COPT DEFENSE PROPERTIES quarterly report, Q1 FY2012

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COPT Q1 2012 Form 10-Q Summary

Business context and reporting period

Corporate Office Properties Trust (COPT), a REIT focused on office and data-center properties serving U.S. government and defense information-technology customers, reported for the three months ended March 31, 2012. The portfolio included 231 operating office properties totaling 20.2 million square feet, development projects, and a partially operational wholesale data center.

Financial performance and liquidity

  • Revenue: $143.5 million, up 4.4% from $137.5 million. Rental revenue was $99.1 million versus $94.2 million.
  • Operating results: Operating income was $30.9 million versus $4.0 million; GAAP operating margin was approximately 21.5% versus 2.9%. The comparison was substantially affected by lower impairment losses in 2012.
  • Net income and EPS: Net income was $7.0 million versus a net loss of $18.6 million. Net income attributable to common shareholders was $2.7 million, or $0.04 per diluted share, versus a loss of $21.8 million, or $0.33 per diluted share. Continuing-operations EPS remained a loss of $0.02, improving from a loss of $0.32.
  • FFO: Diluted FFO was $0.54 per share versus $0.13; diluted FFO adjusted for comparability was $0.53 versus $0.49. These are non-GAAP measures and should not be treated as cash available for distributions or debt service.
  • Property operations: Real-estate NOI was $76.9 million, up from $72.3 million. Same Office Properties NOI increased $3.1 million, despite average occupancy declining to 89.5% from 90.1%. Portfolio office occupancy at quarter-end was 87.0%, versus 86.2% at year-end 2011.
  • Cash flow: Operating cash flow was $43.8 million versus $33.0 million; investing cash flow was positive $7.8 million versus negative $61.4 million; financing cash flow was negative $49.2 million versus positive $30.9 million. Operating cash flow included a $29.7 million settlement of interest-rate swaps, while investing cash flow benefited from property sales.
  • Balance sheet and debt: Total assets were $3.80 billion and debt, net, was $2.42 billion at March 31. Cash and cash equivalents were $8.0 million. Variable-rate debt was $1.14 billion. The $1.0 billion revolving facility had $590.6 million available; construction facilities had $73.2 million available.

Material changes versus the prior comparable period

  • Common-shareholder results improved by $24.5 million, driven principally by impairment expense falling sharply from 2011, when COPT recorded a $27.7 million impairment on Fort Ritchie. COPT still reported aggregate net impairment losses of $6.6 million in Q1 2012 related to its Strategic Reallocation Plan.
  • Real-estate revenue increased $5.5 million. Same Office Properties NOI rose $3.1 million; newly placed-in-service properties also contributed, while dispositions reduced NOI.
  • On February 14, COPT borrowed $250 million under a new unsecured term loan maturing in 2017 and used the proceeds, along with property-sale proceeds, primarily to reduce its revolving-credit balance.
  • COPT sold eight operating properties totaling 314,000 square feet and non-operating properties for aggregate proceeds of $62.7 million. It also completed the sale of its KEYW shares for $14.0 million.
  • COPT declared common dividends of $0.275 per share in the quarter, compared with $0.4125 in Q1 2011.

Outlook, risks, contingencies and unusual items

  • Management expected to spend more than $150 million on construction and development and approximately $70 million on operating-property improvements during the remainder of 2012. It expected to sell more than $130 million of properties during the rest of 2012, primarily using proceeds to repay revolving borrowings and property-secured debt. Management also expected significant property-sale proceeds during the remainder of 2012 and in 2013. No specific earnings or FFO guidance was provided in the supplied filing text.
  • Six office properties under construction were expected to total approximately 789,000 square feet, with one redevelopment expected to add 113,000 square feet. The data center had 3 megawatts operating; no new leases were completed during the quarter.
  • A $15 million nonrecourse mortgage loan secured by a property with an estimated fair value of approximately $11 million was in default at both March 31, 2012 and December 31, 2011. The property was included in the Strategic Reallocation Plan.
  • COPT paid $29.7 million to terminate certain interest-rate swaps in January. It reported $2.7 million of derivative liabilities at quarter-end and estimated that approximately $2.5 million would be reclassified from accumulated other comprehensive loss into interest expense over the next 12 months.
  • Risks highlighted include government shutdowns or budget reductions affecting tenant demand and leasing, property-market conditions, access to financing, development execution and costs, planned property sales, joint-venture funding, impairment estimates, interest rates, and environmental requirements. Management stated it was within its debt-covenant requirements.
  • Contingencies include joint-venture guarantees with a stated maximum exposure of approximately $65 million, potential additional joint-venture funding, a $4.4 million estimated liability related to a tax-incremental-financing obligation, and environmental indemnities with specified caps. Management said routine litigation was not expected to materially affect the company; the filing reported no material litigation.

Important facts for investors to verify

  • Whether planned 2012–2013 asset sales occur on schedule and at prices sufficient to reduce revolving debt.
  • Debt maturities and refinancing exposure, particularly the large scheduled maturities in 2014–2015, variable-rate borrowing costs, and the status of the defaulted $15 million mortgage.
  • Leasing, occupancy, and NOI trends, including government-related tenant demand and the data center’s lease-up progress.
  • The assumptions and property-level impacts behind Q1 impairment charges and further Strategic Reallocation Plan dispositions.
  • Cash available after development commitments, capital spending, dividends, and derivative-related payments; reported operating cash flow was affected by timing and one-off cash items.