COPT 2012 Form 10-K Summary
Business context and reporting period. Corporate Office Properties Trust (NYSE: OFC), a REIT focused on office and data-center properties serving U.S. government agencies and defense contractors, reported for the fiscal year ended December 31, 2012. The portfolio included 208 operating office properties totaling 18.8 million square feet, 87.8% occupied, plus development projects and a partially operational wholesale data center. Most operations are concentrated in the Greater Washington, DC/Baltimore region.
Financial and operating performance
| Metric | 2012 | 2011 | Change / context |
|---|---|---|---|
| Total revenue | $528.0 million | $512.8 million | Up 3.0%; real-estate revenue rose while construction and service revenue declined. |
| Operating income | $96.0 million | $35.8 million | Improved mainly as impairment losses decreased. |
| Net income (loss) | $20.3 million | ($127.6 million) | 2011 included substantial impairment and derivative losses. |
| Net income (loss) attributable to common shareholders | ($1.7 million); ($0.03) per share | ($135.5 million); ($1.97) per share | 2012 included $20.8 million of preferred dividends and $1.8 million of redeemed-preferred-share issuance costs. |
| Real-estate NOI | $312.4 million | $308.0 million | Same-office NOI increased $7.9 million; dispositions reduced NOI. |
| Operating cash flow | $191.8 million | $152.1 million | Improved by $39.7 million. |
| Cash and cash equivalents | $10.6 million | $5.6 million | Year-end balance. |
| Debt | $2.019 billion | $2.426 billion | Down about $407 million; revolving facility balance was zero at year-end. |
| Diluted FFO per share | $2.13 | $0.72 | Adjusted-for-comparability diluted FFO per share was $2.11 versus $2.14. |
| Common dividends declared per share | $1.10 | $1.65 | Quarterly dividend was $0.275 in 2012, versus $0.4125 in 2011. |
The filing does not provide a single consolidated operating margin measure. Same-office average occupancy was 88.6% for 2012 versus 89.1% in 2011, while year-end portfolio occupancy rose to 87.8% from 86.2%, partly because lower-occupancy properties were sold. Properties near strategic government demand drivers were 92.1% occupied.
Material changes, capital and outlook
- Sold 35 operating properties totaling 2.3 million square feet and other non-operating properties for aggregate transaction values of $313.6 million; net proceeds of approximately $291 million were used primarily to repay the revolving credit facility. The company continued its strategic disposition program and approved a plan to sell its Greater Philadelphia properties within four years.
- Raised capital through an 8.6 million-share common offering, netting $204.9 million before offering expenses, and a 6.9 million-share Series L preferred offering, netting $165.7 million before offering expenses. The Series L shares carry a 7.375% dividend rate. The company also redeemed $55 million of Series G preferred shares and entered into term loans totaling $370 million.
- Acquired a fully leased 202,000-square-foot Herndon property for $48.3 million and placed 371,000 square feet of new office space into service. At year-end, 1.36 million square feet were under construction and 67% leased; estimated remaining construction and redevelopment costs were about $154 million.
- Management expected to continue property sales under its Strategic Reallocation Plan through 2013. It expected to spend more than $170 million on construction and development and approximately $50 million on operating-property improvements in 2013.
- Management cited federal budget uncertainty and potential defense spending cuts as pressures on leasing and expansion. It believed strategic properties serving knowledge-based defense and security activities could be relatively resilient, but emphasized that prolonged uncertainty could hinder leasing. No specific earnings or FFO guidance is stated in the provided filing text.
Risks, contingencies and unusual items
- Tenant and government concentration: The U.S. Government represented 24.2% of office-property annualized rental revenue; the four largest tenants together represented approximately 40.8%. Many government leases have one-year terms or early termination rights. Government shutdowns, budget cuts or sequestration could affect rent, renewals and demand.
- Geographic concentration: Greater Washington, DC/Baltimore properties generated 83.6% of office-property annualized rental revenue. A regional downturn could disproportionately affect performance.
- Refinancing and leverage: Scheduled debt principal payments were approximately $121 million in 2013, $158 million in 2014 and $796 million in 2015, with some maturities extendable subject to conditions. The company reported $792.3 million available under its $800 million revolving facility and $94.2 million under construction facilities at year-end; it was in compliance with debt covenants.
- Impairments: Total impairment losses and recoveries were $66.9 million in 2012 versus $151.0 million in 2011. Significant 2012 charges related to the decision to shorten the holding period for Greater Philadelphia assets and dispositions under the strategic plan. Further sales or revised property plans could trigger additional impairments.
- Accounting revisions: The company identified prior-period accounting errors and revised 2011 financial statements. Revisions affected, among other items, 2011 net loss attributable to common shareholders, reported as $135.5 million, and EPS, reported as ($1.97). It also said future quarterly filings would revise affected 2012 quarterly information.
- Joint-venture exposure: A mortgage lender initiated foreclosure proceedings on an unconsolidated real-estate joint venture’s properties in October 2012. The company had guarantees with a maximum exposure reported at approximately $64 million in the notes (elsewhere described as approximately $65 million); it stated that 80% of amounts paid were recoverable under an indemnity. The venture’s mortgage debt exceeded its property assets at year-end.
- Wholesale data center: The Manassas facility had six megawatts operational and four leased, against expected stabilized capacity of 18 megawatts. Management warned leasing could remain slow and that a change in strategy could result in a significant impairment.
- Other matters: A deed-in-lieu transaction for 400 Professional Drive extinguished a $15 million nonrecourse mortgage and generated a $3.7 million debt-extinguishment gain. The filing reported no material litigation and no environmental liability believed likely to materially affect the company. Auditors gave an unqualified opinion and found internal control over financial reporting effective.
Important facts for investors to verify
- Reconcile reported GAAP common-shareholder results with FFO and adjusted FFO, including the substantial impairment, discontinued-operations and preferred-dividend effects.
- Review revised 2011 results and subsequent quarterly revisions, and assess the significance of the accounting errors disclosed in the filing.
- Track 2013 lease expirations, tenant renewals and government lease termination rights, together with developments in federal budgets and defense spending.
- Confirm refinancing plans and covenant headroom for the 2015 maturity concentration, especially the approximately $796 million due that year.
- Monitor completion, leasing and remaining costs of construction projects, the disposition program, and the potential for additional impairment charges.
- Assess the outcome of the joint-venture foreclosure and the company’s actual guarantee and indemnity exposure; also monitor data-center leasing progress.