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COPT Reports Third Quarter 2020 Results

·21-min read

3Q20 Results Outperform High-End of Guidance; Increase Full Year Guidance

COVID-19 Impact on Operations Remain Minimal; 3Q20 Rent Collections Continue to Exceed 99.5%

FFO per share, as adjusted for comparability, of $0.54 in 3Q Exceeded High-End of Guidance by 1-Cent

Same-Property Cash NOI change of (0.2%) in 3Q20 was at High-End of Guidance

Core Portfolio 94.0% Occupied & 94.6% Leased

1.2 Million SF of 99% Leased Developments Placed in Service During First Nine Months of 2020

Raising Full-Year Guidance for FFO per Share, as Adjusted for Comparability, by 2-Cents at the Mid-Point, to $2.09

Solid Leasing Volumes

Total Leasing of 1.1 Million SF in 3Q included 244,000 SF of Development Leasing and 61,000 SF of Vacancy Leasing

Continued Strong Tenant Retention of 89% in 3Q; 84% for First Nine Months of 2020

1.6 Million SF Under Active Development are 84% Leased

Corporate Office Properties Trust ("COPT" or the "Company") (NYSE: OFC) announced financial and operating results for the third quarter ended September 30, 2020.

Management Comments

Stephen E. Budorick, COPT’s President & Chief Executive Officer, commented, "Third quarter FFO per share exceeded the high-end of our guidance, marking the third consecutive quarter of outperformance. Solid demand throughout our Defense/IT Locations continued to support strong development leasing volumes, and tenant retention remains on-track to set a 20-year record. We are in the process of selling interests in data center shell properties to a joint venture with an institutional partner. We anticipate completing two transactions that are expected to raise approximately $165 million of equity proceeds, which would reduce our year-end debt-to-EBITDA ratio to between 6.2x and 6.4x." He continued, "The Company continues to meet or exceed its 2020 plan objectives largely unimpeded by restrictions, shutdowns, or tenant credit issues related to the pandemic, and is raising the mid-point of 2020 guidance for FFO per share, as adjusted for comparability, by 2-cents, to $2.09. The nearly 1.8 million square feet of fully leased development projects we have or will place in service this year position the Company to generate FFO growth of 3-to-6 percent in 2021."

Financial Highlights

3rd Quarter Financial Results:

  • Diluted earnings (loss) per share ("EPS") was ($0.29) for the quarter ended September 30, 2020 as compared to $0.19 for the third quarter of 2019.

  • Diluted funds from operations per share ("FFOPS"), as calculated in accordance with Nareit’s definition, was $0.04 for the third quarter of 2020 as compared to $0.51 for third quarter 2019 results.

  • FFOPS as adjusted for comparability of $0.54 in the third quarter of 2020 was 5.9% higher than the $0.51 reported for the third quarter of 2019.

Operating Performance Highlights

Operating Portfolio Summary:

  • At September 30, 2020, the Company’s core portfolio of 174 operating office and data center shell properties was 94.0% occupied and 94.6% leased.

  • During the quarter, the Company placed into service 599,000 square feet that were 100% leased, bringing the total for the year to 1.2 million square feet placed in service that were 99% leased.

Same-Property Performance:

  • At September 30, 2020, COPT’s same-property portfolio of 152 buildings was 92.5% occupied and 93.2% leased.

  • For the quarter and nine months ended September 30, 2020, the Company’s same-property cash NOI decreased 0.2% and increased 2.1%, respectively, over the prior year’s comparable periods.

Leasing:

  • Total Square Feet Leased: For the quarter ended September 30, 2020, the Company leased 1.1 million total square feet, including 841,000 square feet of renewals, 244,000 square feet in development projects, and 61,000 square feet of new leases on vacant space.

For the nine months ended September 30, 2020, the Company executed 2.7 million square feet of total leasing, including 1.9 million square feet of renewals, 520,000 square feet of development leasing, and 274,000 square feet of vacancy leasing.

  • Renewal Rates: During the quarter and nine months ended September 30, 2020, the Company respectively renewed 89.0% and 84.3% of total expiring square feet and is on-track to set a 20-year record for tenant retention.

  • Cash Rent Spreads & Average Escalations on Renewing Leases: For the quarter and nine months ended September 30, 2020, cash rents on renewed space decreased 2.0%. For the same time periods, annual escalations on renewing leases averaged 2.4%.

  • Lease Terms: In the third quarter, lease terms averaged 3.2 years on renewing leases, 11.8 years on development leasing, and 6.6 years on new leasing of vacant space. For the nine months, lease terms averaged 4.2 years on renewing leases, 14.2 years on development leasing, and 6.6 years on vacancy leasing.

Investment Activity Highlights

  • Development Pipeline: As of October 7, 2020, the Company’s development pipeline consisted of 11 properties and expansion of one fully operational property totaling 1.6 million square feet that were 84% leased. These projects have a total estimated cost of $650.9 million, of which $410.1 million had been incurred as of September 30, 2020.

Balance Sheet and Capital Transaction Highlights

  • As of September 30, 2020, the Company’s net debt plus preferred equity to adjusted book ratio was 41.1% and its net debt plus preferred equity to in-place adjusted EBITDA ratio was 6.8x. For the quarter ended September 30, 2020, the Company’s adjusted EBITDA fixed charge coverage ratio was 3.9x.

  • As of September 30, 2020, and including the effect of interest rate swaps, the Company’s weighted average effective interest rate on its consolidated debt portfolio was 3.55% with a weighted average maturity of 3.3 years; additionally, 94.0% of the Company’s debt was subject to fixed interest rates.

  • During the quarter the Company issued $400 million of 2.25% senior unsecured notes, the proceeds from which were used to complete the tender offer for and subsequent redemption of all of its remaining $300 million of 3.7% senior unsecured notes due in 2021. The redemption was completed on October 19, 2020.

2020 Guidance

Management is increasing its prior full-year guidance ranges from $0.48-$0.52 for EPS to a new range of $0.77-$0.79. Management is also increasing its full-year guidance ranges for FFOPS per Nareit and FFOPS, as adjusted for comparability, to $1.44-$1.46 and $2.08-$2.10, respectively.

For the fourth quarter ending December 31, 2020, management is increasing its guidance for EPS from $0.43-$0.45 to a new range of $0.63-$0.65, lowering its existing guidance for FFOPS, per Nareit, to $0.48-$0.50, and affirming its existing guidance range of $0.52-$0.54 for FFOPS, as adjusted for comparability. Reconciliations of projected diluted EPS to projected FFOPS are as follows:

Table 1: Reconciliation of EPS to FFOPS, per Nareit and

Quarter ending

Year ending

As Adjusted for Comparability

December 31, 2020

December 31, 2020

Low

High

Low

High

EPS

$

0.63

$

0.65

$

0.77

$

0.79

Real estate-related depreciation and amortization

0.36

0.36

1.27

1.27

Gain on sales of real estate

(0.51

)

(0.51

)

(0.51

)

(0.51

)

Impairment losses

-

-

0.01

0.01

FFO allocation to other noncontrolling interests resulting from capital event

-

-

(0.10

)

(0.10

)

FFOPS, Nareit definition

0.48

0.50

1.44

1.46

FFO allocation to other noncontrolling interests resulting from capital event

-

-

0.10

0.10

Loss on interest rate derivatives and early extinguishment of debt

0.04

0.04

0.54

0.54

FFOPS, as adjusted for comparability

$

0.52

$

0.54

$

2.08

$

2.10

Associated Supplemental Presentation

Prior to the call, the Company will post a slide presentation to accompany management’s prepared remarks for its third quarter 2020 conference call, the details of which are provided below. The accompanying slide presentation can be viewed on and downloaded from the ‘Latest Updates’ section of COPT’s Investors website: https://investors.copt.com/

Conference Call Information

Management will discuss third quarter 2020 results on its conference call tomorrow at 12:00 p.m. Eastern Time, details of which are listed below:

Conference Call Date:

Friday, October 30, 2020

Time:

12:00 p.m. Eastern Time

Telephone Number: (within the U.S.)

855-463-9057

Telephone Number: (outside the U.S.)

661-378-9894

Passcode:

8968029

The conference call will also be available via live webcast in the ‘Latest Updates’ section of COPT’s Investors website: https://investors.copt.com/

Replay Information

A replay of the conference call will be immediately available via webcast on the Investors website. Additionally, a telephonic replay of this call will be available beginning at 3:00 p.m. Eastern Time on Friday, October 30, through 2:00 p.m. Eastern Time on Friday, November 13. To access the replay within the United States, please call 855-859-2056; to access it from outside the United States, please call 404-537-3406. In either case, use passcode 8968029.

Definitions

For definitions of certain terms used in this press release, please refer to the information furnished in the Company’s Supplemental Information Package furnished on a Form 8-K which can be found on its website (www.copt.com). Reconciliations of non-GAAP measures to the most directly comparable GAAP measures are included in the attached tables.

About COPT

COPT is a REIT that owns, manages, leases, develops and selectively acquires office and data center properties. The majority of its portfolio is in locations that support the United States Government and its contractors, most of whom are engaged in national security, defense and information technology ("IT") related activities servicing what it believes are growing, durable, priority missions ("Defense/IT Locations"). The Company also owns a portfolio of office properties located in select urban/urban-like submarkets in the Greater Washington, DC/Baltimore region with durable Class-A office fundamentals and characteristics ("Regional Office Properties"). As of September 30, 2020, the Company derived 88% of its core portfolio annualized rental revenue from Defense/IT Locations and 12% from its Regional Office Properties. As of the same date and including 15 properties owned through unconsolidated joint ventures, COPT’s core portfolio of 174 office and data center shell properties encompassed 20.2 million square feet and was 94.6% leased; the Company also owned one wholesale data center with a critical load of 19.25 megawatts that was 86.7% leased.

Forward-Looking Information

This press release may contain "forward-looking" statements, as defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that are based on the Company’s current expectations, estimates and projections about future events and financial trends affecting the Company. Forward-looking statements can be identified by the use of words such as "may," "will," "should," "could," "believe," "anticipate," "expect," "estimate," "plan" or other comparable terminology. Forward-looking statements are inherently subject to risks and uncertainties, many of which the Company cannot predict with accuracy and some of which the Company might not even anticipate. Although the Company believes that the expectations, estimates and projections reflected in such forward-looking statements are based on reasonable assumptions at the time made, the Company can give no assurance that these expectations, estimates and projections will be achieved. Future events and actual results may differ materially from those discussed in the forward-looking statements and the Company undertakes no obligation to update or supplement any forward-looking statements.

The areas of risk that may affect these expectations, estimates and projections include, but are not limited to, those risks described in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 and subsequent Quarterly Reports on Form 10-Q.

Category: Quarterly Results

Source: Corporate Office Properties Trust

Corporate Office Properties Trust

Summary Financial Data

(unaudited)

(in thousands, except per share data)

For the Three Months Ended
September 30,

For the Nine Months Ended
September 30,

2020

2019

2020

2019

Revenues

Revenues from real estate operations

$

134,443

$

130,734

$

399,097

$

395,495

Construction contract and other service revenues

20,323

28,697

46,240

87,946

Total revenues

154,766

159,431

445,337

483,441

Operating expenses

Property operating expenses

51,552

49,714

151,755

147,045

Depreciation and amortization associated with real estate operations

35,332

34,692

101,540

104,290

Construction contract and other service expenses

19,220

27,802

44,052

85,130

Impairment losses

1,530

327

1,530

327

General and administrative expenses

5,558

6,105

17,372

20,474

Leasing expenses

1,909

1,824

5,739

5,592

Business development expenses and land carry costs

1,094

964

3,474

2,947

Total operating expenses

116,195

121,428

325,462

365,805

Interest expense

(17,152)

(17,126)

(50,789)

(54,275)

Interest and other income

1,746

1,842

5,233

5,977

Credit loss recoveries

1,465

161

Gain on sales of real estate

5

84,469

Loss on early extinguishment of debt

(3,237)

(3,237)

Loss on interest rate derivatives

(53,196)

(53,196)

(Loss) income before equity in income of unconsolidated entities and income taxes

(31,803)

22,719

18,052

153,807

Equity in income of unconsolidated entities

477

396

1,372

1,207

Income tax (expense) benefit

(16)

131

(95)

113

Net (loss) income

(31,342)

23,246

19,329

155,127

Net loss (income) attributable to noncontrolling interests:

Common units in the Operating Partnership ("OP")

386

(267)

(185)

(1,863)

Preferred units in the OP

(77)

(157)

(231)

(487)

Other consolidated entities

(812)

(1,565)

(3,207)

(3,870)

Net (loss) income attributable to COPT common shareholders

$

(31,845)

$

21,257

$

15,706

$

148,907

Earnings per share ("EPS") computation:

Numerator for diluted EPS:

Net (loss) income attributable to COPT common shareholders

$

(31,845)

$

21,257

$

15,706

$

148,907

Redeemable noncontrolling interests

100

Amount allocable to share-based compensation awards

(145)

(118)

(359)

(469)

Numerator for diluted EPS

$

(31,990)

$

21,139

$

15,347

$

148,538

Denominator:

Weighted average common shares - basic

111,811

111,582

111,778

111,036

Dilutive effect of share-based compensation awards

361

278

313

Dilutive effect of redeemable noncontrolling interests

123

Weighted average common shares - diluted

111,811

111,943

112,056

111,472

Diluted EPS

$

(0.29)

$

0.19

$

0.14

$

1.33

Corporate Office Properties Trust

Summary Financial Data

(unaudited)

(in thousands, except per share data)

For the Three Months Ended
September 30,

For the Nine Months Ended
September 30,

2020

2019

2020

2019

Net (loss) income

$

(31,342)

$

23,246

$

19,329

$

155,127

Real estate-related depreciation and amortization

35,332

34,692

101,540

104,290

Impairment losses on real estate

1,530

327

1,530

327

Gain on sales of real estate

(5)

(84,469)

Depreciation and amortization on unconsolidated real estate JVs

819

790

2,455

1,922

Funds from operations ("FFO")

6,339

59,055

124,849

177,197

Noncontrolling interests - preferred units in the OP

(77)

(157)

(231)

(487)

FFO allocable to other noncontrolling interests

(1,074)

(1,429)

(14,614)

(3,588)

Basic FFO allocable to share-based compensation awards

(119)

(248)

(449)

(662)

Basic FFO available to common share and common unit holders ("Basic FFO")

5,069

57,221

109,555

172,460

Redeemable noncontrolling interests

34

103

100

Diluted FFO available to common share and common unit holders ("Diluted FFO")

5,069

57,255

109,658

172,560

Loss on early extinguishment of debt

3,237

3,237

Loss on interest rate derivatives

53,196

53,196

Demolition costs on redevelopment and nonrecurring improvements

11

63

44

Executive transition costs

4

Non-comparable professional and legal expenses

175

486

Dilutive preferred units in the OP

77

231

FFO allocation to other noncontrolling interests resulting from capital event

11,090

Diluted FFO comparability adjustments for redeemable noncontrolling interests

34

Diluted FFO comparability adjustments allocable to share-based compensation awards

(139)

(307)

(2)

Diluted FFO available to common share and common unit holders, as adjusted for comparability

61,485

57,430

177,168

173,092

Straight line rent adjustments and lease incentive amortization

(1,009)

(515)

662

(1,131)

Amortization of intangibles included in net operating income

(39)

(59)

(186)

(47)

Share-based compensation, net of amounts capitalized

1,727

1,697

4,754

4,993

Amortization of deferred financing costs

658

538

1,875

1,595

Amortization of net debt discounts, net of amounts capitalized

453

377

1,229

1,121

Accum. other comprehensive loss on derivatives amortized to expense

12

79

Replacement capital expenditures

(13,085)

(16,752)

(46,971)

(43,927)

Other diluted AFFO adjustments associated with real estate JVs

150

66

(6)

280

Diluted adjusted funds from operations available to common share and common unit holders ("Diluted AFFO")

$

50,340

$

42,794

$

138,525

$

136,055

Diluted FFO per share

$

0.04

$

0.51

$

0.97

$

1.53

Diluted FFO per share, as adjusted for comparability

$

0.54

$

0.51

$

1.56

$

1.53

Dividends/distributions per common share/unit

$

0.275

$

0.275

$

0.825

$

0.825

Corporate Office Properties Trust

Summary Financial Data

(unaudited)

(Dollars and shares in thousands, except per share data)

September 30,
2020

December 31,
2019

Balance Sheet Data

Properties, net of accumulated depreciation

$

3,586,938

$

3,340,886

Total assets

4,120,189

3,854,453

Debt, per balance sheet

2,181,551

1,831,139

Total liabilities

2,447,031

2,105,777

Redeemable noncontrolling interests

23,522

29,431

Equity

1,649,636

1,719,245

Net debt to adjusted book

41.0

%

36.8

%

Core Portfolio Data (as of period end) (1)

Number of operating properties

174

168

Total operational square feet (in thousands)

20,232

19,016

% Occupied

94.0

%

93.1

%

% Leased

94.6

%

94.6

%

For the Three Months Ended
September 30,

For the Nine Months Ended
September 30,

2020

2019

2020

2019

Payout ratios

Diluted FFO

613.6

%

54.2

%

85.1

%

54.0

%

Diluted FFO, as adjusted for comparability

50.7

%

54.1

%

52.8

%

53.8

%

Diluted AFFO

61.9

%

72.6

%

67.5

%

68.5

%

Adjusted EBITDA fixed charge coverage ratio

3.9x

3.7x

3.8x

3.7x

Net debt to in-place adjusted EBITDA ratio (2)

6.8x

6.1x

N/A

N/A

Net debt plus preferred equity to in-place adjusted EBITDA ratio (3)

6.8x

6.1x

N/A

N/A

Reconciliation of denominators for per share measures

Denominator for diluted EPS

111,811

111,943

112,056

111,472

Weighted average common units

1,240

1,312

1,235

1,323

Redeemable noncontrolling interests

109

125

Anti-dilutive EPS effect of share-based compensation awards

274

Denominator for diluted FFO per share

113,325

113,364

113,416

112,795

Dilutive convertible preferred units

176

176

Redeemable noncontrolling interests

109

Denominator for diluted FFO per share, as adjusted for comparability

113,610

113,364

113,592

112,795

(1)

Represents Defense/IT Locations and Regional Office properties.

(2)

Represents net debt as of period end divided by in-place adjusted EBITDA for the period, as annualized (i.e. three month periods are multiplied by four).

(3)

Represents net debt plus the total liquidation preference of preferred equity as of period end divided by in-place adjusted EBITDA for the period, as annualized (i.e. three month periods are multiplied by four).

Corporate Office Properties Trust

Summary Financial Data

(unaudited)

(Dollars in thousands)

For the Three Months Ended
September 30,

For the Nine Months Ended
September 30,

2020

2019

2020

2019

Reconciliation of common share dividends to dividends and distributions for payout ratios

Common share dividends - unrestricted shares and deferred shares

$

30,763

$

30,721

$

92,278

$

92,099

Common unit distributions - unrestricted units

341

338

1,021

1,068

Dividends and distributions for diluted FFO payout ratio

31,104

31,059

93,299

93,167

Distributions on dilutive preferred units

77

231

Dividends and distributions for other payout ratios

$

31,181

$

31,059

$

93,530

$

93,167

Reconciliation of GAAP net income to earnings before interest, income taxes, depreciation and amortization for real estate ("EBITDAre"), adjusted EBITDA and in-place adjusted EBITDA

Net (loss) income

$

(31,342)

$

23,246

$

19,329

$

155,127

Interest expense

17,152

17,126

50,789

54,275

Income tax expense (benefit)

16

(131)

95

(113)

Real estate-related depreciation and amortization

35,332

34,692

101,540

104,290

Impairment losses on real estate

1,530

327

1,530

327

Other depreciation and amortization

457

467

1,324

1,396

Gain on sales of real estate

(5)

(84,469)

Adjustments from unconsolidated real estate JVs

1,274

1,202

3,814

2,859

EBITDAre

24,419

76,929

178,416

233,692

Loss on early extinguishment of debt

3,237

3,237

Loss on interest rate derivatives

53,196

53,196

Net loss (gain) on other investments

250

252

(400)

Credit loss recoveries

(1,465)

(161)

Business development expenses

414

419

1,630

1,427

Non-comparable professional and legal expenses

175

486

Demolition costs on redevelopment and nonrecurring improvements

11

63

44

Executive transition costs

4

Adjusted EBITDA

80,062

77,523

$

236,633

$

235,253

Proforma net operating income adjustment for property changes within period

1,631

Change in collectability of deferred rental revenue

224

In-place adjusted EBITDA

$

81,917

$

77,523

Reconciliation of interest expense to the denominators for fixed charge coverage-Adjusted EBITDA

Interest expense

$

17,152

$

17,126

$

50,789

$

54,275

Less: Amortization of deferred financing costs

(658)

(538)

(1,875)

(1,595)

Less: Amortization of net debt discounts, net of amounts capitalized

(453)

(377)

(1,229)

(1,121)

Less: Accum. other comprehensive loss on derivatives amortized to expense

(12)

(79)

COPT’s share of interest expense of unconsolidated real estate JVs, excluding deferred financing costs

444

403

1,327

916

Scheduled principal amortization

1,033

1,107

3,077

3,300

Capitalized interest

2,908

2,927

9,440

7,319

Preferred unit distributions

77

157

231

487

Denominator for fixed charge coverage-Adjusted EBITDA

$

20,503

$

20,793

$

61,760

$

63,502

Corporate Office Properties Trust

Summary Financial Data

(unaudited)

(Dollars in thousands)

For the Three Months Ended
September 30,

For the Nine Months Ended
September 30,

2020

2019

2020

2019

Reconciliations of tenant improvements and incentives, building improvements and leasing costs for operating properties to replacement capital expenditures

Tenant improvements and incentives

$

6,950

$

10,880

$

27,177

$

26,600

Building improvements

10,400

8,908

26,537

17,772

Leasing costs

1,934

2,722

6,918

8,665

Net additions to (exclusions from) tenant improvements and incentives

(943)

(2,156)

1,412

(1,866)

Excluded building improvements and leasing costs

(5,256)

(3,602)

(15,073)

(7,244)

Replacement capital expenditures

$

13,085

$

16,752

$

46,971

$

43,927

Same Properties cash NOI

$

73,910

$

74,071

$

224,709

$

220,063

Straight line rent adjustments and lease incentive amortization

(1,214)

(572)

(3,294)

(587)

Amortization of acquired above- and below-market rents

98

82

291

115

Amortization of intangibles and other assets to property operating expenses

(23)

(23)

(69)

(69)

Lease termination fees, gross

609

823

1,052

1,629

Tenant funded landlord assets and lease incentives

342

526

564

1,452

Cash NOI adjustments in unconsolidated real estate JV

48

42

111

147

Same Properties NOI

$

73,770

$

74,949

$

223,364

$

222,750

September 30,
2020

December 31,
2019

Reconciliation of total assets to adjusted book

Total assets

$

4,120,189

$

3,854,453

Accumulated depreciation

1,095,441

1,007,120

Accumulated amortization of real estate intangibles and deferred leasing costs

215,651

212,547

COPT’s share of liabilities of unconsolidated real estate JVs

50,957

50,734

COPT’s share of accumulated depreciation and amortization of unconsolidated real estate JVs

10,640

8,164

Less: Property - operating lease liabilities

(26,382)

(17,317)

Less: Property - finance lease liabilities

(28)

(702)

Less: Cash and cash equivalents

(11,458)

(14,733)

Less: COPT’s share of cash of unconsolidated real estate JVs

(538)

(498)

Adjusted book

$

5,454,472

$

5,099,768

Reconciliation of debt outstanding to net debt and net debt plus preferred equity

Debt outstanding (excluding net debt discounts and deferred financing costs)

$

2,247,523

1,893,057

Less: Cash and cash equivalents

(11,458)

(14,733)

Less: COPT’s share of cash of unconsolidated real estate JVs

(538)

(498)

Net debt

$

2,235,527

$

1,877,826

Preferred equity

8,800

8,800

Net debt plus preferred equity

$

2,244,327

$

1,886,626

View source version on businesswire.com: https://www.businesswire.com/news/home/20201029006224/en/

Contacts

IR Contacts:
Stephanie Krewson-Kelly
443-285-5453
stephanie.kelly@copt.com

Michelle Layne
443-285-5452
michelle.layne@copt.com