COPT Defense Properties (formerly Corporate Office Properties Trust) — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010; comparisons are to the corresponding 2009 periods. Dollar amounts below are in millions unless otherwise noted.
Business context
COPT is a REIT focused on office and data-center properties serving U.S. government, defense IT and data-sector tenants. At quarter-end, it reported 249 wholly owned operating office properties totaling 19.9 million square feet, 18 office projects under construction, development or redevelopment, and a partially operational wholesale data center. Wholly owned office portfolio occupancy was 87.4%, down from 90.8% at December 31, 2009.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $128.2 | $199.5 | $413.1 | $588.8 |
| Operating income | $30.8 | $34.3 | $96.2 | $105.8 |
| Net income | $8.9 | $15.5 | $28.8 | $51.8 |
| Net income attributable to common shareholders | $4.8 | $10.4 | $15.2 | $35.2 |
| Diluted EPS | $0.08 | $0.18 | $0.24 | $0.62 |
| NOI from continuing real estate operations | $70.3 | $65.6 | $203.6 | $200.7 |
| Diluted FFO per share | $0.54 | $0.60 | $1.60 | $1.94 |
For the nine months, net cash provided by operations was $95.6 million, investing cash flow was $(349.1) million, financing cash flow was $257.0 million, and cash increased $3.5 million to $11.7 million. Capital spending and acquisitions drove investing outflows.
At September 30, total debt was $2.468 billion, up from $2.054 billion at year-end 2009. Total assets were $3.737 billion and total equity was $1.090 billion. The $700 million revolving credit facility had $200.1 million available; the $225 million revolving construction facility had $103.1 million available. The company reported compliance with debt covenants. No current ratio or other summary liquidity ratio is clearly provided in the filing text.
Material changes versus prior periods
- Total revenue fell sharply because construction-contract and other service revenue declined to $13.6 million in Q3 from $95.3 million, and to $77.0 million for nine months from $273.5 million. Management said these activities generally have small margins and attributed the decline primarily to lower activity on one large construction contract.
- Real-estate operating revenue rose, but same-office NOI declined $2.6 million in Q3 and $9.1 million for nine months. Management cited lower occupancy and rental rates; same-office average occupancy was 88.1% in Q3 versus 91.5%, and 89.1% for nine months versus 92.0%.
- Overall continuing real-estate NOI increased $4.7 million in Q3 and $3.0 million for nine months, substantially reflecting acquired and newly operational properties. Higher snow-removal costs also pressured same-office results.
- Interest expense increased $5.6 million in Q3 and $16.1 million for nine months, reflecting higher average debt and higher weighted average borrowing rates. Nine-month weighted average debt rates rose to 5.05% from 4.79%.
- Nine-month common-shareholder income declined $20.0 million. The comparison also reflects the prior-year period’s higher service-contract activity and current-period acquisition, financing and operating costs.
Outlook, risks and unusual items
- Management said liquidity and capital resources were adequate for near- and longer-term needs. It expected to restore revolving-facility capacity for construction through secured or unsecured debt and/or public equity markets; selective asset sales remained possible. No numerical earnings or FFO guidance is provided in the filing text.
- The company acquired office properties for $162.1 million and a partially operational data center for $115.5 million. It estimated another $166 million of development costs to bring the data center to an initial stabilized critical load of 18 megawatts; it was 17% leased at acquisition.
- Development, construction and redevelopment projects had estimated remaining costs of $391.1 million in aggregate: $76.9 million for construction, $307.3 million for development and $6.9 million for redevelopment. Project execution, leasing, tenant occupancy and funding are important uncertainties.
- In April, the Operating Partnership issued $240 million of 4.25% exchangeable senior notes due 2030 and increased revolving-credit capacity by $100 million. Debt maturities include significant variable-rate balances in 2011; the revolving facilities expire in 2011, subject to potential one-year extensions under specified conditions.
- The company recognized a $3.5 million liability for potential shortfalls in debt service on tax-increment financing bonds related to National Business Park North. Joint-venture obligations include possible additional funding; specified guarantees on one venture have a maximum exposure of approximately $66 million. Environmental indemnities also carry capped potential obligations.
- Management warned of continued pressure in the leasing environment and identified borrowing conditions, interest rates, real-estate demand, development risk, joint-venture partner performance, REIT qualification and environmental requirements as risks. It reported no material change to previously disclosed risk factors and no material litigation development.
- The filing expected an approximately $6 million gain in Q4 2010 related to KEYW’s October 2010 IPO. Q3 and nine-month 2010 results also included gains on real-estate sales of $2.5 million and $2.8 million, respectively.
Important facts for investors to verify
- Whether occupancy stabilizes, particularly in Northern Virginia, Colorado Springs and Suburban Maryland, and whether same-office NOI recovers.
- Leasing progress and remaining funding needs for the data center and other development projects; confirm actual costs and financing availability against estimates.
- Debt maturities, refinancing plans, variable-rate exposure and continued covenant compliance, especially around the 2011 facility expirations.
- Cash generation relative to dividends, development spending and debt service; FFO is a supplemental non-GAAP measure and is not equivalent to cash available for distributions.
- Realization and timing of the expected KEYW-related gain, and the final amounts associated with joint-venture, tax-increment financing and environmental exposures.