CDP

Business Context and Reporting Period

Company: Corporate Office Properties Trust (COPT)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: COPT is a fully-integrated, self-managed Real Estate Investment Trust (REIT) focused on the acquisition, development, ownership, and leasing of Class A suburban office properties. The portfolio is heavily concentrated in the Greater Washington, D.C. region and the Mid-Atlantic area, with a strategic focus on the defense industry. As of December 31, 2006, the company owned 170 wholly owned operating properties totaling 15.1 million rentable square feet with an occupancy rate of 92.8%.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 12.5% to $361.4 million, driven primarily by property acquisitions and newly constructed properties placed into service. Revenues from real estate operations increased by $59.2 million.
• Profitability: Net income available to common shareholders increased 22.6% to $29.9 million. This growth was supported by a 2.9% increase in revenues from "Same-Office Properties" and gains from property sales.
• Portfolio Expansion: The company acquired six operating properties (1.0 million sq. ft.) and land parcels for $169.7 million. Seven newly constructed properties (866,000 sq. ft.) became fully operational.
• Dispositions: Sold seven operating properties and a land parcel for $83.0 million, recognizing a gain of $17.3 million before minority interest.
• Financing Activity: Issued $200 million in 3.50% Exchangeable Senior Notes due 2026. Sold 2.0 million common shares ($82.4 million proceeds) and 3.39 million Series J Preferred Shares ($81.9 million proceeds). Redeemed Series E and Series F Preferred Shares for $64.4 million.

Guidance, Outlook, and Risks

Management Commentary & Outlook: Management expects continued growth through acquisitions and development, particularly in the Baltimore/Washington Corridor. The company completed the "Nottingham Acquisition" in January 2007 (56 properties, 2.4 million sq. ft.) for approximately $363.9 million. Management notes uncertainty regarding 2007 leasing activity due to new supply in the market but cites a weighted average lease term of 5.0 years as a buffer against short-term slowdowns.

Key Risks and Contingencies:

• Tenant Concentration: The top 20 tenants accounted for 56.7% of annualized rental revenue. The top five tenants accounted for 34.2%. The United States Government is the largest single tenant (16.3%).
• Industry Concentration: Approximately 54.4% of annualized rental revenue is derived from the U.S. defense industry. A reduction in government defense spending could adversely affect lease renewals and payments.
• Geographic Concentration: 87.6% of annualized rental revenue is derived from the Greater Washington, D.C. region and Suburban Baltimore. Economic downturns in this specific region would significantly impact the company.
• Debt and Refinancing: The company carries significant debt ($1.5 billion). While 93.1% of fixed-rate debt matures after 2007, the company faces refinancing risks and interest rate exposure on variable-rate debt (11.7% of total debt).
• REIT Status: Failure to qualify as a REIT would subject the company to corporate income tax, significantly reducing cash available for distributions.

Investor Verification Checklist

• Defense Spending Exposure: Verify the stability of U.S. defense budgets and the specific lease terms (termination rights) held by the U.S. Government and major defense contractors.
• Nottingham Acquisition Integration: Assess the impact of the January 2007 Nottingham Acquisition on leverage ratios and occupancy rates, noting the acquired portfolio was only 86% occupied at the time of acquisition.
• Debt Maturity Wall: Review the schedule of debt maturities, specifically the $140.9 million due in 2007 and $375.2 million due in 2008, to evaluate refinancing risks.
• Lease Expirations: Analyze the lease expiration schedule, noting that 12.4% of annualized revenue expires in 2007 and 16.0% in 2009, to gauge renewal risks.
• FFO vs. Net Income: Compare Funds from Operations ($98.9 million) against Net Income ($49.2 million) to understand the impact of depreciation and amortization on reported earnings.