COPT Defense Properties (Corporate Office Properties Trust) — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; unaudited. Unless noted, dollar amounts are in millions. The company owns, leases and develops office and data-center-shell properties, with most of its portfolio serving U.S. government, defense and IT tenants.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $169.2 | $185.8 | $336.7 | $381.3 |
| Lease revenue | $153.7 | $142.3 | $304.2 | $283.7 |
| Net income | $31.6 | $33.6 | $112.0 | $94.4 |
| Net income attributable to common shareholders | $30.3 | $32.3 | $109.1 | $91.6 |
| Diluted EPS | $0.27 | $0.29 | $0.96 | $0.81 |
| NOI from real estate operations | $95.0 | $90.2 | $188.9 | $177.4 |
| Diluted FFO per share | $0.60 | $0.59 | $1.19 | $1.17 |
| Cash provided by operating activities | — | — | $140.9 | $138.7 |
- Q2 total revenue fell 8.9%, largely because construction and other service revenue declined to $14.2 million from $42.6 million. Real estate revenue increased 8.2%. Management said the service-revenue decline reflected lower construction activity for one tenant; service margins are small.
- Q2 real estate NOI increased 5.3%; same-property NOI rose $2.6 million, supported by higher occupancy and tenant expense reimbursements. Six-month real estate NOI increased 6.5%.
- Six-month net income included a $49.4 million gain on the sale of a 90% interest in three Northern Virginia data-center shells. The prior-year period included $29.6 million of discontinued-operations income, including a gain on sale of a wholesale data center. Excluding these items, reported net-income comparisons are not directly like-for-like.
Portfolio, balance sheet and liquidity
- At June 30, the portfolio was 93.4% occupied and 94.9% leased; occupancy was 92.7% at December 31, 2022. Defense/IT occupancy was 95.3%, while Regional Office occupancy was 74.8%, down from 79.0% at year-end.
- The company leased 1.7 million square feet during the first half, with an 82.7% tenant retention rate. Annualized rental revenue per occupied square foot was $34.31, versus $33.16 at year-end.
- Total assets were $4.25 billion; debt, net, was $2.18 billion, compared with $2.23 billion at year-end. Cash and cash equivalents were $14.3 million. The $600 million revolving facility had $429 million available.
- Debt maturities include approximately $742.3 million in 2026 and $1.40 billion thereafter. The company reported compliance with debt covenants and investment-grade ratings from the three major rating agencies.
- Interest expense rose to $33.0 million for the first half from $29.2 million. Debt is predominantly fixed-rate; management estimated a 1 percentage-point increase in variable-rate index rates would have added $0.5 million to first-half interest expense, after considering swaps.
- First-half development and other property additions totaled $182.7 million. Cash used in investing activities was $16.4 million, versus $34.9 million provided in the prior period. The company paid $63.0 million of common-share dividends and declared $0.285 per share for Q2.
Outlook, risks and unusual items
- No formal earnings or FFO guidance is stated in the provided filing text. Management said it expects liquidity and capital resources to meet requirements without requiring property sales, while retaining the option to sell property interests opportunistically.
- For the remainder of 2023, management expects approximately $130 million of development spending, most contractually obligated as of June 30, and approximately $45 million for tenant improvements, capital improvements and leasing costs. Development spending is expected to be funded partly from operating cash flow and initially primarily through revolver borrowings.
- The company expects operating cash flow to fund ongoing requirements other than debt balloon payments and part of development costs. There are no debt balloon payments due in the remainder of 2023.
- Key stated risks include interest rates and refinancing costs, government shutdowns or budget reductions affecting government tenants, office and data-center demand, development execution and costs, joint-venture risks, cyber incidents, environmental requirements and potential dilution from equity issuance.
- Management said a loss of up to $4.2 million on certain municipal tax claims is reasonably possible; it could be material to results of operations but is not expected to materially affect financial position or liquidity. No material adverse environmental liability was identified. The company does not expect to fund shortfalls on approximately $29 million of National Business Park tax-increment financing bonds.
Important facts for investors to verify
- Whether occupancy and leasing momentum in Defense/IT properties offsets continued weakness in Regional Office occupancy.
- Development spending, project delivery and leasing progress, including the expected $130 million of remaining-2023 development costs.
- How refinancing or extension of 2026 maturities and variable-rate exposure affect interest expense and liquidity.
- The sustainability of operating cash flow and dividends relative to development, leasing and debt-service needs.
- Final outcome and financial effect of the municipal tax claims, and whether government funding or tenant demand changes materially.