CDP

Business Context and Reporting Period

Company: Corporate Office Properties Trust (COPT)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2001
Business Overview: COPT is a fully integrated, self-managed Real Estate Investment Trust (REIT) focused on owning, managing, leasing, acquiring, and developing suburban office properties in the Mid-Atlantic region. As of September 30, 2001, the portfolio included 97 office properties. The company operates primarily through its Operating Partnership, Corporate Office Properties, L.P.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenue from real estate operations increased 14% ($11.1 million) year-over-year, driven by a 17% increase in rental revenue ($11.6 million). This growth was primarily attributable to 14 properties acquired and 8 newly constructed properties placed in service during 2000 and 2001.
• Expense Increases: Total expenses from real estate operations rose 15% ($8.7 million). Property operating expenses increased 16% due to new acquisitions and higher repair/maintenance costs. Interest expense increased 11% due to a 14% rise in average outstanding debt balances.
• Profitability: Net income available to common shareholders increased 21% ($1.7 million). However, this was offset by a $1.3 million increase in preferred share dividends resulting from new issuances (Series D, E, and F) and a $174,000 loss from the cumulative effect of adopting SFAS 133 (derivatives accounting).
• Balance Sheet: Total assets grew by $120 million, largely due to real estate acquisitions and construction. Total liabilities increased by $50 million, reflecting higher debt levels to fund growth.

Guidance, Outlook, and Risks

• Capital Resources: The company expects to meet short-term capital needs through cash from operations. Long-term needs will be funded via borrowings, new loans, and equity issuances. As of November 9, 2001, $49.2 million remained unused on a $125 million revolving credit facility.
• Construction Pipeline: Six buildings totaling 532,000 square feet were under construction as of September 30, 2001, with estimated completion costs of $89.1 million. Management noted a slower leasing rate for these projects due to increased market competition and slower economic growth.
• Market Risks: The company is exposed to interest rate fluctuations. While 64.5% of debt was fixed-rate as of September 30, 2001, variable-rate debt remains a risk. The company utilizes interest rate swaps and caps to mitigate this exposure.
• Accounting Changes: Adoption of SFAS 133 resulted in a $174,000 cumulative effect loss and the recognition of a $3.9 million fair value liability for derivatives, impacting shareholders' equity.
• Legal and Environmental: Management believes no material legal or environmental liabilities exist that would adversely affect financial position.

Investor Verification Checklist

• Debt Maturities: Verify the repayment status of the $91.0 million Term Credit Facility maturing in October 2001 (noted as repaid in October 2001 using revolving credit).
• Preferred Share Obligations: Review the dividend obligations for the newly issued Series D, E, and F Preferred Shares, which increased total preferred dividends by $1.3 million in the nine-month period.
• Construction Leasing Rates: Monitor the leasing velocity of the six buildings under construction, as management cited slower leasing due to market conditions.
• Derivative Valuation: Confirm the impact of the $3.9 million fair value liability on interest rate swaps on future earnings as unrealized losses are reclassified.
• Acquisition Integration: Assess the performance of the 14 properties acquired in 2000-2001 to ensure they meet projected revenue targets.