COPT Defense Properties (Corporate Office Properties Trust) — Q1 2017 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2017. COPT is a REIT whose operating business is conducted primarily through Corporate Office Properties, L.P. The portfolio focuses on office and data center properties, particularly locations supporting U.S. government, defense and information technology tenants. At quarter-end, it included 164 operating office properties totaling 17.1 million square feet, a 19.25-megawatt wholesale data center, and development or redevelopment projects estimated at approximately 1.3 million square feet.
Financial and operating performance
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Total revenue | $139.8 million | $144.3 million, down 3.1% |
| Operating income | $35.4 million | $30.5 million |
| Net income | $23.1 million | $8.1 million |
| Net income attributable to common shareholders; diluted EPS | $18.2 million; $0.18 | $3.3 million; $0.03 |
| NOI from real estate operations | $79.5 million | $81.2 million, down $1.7 million |
| Diluted FFO per share | $0.51 | $0.39; adjusted for comparability, $0.47 in both periods |
| Cash from operating activities | $60.6 million | $47.4 million |
Same Office Properties NOI rose to $71.1 million from $67.7 million; average occupancy in that group increased to 92.2% from 91.3%. Portfolio occupancy was 92.4% at quarter-end, versus 92.1% at December 31, 2016. The declared common dividend was $0.275 per share, unchanged year over year.
At March 31, total assets were $3.74 billion, debt net of financing costs was $1.90 billion, and cash and cash equivalents were $226.5 million. The $800 million revolving credit facility was fully available. Debt included $547.7 million of term loans, $1.19 billion of unsecured senior notes, and $166.7 million of mortgage and other secured debt. The company reported compliance with its financial covenants. Net investing cash flow was $1.9 million, including $52.6 million of property-sale proceeds; financing used $46.0 million, including preferred-share redemption and distributions.
Material changes and unusual items
- Revenue from real estate operations decreased $6.3 million, principally reflecting property dispositions. Total revenue was partly supported by higher construction and service revenue, which has relatively low operating margins.
- Net income included a $4.2 million gain on land sales. The company also sold an operating property for $39.0 million with no gain recognized. No impairment loss was recorded in Q1 2017; Q1 2016 included $2.4 million of impairment losses.
- Operating expenses fell $9.5 million year over year. General, administrative and leasing expense declined primarily because Q1 2016 included $4.1 million of executive-transition costs, compared with $0.7 million in Q1 2017. Interest expense fell $4.6 million, with the filing citing 11% lower average debt and lower hedge-ineffectiveness expense.
- COPT redeemed all Series K preferred shares for $26.6 million, plus accrued dividends, and COPLP redeemed the corresponding preferred units. COPT issued 546,782 shares through its at-the-market program at a weighted average $33.89 per share, raising $18.3 million net.
Outlook, risks and commitments
Management said liquidity and capital resources were adequate for near- and longer-term needs without requiring property sales, while expecting to raise approximately $40 million from property-interest sales during the remainder of 2017 to fund development. It expected approximately $180 million of construction and development spending and $40 million of improvements to operating properties during the remainder of 2017. Development spending was expected to be funded primarily by revolver borrowings and property-sale proceeds; operating-property improvements primarily by operating cash flow. This is management’s spending outlook, not earnings guidance.
Key risks cited include government shutdowns, budget reductions or delays affecting government tenants and leasing demand; real estate-market competition and demand; access to financing and interest-rate changes; development execution, costs and tenant occupancy; joint-venture partner performance; potential property impairments; REIT qualification; share dilution; and environmental requirements. Management reported no material changes to the risk factors in the 2016 Form 10-K.
Contractual obligations included $128.0 million for development and redevelopment, $51.8 million for operating-property capital expenditures, and $91.8 million of future operating-lease payments, mostly ground leases extending as far as 2100. Total scheduled contractual cash obligations were $2.64 billion, including debt principal and interest. The company reported no material off-balance-sheet arrangements, no material litigation, and no environmental liability expected to materially affect its financial position, operations or liquidity. A $1.5 million estimated tax-incremental-financing obligation and environmental indemnities capped at $19 million were disclosed.
Most important facts for investors to verify
- Whether occupancy and same-property NOI gains persist, particularly given portfolio occupancy differences across submarkets and the reported competitive supply for unleased data-center capacity.
- How much of the year-over-year earnings increase reflects recurring operations versus the land-sale gain, lower prior-year transition costs, and lower interest expense.
- Execution, leasing and funding of the planned 2017 development program, including expected property-interest sales and remaining contractual commitments.
- Debt refinancing and interest-rate exposure: substantial maturities are scheduled from 2020 onward, and a 1% increase in one-month LIBOR was estimated to raise quarterly interest expense by $250,000.
- Potential government budget or procurement changes, development delays, joint-venture obligations, and any changes in covenant compliance or liquidity availability.