redevelopment and capital-improvement program, alongside the planned Vienna acquisition.
- Portfolio occupancy and same-office NOI trends, particularly in weaker submarkets and amid government-related demand risks.
- Debt maturities, revolver availability, interest-rate exposure, and the sustainability of distributions relative to operating cash flow and FFO.