COPT (Corporate Office Properties Trust) — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed February 12, 2021. This is an annual report, not a standalone fourth-quarter report. COPT is a REIT and conducts substantially all operations through Corporate Office Properties, L.P. (COPLP). The portfolio focuses on office and data center properties serving U.S. government (USG) and defense/IT tenants.
Business context and operating performance
- At year-end, the portfolio comprised 181 office and data center shell properties totaling 21.0 million square feet, one wholesale data center with 19.25 MW of critical load, 11 properties under development totaling an estimated 1.5 million square feet, and approximately 830 acres controlled for future development.
- Defense/IT locations generated approximately 87% of office and data center shell annualized rental revenue. The USG accounted for 34.1% of annualized rental revenue; the ten largest tenants together accounted for 62.7%.
- Office and data center shell occupancy increased to 94.1% from 92.9% at year-end 2019, and leasing increased to 94.8% from 94.4%. The wholesale data center was 86.7% leased, up from 76.9%.
Financial results and key metrics
| Metric | 2020 | 2019 | Change / context |
|---|---|---|---|
| Total revenue | $609.4 million | $641.2 million | Down $31.9 million; construction and other service revenue fell $43.1 million, while real estate revenue rose $11.3 million. |
| Real estate revenue | $538.7 million | $527.5 million | Up $11.3 million. |
| Net income | $102.9 million | $200.0 million | Down $97.1 million; includes material derivative and debt-refinancing charges and lower real estate-sale gains. |
| Net income attributable to COPT common shareholders; diluted EPS | $97.4 million; $0.87 | $191.7 million; $1.71 diluted | Reported basic EPS was $0.87 in 2020 versus $1.72 in 2019. |
| NOI from real estate operations | $341.8 million | $335.0 million | Up $6.8 million; Same Properties NOI increased $0.8 million, or 0.3%. |
| Net cash from operating activities | $238.4 million | $228.6 million | Up $9.9 million, or 4.3%. |
| Cash used in investing activities | $325.8 million | $138.0 million | Higher use of cash, including development spending and $53.1 million cash settlement of interest rate swaps. |
| Debt, net | $2.087 billion | $1.831 billion | Year-end debt increased; average outstanding debt was approximately $2.1 billion. |
| Cash and cash equivalents | $18.4 million | $14.7 million | Additionally, $657.0 million was available under the $800 million revolving facility. |
Weighted average effective debt interest rate was approximately 3.6% in 2020 versus 4.1% in 2019. COPT declared $1.10 per common share in dividends for 2020, unchanged from 2019.
Material changes and unusual items
- Net income declined primarily because COPT recorded a $53.2 million loss on interest rate derivatives after forecast borrowing transactions were no longer considered probable, and because gains on real estate sales fell by $75.0 million. A separate $29.4 million gain arose from selling interests in an unconsolidated real estate joint venture.
- COPT issued $400 million of 2.25% senior notes due 2026 and used proceeds in part to purchase and redeem $300 million of 3.70% notes due 2021. The early extinguishment generated a $7.3 million loss. The company reported no debt maturing in 2021.
- Development and redevelopment spending totaled $344.4 million in cash. COPT placed a record 1.8 million square feet in newly developed properties into service; properties under development were 84% leased at year-end.
- Sales of data center property interests generated approximately $143 million of proceeds in 2020. COPT retained minority interests in the properties through joint ventures.
Outlook, risks and contingencies
- Management said COVID-19 had not significantly affected 2020 results, citing the essential nature of many Defense/IT tenants and continued USG-funded contractor work. However, restrictive measures and uncertainty reduced or delayed vacant-space leasing, and management identified greater pandemic-related exposure in the Regional Office portfolio.
- For 2021, COPT expected to spend $275–$300 million on development and approximately $85 million on improvements and leasing costs for operating properties. It expected to fund development initially primarily with revolving-credit borrowings. These are management estimates, not guaranteed results.
- Key risks include reliance on government spending and appropriations, tenant and geographic concentration, potential lease nonrenewals or terminations, office demand changes including remote work, COVID-19 effects, development execution and financing availability, interest-rate and LIBOR transition exposure, and REIT qualification and distribution requirements.
- Approximately 9.0% of total annualized rental revenue was scheduled to expire in 2021 across operating properties. Most USG leases include one-year renewal options and/or early termination rights, making lease-term estimates a significant accounting judgment and an auditor-identified critical audit matter.
- Management reported compliance with debt covenants and no material off-balance-sheet arrangements. It disclosed a reasonably possible loss of up to $3.1 million on certain municipal tax claims; management said this was not expected to materially affect financial position or liquidity, though it could be material to results. No material litigation was reported.
Important facts for investors to verify
- Whether high occupancy and leasing levels persist, and how the 2021 lease expirations and renewal terms affect rents, tenant-improvement costs and occupancy.
- The USG and top-tenant concentration, including appropriations exposure and the renewal or termination terms of government leases.
- Development completion, lease-up and funding for the planned 2021 capital program, as well as the economics and recurring impact of data center joint-venture sales.
- Debt maturities, variable-rate exposure, available revolver capacity and refinancing needs beginning in 2022; reported debt was approximately $2.1 billion.
- Cash generation and dividend coverage: reported 2020 net income and FFO were affected by unusual derivative, debt-extinguishment and property-sale items; FFO is a non-GAAP measure and is not equivalent to cash available for distributions.