COPT Defense Properties (Corporate Office Properties Trust) — Q1 2013 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2013. COPT is a REIT focused on office and data-center properties serving U.S. government agencies and defense contractors, primarily in the Greater Washington, D.C./Baltimore region. At quarter-end it had 210 operating office properties totaling 19.1 million square feet, plus development projects and a partially operational wholesale data center.
Key financial results
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Total revenue | $131.0 million | $132.2 million |
| Operating income | $35.7 million | $36.2 million |
| Income from continuing operations | $9.1 million | $12.7 million |
| Net income | $15.3 million | $10.2 million |
| Net income attributable to common shareholders | $8.9 million | $6.3 million |
| Diluted EPS | $0.11 | $0.09 |
| Operating cash flow | $47.3 million | $43.8 million |
| Basic and diluted FFO | $38.2 million | $44.4 million |
| Diluted FFO per share | $0.45 | $0.59 |
| Diluted FFO per share, adjusted for comparability | $0.48 | $0.53 |
Rental revenue rose to $95.3 million from $89.9 million, while construction and other service revenue fell to $14.3 million from $21.5 million. Real-estate NOI was $78.0 million, down from $78.8 million; NOI margin on real-estate operations revenue was approximately 63.9%, versus 62.8%. Operating margin on total revenue was approximately 27.2%, versus 27.4%. Dividends declared were $0.275 per common share in both periods.
Balance sheet, debt and liquidity
- Total assets were $3.69 billion at March 31, 2013. Debt, net, was $1.96 billion, down from $2.02 billion at December 31, 2012.
- Cash and cash equivalents were $23.5 million; restricted cash and marketable securities were $17.0 million. The $800 million revolving facility had $792.3 million available.
- Operating cash flow was $47.3 million; investing activities used $60.2 million; financing activities provided $25.8 million. Cash increased $12.9 million during the quarter.
- In March, COPT issued 4.485 million common shares at $26.34 per share, generating approximately $118.1 million net proceeds before offering expenses. It repaid $53.7 million principal of its 4.25% exchangeable senior notes, recording a $5.3 million extinguishment loss.
- Debt maturities and scheduled principal payments totaled approximately $1.96 billion, excluding interest, through the periods shown in the filing. Management said it expected to refinance 2013–2014 balloon maturities primarily with credit facilities and secured or unsecured debt.
Changes, outlook and notable items
- Same-office NOI increased by $2.0 million; same-office occupancy improved to 88.8% from 87.7% a year earlier. Total portfolio occupancy was 87.6%, slightly below 87.8% at year-end 2012. The average contractual annual rental rate was $27.97 per square foot.
- Three newly constructed properties totaling 236,000 square feet were placed in service and were fully leased. Nine office properties were under construction or contractually committed, estimated at 1.1 million square feet, with one additional 183,000-square-foot redevelopment underway. Management expected to spend more than $180 million on construction and development and about $50 million on operating-property improvements during the rest of 2013.
- Management stated that liquidity and capital resources were adequate for near- and longer-term needs, while also expecting property sales under its Strategic Reallocation Plan during 2013. The filing gives no earnings or FFO guidance.
- Net income benefited from $3.8 million of discontinued-operations income and a $2.4 million gain on a land condemnation; continuing-operations income declined year over year. Q1 2013 included a $1.9 million noncash impairment. The prior-year period included impairment recoveries and significant discontinued-operation items. A joint venture with defaulted mortgage debt remained in foreclosure proceedings; COPT had discontinued equity-method loss recognition in October 2012.
- On April 22, 2013, COPT redeemed all Series J preferred shares for $84.8 million plus accrued dividends, using proceeds from the common-share offering. The redemption also reduced income available to common shareholders by $2.9 million for original issuance costs.
- Principal risks include government budget cuts or shutdowns affecting tenant demand and lease renewals, real-estate and development execution, financing and interest-rate exposure, property dispositions, joint-venture obligations, environmental requirements and potential dilution from equity issuance. COPT reported compliance with debt covenants and no material change in risk factors or internal controls.
Important investor verification points
- Confirm the effect of the April preferred-share redemption on future dividends, liquidity and common-shareholder earnings.
- Review debt maturity and refinancing needs, particularly 2013 and 2014 maturities and the large 2015 maturities, along with variable-rate exposure.
- Track office occupancy, lease renewals, government-related tenant demand and progress leasing the data center.
- Assess whether planned development spending and Strategic Reallocation Plan sales proceed as expected, and monitor further impairments.
- Review the joint venture foreclosure, guarantees and other contingent funding obligations, including the disclosed guarantee maximum of approximately $64 million before recoveries under an indemnity.
- Note that the 2012 comparative financial statements were revised for prior-period accounting errors and presentation changes; Q1 2012 net income was revised upward by $3.3 million versus the previously reported amount. Compare using the revised figures in this filing.