CDP

Business Context and Reporting Period

Company: Corporate Office Properties Trust (COPT)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010
Business Overview: COPT is a fully-integrated, self-managed Real Estate Investment Trust (REIT) focusing on strategic customer relationships in the U.S. Government, defense information technology, and data sectors. As of March 31, 2010, the portfolio included 248 wholly owned operating properties (18.9 million sq. ft.), 22 properties under construction/development (approx. 2.8 million sq. ft.), and 1,503 acres of developable land.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 17.4% to $149.6 million. This was primarily driven by a 50.1% drop in construction contract and service revenues ($37.4 million decrease) due to lower volume on a large construction contract. Real estate operating revenues increased 5.8%.
• Profitability: Net income attributable to common shareholders fell 51.2% to $5.9 million. Key drivers included a decrease in operating income from properties and a 16.9% increase in interest expense due to higher debt levels.
• NOI Performance: NOI from continuing real estate operations decreased 4.5% to $64.1 million. Same-Office Properties NOI declined 8.1% ($5.2 million), attributed to early lease terminations and lower occupancy (90.1% vs. 92.5% prior year), partially offset by higher tenant recoveries. A $2.8 million NOI decrease was recognized from four properties expected to be redeveloped.
• Debt Levels: Total debt increased to $2.11 billion. The Revolving Credit Facility balance rose to $397 million, and the Revolving Construction Facility balance increased to $100.2 million.

Outlook, Commentary, and Risks

• Management Commentary: Management expects the leasing environment to remain under stress due to the global economic downturn throughout 2010. However, they believe their long-term lease structure and staggered expirations provide a cushion. Occupancy for wholly owned properties stood at 89.6%.
• Development Activity: Significant development activity continues, including the formation of LW Redstone Company, LLC, a joint venture to develop a 468-acre parcel in Huntsville, Alabama, expected to yield 4.6 million sq. ft. of office and retail space over 20 years.
• Liquidity: The company maintains adequate liquidity with $202.5 million available under its Revolving Credit Facility and $124.8 million under its Revolving Construction Facility. In April 2010, the Revolving Credit Facility capacity was increased to $700 million.
• Risks: Key risks include the ability to borrow on favorable terms, general economic conditions affecting office demand, risks associated with real estate development (cost overruns, delays), and joint venture partner performance.
• Subsequent Event: On April 7, 2010, the Operating Partnership issued $240 million of 4.25% Exchangeable Senior Notes due 2030. Net proceeds were used to pay down the Revolving Credit Facility.

Investor Verification Checklist

• Debt Maturities: Verify the schedule of debt maturities, particularly the $397 million Revolving Credit Facility and $100.2 million Construction Facility maturing in 2011, and the company's refinancing strategy.
• Construction Pipeline: Review the status and funding requirements for the 22 properties under construction/development, specifically the new Redstone Gateway joint venture.
• Occupancy Trends: Monitor the 89.6% occupancy rate and the impact of the four properties (approx. 500,000 sq. ft.) currently undergoing redevelopment on future NOI.
• Service Revenue Volatility: Assess the sustainability of construction and service revenues, which dropped significantly in Q1 2010 due to the completion of a large contract.
• Interest Rate Exposure: Evaluate the impact of rising interest rates on the $785 million of variable-rate debt, noting the company's use of interest rate swaps to hedge exposure.