Business context and reporting period
Corporate Office Properties Trust (COPT; NYSE: OFC) and its operating partnership filed this combined unaudited Form 10-Q for the quarter ended September 30, 2020. COPT is a REIT focused on office and data-center properties, with most portfolio revenue tied to U.S. Government, defense and IT customers. At quarter-end, the portfolio comprised 176 properties and was 93.8% occupied and 94.4% leased.
Financial performance and position
- Revenue: Third-quarter revenue was $154.8 million, down 2.9% from $159.4 million. Lease revenue rose to $133.9 million from $129.5 million, while construction and other service revenue declined to $20.3 million from $28.7 million. Nine-month revenue was $445.3 million versus $483.4 million.
- Profit and per-share results: Third-quarter net loss attributable to COPT common shareholders was $31.8 million, or $0.29 per share, compared with net income of $21.3 million, or $0.19 per share, a year earlier. Nine-month attributable income was $15.7 million, or $0.14 per share, versus $148.9 million, or $1.34 per share. The comparisons were affected by derivative and debt-extinguishment losses in 2020 and a large property-sale gain in 2019.
- Operating performance: Third-quarter real estate NOI was $84.6 million, up from $82.6 million; nine-month NOI was essentially flat at $252.5 million. Same-property NOI declined 1.6% in the quarter and rose 0.3% for nine months. Diluted FFO per share was $0.04 for the quarter and $0.97 for nine months; as adjusted for comparability, it was $0.54 and $1.56, respectively, versus $0.51 and $1.53 in 2019.
- Cash flow and investment: Nine-month operating cash flow was $159.0 million, compared with $157.0 million. Investing activities used $396.2 million, including $284.4 million for development and redevelopment and $53.1 million to settle interest-rate swaps. Financing provided $233.7 million. Cash and restricted cash totaled $14.7 million at period-end.
- Debt and liquidity: Debt, net, was $2.182 billion, up from $1.831 billion at year-end 2019. The $800 million revolving facility had $743 million available at September 30. The company issued $400 million of 2.25% notes due 2026 and repurchased $122.9 million of 3.70% notes due 2021; it redeemed the remaining $177.1 million in October. Management reported compliance with debt covenants.
- Margins and distributions: Construction/service operations generated $1.1 million of NOI in the quarter and $2.2 million year to date; management noted these activities have small margins. The quarterly common-share dividend was $0.275.
Changes, outlook, risks and unusual items
- Quarterly results included a $53.2 million loss on interest-rate derivatives after the company discontinued hedge accounting for swaps tied to forecast borrowings that were no longer probable. The swaps were cash-settled for $53.1 million. The filing estimates another $4.8 million of derivative losses will be reclassified to interest expense over the next 12 months.
- The company recorded a $3.2 million loss on early extinguishment of debt in the quarter and approximately $4 million more when the remaining 2021 notes were redeemed in October. A $1.5 million impairment reflected a decision not to proceed with a Baltimore development.
- Management said COVID-19 had not significantly affected results to date, while identifying greater exposure in Regional Office properties than in Defense/IT locations. Same-property NOI reflected higher collectability-loss provisions and lower parking revenue. Approximately $2.6 million of lease receivables were under deferred-payment arrangements, generally repayable by 2021. Remote-work trends, tenant conditions, leasing delays, development schedules and capital-market access remain uncertain.
- Development activity continued: 1.2 million square feet were placed in service during the first nine months. Eleven properties and one expansion were under development at quarter-end; these projects were 84% leased as of the filing date. Management expected to spend about $75 million on development and $30 million on operating-property improvements and leasing costs during the remainder of 2020. No formal earnings guidance was provided.
- On October 30, 2020, the company sold a 90% interest in two Virginia data-center shell properties for $81 million, retaining 10%; proceeds were used to repay revolver borrowings. As of the filing date, it also had a firm commitment to sell an 80% interest in an unconsolidated joint venture for approximately $61 million.
- Potential contingencies include municipal tax claims with a reasonably possible loss of up to $3.1 million, which management said could be material to results but not to financial position or liquidity. The company also disclosed a $33 million tax-incremental-financing bond balance tied to National Business Park; it did not expect to fund future shortfalls. Management cited COVID-19, government spending or shutdowns, tenant demand, interest rates, development execution and refinancing as risks.
Important facts for investors to verify
- Whether occupancy, leasing and collections remain resilient, particularly in Regional Office properties and among tenants receiving payment deferrals.
- Whether ongoing and planned development spending, leasing progress and the two disclosed property/joint-venture transactions proceed as expected.
- The effects of higher debt, the October 2021-note refinancing and derivative settlements on interest expense, liquidity and future cash distributions.
- How COVID-19, remote-work trends and U.S. Government or contractor demand affect rental revenue, property values and operating cash flow.
- Updates on the municipal tax claims, the tax-incremental-financing obligation and any other material contingencies.