COPT 2021 First-Quarter 10-Q Summary
Business context and period: Corporate Office Properties Trust (NYSE: OFC), a self-managed REIT, reported unaudited results for the three months ended March 31, 2021. Its portfolio primarily serves U.S. government, defense and IT tenants, alongside regional office and data-center assets. At quarter-end it had 182 properties totaling 21.0 million square feet, plus a wholesale data center, 10 projects under development and land controlled for future development.
Financial and operating performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Total revenue | $161.7 million | $145.8 million |
| Net income (loss) | $(6.1) million | $25.6 million |
| Net income (loss) attributable to common shareholders; diluted EPS | $(6.7) million; $(0.06) | $24.1 million; $0.21 |
| Net cash provided by operating activities | $40.7 million | $62.2 million |
| Net cash used in investing activities | $72.8 million | $114.5 million |
| Net cash provided by financing activities | $50.4 million | $197.0 million |
| Cash and cash equivalents at March 31 | $36.1 million | |
| Debt, net, at March 31 | $2.208 billion | $2.087 billion at December 31, 2020 |
- Revenue increased 10.9% year over year, including real-estate revenue of $145.2 million, up $13.0 million. Real-estate NOI rose to $89.1 million from $83.8 million.
- Reported results included a $33.2 million loss on early debt extinguishment. Diluted FFO per share was $0.27 versus $0.41; diluted FFO per share adjusted for comparability was $0.56 versus $0.51. These are non-GAAP measures.
- Portfolio occupancy was 93.8%, down from 94.1% at year-end 2020; leased occupancy was 94.7%. The wholesale data center was 86.7% leased. The quarterly dividend was $0.275 per common share.
Material changes and financing
- On March 11, COPT issued $600 million of 2.75% senior notes due 2031, receiving $589.8 million after underwriting discounts. It used the proceeds initially to repay revolving-credit borrowings and for general corporate purposes.
- During the quarter, COPT tendered for $184.4 million of 3.60% notes and $145.6 million of 5.25% notes, paying premiums and recognizing the $33.2 million extinguishment loss.
- On April 12, 2021, after quarter-end, it redeemed the remaining $165.6 million and $104.4 million of those respective note issues for $294.0 million plus accrued interest, funded primarily with revolver borrowings. It expected to record an additional extinguishment loss of approximately $25 million.
- At March 31, the $800 million revolving credit facility was fully available. Debt covenants were satisfied. COPT stated its senior unsecured debt was investment grade and that it believed liquidity and capital resources were adequate without requiring property sales.
Management commentary, outlook and risks
- Management said the portfolio’s Defense/IT concentration helped limit COVID-19 effects: rent collections were not significantly affected and no significant new deferred-payment arrangements were made in the quarter. Same-property NOI nevertheless declined $0.9 million year over year, including a $0.5 million reduction in parking revenue; higher snow-removal costs also weighed on results.
- Management expected to spend approximately $225 million on development and $75 million on operating-property improvements and leasing costs during the remainder of 2021. It expected to fund development initially mainly with revolver borrowings and property improvements with operating cash flow. It did not provide earnings or FFO guidance.
- Development and leasing remained exposed to pandemic-related permitting, labor and supply delays. Other stated risks include tenant credit and demand, remote-work effects on office demand, government budget or shutdown actions, financing conditions, development execution, interest rates, joint-venture risks, cyber events and environmental requirements.
- Management assessed a reasonably possible loss of up to $3.2 million for certain municipal tax claims; it did not expect a material effect on financial position or liquidity, though results of operations could be materially affected. It did not expect future funding shortfalls for the National Business Park tax-increment financing bonds.
Important facts for investors to verify
- Assess recurring property performance separately from the one-time debt-extinguishment charges; reconcile reported earnings, FFO and adjusted FFO.
- Review the April 12 note redemption’s effect on debt balances, interest expense, revolver usage and the additional approximately $25 million loss.
- Track occupancy, leasing, rent collections and same-property NOI, particularly regional office and parking trends.
- Compare planned 2021 development and improvement spending with operating cash generation, available revolver capacity and project completion and leasing progress.
- Monitor the municipal tax claims, interest-rate exposure, covenant headroom and COVID-19-related tenant, supply and development risks.