COPT Defense Properties (Corporate Office Properties Trust) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed May 8, 2020. The combined filing covers COPT, a REIT, and its operating partnership, COPLP, which owns and conducts substantially all operations. COPT held 98.6% of COPLP’s common units.
Business context and operating performance
COPT owns, manages, leases and develops office and data-center properties, with a portfolio concentrated in locations serving U.S. government, defense and IT tenants. At quarter-end it had 171 properties totaling 19.4 million square feet, plus one wholesale data center. Defense/IT locations generated 87.7% of annualized rental revenue.
- The office and data-center-shell portfolio was 93.7% occupied and 94.9% leased, versus 92.9% occupied at December 31, 2019. Same-property average occupancy was 92.3%, up from 91.6% a year earlier.
- Quarterly leasing totaled 631,000 square feet; 89.0% of expiring space, including early renewals, was renewed.
- Management placed 230,000 square feet of newly developed data-center-shell space into service; it was fully leased at quarter-end. The wholesale data center was 76.9% leased; a 11.25-megawatt lease was due to expire in August 2020, with renewal negotiations underway.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue | $145.8 million | $148.9 million |
| Net income | $25.6 million | $22.3 million |
| Net income attributable to COPT common shareholders | $24.1 million; $0.21 per diluted share | $20.9 million; $0.19 per diluted share |
| Net cash from operating activities | $62.2 million | $54.7 million |
| Net cash used in investing activities | $114.5 million | $121.2 million |
| Net cash from financing activities | $197.0 million | $66.3 million |
| Debt, net | $2.077 billion | $1.831 billion at Dec. 31, 2019 |
| Cash and cash equivalents | $159.1 million | $14.7 million at Dec. 31, 2019 |
- Real-estate NOI was $83.8 million, essentially unchanged year over year; same-property NOI increased $1.9 million to $75.0 million.
- Revenue fell $3.1 million, primarily reflecting lower construction and other service revenue. Net income rose $3.2 million, helped by lower depreciation and interest expense, partly offset by a new $0.7 million credit-loss expense and lower interest and other income.
- Reported diluted FFO per share was $0.41 versus $0.50. FFO adjusted for comparability was $0.51 versus $0.50; the filing’s reconciliation includes a significant adjustment for an allocation to noncontrolling interests arising from a capital event.
- Q1 cash generation included increased operating cash flow, while financing included $245.6 million of net debt proceeds. Development and redevelopment spending was $92.8 million.
- At March 31, the $800 million revolving facility had $558 million available. COPT reported compliance with debt covenants; COPLP’s senior unsecured debt was investment grade with the three major rating agencies. COPT guarantees certain COPLP debt but is not itself directly obligated on it.
Material changes, outlook and risks
- On March 6, COPLP amended a term-loan facility, increasing its amount by $150 million and reducing its LIBOR spread; proceeds were used to repay revolving-facility borrowings. Debt nevertheless increased from year-end, with borrowings also supporting development and short-term capital needs.
- Management expected to spend approximately $220 million on development and $70 million on operating-property improvements and leasing costs during the remainder of 2020. It cited cash on hand, available revolver capacity, limited remaining-2020 debt maturities and potential joint-venture sales of data-center-shell interests as liquidity sources. No quantified earnings or FFO guidance is provided in the supplied filing text.
- COVID-19 created uncertainty around tenant operations, leasing, capital-market access, construction materials and labor, and project schedules. Management believed government- and defense-related tenants were relatively resilient, but Regional Office properties faced greater risk. Leasing activity had already been delayed; development was 78% leased as of April 30, though delays remained possible. Management could not estimate the pandemic’s financial impact and warned it could be material.
- Management assessed Regional Office properties for impairment because of COVID-related conditions; estimated undiscounted cash flows supported their carrying values, so no impairment was recorded in Q1.
- Interest-rate swaps had a $63.2 million liability at quarter-end, versus $25.7 million at year-end, contributing to a $37.7 million unrealized derivative loss in other comprehensive income. Approximately $6.0 million of derivative losses was expected to be reclassified to interest expense over the next 12 months.
- Management considered a loss of up to $3.1 million from certain municipal tax claims reasonably possible; it did not expect a material effect on financial position or liquidity, though results of operations could be affected. The filing also describes a tax-incremental-financing obligation and environmental indemnities.
- The EVP and COO resigned effective March 16, 2020; senior employees were covering the responsibilities while the company searched for a replacement.
Important facts for investors to verify
- Subsequent rent collections, tenant credit quality and leasing progress, particularly for Regional Office tenants and the wholesale data-center renewal.
- Whether COVID-19 changes occupancy, development schedules, expected 2020 spending or access to financing beyond the filing’s estimates.
- Debt maturities, variable-rate exposure, covenant headroom and the cost or collateral implications of the derivative liability.
- The assumptions and one-time capital-event allocation behind the difference between reported FFO and adjusted FFO.
- Developments in the municipal tax claims, tax-incremental-financing obligation and other disclosed contingencies.