CDP

Business Context and Reporting Period

Company: Corporate Office Properties Trust (COPT)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
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, 2009, the portfolio included 240 wholly owned operating properties (18.5 million sq. ft.), 16 properties under construction (approx. 1.8 million sq. ft.), and 1,584 acres of developable land.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 69% to $181.7 million, driven primarily by a $64.4 million increase in construction contract revenues ($74.5M in 2009 vs. $10.1M in 2008). Rental revenue from real estate operations grew 9.6% to $89.5 million.
• Profitability: Net income attributable to common shareholders increased 81% to $12.1 million. This was aided by a decrease in interest expense ($19.4M vs. $21.9M) due to lower weighted average interest rates (4.8% vs. 5.4%) and higher interest income.
• Discontinued Operations: Q1 2008 included $1.3 million in income from discontinued operations (gains on property sales), whereas Q1 2009 had no discontinued operations.
• Same-Office Properties: Revenues from properties owned and operational in both periods increased 8.0%, while property operating expenses increased 9.1%, largely due to higher snow removal, utility costs, and bad debt reserves.

Outlook, Risks, and Management Commentary

• Economic Outlook: Management acknowledges the significant global recession and expects its effects to become increasingly evident in 2009 and 2010. Risks include increased competition for tenants, downward pressure on rental rates, and potential tenant defaults.
• Resilience Factors: COPT believes it is less exposed than peers due to its concentration in government and defense sectors and a high concentration of large, high-quality tenants with low exposure to the financial services sector.
• Liquidity: The company maintains $159.8 million available under its $600 million Revolving Credit Facility and $131.7 million under its $225 million Revolving Construction Facility. Management believes liquidity is adequate for near-term and long-term requirements.
• Subsequent Event: In April 2009, COPT issued 2.99 million common shares in an underwritten public offering at $24.35 per share, raising net proceeds of approximately $72.1 million to pay down debt and for general corporate purposes.
• Accounting Changes: The company adopted SFAS 160 (Noncontrolling Interests) and FSP APB 14-1 (Convertible Debt) effective January 1, 2009, resulting in retrospective adjustments to prior period financial statements.

Investor Verification Checklist

• Construction Revenue Sustainability: Verify the duration and backlog of the large construction contracts driving the 69% revenue increase, as this is a non-recurring driver compared to rental income.
• Debt Maturity Profile: Review the schedule of debt maturities, noting that 24.6% of total debt is variable-rate (including swaps) and the reliance on revolving credit facilities for liquidity.
• Occupancy Trends: Monitor the slight decline in occupancy (92.8% vs. 93.2%) and the weighted average lease term (approx. 5 years) to assess exposure to lease expirations in a downturn.
• Bad Debt Exposure: Assess the $525,000 increase in bad debt expense and the potential for further increases given the economic environment.
• FFO vs. Net Income: Compare Funds From Operations ($44.8M) to Net Income ($18.2M) to understand the impact of depreciation and amortization on reported earnings.