COPT Defense Properties (Corporate Office Properties Trust) — Q3 2011 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2011, compared with the same periods in 2010. COPT is a REIT focused on office and data-center properties serving U.S. government, defense IT and related tenants. At quarter-end, it owned 246 operating office properties totaling 20.2 million square feet; wholly owned office occupancy was 88.0%.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $140.6 million | $124.7 million | $426.8 million | $402.7 million |
| Operating income | $31.9 million | $29.9 million | $42.9 million | $93.5 million |
| Net income (loss) | $7.5 million | $8.9 million | $(37.1) million | $28.8 million |
| Net income (loss) attributable to common shareholders | $2.5 million | $4.8 million | $(47.5) million | $15.2 million |
| Basic and diluted EPS | $0.03 | $0.08 | $(0.70) | $0.25 basic; $0.24 diluted |
| NOI from continuing real estate operations | $74.2 million | $68.1 million | $217.7 million | $197.3 million |
| Diluted FFO per share | $0.49 | $0.54 | $0.65 | $1.60 |
| Diluted FFO per share, adjusted for comparability | $0.52 | $0.58 | $1.61 | $1.65 |
For the nine months, operating cash flow was $104.9 million versus $95.6 million; investing cash flow was $(237.7) million versus $(349.1) million; and financing cash flow was $134.3 million versus $257.0 million. Cash and cash equivalents were $11.5 million at September 30, 2011.
Total assets were $3.97 billion, debt was $2.42 billion, and total equity was $1.31 billion at quarter-end. Debt increased from $2.32 billion at December 31, 2010. The $1.0 billion revolving facility had $323.1 million available; construction facilities had a further $82.2 million available. COPT reported compliance with its debt covenants.
Material changes versus prior periods
- Q3 revenue rose about 13%, primarily reflecting acquired and newly placed-in-service properties. Q3 NOI from continuing real estate operations increased $6.2 million; same-office NOI was essentially flat, while acquisitions and construction contributed most of the increase.
- Nine-month common-shareholder results declined by $62.7 million year over year. The company recorded $57.8 million of impairment losses, including $44.6 million primarily related to properties identified for disposition and $27.7 million for Fort Ritchie; the reported total impairment line also includes discontinued-operations amounts.
- Nine-month same-office NOI fell $2.8 million, with lower occupancy and rental revenue and higher operating costs partly offset by tenant recoveries and lower snow-removal expense.
- In May, COPT issued 4.6 million shares at $33.00 per share, generating $145.7 million net of underwriting discounts, before offering expenses. The share count increased from 66.9 million at year-end 2010 to 72.0 million at September 30, 2011.
- On September 1, COPT replaced its prior revolving and construction facilities with a $1.0 billion unsecured revolving facility and borrowed $400 million under a new unsecured term loan. It used financing proceeds in part to repay secured variable-rate loans. The refinancing resulted in a $1.7 million early-extinguishment loss. On September 15, it repurchased $162.5 million principal amount of 3.5% exchangeable notes at par.
Outlook, risks, contingencies and unusual items
- Management expected a challenging leasing environment through at least 2012. Delayed federal budgets and continuing resolutions had held up government and contractor leasing; further budget delays or defense spending reductions could defer or reduce demand. Management viewed longer-term demand near BRAC-related installations as supportive, but noted contractor caution amid spending uncertainty.
- The Strategic Reallocation Plan targets selected properties, mainly in Greater Baltimore, Suburban Maryland and St. Mary’s County, for sale over three years. Management estimated net proceeds after secured-debt repayment of approximately $200 million and planned to reinvest in government, defense IT and related data-sector properties. Eight properties were sold in the first nine months for $24.5 million, producing $19.0 million after related debt repayment.
- Management said available liquidity and capital sources were adequate for near- and longer-term needs and expected to fund 2011–2012 maturities and construction through credit facilities and access to debt or equity markets. No specific earnings or FFO guidance was provided in the supplied filing text.
- Fort Ritchie faces uncertainty over development rights, future demand and existing litigation following Army disclosures about past herbicide testing and use. COPT recorded a $27.7 million impairment. The filing also reports a $4.3 million estimated liability for potential shortfalls on National Business Park North tax-increment financing bonds.
- Interest-rate swaps had a $30.6 million liability at quarter-end. A breach of specified debt or derivative provisions could trigger settlement; the filing cites a $31.8 million termination value. Contractual obligations include a $27.6 million estimated cash settlement of swaps in 2012.
- Other exposures include joint-venture guarantees with a stated maximum of approximately $65 million, potential additional joint-venture funding, and environmental indemnifications with specified caps. Management said ordinary-course litigation was not expected to materially affect the company; it reported no material litigation other than routine matters.
Important facts for investors to verify
- Progress and leasing economics for properties under construction, the data center, and the disposition-and-reinvestment plan; also verify whether expected sale proceeds are realized.
- Occupancy and same-office NOI trends, especially exposure to federal budget decisions and defense spending changes.
- Debt maturities, revolver availability, refinancing access, covenant headroom, and sensitivity to variable interest rates.
- Timing and cash cost of the swap settlement, and the potential consequences of derivative default provisions.
- Further impairment or litigation developments at Fort Ritchie and the amount and timing of any joint-venture, tax-increment financing, or environmental obligations.