COPT Defense Properties (Corporate Office Properties Trust) — Q1 2022 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2022, compared with Q1 2021. The REIT owns, leases, manages and develops office and data-center-shell properties, primarily serving U.S. government and defense/IT tenants. At quarter-end, its portfolio comprised 188 properties totaling 22.0 million square feet; 11 properties were under development.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Total revenue | $195.5 million | $154.4 million |
| Income (loss) from continuing operations | $31.3 million | $(6.9) million |
| Net income (loss) | $60.8 million | $(6.1) million |
| Net income (loss) attributable to common shareholders | $59.3 million | $(6.7) million |
| Diluted EPS | $0.52 | $(0.06) |
| Diluted FFO per share | $0.58 | $0.27 |
| Cash provided by operating activities | $52.7 million | $40.7 million |
| Net debt at carrying value | $2.157 billion | $2.272 billion at Dec. 31, 2021 |
Revenue increased 26.6%, driven chiefly by a $36.6 million increase in construction and other service revenue. These activities generated only $1.6 million of NOI, as the revenue largely reflects reimbursed subcontractor costs. Lease revenue was $141.4 million, up from $137.3 million. Same-property NOI declined to $80.4 million from $82.2 million, with average occupancy falling to 91.7% from 93.6%.
Net income included $29.6 million from discontinued operations, principally the $28.6 million gain on sale of the wholesale data center. The prior-year comparison included a $33.2 million loss on early debt extinguishment. Diluted FFO per share, a non-GAAP measure, was $0.58; adjusted diluted FFO per share was also $0.58, versus $0.56 adjusted in Q1 2021.
Liquidity, debt and capital spending
Cash and cash equivalents were $19.3 million at March 31, 2022; cash plus restricted cash totaled $23.8 million. The $800 million revolver had $640 million available. The company repaid $200 million of its term loan during the quarter and used sale proceeds to repay term-loan and revolver borrowings. Interest expense declined to $14.4 million from $17.5 million, partly reflecting 2021 refinancings.
Operating cash flow increased $12.0 million year over year, mainly due to lower cash interest paid. Investing cash flow was positive $104.2 million, including $220.8 million of property-sale proceeds, while financing cash flow used $150.4 million, including net debt repayments and $30.9 million of common dividends. Development and redevelopment spending was $91.8 million in cash during the quarter.
Material changes, outlook and risks
- The company sold its sole wholesale data center on January 25, 2022, for $222.5 million; it was reported as discontinued operations. The sale reduced reported debt and contributed a one-time gain.
- Quarter-end occupancy was 92.0%, versus 92.4% at year-end 2021; leased occupancy was 93.9%. Q1 leasing totaled 871,000 square feet, with a 64% tenant-retention rate. Two newly developed properties totaling 283,000 square feet were placed in service and were fully leased.
- Management expected to spend approximately $230 million on development and redevelopment during the remainder of 2022, most of which was contractually committed at quarter-end. It also expected approximately $70 million of tenant improvements, capital improvements and leasing costs during that period, and had about $100 million of debt balloon payments due in December 2022.
- Management said liquidity and capital resources were adequate for near- and longer-term needs. It expected to fund ordinary cash needs primarily from operations, and development spending and maturities with a mix of revolver borrowings, long-term debt, equity issuance and property-interest sales. These are expectations, not earnings guidance; the filing provides no specific revenue or EPS guidance.
- Debt covenants were met at quarter-end. The revolver matures in March 2023, with two conditional six-month extension options. The company identified interest rates, government budget actions and demand, development execution and costs, financing access, tenant credit, joint ventures, pandemics, cyber risks and environmental requirements among risks that could affect results.
- Management said a loss of up to $3.7 million on certain municipal tax claims was reasonably possible; it could be material to results of operations, though management did not expect a material effect on financial position or liquidity. No material litigation was reported. The company also said it did not expect to fund potential shortfalls on National Business Park tax-increment financing bonds.
Important facts for investors to verify
- How much of the revenue and earnings increase reflects recurring leasing versus reimbursed construction activity and the nonrecurring data-center sale gain.
- Whether occupancy and same-property NOI stabilize, particularly in Regional Office, where occupancy fell to 81.8% from 87.3% at year-end.
- Funding and completion progress for the committed 2022 development program and the December 2022 debt maturity, including revolver-extension or refinancing plans.
- Whether the possible municipal tax-claim loss or other contingencies change, and how interest-rate movements affect borrowing costs and refinancing.