COPT — Form 10-Q Summary
Business context and period: Corporate Office Properties Trust, a REIT focused on office and data-center properties serving U.S. government, defense IT and related customers, reported unaudited results for the three months ended March 31, 2011, compared with Q1 2010. The filing identifies the registrant as Corporate Office Properties Trust.
Key financial metrics
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Total revenue | $143.4 | $149.6 |
| Operating income | $3.8 | $31.4 |
| Net income (loss) | $(18.6) | $10.7 |
| Net income (loss) attributable to common shareholders | $(21.8); $(0.33) per share | $5.9; $0.10 per share |
| Net cash from operating activities | $33.0 | $35.7 |
| Debt, net, at period end | $2,396.8 | $2,323.7 at Dec. 31, 2010 |
| Cash and cash equivalents, at period end | $12.6 | $10.1 at Dec. 31, 2010 |
- Real estate NOI from continuing operations was $71.5 million, up $7.4 million year over year. Same-office NOI declined $2.8 million, or 4%, while acquisitions and newly operating properties added NOI.
- Reported operating margin was approximately 2.7%, versus 21.0% a year earlier, principally reflecting the impairment charge.
- FFO per diluted share was $0.13, versus $0.53. Diluted FFO per share adjusted for impairment and acquisition costs was $0.52, versus $0.53; these are non-GAAP measures.
- Investing activities used $61.4 million, including $75.4 million of additions to properties. Financing activities provided $30.9 million; cash increased $2.5 million during the quarter.
- Total assets were $3.87 billion and total equity was $1.27 billion at March 31, 2011. Wholly owned office-property occupancy was 87.0%, down from 88.2% at year-end 2010.
Material changes versus Q1 2010
- Revenue fell $6.2 million, or about 4%, as a $16.3 million decline in construction and other service revenue more than offset $10.1 million growth in real estate revenue.
- The $27.7 million non-cash Fort Ritchie impairment drove the swing to a net loss. Common-shareholder results also reflected higher interest expense, up $4.3 million, and higher depreciation and amortization, up $5.4 million.
- Same-office average occupancy was 86.7%, versus 88.8%. Management attributed lower same-office rental revenue partly to occupancy and rental-rate changes; lower snow-removal costs partly offset increased repairs and utilities.
Outlook, liquidity, risks and unusual items
- Management said liquidity and capital resources were adequate for near- and longer-term needs. At quarter-end, $447.8 million was available under the $800 million revolving credit facility, which matured in September 2011 and could be extended one year subject to conditions; $63.4 million was available under the $225 million revolving construction facility, available through May 2012. Management expected to replace the facilities in 2011 and planned to address 2011 maturities and construction needs using credit facilities and debt or equity markets. The company reported compliance with debt covenants.
- In April 2011, the board approved a plan to dispose of selected, primarily smaller non-strategic properties over three years. The company expected approximately $200 million of net proceeds after secured-debt repayment and intended to reinvest in strategically aligned properties. It expected about $39.9 million of additional non-cash impairment charges in Q2 2011.
- Fort Ritchie development remained constrained by litigation and uncertainty following Army disclosures about historic herbicide/defoliant testing. The company recorded a $27.7 million impairment and said it might be unable to execute its development plans if the matter is not resolved favorably. Army indemnification applies subject to statutory limitations.
- Other exposures include joint-venture guarantees with a stated maximum potential payment of approximately $66 million, additional possible joint-venture funding, a $3.6 million estimated liability related to tax-increment financing shortfalls, and environmental indemnities for New Jersey properties. Management did not expect ordinary-course litigation liabilities to materially affect financial position, operations or liquidity.
- Interest-rate sensitivity: management estimated a 1% increase in short-term rates would have raised Q1 interest expense by $0.7 million, after swaps. Approximately $3.9 million was expected to be reclassified from accumulated other comprehensive loss as increased interest expense over the next 12 months.
Important facts for investors to verify
- Progress and ultimate outcome of Fort Ritchie litigation, Army environmental disclosures, and related development rights and costs.
- Execution, timing, realized proceeds and any further impairments under the strategic property-disposition plan.
- Occupancy, same-office NOI trends, and leasing of the wholesale data center, which was 17% leased at quarter-end.
- Refinancing or replacement of the revolving facilities, debt maturities, borrowing costs, and continued covenant compliance.
- Whether development spending and expected funding sources support planned projects and distributions; the filing reported quarterly common dividends of $0.4125 per share.