COPT DEFENSE PROPERTIES (Corporate Office Properties Trust) — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. COPT is a REIT that conducts substantially all operations through Corporate Office Properties, L.P. The business focuses on office and data center properties serving U.S. government agencies and defense contractors, particularly in the Washington, D.C./Baltimore region.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $153.0 million | $131.8 million | $439.5 million | $394.6 million |
| Operating income | $37.4 million | $30.7 million | $94.5 million | $107.1 million |
| Income from continuing operations | $13.7 million | $11.0 million | $28.6 million | $22.4 million |
| Net income (loss) | $24.5 million | $(2.0) million | $39.3 million | $8.9 million |
| Diluted EPS | $0.22 | $(0.09) | $0.24 | $(0.14) |
| Real estate NOI | $75.4 million | $79.7 million | $222.6 million | $238.3 million |
| Diluted FFO per share | $0.49 | $0.48 | $1.34 | $1.18 |
Q3 revenue growth reflected higher construction and service activity as well as real estate revenue gains. Net income benefited from $10.6 million of real estate sale gains and comparison with substantial prior-year discontinued-operation losses. For the first nine months, adjusted diluted FFO per share was $1.39, versus $1.49 in 2013; FFO measures are non-GAAP and are not cash-flow equivalents.
Nine-month same-office NOI was $200.6 million, down $1.7 million year over year, despite average occupancy improving to 91.1% from 90.3%. Higher tenant recoveries and property expenses, partly related to severe Mid-Atlantic winter weather, affected results. Overall portfolio occupancy at quarter-end was 91.5%, compared with 89.1% at year-end 2013; average contractual annual rent was $29.14 per square foot.
Cash, debt and liquidity
- Operating cash flow for the first nine months was $144.2 million, up from $107.0 million; management attributed much of the comparison to prior-year interest and debt-extinguishment payments.
- Investing cash outflow was $137.0 million, including $150.9 million for construction, development and redevelopment. Financing cash outflow was $21.6 million. Cash declined to $40.0 million from $54.4 million at year-end 2013.
- Debt, net, was $2.05 billion at September 30, up from $1.93 billion at December 31, 2013. The $800 million revolving facility had no borrowings outstanding and $785.2 million available. The company reported compliance with debt covenants.
- In May, the company issued $300 million of 3.7% senior notes due 2021. In June, it redeemed $50 million of 7.5% Series H preferred shares and related units.
- Common dividends declared were $0.275 per share for Q3 and $0.825 for the first nine months, unchanged from 2013 comparable periods.
Material developments, outlook and risks
- A subsidiary defaulted on a $150 million nonrecourse mortgage secured by two Northern Virginia properties. The lender accelerated the loan in July, a receiver was appointed in September, and management expected foreclosure and conveyance of the properties to extinguish the debt. Cash flows from the properties belonged to the lender from April 1; these properties are excluded from the reported portfolio occupancy statistics.
- The company placed 692,000 square feet of new properties into service during the first nine months; those properties were 94.6% leased at quarter-end. It sold eight Greater Baltimore properties for $28.8 million and land for $28.3 million. Management expected to spend more than $80 million on construction and development and about $10 million on operating-property improvements during the remainder of 2014.
- Management said liquidity and capital resources were adequate for near- and longer-term requirements without requiring property sales. No numerical earnings or FFO guidance is provided in the supplied filing text.
- Key exposures include federal budget reductions or shutdowns that could affect leasing demand, development and tenant-occupancy risks, refinancing and interest-rate risk, and real estate market conditions. A 1 percentage-point increase in one-month LIBOR was estimated to increase nine-month interest expense by $1.5 million. Management estimated $2.9 million of derivative losses would be reclassified to interest expense over the next 12 months.
- The filing reports routine-course litigation and environmental obligations, with no anticipated material adverse effect from litigation or identified environmental liabilities. It also discloses a $1.1 million estimated tax-increment financing shortfall obligation and environmental indemnities subject to stated caps and terms.
Most important facts for investors to verify
- Progress and final outcome of foreclosure or conveyance of the Northern Virginia properties and treatment of the $150 million loan.
- Whether occupancy and leasing gains translate into durable same-property NOI growth, particularly given rising operating costs and government-related demand exposure.
- Development spending, lease-up and returns on projects under construction, including the partially operational data center.
- Debt maturities, refinancing access, covenant headroom and sensitivity to interest-rate changes.
- Cash available after committed construction, capital improvements, debt service and distributions; also distinguish reported GAAP earnings from FFO and adjusted FFO.