COPT Defense Properties (Corporate Office Properties Trust) — Q2 2020 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2020; financial statements are unaudited. COPT is a REIT that conducts substantially all operations through Corporate Office Properties, L.P. (COPLP), in which COPT owned 98.6% of common units at quarter-end. The portfolio is concentrated in office and data center properties serving U.S. government, defense and IT tenants, with a smaller regional office portfolio.
At June 30, the portfolio included 174 properties totaling 19.8 million square feet, a 19.25-megawatt wholesale data center, 11 properties under development and expansions of three operating properties. COPT placed 642,000 square feet into service during the first half.
Financial and operating metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $144.8 million | $175.1 million | $290.6 million | $324.0 million |
| Net income | $25.1 million | $109.6 million | $50.7 million | $131.9 million |
| Net income attributable to COPT common shareholders | $23.5 million | $106.8 million | $47.6 million | $127.7 million |
| Diluted EPS | $0.21 | $0.95 | $0.42 | $1.15 |
| Real estate NOI | $84.1 million | $86.1 million | $167.9 million | $169.9 million |
| Diluted FFO per share | $0.51 | $0.52 | $0.92 | $1.02 |
| Diluted FFO per share, adjusted for comparability | $0.51 | $0.52 | $1.02 | $1.03 |
Revenue from real estate operations was broadly steady in the first half, while construction and other service revenue fell to $25.9 million from $59.2 million. Service-operation NOI was $1.1 million versus $1.9 million. Interest expense declined to $33.6 million for the first half from $37.1 million.
Operating cash flow was $136.5 million for the first half, up from $111.8 million. Investing cash outflow was $227.3 million, compared with $13.6 million, reflecting development spending and prior-year property-sale proceeds that did not recur. Financing provided $98.5 million, versus $59.4 million used in the prior-year period. Cash and cash equivalents were $21.6 million at quarter-end; cash plus restricted cash totaled $25.9 million.
At June 30, total assets were $4.01 billion and debt, net, was $2.01 billion, up from $1.83 billion at year-end 2019. The $800 million revolving facility had $631 million available. Debt fair value was $2.04 billion. COPT reported compliance with debt covenants. The quarterly common dividend was $0.275 per share; first-half dividends were $0.55 per share.
Material changes versus the prior comparable period
- Q2 net income and EPS were much lower than in 2019, mainly because the prior-year quarter included an $84.5 million gain on the sale of a 90% interest in seven data center shell properties. The current quarter had no comparable gain.
- Q2 total revenue decreased $30.3 million, primarily as construction and other service revenue declined $30.1 million. Real estate operating revenue was nearly flat.
- Same-property NOI decreased 0.2% in Q2 and increased 1.2% for the first half. First-half occupancy improved: the office and data center shell portfolio was 93.4% occupied and 94.5% leased, compared with 92.9% and 94.4% at year-end 2019.
- First-half FFO per share declined year over year; adjusted FFO per share was nearly unchanged. The adjusted measure includes specified comparability adjustments, including a first-half 2020 adjustment related to a capital event.
- Debt increased by approximately $181 million from year-end, including a March amendment that added $150 million to a term loan and reduced its LIBOR spread. Derivative liabilities rose to $65.6 million from $25.7 million at year-end.
Outlook, management commentary, risks and unusual items
- Management said COVID-19 had not significantly affected results through the filing date. It cited the concentration of rental revenue in Defense/IT locations—87.8% of annualized rental revenue—and the essential nature of many tenants’ operations as mitigants. Regional Office properties were viewed as more exposed to conventional office-market risks.
- Management reported $2.8 million of deferred lease payments, primarily involving Regional Office tenants and business-park amenity tenants. It also noted leasing delays and uncertainty around future vacancy, development schedules, tenant credit and longer-term remote-work effects. Regional Office properties were assessed for impairment; no impairment was recorded.
- As of the filing date, developments and expansions underway were 84% leased. Management expected to spend approximately $140 million on development and $45 million on operating-property improvements and leasing costs during the remainder of 2020. No formal earnings or FFO guidance is provided in the supplied filing text.
- A $300 million debt maturity falls in 2021; management expected to refinance it. The company also disclosed $169 million of 2023 revolver maturity that may be extended subject to conditions. Interest-rate swaps had a $65.6 million liability fair value; approximately $8.1 million of accumulated losses was expected to be reclassified to interest expense over the next 12 months.
- Potential municipal tax claim losses were assessed as reasonably possible up to $3.2 million; management said this was not expected to materially affect financial position or liquidity, though it could be material to results. A separate National Business Park tax-increment financing obligation had about $34 million of remaining bond principal; management did not expect future shortfall fundings to be significant.
- Management reported no material off-balance-sheet arrangements and no material litigation beyond ordinary-course matters. Paul R. Adkins resigned as COO in March 2020; a replacement search was underway.
Important facts for investors to verify
- Whether the 11.25-megawatt wholesale data center lease scheduled to expire in August 2020 was renewed, and the effect of the 0.75-megawatt tenant downsizing scheduled for July.
- Progress and cost of the planned 2020 development and property-improvement spending, including whether projects remain on schedule and leased.
- Refinancing terms and timing for the $300 million 2021 maturity, alongside available revolver capacity and covenant headroom.
- Subsequent changes in rent deferrals, credit-loss allowances and tenant collections as COVID-19 conditions evolve.
- Performance of Regional Office properties, any impairment indicators, and the outcome of the potential municipal tax claims.