COPT Defense Properties (Corporate Office Properties Trust) — Q1 2016 10-Q
Business context and reporting period
For the three months ended March 31, 2016. COPT is a REIT that conducts substantially all operations through Corporate Office Properties, L.P. The portfolio focuses primarily on office and data-center properties serving U.S. government, defense and information-technology tenants, alongside regional office assets. At quarter-end it had 179 operating office properties totaling 18.3 million square feet, 11 properties under construction or redevelopment, and a 19.25-megawatt wholesale data center.
Financial and operating performance
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Total revenue | $144.3 million | $161.0 million |
| Net income | $8.1 million | $14.7 million |
| Net income attributable to common shareholders | $3.3 million; $0.03/share | $9.8 million; $0.10/share |
| Real-estate operations revenue | $133.1 million | $122.7 million |
| Real-estate NOI | $81.2 million | $72.0 million |
| Operating cash flow | $47.4 million | $41.9 million |
| Cash and cash equivalents | $62.5 million | $60.3 million at Dec. 31, 2015 |
| Debt, net | $2.14 billion | $2.08 billion at Dec. 31, 2015 |
| Common dividend declared | $0.275/share | $0.275/share |
Real-estate NOI increased 12.8%, while total revenue declined 10.4%, principally because construction and other service revenue fell to $11.2 million from $38.3 million; those services carry small margins. Diluted FFO per share was $0.39 versus $0.43; diluted FFO per share adjusted for comparability was $0.47 versus $0.45. The latter is a non-GAAP measure and should be considered with GAAP results.
Net cash used in investing activities was $56.1 million, mainly for development and property improvements; financing activities provided $10.8 million. Debt included $1.48 billion of fixed-rate debt and $672.7 million of variable-rate debt. The $800 million revolving facility had $678.2 million available, and a further $150 million was available under an unsecured term loan. The company reported compliance with debt covenants. Portfolio occupancy was 90.7%, down from 91.6% at year-end; same-office occupancy was 90.1% versus 90.9%.
Material changes versus the prior period
- Real-estate operations revenue rose $10.4 million, supported by acquired and newly placed-in-service properties and higher wholesale data-center occupancy. Same-office NOI increased $1.2 million.
- Net income fell $6.6 million. Q1 2015 included a $4.0 million gain on real-estate sales; Q1 2016 included $2.4 million of impairment charges and $4.1 million of executive transition costs.
- Interest expense increased $2.7 million, attributed primarily to swap ineffectiveness and a 10% increase in average debt outstanding.
- Assets held for sale rose to $225.9 million from $96.8 million at year-end. COPT recorded impairments on land and White Marsh properties based on estimated sale values.
Outlook, commentary and risks
- Management gave no specific earnings or FFO guidance in the provided filing text. It expected to raise at least $440 million from property-interest sales during 2016, using proceeds to repay borrowings and fund development.
- For the remainder of 2016, management expected approximately $170 million of construction and development spending and $50 million of operating-property improvements. It anticipated funding development primarily with cash and revolver borrowings, and improvements primarily with operating cash flow.
- Management said liquidity and capital resources were adequate for near- and longer-term needs without requiring property sales, while also expecting substantial 2016 dispositions. Most 2016 debt maturities were expected to be repaid using the available $150 million term loan.
- Interest-rate exposure is material: a 1% increase in one-month LIBOR was estimated to add $673,000 to quarterly interest expense at the reported balances. Derivative liabilities were $15.1 million, and about $4.5 million of accumulated derivative losses were expected to be reclassified to interest expense over the next 12 months.
- Key business risks include government budget reductions or shutdowns affecting strategic tenants, office and data-center demand, refinancing costs, development and leasing execution, joint-venture obligations, property-sale valuations and potential further impairment. Management reported no material change to the risk factors in its 2014 Form 10-K.
- CEO Roger Waesche was scheduled to depart effective May 12, 2016, with COO Stephen Budorick appointed to succeed him; development executive Wayne Lingafelter departed March 31. No material litigation or material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Progress, timing and realized proceeds from the planned 2016 property-interest sales, and whether proceeds cover maturities and development funding needs.
- Leasing and occupancy trends, particularly in Northern Virginia, Navy Support Locations, and the wholesale data center following a tenant departure.
- Execution and lease-up of development projects, related committed spending, and potential additional held-for-sale impairments.
- Debt refinancing, variable-rate exposure, hedge effectiveness and compliance with covenants.
- The reconciliation and assumptions behind adjusted FFO, and the effects of executive transition costs and other excluded items on reported results.