Business context and reporting period
Corporate Office Properties Trust (COPT; NYSE: OFC), a REIT focused primarily on office and data center properties serving U.S. government, defense and information technology tenants, filed this unaudited Form 10-Q for the quarter ended September 30, 2021. The filing compares the three and nine months ended September 30, 2021 with the corresponding 2020 periods.
At quarter-end, the portfolio included 186 properties totaling 21.7 million square feet, a 19.25-megawatt wholesale data center and 13 properties under development. The office and data center shell portfolio was 93.3% occupied and 94.6% leased.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $174.6 million | $154.8 million | $500.8 million | $445.3 million |
| Net income (loss) | $28.8 million | $(31.3) million | $66.6 million | $19.3 million |
| Net income (loss) attributable to common shareholders per diluted share | $0.24 | $(0.29) | $0.56 | $0.14 |
| Real estate NOI | $90.5 million | $84.6 million | $270.3 million | $252.5 million |
| Adjusted diluted FFO per share | $0.57 | $0.54 | $1.71 | $1.56 |
Nine-month operating cash flow was $199.9 million, up from $159.0 million. Investing activities used $112.0 million, versus $396.2 million in 2020; financing activities used $91.8 million, versus $233.7 million provided in 2020. Cash and cash equivalents were $14.6 million at September 30.
Debt, net, was $2.160 billion, compared with $2.087 billion at December 31, 2020; reported debt fair value was $2.203 billion. The $800 million revolving facility had $790 million available. COPT reported compliance with financial covenants. The quarterly dividend was $0.275 per share.
Material changes versus prior periods
- Revenue rose 12.8% in Q3 and 12.4% for the first nine months. Nine-month real estate NOI increased $17.8 million; same-property NOI increased $3.7 million, while new properties placed in service contributed $20.9 million of incremental NOI.
- Same-property occupancy averaged 92.0% in Q3 versus 92.8% a year earlier; the nine-month averages were 92.4% and 92.7%. Management attributed NOI growth mainly to higher rents, partly offset by lower occupancy.
- Nine-month GAAP results included a $39.7 million gain on the sale of a 90% interest in two data center shells and a $59.6 million loss on early debt extinguishment. The 2020 comparison included a $53.2 million derivative loss. These items materially affect comparisons of reported net income.
- COPT issued $600 million of 2.75% notes due 2031 and $400 million of 2.00% notes due 2029, while tendering or redeeming $600 million of higher-coupon notes. It also repaid $100 million of term debt and paid off a construction loan. A $100 million sale of a 90% interest in two data center shells generated $106.9 million of proceeds, used to repay revolver borrowings.
- Operating cash flow improved, while development and redevelopment spending declined year over year. COPT placed 709,000 square feet in six newly developed properties into service; those properties were 90.4% leased at quarter-end.
Outlook, risks and unusual items
The filing provides no formal earnings or FFO guidance. Management expected to spend approximately $85 million on development and $40 million on operating-property improvements and leasing costs during the remainder of 2021, initially funding development largely with revolver borrowings. Management stated that liquidity and capital resources were adequate for near- and longer-term needs without requiring property sales.
Management said COVID-19 had not significantly affected results or rent collections to date, citing the portfolio’s Defense/IT concentration, but noted uncertainty around future tenant demand, leasing pace, development schedules, capital access and office-space demand. It viewed Regional Office properties as more exposed than Defense/IT properties. Other stated risks include government budget actions, interest rates and refinancing, development costs and execution, joint-venture partner performance, cyber risks and environmental requirements.
Potential contingencies include up to $3.4 million of reasonably possible municipal tax claim losses; management said these were not expected to materially affect financial position or liquidity but could be material to results. COPT also disclosed approximately $31 million of tax-increment financing bonds tied to National Business Park and did not expect to fund future shortfalls. On October 22, 2021, it acquired for a nominal amount land underlying a property for which it had recorded a $37.8 million finance right-of-use asset. The filing also describes November 1, 2021 change-in-control and severance letters for two executives.
Investor verification priorities
- Assess recurring earnings and cash generation separately from the data-center-shell sale gain, debt-extinguishment losses and prior-year derivative loss; compare GAAP income with FFO and adjusted FFO.
- Review debt maturities, variable-rate exposure and refinancing needs, including the $300 million term-loan maturity in 2022 and the revolving facility’s March 2023 maturity. Check the effect of interest-rate changes and hedge positions.
- Track occupancy, leasing and rent trends, particularly Regional Office occupancy and the 11.25-megawatt wholesale data-center lease that remains in place pending renewal or termination.
- Monitor development commitments, leasing of newly delivered space, project costs and completion schedules, as well as the stated remaining-2021 spending estimates.
- Follow tenant credit and collections, COVID-related effects, government demand and budgets, and the outcome of municipal tax claims and other contingencies.