2017 Annual Report
C O R P O R A T E O F F I C E P R O P E R T I E S T R U S T
Letter to
Shareholders
By many measures, 2017 was a very successful year. We
achieved record and near-record milestones in total leasing
volume, tenant retention rates, and development leasing.
Additionally, we completed seven years of programmatic asset
sales that improved our portfolio and balance sheet that, we
believe, position our Company to deliver steady, high quality
cash flow growth to stakeholders in the future. It was also a year
of challenges, as a record length Continuing Resolution (“CR”) on
the U.S. Government’s fiscal year 2017 budget combined with a
very deliberate government appropriation process to delay until
2018 the lease actions on our two development projects held
for Government use.1
Despite the protracted CR, demand built throughout the year
due in part to tailwinds generated by the eventual passage
of the larger than expected fiscal 2017 budget in early May.
We completed 3.3 million square feet of total leasing in 2017,
the most since 2013. Our 81% tenant retention rate was our
highest since 1999 and illustrates the increased strength of the
defense economy, and the very durable nature of our portfolio.
We renewed 1.9 million square feet, incurring modest average
lease costs2 of $2.60 per square foot per year, the lowest figure
since 2012. Other New Leasing (i.e., filling vacant space) totaled
431,000 square feet, and we placed 1.2 million square feet of
developments into service that were 98% leased.
Figure 1: Historical Development Leasing
As Figure 1 shows, we achieved significant milestones in
development leasing, as the 975,000 square feet of development
leasing executed in 2017 was the second highest volume in the
company’s history. Five build-to-suits totaling 743,000 square feet
of Data Center Shells drove the bulk of development leasing for
the year, and the three leases signed in the fourth quarter kicked
off a multi-year program to develop an additional two million
square feet with hyper scale cloud computing U.S. Government
contractors. These transactions will increase NOI and NAV
significantly, diversify our avenues of growth, and advance our
mission-critical Defense/IT platform.
Between 2011—2017, we disposed of 11 million square feet
of properties for $1.6 billion of proceeds, which we used to
transform our balance sheet and to enhance our competitive
advantage at our proven Defense/IT locations, summarized
in Figure 2. Over that period, we also developed 6.3 million
square feet of new properties primarily for our U.S. Government
and defense contractor customers and, at the end of 2017,
our Defense/IT locations generated 87.4% of our Company’s
annualized revenues. We expect the majority of our future
developments to be at these proven locations.
Figure 2: COPT’s Defense/IT Locations
> DEMAND
DRIVER
Ft. Meade
> COPT
ASSET(S)
NBP
Arundel Preserve
Columbia Gateway
Airport Square
> MISSIONS
Cyber, Signals
Intelligence,
Info Assurance,
DOD IT Function
)
s
n
o
i
l
l
i
m
(
t
e
e
F
e
r
a
u
q
S
1.4M
1.2M
1M
.8M
.6M
.4M
.2M
0
6 year average = 930,000 SF
Redstone Arsenal
Redstone Gateway
Lackland AFB
USG Campus
Missile Defense,
Aviation & Rocket Testing
Army Materiel Command
NASA Space Program
& Others
Air Force Cyber
& Others
2009 2010
2011
2012
2013
2014
2015
2016
2017
1 The 210-day long CR in fiscal 2017 is the longest in U.S. history, surpassing the
previous 196-day CR in fiscal year 2011.
2 Lease costs are tenant improvement allowances (“TIs”) plus leasing commissions.
Continued on Inside Back Cover
Ft. Belvoir
Patriot Ridge
Geospatial Intelligence
NoVA Agencies
Westfields
Intelligence Activities
FBI Cyber
NRO
Washington Navy Yard
NAS Pax River
NSWCDD Dahlgren
Navy Support
Portfolio*
NAVSEA
NAVAIR
NAVFAC
NAWCAD
MAE-East
Data Centers
Cloud Computing
NAP
*Maritime Plaza // Exploration & Expedition Office Parks (“Pax I”) //
Wildewood Technology Park (“Pax II”) // Dahlgren Technology Center
Continued from Inside Front Cover
Figure 3: DOD’s Discretionary Budget Authority (“Base Budget”)*
FY 2000–FY 2010,
DOD’s base
budget compounded
at 6% annually
-1.0%, on average, from
FY 2010–FY 2015
$528
$528
$530
$495
$496
$497
+7% in
FY 2016– FY 2017
$532
$521
+ 4 % – 6 % a v e r a g e
a n n u a l i n c r e a s e s
ex p e c t e d
$689
$656
+14% in FY 2018
and +3% in FY 2019
$625
$605
$800.0
$700.0
$600.0
$500.0
$400.0
In FY 2013, Sequestration cut
the DOD’s base budget by 6.6%
$300.0
$279
$200.0
2000
2010
2011
2012
2013
2014
2015
2016
2017
2018 NDAA 2019 NDAA
2020 F
2021 F
Current dollars, in billions.
Source: Tables 1-9 and 2-1 of the FY 2018 National Defense Budget Estimates (“Green Book”); CRS June 28, 2017 report:
Defense: FY 2018 Budget Request, Authorization, and Appropriations; Capital Alpha Partners; COPT’s IR Department
FY 2020–FY 2021 are forecasted assuming a 5% annual increase over the fiscal 2019 NDAA level.
During these same seven years, we dramatically reduced our
leverage and, in 2013, earned an investment grade rating from
all three major ratings agencies. Since then, we have further
strengthened our balance sheet, evidenced by Moody’s revising
our rating outlook from “stable” to “positive” in August 2017.
Looking forward, as shown in Figure 3, the U.S. Government’s
authorized but not yet appropriated fiscal 2018 budget includes a
$73 billion increase to the Department of Defense’s base budget,
to $605 billion. The 14% increase over the fiscal 2017 budget
will represent the largest increase in spending since 2002, and,
we believe, bodes well for higher demand in our markets. Major
defense contractors convey a highly optimistic outlook for their
businesses, supported by the consensus view that the defense
industry is at the advent of a multi-year expansion to rebuild,
restore, and reinvigorate our nation’s military strength. Having
disposed of our non-strategic assets and their drag on cash
flow growth, we believe that we have never been in a greater
position of strength to capitalize on the opportunities present
and emerging in our markets.
Stephen E. Budorick
President & Chief Executive Officer
FROM LEFT TO RIGHT:
Paul R. Adkins
EVP & Chief Operating Officer
Stephen E. Budorick
President & Chief Executive Officer
Anthony Mifsud
EVP & Chief Financial Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark one)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number 1-14023 (Corporate Office Properties Trust)
Commission file number 333-189188 (Corporate Office Properties, L.P.)
Corporate Office Properties Trust
Corporate Office Properties, L.P.
(Exact name of registrant as specified in its charter)
Corporate Office Properties Trust
Corporate Office Properties, L.P.
Maryland
(State or other jurisdiction of
incorporation or organization)
Delaware
(State or other jurisdiction of
incorporation or organization)
23-2947217
(IRS Employer
Identification No.)
23-2930022
(IRS Employer
Identification No.)
6711 Columbia Gateway Drive, Suite 300, Columbia, MD
(Address of principal executive offices)
21046
(Zip Code)
Registrant’s telephone number, including area code: (443) 285-5400
________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Common Shares of beneficial interest, $0.01 par value
(Title of Each Class)
(Name of Exchange on Which Registered)
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Corporate Office Properties Trust
Corporate Office Properties, L.P.
Yes
Yes
No
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Corporate Office Properties Trust
Corporate Office Properties, L.P.
Yes
Yes
No
No
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Corporate Office Properties Trust
Corporate Office Properties, L.P.
Yes
Yes
No
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to
submit and post such files).
Corporate Office Properties Trust
Corporate Office Properties, L.P.
Yes
Yes
No
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Corporate Office Properties Trust
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
(Do not check if a smaller reporting company)
Corporate Office Properties, L.P.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
(Do not check if a smaller reporting company)
Corporate Office Properties Trust
Corporate Office Properties, L.P.
Yes
Yes
No
No
The aggregate market value of the voting and nonvoting shares of common stock held by non-affiliates of Corporate Office Properties Trust was
approximately $3.5 billion, as calculated using the closing price of such shares on the New York Stock Exchange and the number of outstanding shares as of June
30, 2017. For purposes of calculating this amount only, affiliates are defined as Trustees, executive owners and beneficial owners of more than 10% of Corporate
Office Properties Trust’s outstanding common shares, $0.01 par value. At January 31, 2018, 101,283,508 of Corporate Office Properties Trust’s common shares
were outstanding.
The aggregate market value of the voting and nonvoting common units of limited partnership interest held by non-affiliates of Corporate Office Properties,
L.P. was approximately $108.9 million, as calculated using the closing price of the common shares of Corporate Office Properties Trust (into which common units
not held by Corporate Office Properties Trust are exchangeable) on the New York Stock Exchange and the number of outstanding units as of June 30, 2017.
Portions of the proxy statement of Corporate Office Properties Trust for its 2018 Annual Meeting of Shareholders to be filed within 120 days after the end of
the fiscal year covered by this Form 10-K are incorporated by reference into Part III of this Form 10-K.
EXPLANATORY NOTE
This report combines the annual reports on Form 10-K for the year ended December 31, 2017 of Corporate Office Properties Trust
(“COPT”) and subsidiaries (collectively, the “Company”) and Corporate Office Properties, L.P. (“COPLP”) and subsidiaries (collectively, the
“Operating Partnership”). Unless stated otherwise or the context otherwise requires, “we,” “our,” and “us” refer collectively to COPT, COPLP
and their subsidiaries.
COPT is a real estate investment trust, or REIT, and the sole general partner of COPLP. As of December 31, 2017, COPT owned
approximately 96.9% of the outstanding common units; the remaining common units and all of the outstanding COPLP preferred units were
owned by third parties. As the sole general partner of COPLP, COPT controls COPLP and can cause it to enter into major transactions including
acquisitions, dispositions and refinancings and cause changes in its line of business, capital structure and distribution policies.
There are a few differences between the Company and the Operating Partnership which are reflected in this Form 10-K. We believe it is
important to understand the differences between the Company and the Operating Partnership in the context of how the two operate as an
interrelated, consolidated company. COPT is a REIT whose only material asset is its ownership of partnership interests of COPLP. As a result,
COPT does not conduct business itself, other than acting as the sole general partner of COPLP, issuing public equity and guaranteeing certain
debt of COPLP. COPT itself is not directly obligated under any indebtedness but guarantees some of the debt of COPLP. COPLP owns
substantially all of the assets of COPT either directly or through its subsidiaries, conducts almost all of the operations of the business and is
structured as a limited partnership with no publicly traded equity. Except for net proceeds from public equity issuances by COPT, which are
contributed to COPLP in exchange for partnership units, COPLP generates the capital required by COPT’s business through COPLP’s
operations, by COPLP’s direct or indirect incurrence of indebtedness or through the issuance of partnership units.
Noncontrolling interests, shareholders’ equity and partners’ capital are the main areas of difference between the consolidated financial
statements of COPT and those of COPLP. The common limited partnership interests in COPLP not owned by COPT are accounted for as
partners’ capital in COPLP’s consolidated financial statements and as noncontrolling interests in COPT’s consolidated financial statements.
COPLP’s consolidated financial statements also reflect COPT’s noncontrolling interests in certain real estate partnerships, limited liability
companies (“LLCs”), business trusts and corporations; the differences between shareholders’ equity, partners’ capital and noncontrolling
interests result from the differences in the equity issued at the COPT and COPLP levels and in COPT’s noncontrolling interests in these real
estate partnerships, LLCs, business trusts and corporations. The only other significant differences between the consolidated financial statements
of COPT and those of COPLP are assets in connection with a non-qualified elective deferred compensation plan (comprised primarily of mutual
funds and equity securities) and the corresponding liability to the plan’s participants that are held directly by COPT.
We believe combining the annual reports on Form 10-K of the Company and the Operating Partnership into this single report results in the
following benefits:
•
•
•
•
combined reports better reflect how management, investors and the analyst community view the business as a single operating unit;
combined reports enhance investors’ understanding of the Company and the Operating Partnership by enabling them to view the business
as a whole and in the same manner as management;
combined reports are more efficient for the Company and the Operating Partnership and result in savings in time, effort and expense; and
combined reports are more efficient for investors by reducing duplicative disclosure and providing a single document for their review.
To help investors understand the significant differences between the Company and the Operating Partnership, this report presents the following
separate sections for each of the Company and the Operating Partnership:
•
•
•
•
consolidated financial statements;
the following notes to the consolidated financial statements:
• Note 3, Fair Value Measurements of COPT and subsidiaries and COPLP and subsidiaries;
• Note 13, Equity of COPT and subsidiaries;
• Note 14, Equity of COPLP and subsidiaries;
• Note 18, Earnings per Share of COPT and subsidiaries and Earnings per Unit of COPLP and subsidiaries; and
• Note 20, Quarterly Data of COPT and subsidiaries and COPLP and subsidiaries.
“Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources of
COPT”; and
“Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources of
COPLP.”
This report also includes separate sections under Part II, Item 9A. Controls and Procedures and separate Exhibit 31 and Exhibit 32 certifications
for each of COPT and COPLP to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the
requisite certifications and that COPT and COPLP are compliant with Rule 13a-15 and Rule 15d-14 of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), and 18 U.S.C. §1350.
Table of Contents
Form 10-K
PART I
ITEM 1.
BUSINESS
ITEM 1A
RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2.
ITEM 3.
ITEM 4.
PART II
ITEM 5.
ITEM 6.
ITEM 7.
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
MARKET FOR REGISTRANTS’ COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
SELECTED FINANCIAL DATA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
ITEM 9.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 9A.
CONTROLS AND PROCEDURES
ITEM 9B
OTHER INFORMATION
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11.
EXECUTIVE COMPENSATION
ITEM 12.
ITEM 13.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
ITEM 16.
FORM 10-K SUMMARY
SIGNATURES
PAGE
6
10
17
18
22
22
22
23
28
52
52
52
52
53
54
54
54
54
54
54
59
60
4
FORWARD-LOOKING STATEMENTS
This Form 10-K contains “forward-looking” statements, as defined in the Private Securities Litigation Act of 1995, that are
based on our current expectations, estimates and projections about future events and financial trends affecting the financial
condition and operations of our business. Additionally, documents we subsequently file with the SEC and incorporated by
reference will contain forward-looking statements.
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 we cannot predict with accuracy and some of which we might not even anticipate.
Although we believe that the expectations, estimates and projections reflected in such forward-looking statements are based on
reasonable assumptions at the time made, we 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. We
caution readers that forward-looking statements reflect our opinion only as of the date on which they were made. You should
not place undue reliance on forward-looking statements. The following factors, among others, could cause actual results and
future events to differ materially from those set forth or contemplated in the forward-looking statements:
•
•
•
•
•
•
•
•
•
•
•
•
general economic and business conditions, which will, among other things, affect office property and data center demand
and rents, tenant creditworthiness, interest rates, financing availability and property values;
adverse changes in the real estate markets, including, among other things, increased competition with other companies;
governmental actions and initiatives, including risks associated with the impact of a prolonged government shutdown or
budgetary reductions or impasses, such as a reduction in rental revenues, non-renewal of leases and/or a curtailment of
demand for additional space by our strategic customers;
our ability to borrow on favorable terms;
risks of real estate acquisition and development activities, including, among other things, risks that development projects
may not be completed on schedule, that tenants may not take occupancy or pay rent or that development or operating costs
may be greater than anticipated;
risks of investing through joint venture structures, including risks that our joint venture partners may not fulfill their
financial obligations as investors or may take actions that are inconsistent with our objectives;
changes in our plans for properties or views of market economic conditions or failure to obtain development rights, either
of which could result in recognition of significant impairment losses;
our ability to satisfy and operate effectively under Federal income tax rules relating to real estate investment trusts and
partnerships;
possible adverse changes in tax laws;
the dilutive effects of issuing additional common shares;
our ability to achieve projected results; and
environmental requirements.
We undertake no obligation to publicly update or supplement forward-looking statements, whether as a result of new
information, future events or otherwise. For further information on these and other factors that could affect us and the
statements contained herein, you should refer to the section below entitled “Item 1A. Risk Factors.”
5
Item 1. Business
OUR COMPANY
PART I
General. Corporate Office Properties Trust (“COPT”) and subsidiaries (collectively, the “Company”) is a fully-integrated
and self-managed real estate investment trust (“REIT”). Corporate Office Properties, L.P. (“COPLP”) and subsidiaries
(collectively, the “Operating Partnership”) is the entity through which COPT, the sole general partner of COPLP, conducts
almost all of its operations and owns almost all of its assets. Unless otherwise expressly stated or the context otherwise
requires, “we”, “us” and “our” as used herein refer to each of the Company and the Operating Partnership. We own, manage,
lease, develop and selectively acquire office and data center properties. The majority of our 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 we believe are growing, durable priority missions (“Defense/IT
Locations”). We also own 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”). As of
December 31, 2017, our properties included the following:
•
•
•
•
159 properties totaling 17.3 million square feet comprised of 144 office properties and 15 single-tenant data center shell
properties (“data center shells”). We owned six of these data center shells through an unconsolidated real estate joint
venture;
a wholesale data center with a critical load of 19.25 megawatts;
ten properties under construction or redevelopment (seven office properties and three data center shells) that we estimate
will total approximately 1.1 million square feet upon completion, including two partially operational properties and two
properties completed and held for future lease to the United States Government; and
approximately 1,000 acres of land controlled for future development that we believe could be developed into
approximately 13.0 million square feet and 150 acres of other land.
COPLP owns real estate directly and through subsidiary partnerships and limited liability companies (“LLCs”). In addition to
owning real estate, COPLP also owns subsidiaries that provide real estate services such as property management and
construction and development services primarily for our properties but also for third parties. Some of these services are
performed by a taxable REIT subsidiary (“TRS”).
Equity interests in COPLP are in the form of common units and preferred units. As of December 31, 2017, COPT owned
96.9% of the outstanding COPLP common units (“common units”); the remaining common units and all of the outstanding
COPLP preferred units (“preferred units”) were owned by third parties. Common units not owned by COPT carry certain
redemption rights. The number of common units owned by COPT is equivalent to the number of outstanding common shares
of beneficial interest (“common shares”) of COPT, and the entitlement of all common units to quarterly distributions and
payments in liquidation is substantially the same as those of COPT common shareholders. Similarly, in the case of any series
of preferred units held by COPT, there would be a series of preferred shares of beneficial interest (“preferred shares”) in COPT
that is equivalent in number and carries substantially the same terms as such series of COPLP preferred units. COPT’s
common shares are publicly traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “OFC”.
Because COPLP is managed by COPT, and COPT conducts substantially all of its operations through COPLP, we refer to
COPT’s executive officers as COPLP’s executive officers; similarly, although COPLP, as a partnership, does not have a board
of trustees, we refer to COPT’s Board of Trustees as COPLP’s Board of Trustees.
We believe that COPT is organized and has operated in a manner that satisfies the requirements for taxation as a REIT
under the Internal Revenue Code of 1986, as amended, and we intend to continue to operate COPT in such a manner. If COPT
continues to qualify for taxation as a REIT, it generally will not be subject to Federal income tax on its taxable income (other
than that of its TRS entities) that is distributed to its shareholders. A REIT is subject to a number of organizational and
operational requirements, including a requirement that it distribute to its shareholders at least 90% of its annual taxable income.
Our executive offices are located at 6711 Columbia Gateway Drive, Suite 300, Columbia, Maryland 21046 and our
telephone number is (443) 285-5400.
Our Internet address is www.copt.com. We make available on our Internet website free of charge our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as
reasonably possible after we file such material with the Securities and Exchange Commission (the “SEC”). In addition, we
have made available on our Internet website under the heading “Corporate Governance” the charters for our Board of Trustees’
6
Audit, Nominating and Corporate Governance, Compensation and Investment Committees, as well as our Corporate
Governance Guidelines, Code of Business Conduct and Ethics and Code of Ethics for Financial Officers. We intend to make
available on our website any future amendments or waivers to our Code of Business Conduct and Ethics and Code of Ethics for
Financial Officers within four business days after any such amendments or waivers. The information on our Internet site is not
part of this report.
The SEC maintains an Internet website that contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC. This Internet website can be accessed at www.sec.gov. The public may
also read and copy paper filings that we have made with the SEC at the SEC’s Public Reference Room, located at 100 F Street,
NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling (800)
SEC-0330.
Significant Developments
In 2017:
• we finished the year with our office and data center shell portfolio 93.6% occupied;
• we placed into service an aggregate of 1.2 million square feet in eight newly constructed properties and three redeveloped
properties that were 97.8% leased as of December 31, 2017;
• we sold 13 operating properties totaling 992,000 square feet that were 91.8% occupied and other land for $184.2 million.
We provided a financial guaranty to the buyer of one of these properties under which we would indemnify it for up to $20
million in losses it could incur related to a potential defined capital event occurring on the property by June 30, 2019.
Accordingly, we did not recognize the sale of this property for accounting purposes, and we reported the sales proceeds as
a liability on our consolidated balance sheet. We do not expect to incur any losses under this financial guaranty;
• we repaid $200.0 million on a term loan scheduled to mature in 2020;
• COPT redeemed all of the outstanding shares of its:
•
•
Series K Preferred Shares effective January 21, 2017 at a price of $50 per share, or $26.6 million in the aggregate, plus
accrued and unpaid dividends thereon through the date of redemption; and
Series L Preferred Shares effective June 27, 2017 at a price of $25 per share, or $172.5 million in the aggregate, plus
accrued and unpaid dividends thereon through the date of redemption;
• COPT entered into forward equity sale agreements effective November 2, 2017 to issue 9.2 million common shares at an
initial gross offering price of $285.2 million, or $31.00 per share, before underwriting discounts, commissions and offering
expenses. The forward sale price that we expect to receive upon physical settlement of the agreements will be subject to
adjustment on a daily basis based on a floating interest rate factor equal to the overnight bank funding rate less a spread,
and will be decreased on each of certain dates specified in the agreements during the term of the agreements. On
December 27, 2017, COPT issued 1.7 million common shares under the agreements for net proceeds of $50.0 million; and
• COPT issued 591,000 COPT common shares at a weighted average price of $33.84 per share under our at-the-market
(“ATM”) stock offering program established in September 2016. Net proceeds from the shares issued totaled $19.7
million.
Business and Growth Strategies
Our primary goal is to deliver attractive and competitive total returns to our shareholders. This section sets forth key
components of our business and growth strategies that we have in place to support this goal.
Defense/IT Locations Strategy: We specialize in serving the unique requirements of tenants of our Defense/IT Locations
properties. These properties are primarily occupied by United States Government and contractor tenants engaged in what we
believe are high priority security, defense and IT missions. These tenants’ missions pertain more to knowledge-based activities
(i.e., cyber security, research and development and other highly technical defense and security areas) than to force structure
(i.e., troops) and weapon system production. Our office and data center shell portfolio is significantly concentrated in Defense/
IT Locations, which as of December 31, 2017 accounted for 149 of the portfolio’s 159 properties, or 87.4% of its annualized
rental revenue, plus developable land controlled to accommodate future growth. These properties generally have higher tenant
renewal rates than is typical in commercial office space due in large part to the importance of their proximity to defense
installations or other key demand drivers, the ability of many of these properties to meet Anti-Terrorism Force Protection
(“ATFP”) requirements and significant investments often made by tenants in their space for unique needs such as Secure
Compartmented Information Facility (“SCIF”).
Our data center shell platform has fueled significant growth in our Defense/IT Locations strategy. Data center shells are
properties leased to tenants to be operated as data centers in which the tenants fund the costs for the power, fiber connectivity
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and data center infrastructure. Since 2013, we placed into service 14 data center shells totaling 2.3 million square feet, and we
estimate that an additional 11 totaling 2.0 million square feet will be completed over the next several years. We enter into long-
term leases prior to commencing construction of these properties, with triple-net structures and multiple extension options and
rent escalators to provide future growth. Additionally, our tenants fund the costs to fully power and equip these properties,
significantly enhancing these properties’ values and creating high barriers to exit for such tenants.
We believe that our properties and team collectively complement our Defense/IT Locations strategy due to our:
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properties’ proximity to defense installations and other knowledge-based government demand drivers. Such proximity is
generally preferred and often required for our tenants to execute their missions. Specifically, our:
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office properties are proximate to such mission-critical facilities as Fort George G. Meade (which houses 119
organizations, including U.S. Cyber Command, Defense Information Systems Agency and other Department of
Defense organizations and agencies engaged in signals intelligence) and Redstone Arsenal (which houses priority
missions such as Army procurement, missile defense, space exploration and research, development, testing and
evaluation of advanced weapons systems); and
data center shells are primarily in the Northern Virginia area, proximate to the MAE-East Corridor, which is a major
Network Access Point in the United States for interconnecting traffic between Internet service providers;
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• well-established relationships with the United States Government and its contractors;
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extensive experience in developing:
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secured, specialized space, with the ability to satisfy the United States Government’s unique needs (including SCIF
and ATFP requirements); and
data center shells to customer specifications within very condensed timeframes to accommodate time-sensitive tenant
demand; and
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depth of knowledge, specialized skills and credentialed personnel in operating highly specialized properties with high
security-oriented requirements.
Regional Office Strategy: While our primary focus pertains to Defense/IT Locations, due to our depth of market knowledge
in the Greater Washington, DC/Baltimore region, we focus secondarily on owning office properties located in select urban/
urban-like submarkets that feature the following characteristics: (1) mixed-use, lifestyle oriented locations with a robust high-
end residential and retail base; (2) proximity to public transportation and major transportation routes; (3) an educated
workforce; (4) a diverse and growing employment base; and (5) constraints in supply. We believe that these types of
submarkets provide better overall quality and opportunity for long-term, sustained growth than other commercial office
submarkets. As of December 31, 2017, we owned seven Regional Office properties, representing 12.1% of our annualized
rental revenue from operating properties, which were comprised of: three high-rise Baltimore City properties proximate to the
city’s waterfront; and four Northern Virginia properties proximate to existing or future Washington Metropolitan Area Metrorail
stations and major interstates. In prior reporting periods, this segment also included suburban properties that did not meet these
characteristics (that were since disposed).
Asset Management Strategy: We aggressively manage our portfolio to maximize the value and operating performance of
each property through: (1) proactive property management and leasing; (2) renewal of tenant leases and re-tenanting at
increasing rents where market conditions permit; (3) achievement of operating efficiencies by increasing economies of scale
and, where possible, aggregating vendor contracts to achieve volume pricing discounts; and (4) redevelopment when we
believe property conditions and market demand warrant. In 2017, we completed seven years of programmatic property sales to
improve the strategic focus of our portfolio and improve our balance sheet and overall capital position. In the future, we plan to
continuously evaluate our portfolio and consider dispositions when properties no longer meet our strategic objectives, or when
capital markets and the circumstances pertaining to such holdings otherwise warrant, in order to maximize our return on
invested capital or support our capital strategy.
To the extent possible, we also operate and develop our properties in a manner that minimizes adverse impact on the
environment by: (1) constructing new buildings designed to use resources with a high level of efficiency and low impact on
human health and the environment during their life cycles through our participation in the U.S. Green Building Council’s
Leadership in Energy and Environmental Design (“LEED”) program; (2) investing in energy systems and other equipment that
reduce energy consumption and property operating costs; (3) adopting select LEED for Building Operations and Maintenance
(“LEED O+M: Existing Buildings”) prerequisites for much of our portfolio, including guidelines pertaining to cleaning and
recycling practices and energy reduction; and (4) participating annually in the GRESB (or Global Real Estate Sustainability
Benchmark) survey, which is widely recognized for measuring the environmental, social and governance (“ESG”) performance
of real estate companies and funds. In each of the last three years, we earned an overall score of “Green Star” on the GRESB
survey, which represents the highest quadrant of achievement on the survey.
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Property Development and Acquisition Strategy: We grow our operating portfolio primarily through property development
opportunities in support of our Defense/IT Locations strategy, and we have significant land holdings that we believe can
support that growth and also act as a barrier against competitive supply. We pursue development activities as market conditions
and leasing opportunities support favorable risk-adjusted returns on investment, and therefore typically prefer properties to be
significantly leased prior to commencing construction. To a lesser extent, we may also pursue growth through acquisitions,
seeking to execute such transactions at attractive yields and below replacement cost.
Capital Strategy: Our capital strategy is aimed at maintaining access to capital in the face of differing market conditions in
the most cost-effective manner by:
• maintaining an investment grade rating to enable us to use debt comprised of unsecured, primarily fixed-rate debt
(including the effect of interest rate swaps) from public markets and banks;
using secured nonrecourse debt from institutional lenders and banks;
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• managing our debt by monitoring, among other things: (1) the relationship of certain measures of earnings to our debt level
and to certain capital costs; (2) the timing of debt maturities to ensure that maturities in any one year do not exceed levels
that we believe we can refinance; (3) the relationship of our variable-rate debt to our total debt; and (4) our total and
secured debt levels relative to our overall capital structure;
using equity raised through issuances of common shares in COPT and common units in COPLP and, to a lesser extent,
issuances of preferred shares in COPT and preferred units in COPLP and joint venture structures for certain investments;
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• monitoring capacity available under revolving credit facilities and ATM stock offering programs to provide liquidity to
fund investment activities;
paying dividends at a level that is at least sufficient for us to maintain our REIT status;
recycling proceeds from property sales under our asset management strategy (discussed above) to fund our investment
activities and/or reduce overall debt; and
continuously evaluating the ability of our capital resources to accommodate our plans for future growth.
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Industry Segments
As of December 31, 2017, our operations included the following reportable segments: Defense/IT Locations; Regional
Office; Wholesale Data Center; and Other. Our Defense/IT Locations segment included the following sub-segments:
Fort George G. Meade and the Baltimore/Washington Corridor (referred to herein as “Fort Meade/BW Corridor”);
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• Northern Virginia Defense/IT Locations;
• Lackland Air Force Base in San Antonio, Texas;
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locations serving the U.S. Navy (referred to herein as “Navy Support Locations”). Properties in this segment as of
December 31, 2017 were proximate to the Washington Navy Yard, the Naval Air Station Patuxent River in Maryland and
the Naval Surface Warfare Center Dahlgren Division in Virginia;
• Redstone Arsenal in Huntsville, Alabama; and
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data center shells, primarily in Northern Virginia (including six owned through an unconsolidated real estate joint venture).
As of December 31, 2017, Defense/IT Locations comprised 149 of our office and data center shell portfolio’s properties, or
86.7% of its square feet in operations, while Regional Office comprised seven of the portfolio’s properties, or 11.7% of its
square feet in operations. Our Wholesale Data Center segment is comprised of one property in Manassas, Virginia.
For information relating to our segments, you should refer to Note 17 to our consolidated financial statements, which is
included in a separate section at the end of this Annual Report on Form 10-K beginning on page F-1.
Employees
As of December 31, 2017, we had 375 employees, none of whom were parties to collective bargaining agreements. We
believe that our relations with our employees are good.
Competition
The commercial real estate market is highly competitive. Numerous commercial landlords compete with us for tenants.
Some of the properties competing with ours may be newer or in more desirable locations, or the competing properties’ owners
may be willing to accept lower rents than we are. We also compete with our own tenants, many of whom have the right to
sublease their space. The competitive environment for leasing is affected considerably by a number of factors including,
among other things, changes in economic conditions and supply of and demand for space. These factors may make it difficult
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for us to lease existing vacant space and space associated with future lease expirations at rental rates that are sufficient to
produce acceptable operating cash flows.
We occasionally compete for the acquisition of land and commercial properties with many entities, including other
publicly-traded commercial REITs. Competitors for such acquisitions may have substantially greater financial resources than
ours. In addition, our competitors may be willing to accept lower returns on their investments or may be willing to incur higher
leverage.
We also compete with many entities, including other publicly-traded commercial REITs, for capital. This competition
could adversely affect our ability to raise capital we may need to fulfill our capital strategy.
In addition, we compete with many entities for talent. If there is an increase in the costs for us to retain employees or if we
otherwise fail to attract and retain such employees, our business and operating results could be adversely effected.
Item 1A. Risk Factors
Set forth below are risks and uncertainties relating to our business and the ownership of our securities. These risks and
uncertainties may lead to outcomes that could adversely affect our financial position, results of operations, cash flows and
ability to make expected distributions to our equityholders. You should carefully consider each of these risks and uncertainties
and all of the information in this Annual Report on Form 10-K and its Exhibits, including our consolidated financial statements
and notes thereto for the year ended December 31, 2017, which are included in a separate section at the end of this report
beginning on page F-1.
Our performance and value are subject to risks associated with our properties and with the real estate industry.
Real estate investments are subject to various risks and fluctuations in value and demand, many of which are beyond our
control. Our performance and the value of our real estate assets may decline due to conditions in the general economy and the
real estate business which, in turn, could have an adverse effect on our financial position, results of operations, cash flows and
ability to make expected distributions to our shareholders. These conditions include, but are not limited to:
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downturns in national, regional and local economic environments, including increases in the unemployment rate and
inflation or deflation;
competition from other properties;
trends in office real estate that may adversely affect future demand, including telecommuting and flexible workplaces that
increase the population density per square foot;
deteriorating local real estate market conditions, such as oversupply, reduction in demand and decreasing rental rates;
declining real estate valuations;
adverse developments concerning our tenants, which could affect our ability to collect rents and execute lease renewals;
government actions and initiatives, including risks associated with the impact of prolonged government shutdowns and
budgetary reductions or impasses, such as a reduction of rental revenues, non-renewal of leases and/or a curtailment of
demand for additional space by our strategic customers;
increasing operating costs, including insurance, utilities, real estate taxes and other expenses, some of which we may not
be able to pass through to tenants;
increasing construction costs for materials and labor;
increasing vacancies and the need to periodically repair, renovate and re-lease space;
increasing interest rates and unavailability of financing on acceptable terms or at all;
unavailability of financing for potential purchasers of our properties;
adverse changes in taxation or zoning laws;
potential inability to secure adequate insurance;
adverse consequences resulting from civil disturbances, natural disasters, terrorist acts or acts of war; and
potential liability under environmental or other laws or regulations.
We may suffer adverse consequences as a result of adverse economic conditions. Our business may be affected by
adverse economic conditions in the United States economy or real estate industry as a whole or by the local economic
conditions in the markets in which our properties are located, including the impact of high unemployment and constrained
credit. Adverse economic conditions could increase the likelihood of tenants encountering financial difficulties, including
bankruptcy, insolvency or general downturn of business, and as a result could increase the likelihood of tenants defaulting on
their lease obligations to us. Such conditions also could increase our likelihood of being unsuccessful in renewing tenants,
renewing tenants on terms less favorable to us or being unable to lease newly constructed properties. In addition, such
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conditions could increase the level of risk that we may not be able to obtain new financing for development activities,
acquisitions, refinancing of existing debt or other capital requirements at reasonable terms, if at all.
We may suffer adverse consequences as a result of our reliance on rental revenues for our income. We earn revenue
from renting our properties. Our operating costs do not necessarily fluctuate in relation to changes in our rental revenue. This
means that certain of our costs will not necessarily decline and may increase even if our revenues decline.
For new tenants or upon lease expiration for existing tenants, we generally must make improvements and pay other leasing
costs for which we may not receive increased rents. We also make building-related capital improvements for which tenants
may not reimburse us.
If our properties do not generate revenue sufficient to meet our operating expenses and capital costs, we may have to
borrow additional amounts to cover these costs. In such circumstances, we would likely have lower profits or possibly incur
losses. We may also find in such circumstances that we are unable to borrow to cover such costs, in which case our operations
could be adversely affected.
In addition, the competitive environment for leasing is affected considerably by a number of factors including, among
other things, changes due to economic factors such as supply and demand. These factors may make it difficult for us to lease
existing vacant space and space associated with future lease expirations at rental rates that are sufficient to meet our short-term
capital needs.
We rely on the ability of our tenants to pay rent and would be harmed by their inability to do so. Our performance
depends on the ability of our tenants to fulfill their lease obligations by paying their rental payments in a timely manner. As a
result, we would be harmed if one or more of our major tenants, or a number of our smaller tenants, were to experience
financial difficulties, including bankruptcy, insolvency, government shutdown or general downturn of business.
We may be adversely affected by developments concerning our major tenants or the United States Government and
its contractors, including prolonged shutdowns of the government and actual, or potential, reductions in government
spending targeting knowledge-based activities. As of December 31, 2017, our 10 largest tenants accounted for 58.8% of our
total annualized rental revenue, the four largest of these tenants accounted for 47.0%, and the United States Government, our
largest tenant, accounted for 31.7%. We calculated annualized rental revenue by multiplying by 12 the sum of monthly
contractual base rents and estimated monthly expense reimbursements under active leases in our portfolio as of December 31,
2017; with regard to properties owned through an unconsolidated real estate joint venture, we include the portion of annualized
rental revenue allocable to our ownership interest. For additional information regarding our tenant concentrations, please refer
to the section entitled “Concentration of Operations” within the section entitled “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”
Most of our leases with the United States Government provide for a series of one-year terms. The United States
Government may terminate its leases if, among other reasons, the United States Congress fails to provide funding. We would
be harmed if any of our four largest tenants fail to make rental payments to us over an extended period of time, including as a
result of a prolonged government shutdown, or if the United States Government elects to terminate some or all of its leases and
the space cannot be re-leased on satisfactory terms.
As of December 31, 2017, 87.4% of our office and data center shell properties’ total annualized rental revenue was from
Defense/IT Locations, and we expect to maintain a similarly high revenue concentration of properties in these locations. A
reduction in government spending targeting the activities of the government and its contractors (such as knowledge-based
defense and security activities) in these locations could adversely affect our tenants’ ability to fulfill lease obligations, renew
leases or enter into new leases and limit our future growth from properties in these locations. Moreover, uncertainty regarding
the potential for future reduction in government spending targeting such activities could also decrease or delay leasing activity
from tenants engaged in these activities.
We may suffer economic harm in the event of a decline in the real estate market or general economic conditions in
the Mid-Atlantic region, particularly in the Greater Washington, DC/Baltimore region, or in particular business parks.
Most of our properties are located in the Mid-Atlantic region of the United States, particularly in the Greater Washington, DC/
Baltimore region. Our properties are also often concentrated in business parks in which we own most of the properties.
Consequently, our portfolio of properties is not broadly distributed geographically. As a result, we would be harmed by a
decline in the real estate market or general economic conditions in the Mid-Atlantic region, the Greater Washington, DC/
Baltimore region or the business parks in which our properties are located.
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We would suffer economic harm if we were unable to renew our leases on favorable terms. When leases expire, our
tenants may not renew or may renew on terms less favorable to us than the terms of their original leases. If a tenant vacates a
property, we can expect to experience a vacancy for some period of time, as well as incur higher leasing costs than we would
likely incur if a tenant renews. As a result, we may be harmed if we experience a high volume of tenant departures at the end
of their lease terms.
We may be adversely affected by trends in the office real estate industry. Some businesses increasingly permit
employee telecommuting, flexible work schedules, open workplaces and teleconferencing. These practices enable businesses
to reduce their space requirements. These trends could over time erode the overall demand for office space and, in turn, place
downward pressure on occupancy, rental rates and property valuations.
We may encounter a decline in the value of our real estate. The value of our real estate could be adversely affected by
general economic and market conditions connected to a specific property, a market or submarket, a broader economic region or
the office real estate industry. Examples of such conditions include a broader economic recession, declining demand and
decreases in market rental rates and/or market values of real estate assets. If our real estate assets decline in value, it could
result in our recognition of impairment losses. Moreover, a decline in the value of our real estate could adversely affect the
amount of borrowings available to us under future credit facilities and other loans.
We may not be able to compete successfully with other entities that operate in our industry. The commercial real
estate market is highly competitive. Numerous commercial properties compete with our properties for tenants. Some of the
properties competing with ours may be newer or in more desirable locations, or the competing properties’ owners may be
willing to accept lower rates than are acceptable to us. In addition, we compete for the purchase of commercial property with
many entities, including other publicly traded commercial REITs.
Real estate investments are illiquid, and we may not be able to dispose of properties on a timely basis when we
determine it is appropriate to do so. Real estate investments can be difficult to sell and convert to cash quickly, especially if
market conditions, including real estate lending conditions, are not favorable. Such illiquidity could limit our ability to quickly
change our portfolio of properties in response to changes in economic or other conditions. Our failure to successfully execute
dispositions could adversely affect our ability to effectively execute our business strategy. Moreover, under certain
circumstances, the Internal Revenue Code imposes certain penalties on a REIT that sells property held for less than two years
and limits the number of properties it can sell in a given year.
We are dependent on external sources of capital for growth. Because COPT is a REIT, it must distribute at least 90%
of its annual taxable income to its shareholders. Due to this requirement, we are not able to significantly fund our development
and acquisition activities using retained cash flow from operations. Therefore, our ability to fund these activities may be
dependent on our ability to access debt or equity capital. Such capital could be in the form of new debt, common shares,
preferred shares, common and preferred units in COPLP, joint venture funding or asset sales. These capital sources may not be
available on favorable terms or at all. Moreover, additional debt financing may substantially increase our leverage and subject
us to covenants that restrict management’s flexibility in directing our operations, and additional equity offerings may result in
substantial dilution of our equityholders’ interests. Our inability to obtain capital when needed could have a material adverse
effect on our ability to expand our business and fund other cash requirements.
We often use our Revolving Credit Facility to initially finance much of our investing activities and certain financing
activities. Our lenders under this and other facilities could, for financial hardship or other reasons, fail to honor their
commitments to fund our requests for borrowings under these facilities. If lenders default under these facilities by not being
able or willing to fund a borrowing request, it would adversely affect our ability to access borrowing capacity under these
facilities.
We may be unable to execute our plans to develop and construct additional properties. Although the majority of our
investments are in currently leased properties, we also develop, construct and redevelop properties, including some that are not
fully pre-leased. When we develop, construct and redevelop properties, we assume the risk that actual costs will exceed our
budgets, that we will experience conditions which delay or preclude project completion and that projected leasing will not
occur. In addition, we may find that we are unable to successfully execute plans to obtain construction loans to fund property
construction activities.
We may suffer adverse effects from acquisitions of commercial real estate properties. We may acquire existing
commercial real estate properties to the extent that suitable acquisitions can be made on advantageous terms. Acquisitions of
commercial properties entail risks, such as the risk that we may not be in a position, or have the opportunity in the future, to
make suitable property acquisitions on advantageous terms and/or that such acquisitions will fail to perform as expected.
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We may pursue selective acquisitions of properties in regions where we have not previously owned properties. These
acquisitions may entail risks in addition to those we face in other acquisitions where we are familiar with the regions, such as
the risk that we do not correctly anticipate conditions or trends in a new market and therefore are not able to operate the
acquired property profitably.
In addition, we may acquire properties that are subject to liabilities in situations where we have no recourse, or only
limited recourse, against the prior owners or other third parties with respect to unknown liabilities. As a result, if a liability
were asserted against us based upon ownership of those properties, we might have to pay substantial sums to settle or contest it,
which could adversely affect our results of operations and cash flow. Examples of unknown liabilities with respect to acquired
properties include, but are not limited to:
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liabilities for remediation of disclosed or undisclosed environmental contamination;
claims by tenants, vendors or other persons dealing with the former owners of the properties;
liabilities incurred in the ordinary course of business; and
claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the
properties.
Our wholesale data center may become obsolete. Wholesale data centers are much more expensive investments on a per
square foot basis than office properties due to the level of infrastructure required to operate the centers. At the same time,
technology, industry standards and service requirements for wholesale data centers are rapidly evolving and, as a result, the risk
of investments we make in our wholesale data center becoming obsolete is higher than other commercial real estate properties.
Our wholesale data center may become obsolete due to the development of new systems to deliver power to, or eliminate heat
from, the servers housed in the properties, or due to other technological advances. In addition, we may not be able to
efficiently upgrade or change power and cooling systems to meet new demands or industry standards without incurring
significant costs that we may not be able to pass on to our tenants.
Certain of our properties containing data centers contain space not suitable for lease other than as data centers,
which could make it difficult to reposition them for alternative use. Certain of our properties contain data center space,
which is highly specialized space containing extensive electrical and mechanical systems that are uniquely designed to run and
maintain banks of computer servers. Data centers are subject to obsolescence risks. In the event that we needed to reposition
data center space for another use, the renovations required to do so could be difficult and costly, and we may, as a result, deem
such renovations to be impractical.
Our tenants and contractual counterparties could be designated “Prohibited Persons” by the Office of Foreign
Assets Control. The Office of Foreign Assets Control of the United States Department of the Treasury (“OFAC”) maintains a
list of persons designated as terrorists or who are otherwise blocked or banned (“Prohibited Persons”). OFAC regulations and
other laws prohibit us from conducting business or engaging in transactions with Prohibited Persons. If a tenant or other party
with whom we conduct business is placed on the OFAC list or is otherwise a party with whom we are prohibited from doing
business, we may be required to terminate the lease or other agreement.
We may suffer adverse effects as a result of the indebtedness that we carry and the terms and covenants that relate
to this debt. Several of our properties are pledged by us to support repayment of indebtedness. Any foreclosure on our
properties could result in loss of income and asset value. In addition, we rely on borrowings to fund some or all of the costs of
construction and development activities, new property acquisitions and other items.
Payments of principal and interest on our debt may leave us with insufficient cash to operate our properties or pay
distributions to COPT’s shareholders required to maintain its qualification as a REIT. We are also subject to the risks that:
• we may not be able to refinance our existing indebtedness, or may refinance on terms that are less favorable to us than the
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terms of our existing indebtedness;
in the event of our default under the terms of our Revolving Credit Facility, COPLP could be restricted from making cash
distributions to COPT, which could result in reduced distributions to our equityholders or the need for us to incur
additional debt to fund these distributions; and
if we are unable to pay our debt service on time or are unable to comply with restrictive financial covenants for certain of
our debt, our lenders could foreclose on our properties securing such debt and, in some cases, other properties and assets
that we own.
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Some of our unsecured debt is cross-defaulted, which means that failure to pay interest or principal on the debt above a
threshold value will create a default on certain of our other debt.
If interest rates were to rise, our debt service payments on debt with variable interest rates would increase.
As of December 31, 2017, we had $1.8 billion in debt, the future maturities of which are set forth in Note 10 to our
consolidated financial statements. Our operations likely will not generate enough cash flow to repay all of this debt without
additional borrowings, equity issuances and/or property sales. If we cannot refinance our debt, extend the repayment dates, or
raise additional equity prior to the dates when our debt matures, we would default on our existing debt.
Our organizational documents do not limit the amount of indebtedness that we may incur. Therefore, we may incur
additional indebtedness and become more highly leveraged, which could harm our financial position.
A downgrade in our credit ratings would materially adversely affect our business and financial condition. COPLP’s
Senior Notes are currently rated investment grade by the three major rating agencies. These credit ratings are subject to
ongoing evaluation by the credit rating agencies and can change. Any downgrades of our ratings or outlook by the credit rating
agencies would have a material adverse impact on our cost and availability of capital and also could have a materially adverse
effect on the market price of COPT’s common shares.
We have certain distribution requirements that reduce cash available for other business purposes. Since COPT is a
REIT, it must distribute at least 90% of its annual taxable income, which limits the amount of cash that can be retained for other
business purposes, including amounts to fund acquisitions and development activity. Also, it is possible that because of the
differences between the time we actually receive revenue or pay expenses and the period during which we report those items
for distribution purposes, we may have to borrow funds for COPT to meet the 90% distribution requirement.
We may be unable to continue to make distributions to our equityholders at expected levels. We expect to make
regular quarterly cash distributions to our equityholders. However, our ability to make such distributions depends on a number
of factors, some of which are beyond our control. Some of our loan agreements contain provisions that could, in the event of
default, restrict future distributions. Our ability to make distributions at expected levels will also be dependent, in part, on
other matters, including, but not limited to:
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continued property occupancy and timely receipt of rent from our tenants;
the amount of future capital expenditures and expenses relating to our properties;
our leasing activity and future rental rates;
the strength of the commercial real estate market;
our ability to compete;
governmental actions and initiatives, including risks associated with the impact of a prolonged government shutdown or
budgetary reductions or impasses;
our costs of compliance with environmental and other laws;
our corporate overhead levels;
our amount of uninsured losses; and
our decision to reinvest in operations rather than distribute available cash.
In addition, we can make distributions to the holders of our common shares/units only after we make preferential distributions
to holders of our preferred shares/units.
Our ability to pay distributions may be limited, and we cannot provide assurance that we will be able to pay
distributions regularly. Our ability to pay distributions will depend on a number of things discussed elsewhere herein,
including our ability to operate profitably and generate cash flow from our operations. We cannot guarantee that we will be
able to pay distributions on a regular quarterly basis in the future. Additionally, the terms of some of COPLP’s debt may limit
its ability to make some types of payments and other distributions to COPT in the event of certain default situations. This in
turn may limit our ability to make some types of payments, including payment of distributions on common or preferred shares/
units, unless we meet certain financial tests or such payments or distributions are required to maintain COPT’s qualification as
a REIT. As a result, if we are unable to meet the applicable financial tests, we may not be able to pay distributions in one or
more periods. Furthermore, any new common or preferred shares/units that may be issued in the future for raising capital,
financing acquisitions, share-based compensation arrangements or otherwise will increase the cash required to continue to pay
cash distributions at current levels.
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Our ability to pay distributions is further limited by the requirements of Maryland law. As a Maryland REIT, COPT
may not under applicable Maryland law make a distribution if either of the following conditions exists after giving effect to the
distribution: (1) the REIT would not be able to pay its debts as the debts become due in the usual course of business; or (2) the
REIT’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the REIT were
dissolved at the time of the distribution, to satisfy upon dissolution the rights of equityholders whose preferential rights are
superior to those receiving the distribution. Therefore, we may not be able to make expected distributions to our equityholders
if either of the above described conditions exists for COPT after giving effect to the distribution.
We may issue additional common or preferred shares/units that dilute our equityholders’ interests. We may issue
additional common and preferred shares/units without shareholder approval. Similarly, COPT may cause COPLP to issue its
common or preferred units for contributions of cash or property without approval by the limited partners of COPLP or COPT’s
shareholders. Our existing equityholders’ interests could be diluted if such additional issuances were to occur.
We may suffer economic harm as a result of the actions of our partners in real estate joint ventures and other
investments. We may invest in certain entities in which we are not the exclusive investor or principal decision maker.
Investments in such entities may, under certain circumstances, involve risks not present when a third party is not involved,
including the possibility that the other parties to these investments might become bankrupt or fail to fund their share of required
capital contributions. Our partners in these entities may have economic, tax or other business interests or goals that are
inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives.
Such investments may also lead to impasses on major decisions, such as whether or not to sell a property, because neither we
nor the other parties to these investments may have full control over the entity. In addition, we may in certain circumstances be
liable for the actions of the other parties to these investments.
We may be subject to possible environmental liabilities. We are subject to various Federal, state and local
environmental laws, including air and water quality, hazardous or toxic substances and health and safety. These laws can
impose liability on current and prior property owners or operators for the costs of removal or remediation of hazardous
substances released on a property, even if the property owner was not responsible for, or even aware of, the release of the
hazardous substances. Costs resulting from environmental liability could be substantial. The presence of hazardous substances
on our properties may also adversely affect occupancy and our ability to sell or borrow against those properties. In addition to
the costs of government claims under environmental laws, private plaintiffs may bring claims for personal injury or other
reasons. Additionally, various laws impose liability for the costs of removal or remediation of hazardous substances at the
disposal or treatment facility. Anyone who arranges for the disposal or treatment of hazardous substances at such a facility is
potentially liable under such laws. These laws often impose liability on an entity even if the facility was not owned or operated
by the entity.
Although most of our properties have been subject to varying degrees of environmental assessment, many of these
assessments are limited in scope and may not include or identify all potential environmental liabilities or risks associated with
the property. Identification of new compliance concerns or undiscovered areas of contamination, changes in the extent or
known scope of contamination, discovery of additional sites, human exposure to the contamination or changes in cleanup or
compliance requirements could result in significant costs to us.
We may be adversely affected by natural disasters and the effects of climate change. Natural disasters, including
earthquakes, storms and hurricanes, as well as the potential consequences of climate change could adversely impact our properties.
Over time, climate change could adversely affect demand for space in our properties or our ability to operate our properties; it
could also have indirect effects on our business, including increasing the cost of (or making unavailable) property insurance,
increasing the cost of energy and requiring us to expend funds as we seek to repair and protect our properties against such risks.
Terrorist attacks may adversely affect the value of our properties, our financial position and cash flows. We have
significant investments in properties located in large metropolitan areas and near military installations. Future terrorist attacks
could directly or indirectly damage our properties or cause losses that materially exceed our insurance coverage. After such an
attack, tenants in these areas may choose to relocate their businesses to areas of the United States that may be perceived to be
less likely targets of future terrorist activity, and fewer customers may choose to patronize businesses in these areas. This in
turn would trigger a decrease in the demand for space in these areas, which could increase vacancies in our properties and force
us to lease space on less favorable terms.
We may be subject to other possible liabilities that would adversely affect our financial position and cash flows. Our
properties may be subject to other risks related to current or future laws, including laws relating to zoning, construction, fire
and life safety requirements and other matters. These laws may require significant property modifications in the future and
could result in the levy of fines against us. In addition, although we believe that we adequately insure our properties, we are
15
subject to the risk that our insurance may not cover all of the costs to restore a property that is damaged by a fire or other
catastrophic events, including acts of war or, as mentioned above, terrorism.
We may be subject to increased costs of insurance and limitations on coverage, particularly regarding acts of
terrorism. Our portfolio of properties is insured for losses under our property, casualty and umbrella insurance policies. These
policies include coverage for acts of terrorism. Future changes in the insurance industry’s risk assessment approach and pricing
structure may increase the cost of insuring our properties and decrease the scope of insurance coverage. Most of our loan
agreements contain customary covenants requiring us to maintain insurance. Although we believe that we have adequate
insurance coverage for purposes of these agreements, we may not be able to obtain an equivalent amount of coverage at
reasonable costs, or at all, in the future. In addition, if lenders insist on greater coverage than we are able to obtain, it could
adversely affect our ability to finance and/or refinance our properties and execute our growth strategies.
Our business could be adversely affected by a negative audit by the United States Government. Agencies of the
United States Government, including the Defense Contract Audit Agency and various agency Inspectors General, routinely
audit and investigate government contractors. These agencies review a contractor’s performance under its contracts, cost
structure and compliance with applicable laws, regulations, and standards. The United States Government also reviews the
adequacy of, and a contractor’s compliance with, its internal control systems and policies. Any costs found to be misclassified
may be subject to repayment. If an audit or investigation uncovers improper or illegal activities, we may be subject to civil or
criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of
payments, fines, and suspension or prohibition from doing business with the United States Government. In addition, we could
suffer serious reputational harm if allegations of impropriety were made against us.
Our business could be adversely affected by security breaches through cyber attacks, cyber intrusions or otherwise.
We face risks associated with security breaches and other significant disruptions of our information technology networks and
related systems, which are essential to our business operations. Such breaches and disruptions may occur through cyber attacks
or cyber intrusions over the Internet, malware, computer viruses, attachments to e-mails, persons inside our organization or
persons with access to systems inside our organization. Because of our concentration on serving the United States Government
and its contractors with a general focus on national security and information technology, we may be more likely to be targeted
by cyber attacks, including by governments, organizations or persons hostile to our government. Despite our activities to
maintain the security and integrity of our networks and related systems, as well as purchasing available insurance coverage,
there can be no absolute assurance that these activities will be effective in mitigating these risks. A security breach involving
our networks and related systems could disrupt our operations in numerous ways, including by creating difficulties for our
tenants that may reflect poorly on us.
COPT’s ownership limits are important factors. COPT’s Declaration of Trust limits ownership of its common shares
by any single shareholder to 9.8% of the number of the outstanding common shares or 9.8% of the value of the outstanding
common shares, whichever is more restrictive. COPT’s Declaration of Trust also limits ownership by any single shareholder of
our common and preferred shares in the aggregate to 9.8% of the aggregate value of the outstanding common and preferred
shares. We call these restrictions the “Ownership Limit.” COPT’s Declaration of Trust allows our Board of Trustees to exempt
shareholders from the Ownership Limit. The Ownership Limit and the restrictions on ownership of our common shares may
delay or prevent a transaction or a change of control that might involve a premium price for our common shares/units or
otherwise be in the best interest of our equityholders.
COPT’s Declaration of Trust includes other provisions that may prevent or delay a change of control. Subject to the
requirements of the New York Stock Exchange, our Board of Trustees has the authority, without shareholder approval, to issue
additional securities on terms that could delay or prevent a change in control. In addition, our Board of Trustees has the
authority to reclassify any of our unissued common shares into preferred shares. Our Board of Trustees may issue preferred
shares with such preferences, rights, powers and restrictions as our Board of Trustees may determine, which could also delay or
prevent a change in control.
The Maryland business statutes impose potential restrictions that may discourage a change of control of our
company. Various Maryland laws may have the effect of discouraging offers to acquire us, even if the acquisition would be
advantageous to equityholders. Resolutions adopted by our Board of Trustees and/or provisions of our bylaws exempt us from
such laws, but our Board of Trustees can alter its resolutions or change our bylaws at any time to make these provisions
applicable to us.
COPT’s failure to qualify as a REIT would have adverse tax consequences, which would substantially reduce funds
available to make distributions to our equityholders. We believe that COPT has qualified for taxation as a REIT for Federal
income tax purposes since 1992. We plan for COPT to continue to meet the requirements for taxation as a REIT. Many of
16
these requirements, however, are highly technical and complex. The determination that we are a REIT requires an analysis of
various factual matters and circumstances that may not be totally within our control. For example, to qualify as a REIT, at least
95% of COPT’s gross income must come from certain sources that are specified in the REIT tax laws. COPT is also required
to distribute to shareholders at least 90% of its REIT taxable income (excluding capital gains). The fact that COPT holds most
of its assets through COPLP and its subsidiaries further complicates the application of the REIT requirements. Even a technical
or inadvertent mistake could jeopardize COPT’s REIT status. Furthermore, Congress and the Internal Revenue Service might
make changes to the tax laws and regulations and the courts might issue new rulings that make it more difficult or impossible
for COPT to remain qualified as a REIT.
If COPT fails to qualify as a REIT, it would be subject to Federal income tax at regular corporate rates. Also, unless the
Internal Revenue Service granted us relief under certain statutory provisions, COPT would remain disqualified as a REIT for
four years following the year it first fails to qualify. If COPT fails to qualify as a REIT, it would have to pay significant income
taxes and would therefore have less money available for investments or for distributions to our equityholders. In addition, if
COPT fails to qualify as a REIT, it will no longer be required to pay distributions to shareholders. As a result of all these
factors, COPT’s failure to qualify as a REIT could impair our ability to expand our business and raise capital and would likely
have a significant adverse effect on the value of our shares/units.
We may be adversely impacted by changes in tax laws. At any time, U.S. federal tax laws or the administrative
interpretations of those laws may be changed. In December 2017, the legislation commonly referred to as the Tax Cuts and
Jobs Act, which made widespread changes to the Internal Revenue Code, was signed into law; while we believe that this law
generally will have a favorable effect on REITs and their shareholders, uncertainty remains regarding the full effect that this
law will have on us and our tenants, equityholders and other stakeholders. We also cannot predict whether, when or to what
extent other new U.S. federal tax laws, regulations, interpretations or rulings will be issued. As a result, changes in U.S. federal
tax laws could negatively impact our operating results, financial condition and business operations, and adversely impact our
equityholders.
Occasionally, changes in state and local tax laws or regulations are enacted that may result in an increase in our tax
liability. Shortfalls in tax revenues for states and municipalities in recent years may lead to an increase in the frequency and
size of such changes. If such changes occur, we may be required to pay additional taxes on our assets or income.
A number of factors could cause our security prices to decline. As is the case with any publicly-traded securities,
certain factors outside of our control could influence the value of COPT’s common and preferred shares. These conditions
include, but are not limited to:
• market perception of REITs in general and office REITs in particular;
• market perception regarding our major tenants and sector concentrations;
•
•
•
•
•
• market perception of our financial condition, performance, dividends and growth potential; and
•
the level of institutional investor interest in COPT;
general economic and business conditions;
prevailing interest rates;
our financial performance;
our underlying asset value;
adverse changes in tax laws.
We may experience significant losses and harm to our financial condition if financial institutions holding our cash
and cash equivalents file for bankruptcy protection. We believe that we maintain our cash and cash equivalents with high
quality financial institutions. We have not experienced any losses to date on our deposited cash. However, we may incur
significant losses and harm to our financial condition in the future if any of these financial institutions files for bankruptcy
protection.
Item 1B. Unresolved Staff Comments
None
17
Item 2. Properties
The following table provides certain information about our operating property segments as of December 31, 2017
(dollars and square feet in thousands, except per square foot amounts):
Segment
Office and Data Center Shell Portfolio
Defense/IT Locations:
Fort Meade/BW Corridor:
National Business Park (Annapolis Junction, MD)
Howard County, MD
Other
Fort Meade/BW Corridor Subtotal / Average
Northern Virginia Defense/IT
Lackland Air Force Base
Navy Support Locations
Redstone Arsenal
Data Center Shells
Consolidated Properties
Unconsolidated Joint Venture Properties (4)
Defense/IT Locations Subtotal / Average
Regional Office
Other Properties
Total Office and Data Center Shell Portfolio
Wholesale Data Center
Total Operating Properties
Total Consolidated Operating Properties
Number of
Properties
Rentable
Square Feet
or Megawatts
(“MW”)
Occupancy (1)
Annualized
Rental
Revenue (2)
Annualized Rental
Revenue per
Occupied Square
Foot (2)(3)
31
35
21
87
12
7
21
7
9
6
149
7
3
159
1
3,577
2,759
1,563
7,899
1,840
953
1,253
651
1,478
962
15,036
2,023
286
17,345
19.25 MW
95.2 % $
96.5 %
94.8 %
95.6 %
89.1 %
100.0 %
87.7 %
98.2 %
100.0 %
100.0 %
95.2 %
89.5 %
34.4 %
93.6%
87.6%
$
$
132,114
73,619
41,177
246,910
51,694
47,451
30,973
14,663
21,528
5,333
418,552
57,722
2,558
478,832
22,380
501,212
495,879
$38.82
27.65
27.79
32.71
31.53
49.79
28.18
22.94
14.57
11.09
29.60
31.88
26.03
$29.84
N/A
(1) This percentage is based upon all rentable square feet or megawatts under lease terms that were in effect as of December 31, 2017.
(2) Annualized rental revenue is the monthly contractual base rent as of December 31, 2017 (ignoring free rent then in effect) multiplied by
12, plus the estimated annualized expense reimbursements under existing leases. With regard to properties owned through an
unconsolidated real estate joint venture, we include the portion of annualized rental revenue allocable to our ownership interest. We
consider annualized rental revenue to be a useful measure for analyzing revenue sources because, since it is point-in-time based, it does
not contain increases and decreases in revenue associated with periods in which lease terms were not in effect; historical revenue under
generally accepted accounting principles does contain such fluctuations. We find the measure particularly useful for leasing, tenant and
segment analysis.
(3) Annualized rental revenue per occupied square foot is a property’s annualized rental revenue divided by that property’s occupied square
feet as of December 31, 2017. Our computation of annualized rental revenue excludes the effect of lease incentives. The annualized
rent per occupied square foot, including the effect of lease incentives, was $29.58 for our total office and data center shell portfolio,
$32.58 for Fort Meade/BW Corridor (our largest Defense/IT Location sub-segment) and $31.31 for our Regional Office portfolio.
(4) Represents properties owned through an unconsolidated real estate joint venture. The amounts reported above reflect 100% of the
properties’ square footage but only reflect the portion of Annualized Rental Revenue that was allocable to our ownership interest.
18
The following table provides certain information about office and data center shell properties that were under construction, or
had redevelopment underway, or otherwise approved, as of December 31, 2017 (dollars and square feet in thousands):
Estimated
Rentable
Square Feet
Upon
Completion
Percentage
Leased
Calendar
Quarter
Anticipated to
be Operational
Costs
Incurred to
Date (1)
Estimated
Costs to
Complete (1)
Property and Location
Under Construction
Fort Meade/BW Corridor:
310 Sentinel Way (2)
Annapolis Junction, MD
540 National Business Parkway (2)
Annapolis Junction, MD
5801 University Research Court
College Park, MD
Subtotal / Average
Data Center Shells:
DC 23
Northern VA
BLC 1
Northern VA
BLC 2
Northern VA
Subtotal / Average
Northern Virginia Defense/IT:
NOVA Office B
Northern VA
Redstone Arsenal:
4100 Market Street
Huntsville, AL
4000 Market Street
Huntsville, AL
Subtotal / Average
191
145
71
407
149
149
149
447
161
36
43
79
12 %
(3)
$
41,237
$
13,115
49 %
1Q 2018
32,630
11,082
0 %
1Q 2019
9,938
8,606
23 %
83,805
32,803
100 %
3Q 2018
498
20,849
100 %
3Q 2018
12,277
20,723
100 %
4Q 2018
12,201
20,909
100 %
24,976
62,481
0 %
(3)
31,187
10,313
59 %
2Q 2019
0 %
3Q 2019
27 %
51%
1,014
466
6,452
7,649
1,480
14,101
$
141,448
$
119,698
Total Under Construction
1,094
Under Redevelopment
Fort Meade/BW Corridor:
7142 Columbia Gateway Drive (2)
Columbia, MD
22
73% 1Q 2019
$
1,387
$
2,531
(1) Includes land, construction, leasing costs and allocated portion of structured parking and other shared infrastructure, if applicable.
(2) These properties had occupied square feet in service as of December 31, 2017. Therefore, the properties and their occupied square feet are
included in our operating property statistics, including the information set forth on the previous page.
(3) The building shells of these properties were completed and held for future lease to the United States Government.
19
The following table provides certain information about land that we owned or controlled as of December 31, 2017, including
properties under ground lease to us (square feet in thousands):
Segment
Defense/IT Locations:
Fort Meade/BW Corridor:
National Business Park
Howard County
Other
Total Fort Meade/BW Corridor
Northern Virginia Defense/IT Locations
Lackland Air Force Base
Navy Support Locations
Redstone Arsenal (1)
Data Center Shells
Total Defense/IT Locations
Regional Office (2)
Total land owned/controlled for future development
Other land owned/controlled
Total Land Owned/Controlled
Estimated
Developable
Square Feet
Acres
196
27
133
356
59
68
44
422
41
990
11
1,001
150
1,151
2,106
590
1,494
4,190
1,965
1,033
109
4,005
636
11,938
1,090
13,028
1,638
14,666
(1) This land is owned by the United States Government and is controlled under a long-term, enhanced-use lease to a consolidated joint
venture. As this land is developed in the future, the joint venture will execute site-specific leases under the master lease agreement. Rental
payments will commence under the site-specific leases as cash rents under tenant leases commence at the respective properties.
(2) Includes a pre-leased, pre-construction project totaling 190,000 square feet.
20
Lease Expirations
The following table provides a summary schedule of lease expirations for leases in place at our operating properties as of
December 31, 2017 based on the non-cancelable term of tenant leases determined in accordance with generally accepted
accounting principles (dollars and square feet in thousands, except per square foot amounts):
Year of Lease Expiration
Square Footage
of Leases
Expiring
Annualized
Rental
Revenue of
Expiring
Leases (1)
(in thousands)
Percentage of
Total
Annualized
Rental Revenue
Expiring (1)
Total Annualized
Rental Revenue
of Expiring
Leases Per
Occupied Square
Foot
2018: Office and Data Center Shells
2,135
$
Wholesale Data Center
2019: Office and Data Center Shells
Wholesale Data Center
2020: Office and Data Center Shells
Wholesale Data Center
2021: Office and Data Center Shells
Wholesale Data Center
2022: Office and Data Center Shells
Wholesale Data Center
2023: Office and Data Center Shells
Wholesale Data Center
2024: Office and Data Center Shells
2025: Office and Data Center Shells
2026: Office and Data Center Shells
2027: Office and Data Center Shells
2028: Office and Data Center Shells
2029: Office and Data Center Shells
2033: Office and Data Center Shells
Total Operating Properties
Total Office and Data Center Shells
N/A
2,680
N/A
1,692
N/A
1,318
N/A
1,221
N/A
957
N/A
1,424
1,858
1,062
652
499
489
68,997
218
84,722
4,097
57,981
13,722
40,647
570
35,002
1,842
30,169
1,931
31,198
60,931
27,639
13,384
11,986
11,736
240
16,227
16,227
$
$
4,440
501,212
478,832
13.8 %
— %
16.9 %
0.8 %
11.6 %
2.7 %
8.1 %
0.1 %
7.0 %
0.4 %
6.0 %
0.4 %
6.2 %
12.2 %
5.5 %
2.7 %
2.4 %
2.3 %
0.9 %
100.0%
100.0%
$32.32
N/A
31.62
N/A
35.14
N/A
30.83
N/A
29.69
N/A
31.54
N/A
22.65
34.07
26.01
20.53
24.03
23.99
18.50
N/A
$29.84
(1) Please refer to definition provided on first page of Item 2 of this Annual Report on Form 10-K.
With regard to office and data center shell property leases expiring in 2018, we believe that the weighted average annualized
rental revenue per occupied square foot for such leases as of December 31, 2017 was, on average, approximately 0% to 2%
higher than estimated current market rents for the related space, with specific results varying by market.
21
Item 3. Legal Proceedings
We are not currently involved in any material litigation nor, to our knowledge, is any material litigation currently
threatened against the Company or the Operating Partnership (other than routine litigation arising in the ordinary course of
business, substantially all of which is expected to be covered by liability insurance).
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrants’ Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
COPT’s common shares trade on the New York Stock Exchange (“NYSE”) under the symbol “OFC.” The table below
shows the range of the high and low sale prices for COPT’s common shares as reported on the NYSE, as well as the quarterly
common share dividends per share declared:
2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Price Range
Low
$19.52
$25.17
$26.91
$24.92
High
$26.45
$29.58
$30.55
$31.51
Price Range
Low
$30.22
$32.22
$32.03
$28.88
High
$34.25
$36.03
$35.66
$33.81
Dividends
Per Share
$0.2750
$0.2750
$0.2750
$0.2750
Dividends
Per Share
$0.2750
$0.2750
$0.2750
$0.2750
The number of holders of record of COPT’s common shares was 463 as of December 31, 2017. This number does not
include shareholders whose shares are held of record by a brokerage house or clearing agency, but does include any such
brokerage house or clearing agency as one record holder.
COPT pays dividends at the discretion of its Board of Trustees. COPT’s ability to pay cash dividends will be dependent
upon: (1) the cash flow generated from our operations; (2) cash generated or used by our financing and investing activities; and
(3) the annual distribution requirements under the REIT provisions of the Code described above and such other factors as the
Board of Trustees deems relevant. COPT’s ability to make cash dividends will also be limited by the terms of COPLP’s
Partnership Agreement, as well as by limitations imposed by state law. In addition, COPT is prohibited from paying cash
dividends in excess of the amount necessary for it to qualify for taxation as a REIT if a default or event of default exists
pursuant to the terms of our Revolving Credit Facility; this restriction does not currently limit COPT’s ability to pay dividends,
and COPT does not believe that this restriction is reasonably likely to limit its ability to pay future dividends because it expects
to comply with the terms of our Revolving Credit Facility.
There is no established public trading market for COPLP’s partnership units. Quarterly common unit distributions per unit
were the same as quarterly common dividends per share declared by COPT. As of December 31, 2017, there were 35 holders
of record of COPLP’s common units.
Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended December 31, 2017, 2,513 of COPLP’s common units were exchanged for 2,513 COPT
common shares in accordance with COPLP’s Second Amended and Restated Limited Partnership Agreement, as amended. The
issuance of these common shares was effected in reliance upon the exemption from registration under Section 4(a)(2) of the
Securities Act of 1933, as amended.
22
COPT’s Common Shares Performance Graph
The graph and the table set forth below assume $100 was invested on December 31, 2012 in COPT’s common shares. The
graph and the table compare the cumulative return (assuming reinvestment of dividends) of this investment with a $100
investment at that time in the S&P 500 Index or the All Equity REIT Index of the National Association of Real Estate
Investment Trusts (“NAREIT”):
Index
Corporate Office Properties Trust
S&P 500
NAREIT All Equity REIT Index
12/31/12
$ 100.00
$ 100.00
$ 100.00
12/31/13
$
99.11
$ 132.39
$ 102.86
12/31/14
$ 123.58
$ 150.51
$ 131.68
12/31/15
$
99.58
$ 152.59
$ 135.40
12/31/16
$ 147.98
$ 170.84
$ 147.09
12/31/17
$ 143.16
$ 208.14
$ 159.85
Period Ended
Item 6. Selected Financial Data
The following tables set forth summary historical consolidated financial and operating data for COPT and COPLP and
their respective subsidiaries as of and for each of the years ended December 31, 2013 through 2017. Our revenues relating to
real estate operations are derived from rents and property operating expense reimbursements earned from tenant leases on our
properties. Most of our expenses relating to our real estate operations take the form of property operating costs (such as real
estate taxes, utilities and repairs and maintenance) and depreciation and amortization associated with our operating properties.
Most of our profitability from real estate operations depends on our ability to maintain high levels of occupancy and increase
rents, which is affected by a number of factors, including, among other things, our tenants’ ability to fulfill their lease
obligations and their continuing space needs based on variables such as employment levels, business confidence, competition,
general economic conditions of the markets in which we operate and governmental actions and initiatives. You should read the
following summary historical financial data in conjunction with the consolidated historical financial statements and notes
thereto of COPT and its subsidiaries and COPLP and its subsidiaries and the section of this report entitled “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” for additional information.
23
Corporate Office Properties Trust and Subsidiaries
(in thousands, except per share data and number of properties)
Revenues
Revenues from real estate operations
Construction contract and other service revenues
Total revenues
Expenses
Property operating expenses
Depreciation and amortization associated with real estate
operations
Construction contract and other service expenses
Impairment losses
General, administrative and leasing expenses
Business development expenses and land carry costs
Total operating expenses
Operating income
Interest expense
Interest and other income
(Loss) gain on early extinguishment of debt
Income (loss) from continuing operations before equity in
income of unconsolidated entities and income taxes
Equity in income of unconsolidated entities
Income tax expense
Income (loss) from continuing operations
Discontinued operations (1)
Income (loss) before gain on sales of real estate
Gain on sales of real estate (2)
Net income
Net income attributable to noncontrolling interests
Net income attributable to COPT
Preferred share dividends
Issuance costs associated with redeemed preferred shares (3)
Net income (loss) attributable to COPT common
shareholders
Basic earnings per common share (4)
Income (loss) from continuing operations
Net income (loss)
Diluted earnings per common share (4)
Income (loss) from continuing operations
Net income (loss)
2017
2016
2015
2014
2013
$ 509,980
102,840
612,820
$ 525,964
48,364
574,328
$ 519,064
106,402
625,466
$ 479,725
106,748
586,473
$ 460,997
62,363
523,360
190,964
197,530
194,494
179,934
167,199
134,228
99,618
15,123
30,837
6,213
476,983
135,837
(76,983)
6,318
(513)
64,659
2,882
(1,098)
66,443
—
66,443
9,890
76,333
(6,242)
70,091
(6,219)
(6,847)
132,719
45,481
101,391
36,553
8,244
521,918
52,410
(83,163)
5,444
(1,110)
(26,419)
1,332
(244)
(25,331)
—
(25,331)
40,986
15,655
(4,216)
11,439
(14,297)
(17)
140,025
102,696
23,289
31,361
13,507
505,372
120,094
(89,074)
4,517
85,275
120,812
62
(199)
120,675
156
120,831
68,047
188,878
(10,578)
178,300
(14,210)
—
136,086
100,058
1,416
31,794
5,573
454,861
131,612
(92,393)
4,923
(9,552)
34,590
229
(310)
34,509
26
34,535
10,671
45,206
(4,951)
40,255
(15,939)
(1,769)
113,214
58,875
5,857
30,869
5,436
381,450
141,910
(82,010)
3,834
(27,030)
36,704
2,110
(1,978)
36,836
55,692
92,528
9,016
101,544
(7,837)
93,707
(19,971)
(2,904)
$ 57,025
$
$
$
$
0.57
0.57
0.57
0.57
$
$
$
$
$
(2,875) $ 164,090
$ 22,547
$ 70,832
(0.03) $
(0.03) $
(0.03) $
(0.03) $
1.74
1.74
1.74
1.74
$
$
$
$
0.25
0.25
0.25
0.25
$
$
$
$
0.21
0.83
0.21
0.83
Weighted average common shares outstanding – basic
Weighted average common shares outstanding – diluted
98,969
99,155
94,502
94,502
93,914
97,667
88,092
88,263
85,167
85,224
24
Balance Sheet Data (as of year end):
Total properties, net
Total assets
Debt
Total liabilities
Redeemable noncontrolling interests
Total equity
Other Financial Data (for the year ended):
Cash flows provided by (used in):
Operating activities
Investing activities
Financing activities
Numerator for diluted EPS
Diluted funds from operations (“FFO”) (5)
Diluted FFO, as adjusted for comparability (5)
Diluted FFO per share (5)
Diluted FFO, as adjusted for comparability per share (5)
Cash dividends declared per common share
Property Data (as of year end):
Number of office and data center shells owned (6)
Total rentable square feet owned (6)
2017
2016
2015
2014
2013
$3,141,105
$3,578,484
$1,828,333
$2,103,773
23,125
$
$1,451,586
$3,073,362
$3,780,885
$1,904,001
$2,163,242
22,979
$
$1,594,664
$3,349,748
$3,909,312
$2,077,752
$2,273,530
19,218
$
$1,616,564
$3,296,914
$3,664,236
$1,914,036
$2,124,935
18,417
$
$1,520,884
$3,214,301
$3,621,251
$1,919,002
$2,106,244
17,758
$
$1,497,249
$ 232,538
71,449
$ 230,654
$ (89,710) $
$ (338,546) $ (154,434) $ 157,757
(3,294) $ 169,787
$
56,576
$ 249,454
$ 199,553
$ 195,824
$ 207,739
2.55
$
1.95
$
2.01
$
2.03
$
1.10
$
1.10
$
$ 158,979
$ 193,885
$ 204,008
$ (307,532) $ (209,689) $ (119,790)
$ (32,492) $
4,590
$
$
70,418
22,115
$ 214,149
$ 155,296
$ 175,613
$ 173,110
2.40
$
1.69
$
1.97
$
1.88
$
1.10
$
1.10
$
$
$ 178,761
$ 197,317
1.82
$
2.01
$
1.10
$
159
17,345
164
17,190
177
18,053
173
16,790
183
17,370
(1) Includes income derived from 31 operating properties disposed in 2013.
(2) Reflects gain from sales of properties and unconsolidated real estate joint ventures not associated with discontinued operations.
(3) Reflects a decrease to net income available to common shareholders pertaining to the original issuance costs recognized in
connection with the redemption of the Series K Preferred Shares (following shareholder notification of such redemption in
December 2016) and Series L Preferred Shares in 2017, the Series H Preferred Shares in 2014 and the Series J Preferred Shares in
2013.
(4) Basic and diluted earnings per common share are calculated based on amounts attributable to common shareholders of COPT.
(5) For definitions and reconciliations of these measures to their comparable measures under generally accepted accounting principles,
you should refer to the section entitled “Funds from Operations” within the section entitled “Management's Discussion and
Analysis of Financial Condition and Results of Operations.”
(6) Amounts reported reflect only operating office and data center shell properties, including six owned through an unconsolidated real
estate joint venture.
25
Corporate Office Properties, L.P. and Subsidiaries
(in thousands, except per share data and number of properties)
Revenues
Revenues from real estate operations
Construction contract and other service revenues
Total revenues
Expenses
Property operating expenses
Depreciation and amortization associated with real estate
operations
Construction contract and other service expenses
Impairment losses
General, administrative and leasing expenses
Business development expenses and land carry costs
Total operating expenses
Operating income
Interest expense
Interest and other income
(Loss) gain on early extinguishment of debt
Income (loss) from continuing operations before equity in
income of unconsolidated entities and income taxes
Equity in income of unconsolidated entities
Income tax expense
Income (loss) from continuing operations
Discontinued operations (1)
Income (loss) before gain on sales of real estate
Gain on sales of real estate (2)
Net income
Net income attributable to noncontrolling interests
Net income attributable to COPLP
Preferred unit distributions
Issuance costs associated with redeemed preferred units (3)
Net income (loss) attributable to COPLP common
unitholders
Basic earnings per common unit (4)
Income (loss) from continuing operations
Net income (loss)
Diluted earnings per common unit (4)
Income (loss) from continuing operations
Net income (loss)
2017
2016
2015
2014
2013
$ 509,980
102,840
612,820
$ 525,964
48,364
574,328
$ 519,064
106,402
625,466
$ 479,725
106,748
586,473
$ 460,997
62,363
523,360
190,964
197,530
194,494
179,934
167,199
134,228
99,618
15,123
30,837
6,213
476,983
135,837
(76,983)
6,318
(513)
64,659
2,882
(1,098)
66,443
—
66,443
9,890
76,333
(3,646)
72,687
(6,879)
(6,847)
132,719
45,481
101,391
36,553
8,244
521,918
52,410
(83,163)
5,444
(1,110)
(26,419)
1,332
(244)
(25,331)
—
(25,331)
40,986
15,655
(3,715)
11,940
(14,957)
(17)
140,025
102,696
23,289
31,361
13,507
505,372
120,094
(89,074)
4,517
85,275
120,812
62
(199)
120,675
156
120,831
68,047
188,878
(3,520)
185,358
(14,870)
—
136,086
100,058
1,416
31,794
5,573
454,861
131,612
(92,393)
4,923
(9,552)
34,590
229
(310)
34,509
26
34,535
10,671
45,206
(3,276)
41,930
(16,599)
(1,769)
113,214
58,875
5,857
30,869
5,436
381,450
141,910
(82,010)
3,834
(27,030)
36,704
2,110
(1,978)
36,836
55,692
92,528
9,016
101,544
(3,907)
97,637
(20,631)
(2,904)
$ 58,961
$
$
$
$
0.57
0.57
0.57
0.57
$
$
$
$
$
(3,034) $ 170,488
$ 23,562
$ 74,102
(0.04) $
(0.04) $
(0.04) $
(0.04) $
1.74
1.74
1.74
1.74
$
$
$
$
0.25
0.25
0.25
0.25
$
$
$
$
0.21
0.83
0.21
0.83
Weighted average common units outstanding – basic
Weighted average common units outstanding – diluted
102,331
102,517
98,135
98,135
97,606
97,667
91,989
92,160
89,036
89,093
26
Balance Sheet Data (as of year end):
Total properties, net
Total assets
Debt
Total liabilities
Redeemable noncontrolling interests
Total equity
Other Financial Data (for the year ended):
Cash flows provided by (used in):
Operating activities
Investing activities
Financing activities
Numerator for diluted EPU
Cash distributions declared per common unit
Property Data (as of year end):
Number of office and data center shells owned (5)
Total rentable square feet owned (5)
2017
2016
2015
2014
2013
$3,141,105
$3,573,868
$1,828,333
$2,099,157
23,125
$
$1,451,586
$3,073,362
$3,775,448
$1,904,001
$2,157,805
22,979
$
$1,594,664
$3,349,748
$3,903,549
$2,077,752
$2,267,767
19,218
$
$1,616,564
$3,296,914
$3,658,354
$1,914,036
$2,119,053
18,417
$
$1,520,884
$3,214,301
$3,613,784
$1,919,002
$2,098,777
17,758
$
$1,497,249
$ 232,538
71,449
$ 230,654
$ (89,710) $
$ (338,546) $ (154,434) $ 157,757
(3,453) $ 169,782
$
1.10
$
$
$ 158,979
$ 193,885
$ 204,008
$ (307,532) $ (209,689) $ (119,790)
4,590
73,688
1.10
$ (32,492) $
$
23,130
$
$
1.10
$
58,512
1.10
1.10
$
$
159
17,345
164
17,190
177
18,053
173
16,790
183
17,370
(1) Includes income derived from 31 operating properties disposed in 2013.
(2) Reflects gain from sales of properties and unconsolidated real estate joint ventures not associated with discontinued operations.
(3) Reflects a decrease to net income available to common shareholders pertaining to the original issuance costs recognized in
connection with the redemption of the Series K Preferred Units (following notification of such redemption in December 2016) and
Series L Preferred Units in 2017, the Series H Preferred Units in 2014 and the Series J Preferred Units in 2013.
(4) Basic and diluted earnings per common unit are calculated based on amounts attributable to common unitholders of COPLP.
(5) Amounts reported reflect only operating office and data center shell properties, including six owned through an unconsolidated real
estate joint venture.
27
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
You should refer to our consolidated financial statements and the notes thereto and our Selected Financial Data table as
you read this section.
This section contains “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995,
that are based on our current expectations, estimates and projections about future events and financial trends affecting the
financial condition and operations of our business. 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 we cannot predict with accuracy
and some of which we might not even anticipate. Although we believe that the expectations, estimates and projections
reflected in such forward-looking statements are based on reasonable assumptions at the time made, we 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. Important factors that may affect these expectations, estimates and
projections include, but are not limited to:
•
•
•
•
•
•
•
•
•
•
•
general economic and business conditions, which will, among other things, affect office property and data center demand
and rents, tenant creditworthiness, interest rates, financing availability and property values;
adverse changes in the real estate markets, including, among other things, increased competition with other companies;
governmental actions and initiatives, including risks associated with the impact of a prolonged government shutdown or
budgetary reductions or impasses, such as a reduction in rental revenues, non-renewal of leases and/or a curtailment of
demand for additional space by our strategic customers;
our ability to borrow on favorable terms;
risks of real estate acquisition and development activities, including, among other things, risks that development projects
may not be completed on schedule, that tenants may not take occupancy or pay rent or that development or operating costs
may be greater than anticipated;
risks of investing through joint venture structures, including risks that our joint venture partners may not fulfill their
financial obligations as investors or may take actions that are inconsistent with our objectives;
changes in our plans for properties or views of market economic conditions or failure to obtain development rights, either
of which could result in recognition of significant impairment losses;
our ability to satisfy and operate effectively under Federal income tax rules relating to real estate investment trusts and
partnerships;
the dilutive effects of issuing additional common shares;
our ability to achieve projected results; and
environmental requirements.
We undertake no obligation to update or supplement forward-looking statements.
Overview
We ended 2017 with our office and data center shell portfolio 93.6% occupied, an increase from 92.1% as of December 31,
2016 and representing our highest year-end occupancy since 2005. Most of this increase was attributable to high occupancy
rates in newly-developed properties placed into service and re-tenanted space in existing properties (re-tenant is the term we
use to refer to new occupancy of space previously occupied but subsequently vacated). Our Same Properties (defined below)
were 92.8% occupied as of December 31, 2017, increased from 91.8% as of December 31, 2016, and had higher average
occupancy in 2017 than in 2016.
Occupancy for our Defense/IT Locations segment increased to 95.2% as of December 31, 2017 from 92.6% at December
31, 2016, which included increases in each of that segment’s sub-segments. From 2012 through 2015, our ability to lease
Defense/IT Locations properties was adversely affected by diminished defense spending, a shift in contract award criteria and
uncertainty regarding the potential for future reductions in government spending targeting defense. This served to disrupt the
government’s process for awarding contracts to prospective tenants and pressured defense contractor margins, causing
significant contraction in the defense contractor sector. The government’s passage of appropriations legislation for fiscal years
2015, 2016 and 2017 brought clarity regarding funding for defense spending and elevated spending levels through September
30, 2017; this served to normalize the leasing environment for our Defense/IT Locations, resulting in increased segment
occupancy over that timeframe. Funding for the Department of Defense’s discretionary base budget authority, as set forth in
the National Defense Authorization Act for Fiscal Year 2018, represents a 14% increase over the prior year. While, as of mid-
February 2018, Congress had not yet appropriated funding for this Act and the United States Government was operating under
a continuing resolution, we believe that the defense industry has, to a certain extent, adapted to operating under new contract
28
award criteria and to uncertainty pertaining to timing of defense appropriations. We also believe that the knowledge-based
activities of most of our tenants will continue to be a priority in defense budgets as such activities are considered critical to our
national security.
In 2017, we further increased our portfolio’s concentration in Defense/IT Location properties by:
•
•
placing into service an aggregate of 1.2 million square feet in eight newly-constructed and three redeveloped Defense/IT
Location properties. These square feet were 97.8% leased as of December 31, 2017; and
selling 13 operating properties totaling 992,000 square feet that were 91.8% occupied and other land for $184.2 million.
These operating property sales included: eight properties representing the last of our White Marsh, Maryland portfolio,
including the last of our Regional Office properties not located in urban/urban-like submarkets; and five Defense/IT
Location properties that included three in the Greater Washington, DC/Baltimore region and two located outside of our
strategic investment area.
Due in large part to these development and sale activities, the percentage of our office and data center shell portfolio’s
annualized rent from Defense/IT Locations increased to 87.4% as of December 31, 2017 from 84.5% as of December 31, 2016;
we expect this trend to continue in 2018 as we place into service additional newly-constructed properties.
We entered 2017 with $210 million in cash on hand and $800 million in borrowing capacity under our Revolving Credit
Facility, with goals of redeeming COPT’s remaining $199 million in preferred equity and funding development activities, while
maintaining our debt and liquidity levels. As a result, in 2017:
• we funded $201 million in construction, development and redevelopment costs;
• COPT redeemed of all of its remaining preferred shares, including its:
•
•
Series K Preferred Shares effective January 21, 2017 at a price of $50 per share, or $26.6 million in the aggregate, plus
accrued and unpaid dividends thereon through the date of redemption using available cash. These shares accrued
dividends equal to 5.6% of their liquidation preference; and
Series L Preferred Shares effective June 27, 2017 at a price of $25 per share, or $172.5 million in the aggregate, plus
accrued and unpaid dividends thereon through the date of redemption using borrowings from our Revolving Credit
Facility. These shares accrued dividends equal to 7.375% of their liquidation preference;
• we repaid $200.0 million of the loan balance on a term loan scheduled to mature in 2020 using available cash;
• we used most of the proceeds from the property sales discussed above to repay borrowings under our Revolving Credit
Facility and fund cash reserves;
• COPT entered into forward equity sale agreements effective November 2, 2017 to issue 9.2 million common shares at an
initial gross offering price of $285.2 million, or $31.00 per share, before underwriting discounts, commissions and offering
expenses to fund low-risk, high-probability development activities. The forward sale price that we expect to receive upon
physical settlement of the agreements will be subject to adjustment on a daily basis based on a floating interest rate factor
equal to the overnight bank funding rate less a spread, and will be decreased on each of certain dates specified in the
agreements during the term of the agreements. On December 27, 2017, COPT issued 1.7 million common shares under the
agreements for net proceeds of $50.0 million, which was used to fund development land acquisitions; and
• COPT issued 591,000 COPT common shares at a weighted average price of $33.84 per share under our at-the-market
(“ATM”) stock offering program established in September 2016. Net proceeds from the shares issued totaled $19.7
million, which were used primarily to fund cash reserves.
We ended 2017:
• with $1.83 billion in debt, which was decreased from $1.90 billion as of December 31, 2016; and
•
from a liquidity perspective with: $12 million in cash on hand; $674 million in borrowing capacity under our Revolving
Credit Facility; and 7.5 million shares available for issuance under COPT’s forward equity sale agreements with a
settlement value of $221.9 million.
Net operating income (“NOI”) from real estate operations, our segment performance measure discussed further below,
increased $5.9 million from 2016 to 2017 for our Same Properties due in large part to a higher average occupancy rate and
average straight-line rent per occupied square foot. Our total NOI from real estate operations decreased from 2016 to 2017 due
to our sale of properties in each of the years. Our net income increased $60.7 million from 2016 to 2017 due primarily to: an
$86.3 million decrease in impairment losses attributable primarily to decisions by us in 2016 to either sell, or abandon plans to
develop, properties; offset in part by a $31.1 million decrease in gain on sales of real estate.
29
We discuss significant factors contributing to changes in our net income over the last three years in the section below
entitled “Results of Operations.” The results of operations discussion is combined for COPT and COPLP because there are no
material differences in the results of operations between the two reporting entities.
In addition, the section below entitled “Liquidity and Capital Resources” includes discussions of, among other things:
•
•
how we expect to generate cash for short and long-term capital needs; and
our commitments and contingencies.
We refer to the measure “annualized rental revenue” in various sections of the Management’s Discussion and Analysis of
Financial Condition and Results of Operations section of this Annual Report on Form 10-K. Annualized rental revenue is a
measure that we use to evaluate the source of our rental revenue as of a point in time. It is computed by multiplying by 12 the
sum of monthly contractual base rents and estimated monthly expense reimbursements under active leases as of a point in time
(ignoring free rent then in effect). Our computation of annualized rental revenue excludes the effect of lease incentives,
although the effect of this exclusion is not material. We consider annualized rental revenue to be a useful measure for
analyzing revenue sources because, since it is point-in-time based, it does not contain increases and decreases in revenue
associated with periods in which lease terms were not in effect; historical revenue under generally accepted accounting
principles in the United States of America (“GAAP”) does contain such fluctuations. We find the measure particularly useful
for leasing, tenant, segment and industry analysis.
With regard to our operating portfolio square footage, occupancy and leasing statistics included below and elsewhere in
this Annual Report on Form 10-K, amounts disclosed:
•
•
•
include total information pertaining to six properties owned through an unconsolidated real estate joint venture except for
amounts reported for Annualized Rental Revenue, which represent the portion attributable to our ownership interest;
exclude the unoccupied portion of two newly-constructed properties that were completed but reported as construction
projects since they were held for future lease to the United States Government. Effective in 2018, these properties will be
fully included in our operating property statistics; and
exclude, for purposes of amounts reported as of December 31, 2017, a property reported as held for sale that we sold in
2017 subject to our providing a financial guaranty to the buyer under which we would indemnify it for up to $20 million in
losses it could incur related to a potential defined capital event occurring on the property by June 30, 2019. Accordingly,
we did not recognize the sale of this property for accounting purposes, and we reported the sales proceeds as a liability on
our consolidated balance sheet.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP, which require us to make certain estimates
and assumptions. A summary of our significant accounting policies is provided in Note 2 to our consolidated financial
statements. The following section is a summary of certain aspects of those accounting policies involving estimates and
assumptions that (1) require our most difficult, subjective or complex judgments in accounting for uncertain matters or matters
that are susceptible to change and (2) materially affect our reported operating performance or financial condition. It is possible
that the use of different reasonable estimates or assumptions in making these judgments could result in materially different
amounts being reported in our consolidated financial statements. While reviewing this section, you should refer to Note 2 to
our consolidated financial statements, including terms defined therein.
Impairment of Long-Lived Assets
We assess each of our properties and related intangible assets for indicators of impairment quarterly or when circumstances
indicate that a property may be impaired. We review our plans and intentions for our development projects and land parcels
quarterly. If our analyses indicate that the carrying values of operating properties, properties in development or land held for
future development may be impaired, we perform a recovery analysis for such properties. For long-lived assets to be held and
used, we analyze recoverability based on the estimated undiscounted future cash flows expected to be generated from the
operations and eventual disposition of the assets over, in most cases, a ten-year holding period. If we believe there is a
significant possibility that we might dispose of the assets earlier, we analyze recoverability using a probability weighted
analysis of the estimated undiscounted future cash flows expected to be generated from the operations and eventual disposition
of the assets over the various possible holding periods. If the analysis indicates that the carrying value of a tested property is
not recoverable from estimated future cash flows, it is written down to its estimated fair value and an impairment loss is
recognized. If and when our plans change, we revise our recoverability analyses to use the cash flows expected from the
operations and eventual disposition of each asset using holding periods that are consistent with our revised plans.
30
Property fair values are estimated based on contract prices, indicative bids, discounted cash flow analyses or comparable
sales analyses. Estimated cash flows used in such analyses are based on our plans for the property and our views of market and
economic conditions. The estimates consider items such as current and future rental rates, occupancies for the tested property
and comparable properties, estimated operating and capital expenditures and recent sales data for comparable properties; most
of these items are influenced by market data obtained from real estate leasing and brokerage firms and our direct experience
with the properties and their markets. Determining the appropriate capitalization or yield rate also requires significant
judgment and is typically based on many factors, including the prevailing rate for the market or submarket, as well as the
quality and location of the property. Changes in the estimated future cash flows due to changes in our plans for a property
(especially our expected holding period), views of market and economic conditions and/or our ability to obtain development
rights could result in recognition of impairment losses which could be substantial.
Properties held for sale are carried at the lower of their carrying values (i.e., cost less accumulated depreciation and any
impairment loss recognized, where applicable) or estimated fair values less costs to sell. Accordingly, decisions to sell certain
operating properties, properties in development or land held for development will result in impairment losses if carrying values
of the specific properties exceed their estimated fair values less costs to sell. The estimates of fair value consider matters such
as recent sales data for comparable properties and, where applicable, contracts or the results of negotiations with prospective
purchasers. These estimates are subject to revision as market conditions, and our assessment of such conditions, change.
Acquisitions of Properties
When we acquire properties, we allocate the purchase price to numerous tangible and intangible components. Most of the
terms in this bullet section are discussed in further detail in Note 2 to the consolidated financial statements entitled
“Acquisitions of Properties.” Our process for determining the allocation to these components requires many estimates and
assumptions, including the following: (1) determination of market rental rates; (2) estimation of leasing and tenant
improvement costs associated with the remaining term of acquired leases; (3) assumptions used in determining the in-place
lease value, if-vacant value and tenant relationship value, including the rental rates, period of time that it would take to lease
vacant space and estimated tenant improvement and leasing costs; (4) renewal probabilities; and (5) allocation of the if-vacant
value between land and building. A change in any of the above key assumptions can materially change not only the
presentation of acquired properties in our consolidated financial statements but also our reported results of operations. The
allocation to different components affects the following:
•
the amount of the purchase price allocated among different categories of assets and liabilities on our consolidated balance
sheets; the amount of costs assigned to individual properties in multiple property acquisitions; and the amount of gain
recognized in our consolidated statements of operations should we determine that the fair value of the acquisition exceeds
its cost;
•
• where the amortization of the components appear over time in our consolidated statements of operations. Allocations to
above- and below-market leases are amortized into rental revenue, whereas allocations to most of the other tangible and
intangible assets are amortized into depreciation and amortization expense. As a REIT, this is important to us since much
of the investment community evaluates our operating performance using non-GAAP measures such as funds from
operations, the computation of which includes rental revenue but does not include depreciation and amortization expense;
and
the timing over which the items are recognized as revenue or expense in our consolidated statements of operations. For
example, for allocations to the as-if vacant value, the land portion is not depreciated and the building portion is depreciated
over a longer period of time than the other components (generally 40 years). Allocations to above- and below-market
leases, in-place lease value and tenant relationship value are amortized over significantly shorter timeframes, and if
individual tenants’ leases are terminated early, any unamortized amounts remaining associated with those tenants are
written off upon termination. These differences in timing can materially affect our reported results of operations. In
addition, we establish lives for tenant relationship values based on our estimates of how long we expect the respective
tenants to remain in the properties.
Assessment of Lease Term
As discussed above, a significant portion of our portfolio is leased to the United States Government, and the majority of
those leases consist of a series of one-year renewal options, or provide for early termination rights. In addition, certain other
leases in our portfolio provide early termination rights to tenants. Applicable accounting guidance requires us to recognize
minimum rental payments on a straight-line basis over the terms of each lease and to assess the lease terms as including all
periods for which failure to renew, or continue, the lease imposes a penalty on the lessee in such amounts that renewal, or
continuation, appears, at the inception of the lease, to be reasonably assured. Factors we consider when determining whether a
31
penalty is significant include the uniqueness of the purpose or location of the property, the availability of a comparable
replacement property, the relative importance or significance of the property to the continuation of the lessee’s line of business
and the existence of leasehold improvements or other assets whose value would be impaired by the lessee vacating or
discontinuing use of the leased property. For most of our leases with the United States Government, we have concluded, based
on the factors above, that exercise of existing renewal options, or continuation of such leases without exercising early
termination rights, is reasonably assured. Changes in these assessments could result in the write-off of any recorded assets
associated with straight-line rental revenue and acceleration of depreciation and amortization expense associated with costs we
incurred related to these leases.
Revenue Recognition on Tenant Improvements
Most of our leases involve some form of improvements to leased space. When we are required to provide improvements
under the terms of a lease, we need to determine whether the improvements constitute landlord assets or tenant assets. If the
improvements are landlord assets, we capitalize the cost of the improvements and recognize depreciation expense associated
with such improvements over the shorter of the useful life of the assets or the term of the lease and recognize any payments
from the tenant as rental revenue over the term of the lease. If the improvements are tenant assets, we defer the cost of
improvements funded by us as a lease incentive asset and amortize it as a reduction of rental revenue over the term of the lease.
Our determination of whether improvements are landlord assets or tenant assets also may affect when we commence revenue
recognition in connection with a lease.
In determining whether improvements constitute landlord or tenant assets, we consider numerous factors that may require
subjective or complex judgments, including: whether the improvements are unique to the tenant or reusable by other tenants;
whether the tenant is permitted to alter or remove the improvements without our consent or without compensating us for any
lost fair value; whether the ownership of the improvements remains with us or remains with the tenant at the end of the lease
term; and whether the economic substance of the lease terms is properly reflected.
Collectability of Accounts and Deferred Rent Receivable
Allowances for doubtful accounts and deferred rent receivable are established based on quarterly analyses of the risk of
loss on specific accounts. The analyses place particular emphasis on past-due accounts and consider information such as the
nature and age of the receivables, the payment history of the tenants, the financial condition of the tenants and our assessment
of their ability to meet their lease obligations, the basis for any disputes and the status of related negotiations. Our estimate of
the required allowance is subject to revision as these factors change and is sensitive to the effects of economic and market
conditions on tenants.
Activities we conduct to monitor the credit quality of our tenants include the following: monitoring the timeliness of
tenant lease payments; reviewing credit ratings of tenants that are rated by a nationally recognized credit agency prior to such
tenants’ entry into leases, and monitoring periodically thereafter; reviewing financial statements of tenants that are publicly
available or that are required to be provided to us pursuant to the terms of such tenants’ leases; and monitoring news reports
regarding our tenants.
Accounting Method for Investments
We use three different accounting methods to report our investments in entities: the consolidation method; the equity
method; and the cost method (see Note 2 to our consolidated financial statements). We use the consolidation method when we
own most of the outstanding voting interests in an entity and can control its operations. We also consolidate certain entities
when control of such entities can be achieved through means other than voting rights (“variable interest entities” or “VIEs”) if
we are deemed to be the primary beneficiary. Generally, this applies to entities for which either: (1) the equity investors (if
any) lack one or more of the essential characteristics of a controlling financial interest; (2) the equity investment at risk is
insufficient to finance that entity’s activities without additional subordinated financial support; or (3) the equity investors have
voting rights that are not proportionate to their economic interests and the activities of the entity involve, or are conducted on
behalf of, an investor with a disproportionately small voting interest. We use the equity method of accounting when we own an
interest in an entity and can exert significant influence over, but cannot control, the entity’s operations. We use the cost method
of accounting when we own an interest in an entity and cannot exert significant influence over its operations.
In making these determinations, we must consider both our and our partner’s ability to participate in the management of
the entity’s operations and make decisions that could significantly affect the entity’s performance and allow the parties to
manage their economic risks. We need to make subjective estimates and judgments regarding the entity’s planned activities and
expected future operating performance, financial condition, future valuation and other variables that may affect the cash flows
32
of the entity. We may also need to estimate the probability of different scenarios taking place over time and their effect on the
partners’ cash flows. The conclusion reached as a result of this process affects whether or not we use the consolidation method
in accounting for our investment or the equity method. Whether or not we consolidate an investment can materially affect our
consolidated financial statements.
Concentration of Operations
Customer Concentration of Property Operations
The table below sets forth the 20 largest tenants in our portfolio of operating properties (including our office and data
center shell properties and wholesale data center) based on percentage of annualized rental revenue:
Tenant
United States Government
Vadata Inc.
The Boeing Company (1)
General Dynamics Corporation (1)
CSRA Inc. (1)
Northrop Grumman Corporation (1)
CareFirst, Inc.
Booz Allen Hamilton, Inc.
Wells Fargo & Company (1)
CACI Technologies, Inc.
AT&T Corporation (1)
KEYW Corporation
Miles & Stockbridge, PC
The Raytheon Company (1)
University of Maryland
Kratos Defense & Security Solution, Inc. (1)
Science Applications International Corporation (1)
The MITRE Corporation
Transamerica Life Insurance Company
Accenture Federal Services LLC
Harris Corporation
L-3 Communications Holdings, Inc. (1)
Engility Holdings, Inc.
Subtotal of 20 largest tenants
All remaining tenants
Total
Percentage of Annualized Rental
Revenue of Operating Properties
for 20 Largest Tenants as of December 31,
2016
2015
2017
31.7%
7.6%
4.2%
3.5%
2.3%
2.2%
2.1%
2.0%
1.7%
1.5%
1.2%
1.2%
1.1%
1.1%
1.0%
1.0%
0.9%
0.9%
0.9%
0.7%
N/A
N/A
N/A
68.8%
31.2%
100.0%
29.8%
5.6%
4.1%
4.1%
2.2%
4.6%
2.2%
1.9%
1.5%
1.5%
1.2%
1.2%
1.0%
1.2%
1.0%
0.9%
0.9%
0.9%
1.0%
N/A
1.0%
N/A
N/A
67.8%
32.2%
100.0%
27.8%
4.7%
4.3%
3.9%
2.1%
4.4%
2.0%
1.9%
1.6%
N/A
1.2%
1.1%
1.0%
1.1%
0.9%
0.9%
1.1%
N/A
0.9%
N/A
1.3%
1.1%
0.9%
64.2%
35.8%
100.0%
(1) Includes affiliated organizations and predecessor companies.
The United States Government’s concentration increased each of the last two years due primarily to our dispositions of
properties in which it was not a tenant and from its occupancy of a newly-constructed property in 2017.
33
Concentration of Office and Data Center Shell Properties by Segment
The table below sets forth the segment allocation of our annualized rental revenue of office and data center shell properties
as of the end of the last three calendar years:
Region
Defense/IT Locations:
Fort Meade/BW Corridor
Northern Virginia Defense/IT
Lackland Air Force Base
Navy Support Locations
Redstone Arsenal
Data Center Shells
Total Defense/IT Locations
Regional Office
Other
Percentage of Annualized Rental
Revenue of Office and Data Center Shell
Properties as of December 31,
2016
2015
2017
Number of Properties
as of December 31,
2016
2017
2015
51.6%
10.8%
9.9%
6.5%
3.0%
5.6%
87.4%
12.1%
0.5%
100.0%
50.3%
10.7%
9.4%
5.6%
2.9%
5.6%
84.5%
14.5%
1.0%
100.0%
49.6%
10.3%
8.3%
5.2%
2.7%
4.7%
80.8%
17.8%
1.4%
100.0%
87
12
7
21
7
15
149
7
3
159
86
12
7
21
7
13
146
13
5
164
90
13
7
21
6
9
146
24
7
177
The changes reflected above were attributable primarily to dispositions of Regional Office Properties and newly constructed
properties placed into service in certain of our Defense/IT Location sub-segments. While our Data Center Shells sub-segment
experienced the most growth in recent years from newly-constructed properties placed into service, its percentage
concentration of annualized rental revenue was unchanged between year end 2016 and 2017 due to our sale of two data center
shells that were outside of our core markets.
Occupancy and Leasing
Office and Data Center Shell Portfolio
The tables below set forth occupancy information pertaining to our portfolio of office and data center shell properties:
Occupancy rates at period end
Total
Defense/IT Locations:
Fort Meade/BW Corridor
Northern Virginia Defense/IT
Lackland Air Force Base
Navy Support Locations
Redstone Arsenal
Data Center Shells
Total Defense/IT Locations
Regional Office
Other
December 31,
2016
2015
2017
93.6%
92.1%
91.6%
95.6%
89.1%
100.0%
87.7%
98.2%
100.0%
95.2%
89.5%
34.4%
94.3%
85.0%
100.0%
72.7%
96.4%
100.0%
92.6%
95.2%
52.9%
94.5%
81.9%
100.0%
72.1%
97.0%
100.0%
91.9%
95.4%
57.3%
Average contractual annualized rental rate per square foot at year end (1)
$ 29.84
$ 30.16
$ 29.55
(1) Includes estimated expense reimbursements. The decrease from December 31, 2016 to December 31, 2017 was
attributable primarily to lower rents per square foot being in place for our properties placed in service in 2017 relative to
the properties we sold since most of the properties we placed into service were data center shells and most of the ones sold
were full service office properties.
34
December 31, 2016
Square feet vacated upon lease expiration (1)
Occupancy of previously vacated space in connection with new leases (2)
Square feet constructed or redeveloped
Dispositions
Square feet removed from operations for redevelopment
Other changes
December 31, 2017
Rentable
Square Feet
Occupied
Square Feet
(in thousands)
17,190
—
—
1,165
(992)
(22)
4
17,345
15,831
(446)
562
1,187
(912)
—
5
16,227
(1) Includes lease terminations and space reductions occurring in connection with lease renewals.
(2) Excludes occupancy of vacant square feet acquired or developed.
As the table above reflects, the increase in our total occupancy rate from December 31, 2016 to December 31, 2017 was
attributable primarily to high occupancy rates in newly-constructed properties placed into service and re-tenanted space in
existing properties. With regard to our segment occupancy trends, including changes from December 31, 2016 to
December 31, 2017:
• Northern Virginia Defense/IT: Occupancy increased for this sub-segment due to: progress we made in re-tenanting space in
certain properties; and a fully-occupied property placed into service in 2017. These occupancy statistics exclude the effect
of a 161,000 square foot property completed but reported as a construction project since it was held for future lease to the
United States Government. As of December 31, 2017, only 2% of the sub-segment’s occupied square feet had scheduled
lease expirations in 2018;
• Navy Support Locations: After experiencing several years of weak demand in each of this sub-segment’s three submarkets,
we improved occupancy in each of these submarkets in 2017 by leasing previously vacant space. As of December 31,
2017, we also had scheduled lease expirations in 2018 for 381,000, or 35%, of the segment’s occupied square feet;
however, we expect to renew at least 80% of this space;
• Regional Office: Occupancy decreased in each of our three sub-markets comprising this segment, with scheduled lease
expirations, as of December 31, 2017, on 5% of its occupied square feet in 2018 and 12% in 2019. We believe that
occupancy in this segment will temporarily decrease several percentage points from its current levels in 2018 due to tenant
turnover; and
• Other: As of December 31, 2017, our Other segment included three properties totaling 286,000 square feet in Aberdeen,
Maryland that we are not expecting to hold long-term.
In 2017, we completed 3.3 million square feet of leasing, including 975,000 square feet of construction and redevelopment
space. Our construction and redevelopment leasing was highlighted by five data center shells leased in Northern Virginia
totaling 743,000 square feet.
In 2017, we renewed leases on 1.9 million square feet, representing 81.0% of the square footage of our lease expirations
(including the effect of early renewals). The annualized rents of these renewals (totaling $30.22 per square foot) decreased on
average by approximately 0.7% and the revenue under GAAP (totaling $30.88 per square foot) increased on average by
approximately 9.5% relative to the leases previously in place for the space. The renewed leases had a weighted average lease
term of approximately 3.7 years and the average estimated tenant improvements and lease costs associated with completing the
leasing was approximately $10 per square foot.
In 2017, we also completed 431,000 square feet in other leasing, consisting primarily of re-tenanted space. The annualized
rents of this other leasing totaled $26.04 per square foot and the revenue under GAAP totaled $26.49 per square foot; these
leases had a weighted average lease term of approximately 5.8 years and the average estimated tenant improvements and lease
costs associated with completing this leasing was approximately $49 per square foot.
35
Wholesale Data Center
The leased portion of our 19.25 megawatt wholesale data center property increased from 14.9 megawatts as of
December 31, 2016 to 16.9 megawatts as of December 31, 2017; the leased megawatts as of December 31, 2016 excluded
approximately one additional megawatt provided to users under management agreements.
Lease Expirations
The table below sets forth as of December 31, 2017 our scheduled lease expirations based on the non-cancelable term of
tenant leases determined in accordance with generally accepted accounting principles for our operating properties by segment/
sub-segment in terms of percentage of annualized rental revenue:
Defense/IT Locations
Fort Meade/BW Corridor
Northern Virginia Defense/IT
Lackland Air Force Base
Navy Support Locations
Redstone Arsenal
Data Center Shells
Regional Office
Other
Wholesale Data Center
Total
Expiration of Annualized Rental
Revenue of Operating Properties
2018
2019
2020
2021
2022
Thereafter
Total
10.6% 10.4% 6.9% 5.2% 3.0%
0.1% 2.6% 1.0% 0.8% 0.4%
0.0% 0.0% 2.2% 0.0% 0.0%
2.3% 0.7% 0.7% 1.1% 0.5%
0.0% 1.5% 0.0% 0.7% 0.0%
0.0% 0.5% 0.0% 0.0% 0.0%
0.7% 1.1% 0.5% 0.2% 3.1%
0.1% 0.1% 0.3% 0.0% 0.0%
0.0% 0.8% 2.7% 0.1% 0.4%
13.8% 17.7% 14.3% 8.1% 7.4%
13.5% 49.6%
5.3% 10.2%
9.5%
7.3%
6.2%
0.9%
2.8%
0.6%
4.9%
5.4%
5.8% 11.4%
0.5%
0.0%
0.4%
4.4%
38.7% 100.0%
For our office and data center shell properties, our weighted average lease term as of December 31, 2017 was
approximately 4.7 years. We believe that the weighted average annualized rental revenue per occupied square foot for our
office and data center shell property leases expiring in 2018 was, on average, approximately 0% to 2% higher than estimated
current market rents for the related space, with specific results varying by segment. While our Fort Meade/BW Corridor sub-
segment had scheduled lease expirations of 21% of its annualized rental revenue in each of 2018 and 2019, we believe that the
rollover risk for this space is mitigated by the fact that the space is at mission critical Defense/IT locations. Our wholesale data
center had scheduled lease expirations for 61% of its annualized rental revenue in 2020.
Most of the leases with our largest tenant, the United States Government, provide for consecutive one-year terms with
automatic renewals; most of the leasing statistics set forth above assume that the United States Government will remain in the
space that they lease through the end of the respective arrangements without ending consecutive one-year leases prematurely.
Results of Operations
We evaluate the operating performance of our properties using NOI from real estate operations, our segment performance
measure, which includes: real estate revenues and property operating expenses from continuing and discontinued operations;
and the net of revenues and property operating expenses of real estate operations owned through unconsolidated real estate
joint ventures (“UJVs”) that is allocable to COPT’s ownership interest (“UJV NOI allocable to COPT”). We view our NOI
from real estate operations as comprising the following primary categories:
•
office and data center shell properties:
•
continually owned and 100% operational throughout the two years being compared, excluding properties held for sale.
We define these as changes from “Same Properties.” For further discussion of the concept of “operational,” you
should refer to the section of Note 2 of the consolidated financial statements entitled “Properties”;
constructed or redeveloped and placed into service that were not 100% operational throughout the two years being
compared;
acquired during the two years being compared; and
disposed (including a property reported as held for sale as of December 31, 2017 the sale of which in 2017 was not
recognized for accounting purposes); and
•
•
•
•
our wholesale data center.
36
In addition to owning properties, we provide construction management and other services. The primary manner in which
we evaluate the operating performance of our construction management and other service activities is through a measure we
define as NOI from service operations, which is based on the net of the revenues and expenses from these activities. The
revenues and expenses from these activities consist primarily of subcontracted costs that are reimbursed to us by customers
along with a management fee. The operating margins from these activities are small relative to the revenue. We believe NOI
from service operations is a useful measure in assessing both our level of activity and our profitability in conducting such
operations.
Since both of the measures discussed above exclude certain items includable in operating income, reliance on these
measures has limitations; management compensates for these limitations by using the measures simply as supplemental
measures that are considered alongside other GAAP and non-GAAP measures. A reconciliation of NOI from real estate
operations and NOI from service operations to income from continuing operations reported on the consolidated statements of
operations of COPT and subsidiaries is provided in Note 17 to our consolidated financial statements.
Comparison of Statements of Operations for the Years Ended December 31, 2017 and December 31, 2016
2017
For the Years Ended December 31,
2016
(in thousands)
Variance
Revenues
Revenues from real estate operations
Construction contract and other service revenues
Total revenues
Expenses
Property operating expenses
Depreciation and amortization associated with real estate operations
Construction contract and other service expenses
Impairment losses
General, administrative and leasing expenses
Business development expenses and land carry costs
Total operating expenses
Operating income
Interest expense
Interest and other income
Loss on early extinguishment of debt
Equity in income of unconsolidated entities
Income tax expense
Income (loss) from continuing operations
Gain on sales of real estate
Net income
$
509,980
102,840
612,820
$
525,964
48,364
574,328
$
(15,984)
54,476
38,492
190,964
134,228
99,618
15,123
30,837
6,213
476,983
135,837
(76,983)
6,318
(513)
2,882
(1,098)
66,443
9,890
76,333
$
197,530
132,719
45,481
101,391
36,553
8,244
521,918
52,410
(83,163)
5,444
(1,110)
1,332
(244)
(25,331)
40,986
15,655
$
(6,566)
1,509
54,137
(86,268)
(5,716)
(2,031)
(44,935)
83,427
6,180
874
597
1,550
(854)
91,774
(31,096)
60,678
$
37
NOI from Real Estate Operations
For the Years Ended December 31,
2016
(Dollars in thousands, except per square foot data)
Variance
2017
Revenues
Same Properties revenues
Rental revenue, excluding lease termination revenue
Lease termination revenue
Tenant recoveries and other real estate operations revenue
$
Same Properties total revenues
Constructed and redeveloped properties placed in service
Wholesale data center
Dispositions
Other
Property operating expenses
Same Properties
Constructed and redeveloped properties placed in service
Wholesale data center
Dispositions
Other
345,314
2,911
93,047
441,272
24,112
28,875
14,652
1,069
509,980
(167,061)
(6,601)
(13,551)
(2,834)
(917)
(190,964)
$
338,222
2,279
95,264
435,765
7,749
26,869
54,531
1,050
525,964
(167,434)
(2,330)
(11,512)
(15,495)
(759)
(197,530)
$
7,092
632
(2,217)
5,507
16,363
2,006
(39,879)
19
(15,984)
373
(4,271)
(2,039)
12,661
(158)
6,566
UJV NOI allocable to COPT
5,188
2,305
2,883
NOI from real estate operations
Same Properties
Constructed and redeveloped properties placed in service
Wholesale data center
Dispositions
UJV NOI allocable to COPT
Other
Same Properties rent statistics
Average occupancy rate
Average straight-line rent per occupied square foot (1)
274,211
17,511
15,324
11,818
5,188
152
324,204
92.5%
25.92
$
$
268,331
5,419
15,357
39,036
2,305
291
330,739
91.5%
25.69
5,880
12,092
(33)
(27,218)
2,883
(139)
(6,535)
1.0%
0.23
$
$
$
$
(1) Includes minimum base rents, net of abatements, and lease incentives on a straight-line basis for the years set forth above.
Our Same Properties pool consisted of 135 properties, comprising 83.1% of our office and data center shell portfolio’s
square footage as of December 31, 2017. This pool of properties included the following changes from the pool used for
purposes of comparing 2016 and 2015 in our 2016 Annual Report on Form 10-K: the addition of four properties placed into
service and 100% operational on or before January 1, 2016 and three properties acquired in 2015; and the removal of four
properties disposed and one property reclassified as redevelopment in 2017. Our increase in NOI from Same Properties from
2016 to 2017 was due in large part to a higher average occupancy rate and average straight-line rent per occupied square foot,
as reflected above.
Our NOI from constructed and redeveloped properties placed into service included 17 properties placed into service in
2016 and 2017.
Our property operating expense included bad debt expense of $378,000, or 0.07% of our revenue from real estate
operations, in 2017 and none in 2016.
38
NOI from Service Operations
Construction contract and other service revenues
Construction contract and other service expenses
NOI from service operations
$ 102,840
99,618
3,222
$
2017
2016
(in thousands)
48,364
$
45,481
2,883
$
Variance
$
$
54,476
54,137
339
For the Years Ended December 31,
Construction contract and other service revenue and expenses increased due primarily to a greater volume of construction
activity in connection with several of our tenants. Construction contract activity is inherently subject to significant variability
depending on the volume and nature of projects undertaken by us (primarily on behalf of tenants). Service operations are an
ancillary component of our overall operations that typically contribute an insignificant amount of operating income relative to
our real estate operations.
Impairment Losses
As discussed further below, the decrease in impairment losses was attributable primarily to decisions by us in 2016 to
either sell, or abandon plans to develop, properties.
2017
In the fourth quarter of 2017, our assessment of weakening leasing prospects and expected enduring vacancy in our
Aberdeen, Maryland (“Aberdeen”) portfolio indicated that these properties could be impaired. We have performed recovery
analyses on the properties considering weakening tenant demand, high vacancy and low investor demand for office properties
in the submarket and concluded that the carrying values of these properties were not likely to be recovered from the expected
undiscounted cash flows from the operation and eventual disposition of these properties. Accordingly, we recognized $9.0
million of impairment losses on the operating properties in Aberdeen (included in our Other segment). In addition, and also
considering these conditions, we determined that we would not likely recover the carrying amount of land in this submarket
and recognized a $4.7 million impairment loss on it. We previously recognized impairment losses on these properties in the
second quarter of 2016 as discussed below. We determined that the declines in values that have occurred since the initial losses
were recognized were due to deteriorating market conditions.
During 2017, we performed recoverability analyses for our properties classified as held for sale, which resulted in
impairment losses of $1.6 million in the second quarter of 2017. These impairment losses were primarily on properties in
White Marsh, Maryland (“White Marsh”) (included in our Regional Office and Other segments) that we reclassified to held for
sale during the period and adjusted to fair value less costs to sell. These properties were sold in the third quarter.
2016
In the first quarter of 2016, we set a goal to raise cash from sales of properties in 2016 considerably in excess of our assets
held for sale at December 31, 2015. The specific properties we would sell to achieve this goal had not been identified when the
goal was established. Throughout 2016, we engaged in the process of identifying properties we would sell.
In the first quarter of 2016, we reclassified: most of our properties in Greater Philadelphia (included in our Regional
Office segment); two properties in the Fort Meade/BW Corridor sub-segment; and our remaining land holdings in Colorado
Springs, Colorado (“Colorado Springs”) to held for sale and recognized $2.4 million of impairment losses. As of March 31,
2016, we had $225.9 million of assets held for sale.
During the second quarter of 2016, as part of our closing process, we conducted our quarterly review of our portfolio for
indicators of impairment considering the refined investment strategy of our then newly-appointed Chief Executive Officer and
the goals of the asset sales program and concluded that we would: (1) not hold our operating properties in Aberdeen for the
long-term; (2) not develop commercial properties on land in Frederick, Maryland; (3) sell specific properties in our Northern
Virginia Defense/IT and Fort Meade/BW Corridor sub-segments; and (4) sell the remaining operating property in Greater
Philadelphia that had not previously been classified as held for sale. Accordingly, we performed recoverability analyses for
each of these properties and recorded the following impairment losses:
•
$34.4 million on operating properties in Aberdeen (included in our Other segment). After shortening our estimated holding
period for these properties, we determined that the carrying amount of the properties would not likely be recovered from
39
•
•
•
•
•
the operation and eventual dispositions of the properties during the shortened holding period. Accordingly, we adjusted the
properties to their estimated fair values;
$4.4 million on land in Aberdeen. In performing our analysis related to the operating properties in Aberdeen, we
determined that the weakening leasing and overall commercial real estate conditions in that market indicated that our land
holdings in the market may be impaired. As a result, we determined that the carrying amount of the land was not
recoverable and adjusted the land to its estimated fair value;
$8.2 million on land in Frederick, Maryland. We determined that the carrying amount of the land would not likely be
recovered from its sale and adjusted the land to its estimated fair value;
$14.1 million on operating properties in our Northern Virginia and Fort Meade/BW Corridor sub-segments that we
reclassified to held for sale during the period whose carrying amounts exceeded their estimated fair values less costs to
sell;
$6.2 million on the property in Greater Philadelphia (included in our Regional Office segment) that we reclassified to held
for sale during the period and adjusted to fair value less costs to sell; and
$2.4 million primarily on land in Colorado Springs and operating properties in White Marsh (included in our Regional
Office Segment) classified as held for sale whose carrying amounts exceeded their estimated fair values less costs to sell
based on updated negotiations with prospective buyers.
There were no property sales in the second quarter of 2016 and as of June 30, 2016, we had $300.6 million of assets held for
sale.
During the third quarter of 2016, as part of our closing process, we conducted our quarterly review of our portfolio for
indicators of impairment considering refinements to our disposition strategy made during the third quarter of 2016 to sell an
additional operating property in our Northern Virginia Defense/IT sub-segment, an additional operating property in our Fort
Meade/BW Corridor sub-segment and our remaining operating properties and land in White Marsh that had not previously
been classified as held for sale. In connection with our determinations that we planned to sell these properties, we performed
recoverability analyses for each of these properties and recorded the following impairment losses:
•
•
$13.3 million on the operating property in our Northern Virginia Defense/IT sub-segment. Communication with a major
tenant in the building during the quarter led us to conclude that there was significant uncertainty with respect to the tenant
renewing its lease expiring in 2019. As a result of this information and continuing sub-market weakness, we determined
that this property no longer met our long-term hold strategy and we placed it into our asset sales program. Accordingly, we
adjusted the carrying amount of the property to its estimated fair value less costs to sell; and
$2.9 million on the other properties that we reclassified as held for sale, primarily associated with a land parcel in White
Marsh. As of June 30, 2016, this land was under a sales contract subject to a re-zoning contingency. During the third
quarter, we were denied favorable re-zoning and the contract was canceled. As a result, we determined this property will
be sold as is, reclassified it to held for sale and adjusted its carrying value to its estimated fair value less costs to sell.
During our review we also recognized additional impairment losses of $11.5 million on properties previously classified as held
for sale. Approximately $10.0 million of these losses pertained to properties in White Marsh due to our assessment that certain
significant tenants will likely exercise lease termination rights and to reflect market conditions. The remainder of these losses
pertained primarily to properties in San Antonio, Texas (included in our Other segment), where prospective purchasers reduced
offering prices late in the third quarter. We executed property sales of $210.7 million in the third quarter of 2016 (discussed
further in Note 5), and had $161.5 million of assets held for sale as of September 30, 2016.
We executed property sales of $54.1 million in the fourth quarter of 2016 (discussed further in Note 5), and had $94.7
million of assets held for sale as of December 31, 2016. As part of our closing process for the fourth quarter, we conducted our
quarterly review of our portfolio for indicators of impairment and found there to be no impairment losses for the quarter other
than additional impairment losses of $1.3 million on properties previously classified as held for sale in White Marsh, where
prospective purchasers reduced offering prices, and $0.3 million of losses on properties that were sold during the period.
Changes in the expected future cash flows due to changes in our plans for specific properties (especially our expected
holding period) could result in the recognition of additional impairment losses. In addition, because properties held for sale are
carried at the lower of carrying value or estimated fair values less costs to sell, declines in their estimated fair values due to
market conditions and other factors could result in the recognition of additional impairment losses.
40
General, Administrative and Leasing Expenses
The decrease in general, administrative and leasing expenses from 2016 to 2017 was attributable primarily to $6.5 million
of executive transition costs incurred in 2016, representing mostly severance and termination benefits in connection with the
departures of former executive officers Roger A. Waesche, Jr., Wayne H. Lingafelter and Karen M. Singer, compared to
$732,000 in such costs recognized in 2017.
We capitalize compensation and indirect costs associated with properties, or portions thereof, undergoing construction,
development and redevelopment activities. We also capitalize compensation costs associated with obtaining new tenant leases
or extending existing tenants. Capitalized compensation and indirect costs were as follows:
For the Years Ended December 31,
2017
2016
Construction, development, redevelopment, capital and tenant improvements
Leasing and other
Total
$
$
Interest Expense
The table below sets forth components of our interest expense:
$
(in thousands)
7,879
1,396
9,275
$
7,418
1,115
8,533
Interest on Unsecured Senior Notes
Interest on mortgage and other secured debt
Interest on unsecured term debt
Amortization of deferred financing costs
Interest expense recognized on interest rate swaps
Interest on Revolving Credit Facility
Other interest
Capitalized interest
Interest expense
$
$
$
Variance
For the Years Ended December 31,
2016
2017
(in thousands)
53,129
$
12,487
10,543
4,573
4,230
1,511
2,413
(5,723)
83,163
53,190
6,766
11,257
2,928
3,216
2,419
2,436
(5,229)
76,983
61
(5,721)
714
(1,645)
(1,014)
908
23
494
(6,180)
$
$
Our average outstanding debt decreased from $2.0 billion in 2016 to $1.9 billion in 2017, and our weighted average effective
interest rate on debt under GAAP was 4.1% in 2016 and 2017.
Gain on Sales of Real Estate
In 2017, we recognized gain on sales of real estate of $5.4 million in connection with land sales and $4.5 million on sales
of operating properties. In 2016, we recognized gain on sales of real estate of $17.9 million on our sale of a 50% interest in six
single-tenant data center properties, $15.9 million on sales of other operating properties and $7.2 million on land sales.
41
Comparison of Statements of Operations for the Years Ended December 31, 2016 and December 31, 2015
2016
For the Years Ended December 31,
2015
(in thousands)
Variance
Revenues
Revenues from real estate operations
Construction contract and other service revenues
Total revenues
Expenses
Property operating expenses
Depreciation and amortization associated with real estate operations
Construction contract and other service expenses
Impairment losses
General, administrative and leasing expense
Business development expenses and land carry costs
Total operating expenses
Operating income
Interest expense
Interest and other income
(Loss) gain on early extinguishment of debt
Equity in income of unconsolidated entities
Income tax expense
(Loss) income from continuing operations
Discontinued operations
Gain on sales of real estate
Net income
$
525,964
48,364
574,328
$
519,064
106,402
625,466
$
6,900
(58,038)
(51,138)
197,530
132,719
45,481
101,391
36,553
8,244
521,918
52,410
(83,163)
5,444
(1,110)
1,332
(244)
(25,331)
—
40,986
15,655
$
194,494
140,025
102,696
23,289
31,361
13,507
505,372
120,094
(89,074)
4,517
85,275
62
(199)
120,675
156
68,047
188,878
3,036
(7,306)
(57,215)
78,102
5,192
(5,263)
16,546
(67,684)
5,911
927
(86,385)
1,270
(45)
(146,006)
(156)
(27,061)
$ (173,223)
$
42
NOI from Real Estate Operations
For the Years Ended December 31,
2015
(Dollars in thousands, except per square foot data)
Variance
2016
Revenues
Same Properties revenues
Rental revenue, excluding lease termination revenue
Lease termination revenue
Tenant recoveries and other real estate operations revenue
$
Same Properties
Constructed and redeveloped properties placed in service
Acquired properties
Wholesale data center
Dispositions
Other
Property operating expenses
Same Properties
Constructed and redeveloped properties placed in service
Acquired properties
Wholesale data center
Dispositions
Other
$
296,422
2,280
85,061
383,763
22,864
36,876
26,869
54,531
1,061
525,964
(146,412)
(7,197)
(15,865)
(11,512)
(15,495)
(1,049)
(197,530)
$
294,163
2,366
80,086
376,615
11,229
20,176
19,032
90,994
1,022
519,068
(143,400)
(3,131)
(8,219)
(10,402)
(28,986)
(350)
(194,488)
2,259
(86)
4,975
7,148
11,635
16,700
7,837
(36,463)
39
6,896
(3,012)
(4,066)
(7,646)
(1,110)
13,491
(699)
(3,042)
UJV NOI allocable to COPT
2,305
—
2,305
NOI from real estate operations
Same Properties
Constructed and redeveloped properties placed in service
Acquired properties
Wholesale data center
Dispositions
UJV NOI allocable to COPT
Other
Same Properties rent statistics
Average occupancy rate
Average straight-line rent per occupied square foot (1)
237,351
15,667
21,011
15,357
39,036
2,305
12
330,739
91.0%
25.42
$
$
233,215
8,098
11,957
8,630
62,008
—
672
324,580
91.0%
25.22
$
$
4,136
7,569
9,054
6,727
(22,972)
2,305
(660)
6,159
—%
0.20
$
$
(1) Includes minimum base rents, net of abatements, and lease incentives on a straight-line basis for the years set forth above.
Our Same Properties pool consisted of 128 properties, comprising 74.5% of our office and data center shell portfolio’s
square footage as of December 31, 2016. This pool of properties changed from the pool used for purposes of comparing 2016
and 2015 in our 2016 Annual Report on Form 10-K due to the removal of four properties disposed and one property reclassified
as redevelopment in 2017.
Our NOI from constructed properties placed in service included 13 properties placed in service in 2015 and 2016, and our
NOI from acquired properties included our acquisition of three properties in 2015.
The increase in NOI from our wholesale data center was attributable primarily to higher average occupancy for the
property in 2016.
Our property operating expense included no bad debt expense in 2016 and $1.1 million in 2015.
43
NOI from Service Operations
Construction contract and other service revenues
Construction contract and other service expenses
NOI from service operations
$
$
48,364
45,481
2,883
2016
2015
(in thousands)
$ 106,402
102,696
3,706
$
Variance
$ (58,038)
(57,215)
(823)
$
For the Years Ended December 31,
Construction contract and other service revenue and expenses decreased due primarily to a lower volume of construction
activity in connection with several of our tenants.
Depreciation and Amortization Expense
The decrease in depreciation and amortization expense was due primarily to a $16.8 million decrease attributable to
property dispositions, partially offset by additional expense recognized in 2016 of $8.0 million from properties acquired in
2015.
Impairment Losses
Refer to 2016 impairment losses described above in our explanation for 2017 losses as compared to 2016.
We recognized the following impairment losses in 2015:
•
•
$12.8 million on land in Colorado Springs. We classified some of this land as held for sale in the fourth quarter of 2015, at
which time we adjusted the land to its estimated fair value less costs to sell. Due to the impairment loss on the land held
for sale, we updated our estimates of fair value for other land owned in Colorado Springs and determined that the carrying
value of some of this land exceeded such land’s estimated fair value, which resulted in recognition of an additional
impairment loss; and
$6.6 million on land in Aberdeen. After concluding in 2015 that we no longer expected to develop operating properties on
the land, we determined that the carrying amount of the land would not likely be recovered from the sale of this property
over the likely remaining holding period. Accordingly, we adjusted the land to its estimated fair value.
General, Administrative and Leasing Expenses
The increase in general, administrative and leasing expenses from 2015 to 2016 was attributable primarily to $6.5 million
of executive transition costs incurred in 2016, representing mostly severance and termination benefits in connection with the
departures of Mr. Waesche, Mr. Lingafelter and Ms. Singer. Capitalized compensation and indirect costs were as follows:
For the Years Ended December 31,
2016
2015
Construction, development, redevelopment, capital and tenant improvements
Leasing and other
Total
$
$
Business Development Expenses and Land Carry Costs
$
(in thousands)
7,418
1,115
8,533
$
7,732
1,214
8,946
The decrease in business development expenses and land carry costs was due primarily to a $4.1 million decrease in
acquisition costs and a $1.4 million decrease in demolition costs on properties undergoing redevelopment.
44
Interest Expense
The table below sets forth components of our interest expense:
Interest on Unsecured Senior Notes
Interest on mortgage and other secured debt
Interest, excluding default rate on extinguished debt reported below
Interest under default rate on debt extinguished via property
conveyance
Interest on unsecured term debt
Amortization of deferred financing costs
Interest expense recognized on interest rate swaps
Interest on Revolving Credit Facility
Other interest
Capitalized interest
Interest expense
For the Years Ended December 31,
2016
2015
Variance
$ 53,129
(in thousands)
$ 45,525
$
7,604
12,487
22,644
(10,157)
—
10,543
4,573
4,230
1,511
2,413
(5,723)
$ 83,163
5,270
9,469
4,466
3,599
1,771
3,481
(7,151)
$ 89,074
(5,270)
1,074
107
631
(260)
(1,068)
1,428
$ (5,911)
Our average outstanding debt decreased from $2.1 billion in 2015 to $2.0 billion in 2016. Our weighted average effective
interest rate on debt under GAAP changed from 4.3% in 2015 (or 4.0% excluding the effect of default interest on debt that we
extinguished via a property conveyance) to 4.1% in 2016. The overall decrease in interest expense was due primarily to the
default rate interest that we incurred in 2015 on the extinguished debt. The changes reflected in the table above also reflect our
increased emphasis on unsecured debt over mortgage and other secured debt. Interest expense for Unsecured Senior Notes
increased due to our issuance of notes in June 2015. Capitalized interest decreased due primarily to decreased volume in active
construction and development projects.
(Loss) Gain on Early Extinguishment of Debt
We recognized a gain on early extinguishment of debt of $85.7 million in 2015 primarily in connection with our transfer of
ownership in two properties serving as collateral for a $150.0 million nonrecourse mortgage loan to the mortgage lender and
the removal of the debt obligation and accrued interest from our balance sheet.
Gain on Sales of Real Estate
We recognized gain on sales of real estate in 2016 of $17.9 million on our sale of a 50% interest in six single-tenant data
center properties, $15.9 million on sales of other operating properties and $7.2 million on land sales. We recognized gain on
sales of real estate in 2015 of $64.1 million on operating property dispositions and $4.0 million on land sales.
45
Funds from Operations
Funds from operations (“FFO”) is defined as net income computed using GAAP, excluding gains on sales of, and
impairment losses on, previously depreciated operating properties, plus real estate-related depreciation and amortization. When
multiple properties consisting of both operating and non-operating properties exist on a single tax parcel, we classify all of the
gains on sales of, and impairment losses on, the tax parcel as all being for previously depreciated operating properties when
most of the value of the parcel is associated with operating properties on the parcel. FFO also includes adjustments to net
income for the effects of the items noted above pertaining to UJVs that were allocable to our ownership interest in the UJVs.
We believe that we use the National Association of Real Estate Investment Trusts (“NAREIT”) definition of FFO, although
others may interpret the definition differently and, accordingly, our presentation of FFO may differ from those of other REITs.
We believe that FFO is useful to management and investors as a supplemental measure of operating performance because, by
excluding gains related to sales of, and impairment losses on, previously depreciated operating properties, net of related tax
benefit, and excluding real estate-related depreciation and amortization, FFO can help one compare our operating performance
between periods. In addition, since most equity REITs provide FFO information to the investment community, we believe that
FFO is useful to investors as a supplemental measure for comparing our results to those of other equity REITs. We believe that
net income is the most directly comparable GAAP measure to FFO.
Since FFO excludes certain items includable in net income, reliance on the measure has limitations; management
compensates for these limitations by using the measure simply as a supplemental measure that is weighed in balance with other
GAAP and non-GAAP measures. FFO is not necessarily an indication of our cash flow available to fund cash needs.
Additionally, it should not be used as an alternative to net income when evaluating our financial performance or to cash flow
from operating, investing and financing activities when evaluating our liquidity or ability to make cash distributions or pay debt
service.
Basic FFO available to common share and common unit holders (“Basic FFO”) is FFO adjusted to subtract (1) preferred
share dividends, (2) issuance costs associated with redeemed preferred shares, (3) income attributable to noncontrolling
interests through ownership of preferred units in the Operating Partnership or interests in other consolidated entities not owned
by us, (4) depreciation and amortization allocable to noncontrolling interests in other consolidated entities and (5) Basic FFO
allocable to restricted shares. With these adjustments, Basic FFO represents FFO available to common shareholders and
common unitholders. Common units in the Operating Partnership are substantially similar to our common shares and are
exchangeable into common shares, subject to certain conditions. We believe that Basic FFO is useful to investors due to the
close correlation of common units to common shares. We believe that net income is the most directly comparable GAAP
measure to Basic FFO. Basic FFO has essentially the same limitations as FFO; management compensates for these limitations
in essentially the same manner as described above for FFO.
Diluted FFO available to common share and common unit holders (“Diluted FFO”) is Basic FFO adjusted to add back any
changes in Basic FFO that would result from the assumed conversion of securities that are convertible or exchangeable into
common shares. We believe that Diluted FFO is useful to investors because it is the numerator used to compute Diluted FFO
per share, discussed below. We believe that net income is the most directly comparable GAAP measure to Diluted FFO. Since
Diluted FFO excludes certain items includable in the numerator to diluted EPS, reliance on the measure has limitations;
management compensates for these limitations by using the measure simply as a supplemental measure that is weighed in the
balance with other GAAP and non-GAAP measures. Diluted FFO is not necessarily an indication of our cash flow available to
fund cash needs. Additionally, it should not be used as an alternative to net income when evaluating our financial performance
or to cash flow from operating, investing and financing activities when evaluating our liquidity or ability to make cash
distributions or pay debt service.
Diluted FFO available to common share and common unit holders, as adjusted for comparability is defined as Diluted FFO
adjusted to exclude: operating property acquisition costs; gains on sales of, and impairment losses on, properties other than
previously depreciated operating properties, net of associated income tax; gain or loss on early extinguishment of debt; FFO
associated with properties securing non-recourse debt on which we have defaulted and which we have extinguished, or expect
to extinguish, via conveyance of such properties, including property NOI, interest expense and gains on debt extinguishment
(discussed further below); loss on interest rate derivatives; demolition costs on redevelopment properties; executive transition
costs; and issuance costs associated with redeemed preferred shares. This measure also includes adjustments for the effects of
the items noted above pertaining to UJVs that were allocable to our ownership interest in the UJVs. We believe this to be a
useful supplemental measure alongside Diluted FFO as it excludes gains and losses from certain investing and financing
activities and certain other items that we believe are not closely correlated to (or associated with) our operating performance.
The adjustment for FFO associated with properties securing non-recourse debt on which we have defaulted pertains to the
periods subsequent to our default on one loan’s payment terms, which was the result of our decision to not support payments on
the loan since the estimated fair value of the properties was less than the loan balance. While we continued as the legal owner
46
of the properties during this period up until the transfer of ownership, all cash flows produced by them went directly to the
lender and we did not fund any debt service shortfalls, which included incremental additional interest under the default rate of
$5.3 million in 2015 and $5.8 million in 2014. We believe that net income is the most directly comparable GAAP measure to
this non-GAAP measure. This measure has essentially the same limitations as Diluted FFO, as well as the further limitation of
not reflecting the effects of the excluded items; we compensate for these limitations in essentially the same manner as described
above for Diluted FFO.
Diluted FFO per share is (1) Diluted FFO divided by (2) the sum of the (a) weighted average common shares outstanding
during a period, (b) weighted average common units outstanding during a period and (c) weighted average number of potential
additional common shares that would have been outstanding during a period if other securities that are convertible or
exchangeable into common shares were converted or exchanged. We believe that Diluted FFO per share is useful to investors
because it provides investors with a further context for evaluating our FFO results in the same manner that investors use
earnings per share (“EPS”) in evaluating net income available to common shareholders. In addition, since most equity REITs
provide Diluted FFO per share information to the investment community, we believe that Diluted FFO per share is a useful
supplemental measure for comparing us to other equity REITs. We believe that diluted EPS is the most directly comparable
GAAP measure to Diluted FFO per share. Diluted FFO per share has most of the same limitations as Diluted FFO (described
above); management compensates for these limitations in essentially the same manner as described above for Diluted FFO.
Diluted FFO per share, as adjusted for comparability is (1) Diluted FFO, as adjusted for comparability divided by (2) the
sum of the (a) weighted average common shares outstanding during a period, (b) weighted average common units outstanding
during a period and (c) weighted average number of potential additional common shares that would have been outstanding
during a period if other securities that are convertible or exchangeable into common shares were converted or exchanged. We
believe that this measure is useful to investors because it provides investors with a further context for evaluating our FFO
results. We believe this to be a useful supplemental measure alongside Diluted FFO per share as it excludes gains and losses
from certain investing and financing activities and certain other items that we believe are not closely correlated to (or
associated with) our operating performance. We believe that diluted EPS is the most directly comparable GAAP measure to
this per share measure. This measure has most of the same limitations as Diluted FFO (described above) as well as the further
limitation of not reflecting the effects of the excluded items; we compensate for these limitations in essentially the same
manner as described above for Diluted FFO.
The computations for all of the above measures on a diluted basis assume the conversion of common units in COPLP but
do not assume the conversion of other securities that are convertible into common shares if the conversion of those securities
would increase per share measures in a given period.
We use measures called payout ratios as supplemental measures of our ability to make distributions to investors based on
each of the following: FFO; Diluted FFO; and Diluted FFO, adjusted for comparability. These measures are defined as (1) the
sum of (a) dividends on unrestricted common shares and (b) distributions to holders of interests in COPLP and dividends on
convertible preferred shares when such distributions and dividends are included in Diluted FFO divided by either (2) FFO,
Diluted FFO or Diluted FFO, adjusted for comparability.
The table below sets forth the computation of the above stated measures for the years ended December 31, 2013 through
2017 and provides reconciliations to the GAAP measures of COPT and subsidiaries associated with such measures:
47
Net income
Add: Real estate-related depreciation and amortization
Add: Depreciation and amortization on UJV allocable to COPT
Add: Impairment losses on previously depreciated operating
properties
Less: Gain on sales of previously depreciated operating properties
FFO
Less: Noncontrolling interests-preferred units in the Operating
Partnership
Less: FFO allocable to other noncontrolling interests
Less: Preferred share dividends
Less: Issuance costs associated with redeemed preferred shares
Basic and diluted FFO allocable to share-based compensation awards
Basic and diluted FFO available to common shares and common unit
holders
Operating property acquisition costs
Gain on sales of non-operating properties
Impairment losses (recoveries) on non-operating properties
Income tax expense associated with FFO comparability
Valuation allowance on tax asset associated with FFO comparability
adjustments
(Gain) loss on interest rate derivatives
Loss (gain) on early extinguishment of debt
Issuance costs associated with redeemed preferred shares
Demolition costs on redevelopment properties
Executive transition costs
Add: Negative FFO of properties conveyed to extinguish debt in
default
Diluted FFO comparability adjustments allocable to share-based
compensation awards
Diluted FFO available to common share and common unit holders, as
adjusted for comparability
2017
For the Year Ended December 31,
2014
2015
2016
(Dollars and shares in thousands, except per share data)
$ 188,878
140,025
—
$ 15,655
132,719
518
$ 45,206
136,086
—
$ 101,544
117,719
—
2013
$ 76,333
134,228
1,243
10,455
(4,491)
217,768
(660)
(3,675)
(6,219)
(6,847)
(814)
83,346
(33,789)
198,449
(660)
(4,020)
(14,297)
(17)
(694)
4,110
(64,062)
268,951
(660)
(3,586)
(14,210)
—
(1,041)
1,370
(5,117)
177,545
(660)
(3,216)
(15,939)
(1,769)
(665)
32,047
(9,004)
242,306
(660)
(3,710)
(19,971)
(2,904)
(912)
$ 199,553
—
(5,399)
4,668
800
$ 178,761
—
(7,197)
18,045
—
$ 249,454
4,134
(3,985)
19,413
—
$ 155,296
—
(5,578)
49
—
$ 214,149
—
(2,683)
—
—
—
(234)
513
6,847
294
732
—
(35)
—
(378)
1,110
17
578
6,454
—
386
(85,655)
—
1,396
—
—
—
9,668
1,769
—
1,056
—
10,456
10,928
(73)
225
(78)
1,855
—
(40,780)
2,904
—
—
—
168
$ 207,739
$ 197,317
$ 195,824
$ 173,110
$ 175,613
Weighted average common shares
Conversion of weighted average common units
Weighted average common shares/units - Basic FFO
Dilutive effect of forward equity sale agreements and share-based
compensation awards
Weighted average common shares/units - Diluted FFO
98,969
3,362
102,331
186
102,517
94,502
3,633
98,135
92
98,227
93,914
3,692
97,606
61
97,667
88,092
3,897
91,989
171
92,160
85,167
3,869
89,036
57
89,093
Diluted FFO per share
Diluted FFO per share, as adjusted for comparability
$
$
1.95
2.03
$
$
1.82
2.01
$
$
2.55
2.01
$
$
1.69
1.88
$
$
2.40
1.97
Denominator for diluted EPS
Weighted average common units
Anti-dilutive EPS effect of share-based compensation awards
Denominator for diluted FFO per share measures
99,155
3,362
—
102,517
94,502
3,633
92
98,227
97,667
—
—
97,667
88,263
3,897
—
92,160
85,224
3,869
—
89,093
Dividends on unrestricted common shares
Common unit distributions
Numerator for diluted FFO payout ratio, adjusted for comparability
$ 109,489
3,661
$ 113,150
$ 104,811
3,990
$ 108,801
$ 103,552
4,046
$ 107,598
$ 97,512
4,270
$ 101,782
$ 94,832
4,280
$ 99,112
FFO payout ratio
Diluted FFO payout ratio
Diluted FFO payout ratio, as adjusted for comparability
52.0%
56.7%
54.5%
54.8%
60.9%
55.1%
40.0%
43.1%
54.9%
57.3%
65.5%
58.8%
40.9%
46.3%
56.4%
48
Property Additions
The table below sets forth the major components of our additions to properties for 2017 and 2016:
Construction, development and redevelopment
Tenant improvements on operating properties (1)
Capital improvements on operating properties
Variance
For the Years Ended December 31,
2016
2017
(in thousands)
$ 194,490
35,346
22,124
$ 251,960
$ 204,278
32,978
22,292
$ 259,548
$
$
9,788
(2,368)
168
7,588
(1) Tenant improvement costs incurred on newly-constructed properties are classified in this table as construction, development and
redevelopment.
Cash Flows
Net cash flow provided by operating activities decreased $1.9 million from 2016 to 2017 due primarily to lower net cash
flows from construction contract and other services, which was offset in part by lower interest expense payments in the current
period due to lower outstanding debt balances.
Net cash flow provided by investing activities decreased $161.2 million from 2016 to 2017 due primarily to a decrease in
property sales and higher development expenditures in 2017 relative to 2016.
Net cash flow used in financing activities in 2017 was $338.5 million and included the following:
•
•
•
•
•
•
•
redemption of preferred shares (or units) of $199.1 million;
dividends and/or distributions to equity holders of $122.9 million; and
net repayments of debt borrowings of $78.1 million; offset in part by
net proceeds from the issuance of common shares (or units) of $69.5 million.
Net cash flow used in financing activities in 2016 was $154.4 million and included the following:
dividends and/or distributions to shareholders and/or unitholders of $123.0 million; and
net repayments of debt borrowings of $117.0 million; offset in part by
net proceeds from the issuance of common shares (or units) of $109.1 million.
Liquidity and Capital Resources of COPT
COPLP is the entity through which COPT, the sole general partner of COPLP, conducts almost all of its operations and
owns almost all of its assets. COPT occasionally issues public equity but does not otherwise generate any capital itself or
conduct any business itself, other than incurring certain expenses in operating as a public company which are fully reimbursed
by COPLP. COPT itself does not hold any indebtedness, and its only material asset is its ownership of partnership interests of
COPLP. COPT’s principal funding requirement is the payment of dividends on its common and preferred shares. COPT’s
principal source of funding for its dividend payments is distributions it receives from COPLP.
As of December 31, 2017, COPT owned 96.9% of the outstanding common units in COPLP; the remaining common units
and all of the outstanding preferred units were owned by third parties. As the sole general partner of COPLP, COPT has the
full, exclusive and complete responsibility for COPLP’s day-to-day management and control.
The liquidity of COPT is dependent on COPLP’s ability to make sufficient distributions to COPT. The primary cash
requirement of COPT is its payment of dividends to its shareholders. COPT also guarantees some of the Operating
Partnership’s debt, as discussed further in Note 10 of the notes to consolidated financial statements included elsewhere herein.
If the Operating Partnership fails to fulfill certain of its debt requirements, which trigger COPT’s guarantee obligations, then
COPT will be required to fulfill its cash payment commitments under such guarantees. However, COPT’s only significant
asset is its investment in COPLP.
49
As discussed further below, we believe the Operating Partnership’s sources of working capital, specifically its cash flow
from operations, and borrowings available under its Revolving Credit Facility, are adequate for it to make its distribution
payments to COPT and, in turn, for COPT to make its dividend payments to its shareholders.
COPT’s short-term liquidity requirements consist primarily of funds to pay for future dividends expected to be paid to its
shareholders. COPT periodically accesses the public equity markets to raise capital by issuing common and/or preferred
shares.
For COPT to maintain its qualification as a REIT, it must pay dividends to its shareholders aggregating annually to at least
90% of its ordinary taxable income. As a result of this distribution requirement, it cannot rely on retained earnings to fund its
ongoing operations to the same extent that some other companies can. COPT may need to continue to raise capital in the
equity markets to fund COPLP’s working capital needs, acquisitions and developments.
Liquidity and Capital Resources of COPLP
COPLP’s primary cash requirements are for operating expenses, debt service, development of new properties,
improvements to existing properties and acquisitions, to the extent they are pursued in the future. We expect COPLP to
continue to use cash flow provided by operations as the primary source to meet its short-term capital needs, including property
operating expenses, general and administrative expenses, interest expense, scheduled principal amortization of debt,
distributions to its security holders and improvements to existing properties. As of December 31, 2017, COPLP had $12.3
million in cash and cash equivalents.
COPLP’s senior unsecured debt is currently rated investment grade by the three major rating agencies. We aim to maintain
an investment grade rating to enable COPLP to use debt comprised of unsecured, primarily fixed-rate debt (including the effect
of interest rate swaps) from public markets and banks. COPLP also uses secured nonrecourse debt from institutional lenders
and banks, when appropriate. In addition, COPLP periodically raises equity from COPT when COPT accesses the public
equity markets by issuing common and/or preferred shares.
COPLP uses its Revolving Credit Facility to initially finance much of its investing activities. COPLP subsequently pays
down the facility using cash available from operations and proceeds from long-term borrowings, equity issuances and property
sales. The lenders’ aggregate commitment under the facility is $800.0 million, with the ability for COPLP to increase the
lenders’ aggregate commitment to $1.3 billion, provided that there is no default under the facility and subject to the approval of
the lenders. The Revolving Credit Facility matures in May 2019, and may be extended by two six-month periods at COPLP’s
option, provided that there is no default under the facility and it pays an extension fee of 0.075% of the total availability of the
facility. As of December 31, 2017, the maximum borrowing capacity under this facility totaled $800.0 million, of which
$674.0 million was available.
As of December 31, 2017, COPT had forward equity sale agreements in place with 7.5 million shares available for future
issuance with a settlement value of $221.9 million that we expect COPLP to use to fund development costs.
We believe that COPLP’s liquidity and capital resources are adequate for its near-term and longer-term requirements
without necessitating property sales.
50
The following table summarizes our contractual obligations as of December 31, 2017 (in thousands):
2018
2019
2020
2021
2022
Thereafter
Total
For the Years Ending December 31,
Contractual obligations (1)
Debt (2)
Balloon payments due upon maturity
Scheduled principal payments (3)
$
Interest on debt (3)(4)
New construction and redevelopment
obligations (5)(6)
Third-party construction and
development obligations (6)(7)
Capital expenditures for operating
properties (3)(6)(8)
Capital lease obligation (principal and
interest)
Operating leases (3)
Other obligations (3)
Total contractual cash obligations
— $ 126,000
4,387
69,210
4,241
71,656
$ 112,132
4,024
65,951
$ 300,000
3,875
58,034
$ 250,000
4,033
52,968
$ 1,026,830
6,645
63,592
$ 1,814,962
27,205
381,411
22,268
35,815
535
—
—
—
19,963
15,845
8,364
—
—
—
—
—
—
—
—
—
22,803
35,815
44,172
15,829
1,283
469
$ 171,524
—
1,267
349
$ 217,593
135
1,259
126
$ 191,991
—
1,263
5
$ 363,177
75
1,149
—
$ 308,225
—
84,611
—
$ 1,181,678
16,039
90,832
949
$ 2,434,188
(1) The contractual obligations set forth in this table exclude property operations contracts that may be terminated with notice of one month
or less and also exclude accruals and payables incurred (with the exclusion of debt) and therefore reflected in our reported liabilities.
(2) Represents scheduled principal amortization payments and maturities only and therefore excludes net debt discounts and deferred
financing costs of $13.8 million. As of December 31, 2017, maturities included $126.0 million in 2019 that may be extended to 2020,
subject to certain conditions.
(3) We expect to pay these items using cash flow from operations.
(4) Represents interest costs for our outstanding debt as of December 31, 2017 for the terms of such debt. For variable rate debt, the
amounts reflected above used December 31, 2017 interest rates on variable rate debt in computing interest costs for the terms of such
debt. We expect to pay these items using cash flow from operations.
(5) Represents contractual obligations pertaining to new development and redevelopment activities.
(6) Due to the long-term nature of certain construction and development contracts and leases included in these lines, the amounts reported in
the table represent our estimate of the timing for the related obligations being payable.
(7) Represents contractual obligations pertaining to projects for which we are acting as construction manager on behalf of unrelated parties
who are our clients. We expect to be reimbursed in full for these costs by our clients.
(8) Represents contractual obligations pertaining to capital expenditures for our operating properties. We expect to pay these costs primarily
using cash flow from operations.
We expect to spend approximately $320 million on construction and development costs and approximately $60 million on
improvements to operating properties (including the commitments set forth in the table above) in 2018. We expect to fund the
construction and development costs initially using primarily borrowings under our Revolving Credit Facility and proceeds from
common shares issued under COPT’s forward equity sale agreements. We expect to fund improvements to existing operating
properties using cash flow from operations.
Certain of our debt instruments require that we comply with a number of restrictive financial covenants, including
maximum leverage ratio, unencumbered leverage ratio, minimum net worth, minimum fixed charge coverage, minimum
unencumbered interest coverage ratio, minimum debt service and maximum secured indebtedness ratio. As of December 31,
2017, we were compliant with these covenants.
Off-Balance Sheet Arrangements
We had no material off-balance sheet arrangements during 2017.
Inflation
Most of our tenants are obligated to pay their share of a property’s operating expenses to the extent such expenses exceed
amounts established in their leases, which are based on historical expense levels. Some of our tenants are obligated to pay their
full share of a building’s operating expenses. These arrangements somewhat reduce our exposure to increases in such costs
resulting from inflation.
51
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements for information regarding recent accounting pronouncements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to certain market risks, one of the most predominant of which is a change in interest rates. Increases in
interest rates can result in increased interest expense under our Revolving Credit Facility and other variable rate debt. Increases
in interest rates can also result in increased interest expense when our fixed rate debt matures and needs to be refinanced.
The following table sets forth as of December 31, 2017 our debt obligations and weighted average interest rates on debt
maturing each year (dollars in thousands):
2018
2019
2020
2021
2022
Thereafter
Total
For the Years Ending December 31,
Debt:
Fixed rate debt (1)
Weighted average interest rate
Variable rate debt (2)
Weighted average interest rate (3)
$
$
3,858
4.37%
383
3.21%
$
$
3,991
4.36%
3,718
3.96%
$ 303,875
$
3.70%
4,033
3.98%
$ 126,396
$ 112,438
$
2.69%
2.82%
— $ 250,000
—%
2.72%
$
$ 1,033,475
$ 1,352,950
4.48%
4.30%
— $ 489,217
—%
2.74%
(1) Represents principal maturities only and therefore excludes net discounts and deferred financing costs of $13.8 million.
(2) As of December 31, 2017, maturities included $126.0 million in 2019 that may be extended to 2020, subject to certain conditions.
(3) The amounts reflected above used interest rates as of December 31, 2017 for variable rate debt.
The fair value of our debt was $1.9 billion as of December 31, 2017 and December 31, 2016. If interest rates had been 1%
lower, the fair value of our fixed-rate debt would have increased by approximately $68 million as of December 31, 2017 and
$103 million as of December 31, 2016.
See Note 11 to our consolidated financial statements for information pertaining to interest rate swap contracts in place as of
December 31, 2017 and 2016 and their respective fair values.
Based on our variable-rate debt balances, including the effect of interest rate swap contracts, our interest expense would
have increased by $1.3 million in 2017 and $1.8 million in 2016 if the applicable LIBOR rate was 1% higher. Interest expense
in 2017 was less sensitive to a change in interest rates than 2016 due primarily to our having a lower average variable-rate debt
balance in 2017.
Item 8. Financial Statements and Supplementary Data
This item is included in a separate section at the end of this report beginning on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
I.
Internal Control Over Financial Reporting
COPT
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of COPT’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of
December 31, 2017. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the
COPT’s disclosure controls and procedures as of December 31, 2017 were functioning effectively to provide reasonable
assurance that the information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934
is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and
(ii) accumulated and communicated to its management, including its principal executive and principal financial officers, or
persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
52
(a) Management’s Annual Report on Internal Control Over Financial Reporting
Management’s Annual Report on Internal Control Over Financial Reporting is included in a separate section at the end of
this report on page F-2.
(b) Report of Independent Registered Public Accounting Firm
The Report of Independent Registered Public Accounting Firm is included in a separate section at the end of this report on
page F-4.
(c) Change in Internal Control over Financial Reporting
No change in COPT’s internal control over financial reporting occurred during the most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
COPLP
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of COPLP’s disclosure controls and procedures (as defined in Rule 15d-15(e) under the Exchange Act) as of
December 31, 2017. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that
COPLP’s disclosure controls and procedures as of December 31, 2017 were functioning effectively to provide reasonable
assurance that the information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934
is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and
(ii) accumulated and communicated to its management, including its principal executive and principal financial officers, or
persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
(a) Management’s Annual Report on Internal Control Over Financial Reporting
Management’s Annual Report on Internal Control Over Financial Reporting is included in a separate section at the end of
this report on page F-3.
(b) Report of Independent Registered Public Accounting Firm
The Report of Independent Registered Public Accounting Firm is included in a separate section at the end of this report on
page F-5.
(c) Change in Internal Control over Financial Reporting
No change in the COPLP’s internal control over financial reporting occurred during the most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
Item 9B. Other Information
None.
53
PART III
Items 10, 11, 12, 13 & 14. Directors, Executive Officers and Corporate Governance; Executive Compensation; Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters; Certain Relationships
and Related Transactions, and Director Independence; and Principal Accountant Fees and Services
For the information required by Item 10, Item 11, Item 12, Item 13 and Item 14, you should refer to COPT’s definitive
proxy statement relating to the 2018 Annual Meeting of COPT’s Shareholders to be filed with the Securities and Exchange
Commission no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
Item 15. Exhibits and Financial Statement Schedules
(a)
The following documents are filed as exhibits to this Form 10-K:
PART IV
1. Financial Statements. See “Index to consolidated financial statements” on page F-1 of this Annual Report on Form
10-K.
2. Financial Statement Schedules. See “Index to consolidated financial statements” on page F-1 of this Annual Report
on Form 10-K.
3. See section below entitled “Exhibits.”
(b) Exhibits. Refer to the Exhibit Index that follows. Unless otherwise noted, the file number of all documents incorporated by
reference is 1-14023.
EXHIBIT
NO.
DESCRIPTION
3.1
3.2
3.3
3.4
10.1.1
10.1.2
10.1.3
10.1.4
10.1.5
10.1.6
Articles Supplementary filed with the State Department of Assessments and Taxation of Maryland on
September 22, 2014 (filed with the Company’s Current Report on Form 8-K dated September 24, 2014 and
incorporated herein by reference).
Amended and Restated Declaration of Trust of Corporate Office Properties Trust, as amended through
November 2017 (filed herewith).
Amended and Restated Bylaws of Corporate Office Properties Trust, as amended through May 2017 (filed on
July 31, 2017 with the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 and
incorporated herein by reference).
Form of certificate for the Registrant's Common Shares of Beneficial Interest, $0.01 par value per share (filed
with the Registrant's Registration Statement on Form S-4 (Commission File No. 333-45649) and incorporated
herein by reference).
Second Amended and Restated Limited Partnership Agreement of the Operating Partnership, dated December 7,
1999 (filed on March 16, 2000 with the Company’s Annual Report on Form 10-K for the year ended December
31, 1999 and incorporated herein by reference).
First Amendment to Second Amended and Restated Limited Partnership Agreement of the Operating
Partnership, dated December 21, 1999 (filed on March 16, 2000 with the Company’s Annual Report on Form
10-K for the year ended December 31, 1999 and incorporated herein by reference).
Second Amendment to Second Amended and Restated Limited Partnership Agreement of the Operating
Partnership, dated December 21, 1999 (filed with the Company’s Post Effective Amendment No. 2 to Form S-3
dated November 1, 2000 (Registration Statement No. 333-71807) and incorporated herein by reference).
Third Amendment to Second Amended and Restated Limited Partnership Agreement of the Operating
Partnership, dated September 29, 2000 (filed with the Company’s Post Effective Amendment No. 2 to Form S-3
dated November 1, 2000 (Registration Statement No. 333-71807) and incorporated herein by reference).
Fourth Amendment to Second Amended and Restated Limited Partnership Agreement of the Operating
Partnership, dated November 27, 2000 (filed on March 27, 2003 with the Company’s Annual Report on Form
10-K for the year ended December 31, 2002 and incorporated herein by reference).
Fifth Amendment to Second Amended and Restated Limited Partnership Agreement of the Operating
Partnership, dated January 25, 2001 (filed on March 27, 2003 with the Company’s Annual Report on Form 10-K
for the year ended December 31, 2002 and incorporated herein by reference).
54
EXHIBIT
NO.
10.1.7
10.1.8
10.1.9
10.1.10
10.1.11
10.1.12
10.1.13
10.1.14
10.1.15
10.1.16
10.1.17
10.1.18
10.1.19
10.1.20
10.1.21
10.1.22
10.1.23
10.1.24
10.1.25
DESCRIPTION
Sixth Amendment to Second Amended and Restated Limited Partnership Agreement of the Operating
Partnership, dated April 3, 2001 (filed with the Company’s Current Report on Form 8-K dated April 4, 2001 and
incorporated herein by reference).
Seventh Amendment to Second Amended and Restated Limited Partnership Agreement of the Operating
Partnership, dated August 30, 2001 (filed on March 27, 2003 with the Company’s Annual Report on Form 10-K
for the year ended December 31, 2002 and incorporated herein by reference).
Eighth Amendment to Second Amended and Restated Limited Partnership Agreement of the Operating
Partnership, dated September 14, 2001 (filed with the Company’s Amended Current Report on Form 8-K dated
September 14, 2001 and incorporated herein by reference).
Ninth Amendment to Second Amended and Restated Limited Partnership Agreement of the Operating
Partnership, dated October 16, 2001 (filed on March 27, 2003 with the Company’s Annual Report on Form 10-
K for the year ended December 31, 2002 and incorporated herein by reference).
Tenth Amendment to Second Amended and Restated Limited Partnership Agreement of the Operating
Partnership, dated December 29, 2001 (filed on March 27, 2003 with the Company’s Annual Report on Form
10-K for the year ended December 31, 2002 and incorporated herein by reference).
Eleventh Amendment to Second Amended and Restated Limited Partnership Agreement of the Operating
Partnership, dated December 15, 2002 (filed on March 27, 2003 with the Company’s Annual Report on Form
10-K for the year ended December 31, 2002 and incorporated herein by reference).
Twelfth Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate Office
Properties, L.P., dated June 2, 2003 (filed on August 12, 2003 with the Registrant’s Quarterly Report on Form
10-Q for the quarter ended June 30, 2003 and incorporated herein by reference).
Thirteenth Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate Office
Properties, L.P., dated August 11, 2003 (filed on November 12, 2003 with the Company’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2003 and incorporated herein by reference).
Fourteenth Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate Office
Properties, L.P., dated December 18, 2003 (filed on March 11, 2004 with the Company’s Annual Report on
Form 10-K for the year ended December 31, 2003 and incorporated herein by reference).
Fifteenth Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate Office
Properties, L.P., dated January 31, 2004 (filed on March 11, 2004 with the Company’s Annual Report on Form
10-K for the year ended December 31, 2003 and incorporated herein by reference).
Sixteenth Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate Office
Properties, L.P., dated April 15, 2004 (filed on May 7, 2004 with the Company’s Form 10-Q for the quarter
ended March 31, 2004 and incorporated herein by reference).
Seventeenth Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate Office
Properties, L.P., dated September 23, 2004 (filed with the Company’s Current Report on Form 8-K dated
September 23, 2004 and incorporated herein by reference).
Eighteenth Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate Office
Properties, L.P., dated April 18, 2005 (filed with the Company’s Form 8-K on April 22, 2005 and incorporated
herein by reference).
Nineteenth Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate Office
Properties, L.P., dated July 8, 2005 (filed with the Company’s Current Report on Form 8-K on July 14, 2005
and incorporated herein by reference).
Twentieth Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate Office
Properties, L.P., dated June 29, 2006 (filed with the Company’s Current Report on Form 8-K dated July 6, 2006
and incorporated herein by reference).
Twenty-First Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate Office
Properties, L.P., dated July 20, 2006 (filed with the Company’s Current Report on Form 8-K dated July 26, 2006
and incorporated herein by reference).
Twenty-Second Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate
Office Properties, L.P., dated January 9, 2007 (filed with the Company’s Current Report on Form 8-K dated
January 16, 2007 and incorporated herein by reference).
Twenty-Third Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate
Office Properties, L.P., dated April 6, 2007 (filed with the Company’s Current Report on Form 8-K dated April
12, 2007 and incorporated herein by reference).
Twenty-Fourth Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate
Office Properties, L.P., dated November 2, 2007 (filed with the Company’s Current Report on Form 8-K dated
November 5, 2007 and incorporated herein by reference).
55
EXHIBIT
NO.
10.1.26
10.1.27
10.1.28
10.1.29
10.1.30
10.1.31
10.1.32
10.1.33
10.1.34
10.2.1*
10.2.2*
10.2.3*
10.3.1*
10.3.2*
10.4.1*
10.4.2*
10.4.3*
10.5*
10.5.1*
DESCRIPTION
Twenty-Fifth Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate
Office Properties, L.P., dated December 31, 2008 (filed with the Company’s Current Report on Form 8-K dated
January 5, 2009 and incorporated herein by reference).
Twenty-Sixth Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate
Office Properties, L.P., dated March 4, 2010 (filed with the Company’s Current Report on Form 8-K dated
March 10, 2010 and incorporated herein by reference).
Twenty-Seventh Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate
Office Properties, L.P., dated February 3, 2011 (filed with the Company’s Current Report on Form 8-K dated
February 9, 2011 and incorporated herein by reference).
Twenty-Eighth Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate
Office Properties, L.P., dated September 15, 2011 (filed with the Company’s Current Report on Form 8-K dated
September 16, 2011 and incorporated herein by reference).
Twenty-Ninth Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate
Office Properties, L.P., dated June 27, 2012 (filed with the Company’s Current Report on Form 8-K dated June
27, 2012 and incorporated herein by reference).
Thirtieth Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate Office
Properties, L.P., dated July 16, 2013 (filed with the Company’s Current Report on Form 8-K dated July 19, 2013
and incorporated herein by reference).
Thirty-First Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate Office
Properties, L.P., dated September 17, 2013 (filed with the Company’s Current Report on Form 8-K dated
September 19, 2013 and incorporated herein by reference).
Thirty-Second Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate
Office Properties, L.P., dated April 15, 2015 (filed with the Company’s Current Report on Form 8-K dated April
21, 2015 and incorporated herein by reference).
Thirty-Third Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate Office
Properties, L.P., dated January 25, 2018 (filed with the Company’s Current Report on Form 8-K dated January
26, 2018 and incorporated herein by reference).
Corporate Office Properties Trust 1998 Long Term Incentive Plan (filed with the Registrant’s Registration
Statement on Form S-4 (Commission File No. 333-45649) and incorporated herein by reference).
Amendment No. 1 to Corporate Office Properties Trust 1998 Long Term Incentive Plan (filed on August 13,
1999 with the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 and incorporated
herein by reference).
Amendment No. 2 to Corporate Office Properties Trust 1998 Long Term Incentive Plan (filed on March 22,
2002 with the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated
herein by reference).
Corporate Office Properties Trust Supplemental Nonqualified Deferred Compensation Plan (filed with the
Company’s Current Report on Form 8-K dated December 10, 2008 and incorporated herein by reference).
First Amendment to the Corporate Office Properties Trust Supplemental Nonqualified Deferred Compensation
Plan dated December 4, 2008 (filed with the Company’s Current Report on Form 8-K dated December 10, 2008
and incorporated herein by reference).
Corporate Office Properties Trust 2008 Omnibus Equity and Incentive Plan (included in Annex B to the
Company’s Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission
on April 9, 2008 and incorporated herein by reference).
Corporate Office Properties Trust Amended and Restated 2008 Omnibus Equity and Incentive Plan (included in
Annex A to the Company’s Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange
Commission on March 30, 2010 and incorporated herein by reference).
Corporate Office Properties Trust First Amendment to the Amended and Restated 2008 Omnibus Equity and
Incentive Plan (filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016
and incorporated herein by reference).
Corporate Office Properties Trust 2017 Omnibus Equity and Incentive Plan (included in Annex B to the
Company’s Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission
on March 27, 2017 and incorporated herein by reference).
Form of Corporate Office Properties Trust Performance-Based Restricted Share Unit Award Certificate (2017
Omnibus Equity and Incentive Plan) (filed with the Company’s Current Report on Form 8-K dated August 23,
2017 and incorporated herein by reference).
10.5.2*
Form of Corporate Office Properties Trust Performance-Based Restricted Share Unit Award Certificate (2017
Omnibus Equity and Incentive Plan) (filed herewith).
56
EXHIBIT
NO.
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
DESCRIPTION
Corporate Office Properties Trust and Corporate Office Properties, L.P. Executive Change in Control and
Severance Plan (filed with the Company’s Current Report on Form 8-K dated March 13, 2013 and incorporated
herein by reference).
Separation Agreement, dated February 11, 2016, between Corporate Office Properties Trust, Corporate Office
Properties, L.P., and Roger A. Waesche, Jr. (filed with the Company’s Current Report on Form 8-K dated
February 12, 2016 and incorporated herein by reference).
Separation Agreement, dated February 26, 2016, between Corporate Office Properties Trust, Corporate Office
Properties, L.P., and Wayne H. Lingafelter (filed with the Company’s Current Report on Form 8-K dated March
3, 2016 and incorporated herein by reference).
Letter Agreement, dated May 12, 2016, between Corporate Office Properties Trust, Corporate Office Properties,
L.P., and Stephen E. Budorick (filed with the Company’s Current Report on Form 8-K dated May 17, 2016 and
incorporated herein by reference).
Separation Agreement, dated July 26, 2016, between Corporate Office Properties Trust, Corporate Office
Properties, L.P., and Karen M. Singer (filed with the Company’s Form 8-K dated July 28, 2016 and
incorporated herein by reference).
Letter Agreement, dated November 1, 2016, between Corporate Office Properties Trust, Corporate Office
Properties, L.P., and Anthony Mifsud (filed with the Company’s Annual Report on Form 10-K for the year
ended December 31, 2017 and incorporated herein by reference).
Letter Agreement, dated November 1, 2016, between Corporate Office Properties Trust, Corporate Office
Properties, L.P., and Gregory J. Thor (filed with the Company’s Annual Report on Form 10-K for the year
ended December 31, 2017 and incorporated herein by reference).
Letter Agreement, dated November 28, 2016, between Corporate Office Properties Trust, Corporate Office
Properties, L.P., and Paul R. Adkins (filed with the Company’s Annual Report on Form 10-K for the year ended
December 31, 2017 and incorporated herein by reference).
Amended and Restated Registration Rights Agreement, dated March 16, 1998, for the benefit of certain
shareholders of the Company (filed on August 12, 1998 with the Company’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998 and incorporated herein by reference).
Amended, Restated and Consolidated Credit Agreement, dated as of May 6, 2015, by and among Corporate
Office Properties, L.P.; Corporate Office Properties Trust; KeyBank National Association; KeyBanc Capital
Markets, Inc.; J.P. Morgan Securities LLC; JPMorgan Chase Bank, N.A.; Bank of America, N.A.; PNC Bank,
National Association; Royal Bank of Canada; Wells Fargo Bank, National Association; Barclays Bank PLC;
Regions Bank; Citizens Bank of Pennsylvania; and Citibank, N.A. (filed with the Company’s Current Report on
Form 8-K dated May 12, 2015 and incorporated herein by reference).
Indenture, dated as of May 6, 2013, among Corporate Office Properties, L.P., as issuer, Corporate Office
Properties Trust, as guarantor, and U.S. Bank National Association, as trustee (filed with the Company’s Current
Report on Form 8-K dated May 7, 2013 and incorporated herein by reference).
Registration Rights Agreement, dated May 6, 2013, among Corporate Office Properties, L.P., Corporate Office
Properties Trust, J.P. Morgan Securities LLC and Wells Fargo Securities, LLC (filed with the Company’s
Current Report on Form 8-K dated May 7, 2013 and incorporated herein by reference).
Indenture, dated as of September 16, 2013, by and among Corporate Office Properties, L.P., as issuer, Corporate
Office Properties Trust, as guarantor, and U.S. Bank National Association, as trustee (filed with the Company’s
Current Report on Form 8-K dated September 19, 2013 and incorporated herein by reference).
First Supplemental Indenture, dated September 16, 2013, by and among Corporate Office Properties, L.P., as
issuer, Corporate Office Properties Trust, as guarantor, and U.S. Bank National Association, as trustee (filed
with the Company’s Current Report on Form 8-K dated September 19, 2013 and incorporated herein by
reference).
Second Supplemental Indenture, dated as of May 14, 2014, among Corporate Office Properties, L.P., as issuer,
Corporate Office Properties Trust, as guarantor, and U.S. Bank National Association, as trustee. (filed with the
Company’s Current Report on Form 8-K dated May 20, 2014 and incorporated herein by reference).
Third Supplemental Indenture, dated as of June 29, 2015, among Corporate Office Properties, L.P., as issuer,
Corporate Office Properties Trust, as guarantor, and U.S. Bank National Association, as trustee (filed with the
Company’s Current Report on Form 8-K dated July 1, 2015 and incorporated herein by reference).
10.22.1
Term Loan Agreement, dated as of December 17, 2015, by and among Corporate Office Properties, L.P.;
Corporate Office Properties Trust; Capital One, National Association, PNC Capital Markets LLC and Regions
Capital Markets, a division of Regions Bank, PNC Bank, National Association and Regions Bank (filed with the
Company’s Annual Report on Form 10-K for the year ended December 31, 2015 and incorporated herein by
reference).
57
EXHIBIT
NO.
10.22.2
10.22.3
12.1
12.2
21.1
21.2
23.1
23.2
31.1
31.2
31.3
31.4
32.1
32.2
32.3
32.4
DESCRIPTION
First Amendment to Term Loan Agreement, dated as of September 15, 2016, by and among Corporate Office
Properties, L.P.; Corporate Office Properties Trust; Capital One, National Association, PNC Capital Markets
LLC and Regions Capital Markets, a division of Regions Bank, PNC Bank, National Association and Regions
Bank (filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30 2016 and
incorporated herein by reference).
Second Amendment to Term Loan Agreement, dated as of December 18, 2017, by and among Corporate Office
Properties, L.P.; Corporate Office Properties Trust; Capital One, National Association, PNC Capital Markets
LLC and Regions Capital Markets, a division of Regions Bank, PNC Bank, National Association and Regions
Bank (filed herewith).
COPT’s Statement regarding Computation of Consolidated Ratio of Earnings to Combined Fixed Charges and
Preferred Share Dividends (filed herewith).
COPLP’s Statement regarding Computation of Consolidated Ratio of Earnings to Fixed Charges (filed
herewith).
Subsidiaries of COPT (filed herewith).
Subsidiaries of COPLP (filed herewith).
COPT’s Consent of Independent Registered Public Accounting Firm (filed herewith).
COPLP’s Consent of Independent Registered Public Accounting Firm (filed herewith).
Certification of the Chief Executive Officer of Corporate Office Properties Trust required by
Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended (filed herewith).
Certification of the Chief Financial Officer of Corporate Office Properties Trust required by
Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended (filed herewith).
Certification of the Chief Executive Officer of Corporate Office Properties, L.P. required by
Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended (filed herewith).
Certification of the Chief Financial Officer of Corporate Office Properties, L.P. required by
Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended (filed herewith).
Certification of the Chief Executive Officer of Corporate Office Properties Trust required by
Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed
“filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to
the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any
filing under the Securities Exchange Act of 1933, as amended, or the Securities Exchange Act of 1934, as
amended.) (Furnished herewith).
Certification of the Chief Financial Officer of Corporate Office Properties Trust required by
Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed
“filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to
the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any
filing under the Securities Exchange Act of 1933, as amended, or the Securities Exchange Act of 1934, as
amended). (Furnished herewith).
Certification of the Chief Executive Officer of Corporate Office Properties, L.P. required by
Rule 15d-14(b) under the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed
“filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to
the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any
filing under the Securities Exchange Act of 1933, as amended, or the Securities Exchange Act of 1934, as
amended.) (Furnished herewith).
Certification of the Chief Financial Officer of Corporate Office Properties, L.P. required by
Rule 15d-14(b) under the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed
“filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to
the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any
filing under the Securities Exchange Act of 1933, as amended, or the Securities Exchange Act of 1934, as
amended). (Furnished herewith).
101.INS
XBRL Instance Document (filed herewith).
101.SCH XBRL Taxonomy Extension Schema Document (filed herewith).
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith).
101.LAB XBRL Extension Labels Linkbase (filed herewith).
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith).
101.DEF XBRL Taxonomy Extension Definition Linkbase Document (filed herewith).
58
* - Indicates a compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K.
(c)
Not applicable.
Item 16. Form 10-K Summary
None.
59
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: February 16, 2018
Date: February 16, 2018
By:
By:
CORPORATE OFFICE PROPERTIES TRUST
/s/ Stephen E. Budorick
Stephen E. Budorick
President and Chief Executive Officer
/s/ Anthony Mifsud
Anthony Mifsud
Executive Vice President and Chief Financial Officer
60
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signatures
Title
Date
/s/ Thomas F. Brady
(Thomas F. Brady)
/s/ Stephen E. Budorick
(Stephen E. Budorick)
/s/ Anthony Mifsud
(Anthony Mifsud)
/s/ Gregory J. Thor
(Gregory J. Thor)
/s/ Robert L. Denton
( Robert L. Denton)
/s/ Philip L. Hawkins
(Philip L. Hawkins)
/s/ Elizabeth A. Hight
(Elizabeth A. Hight)
/s/ David M. Jacobstein
(David M. Jacobstein)
/s/ Steven D. Kesler
(Steven D. Kesler)
/s/ C. Taylor Pickett
(C. Taylor Pickett)
/s/ Richard Szafranski
(Richard Szafranski)
/s/ Lisa G. Trimberger
(Lisa G. Trimberger)
Chairman of the Board and Trustee
February 16, 2018
President and Chief Executive Officer and Trustee February 16, 2018
Executive Vice President and Chief Financial
Officer (Principal Financial Officer)
February 16, 2018
Senior Vice President, Controller and Chief
Accounting Officer (Principal Accounting Officer)
February 16, 2018
February 16, 2018
February 16, 2018
February 16, 2018
February 16, 2018
February 16, 2018
February 16, 2018
February 16, 2018
February 16, 2018
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
61
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 16, 2018
Date: February 16, 2018
CORPORATE OFFICE PROPERTIES, L.P.
By: Corporate Office Properties Trust,
its General Partner
/s/ Stephen E. Budorick
Stephen E. Budorick
President and Chief Executive Officer
/s/ Anthony Mifsud
Anthony Mifsud
Executive Vice President and Chief Financial Officer
By:
By:
62
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signatures
Title
Date
/s/ Thomas F. Brady
(Thomas F. Brady)
/s/ Stephen E. Budorick
(Stephen E. Budorick)
/s/ Anthony Mifsud
(Anthony Mifsud)
/s/ Gregory J. Thor
(Gregory J. Thor)
/s/ Robert L. Denton
( Robert L. Denton)
/s/ Philip L. Hawkins
(Philip L. Hawkins)
/s/ Elizabeth A. Hight
(Elizabeth A. Hight)
/s/ David M. Jacobstein
(David M. Jacobstein)
/s/ Steven D. Kesler
(Steven D. Kesler)
/s/ C. Taylor Pickett
(C. Taylor Pickett)
/s/ Richard Szafranski
(Richard Szafranski)
/s/ Lisa G. Trimberger
(Lisa G. Trimberger)
Chairman of the Board and Trustee
February 16, 2018
President and Chief Executive Officer and Trustee February 16, 2018
Executive Vice President and Chief Financial
Officer (Principal Financial Officer)
February 16, 2018
Senior Vice President, Controller and Chief
Accounting Officer (Principal Accounting Officer)
February 16, 2018
February 16, 2018
February 16, 2018
February 16, 2018
February 16, 2018
February 16, 2018
February 16, 2018
February 16, 2018
February 16, 2018
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
63
(This page has been left blank intentionally.)
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Management’s Reports of Internal Control Over Financial Reporting
Corporate Office Properties Trust
Corporate Office Properties, L.P.
Reports of Independent Registered Public Accounting Firm
Corporate Office Properties Trust
Corporate Office Properties, L.P.
Consolidated Financial Statements of Corporate Office Properties Trust
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Operations for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017, 2016
and 2015
Consolidated Statements of Equity for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Financial Statements of Corporate Office Properties, L.P.
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Operations for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017, 2016
and 2015
Consolidated Statements of Equity for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
Financial Statements Schedules
Schedule II - Valuation and Qualifying Accounts
Schedule III - Real Estate and Accumulated Depreciation as of December 31, 2017
F-2
F-3
F-4
F-6
F-8
F-9
F-10
F-11
F-12
F-14
F-15
F-16
F-17
F-18
F-20
F-64
F-65
F-1
Corporate Office Properties Trust Management’s Report On Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, and for
performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2017. Internal
control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in
accordance with authorizations of our management and trustees; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial
statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Management performed an assessment of the effectiveness of our internal control over financial reporting as of
December 31, 2017 based upon criteria in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). Based on our assessment, management determined that our internal
control over financial reporting was effective as of December 31, 2017 based on the criteria in Internal Control - Integrated
Framework (2013) issued by the COSO.
The effectiveness of our internal control over financial reporting as of December 31, 2017 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
F-2
Corporate Office Properties, L.P. Management’s Report On Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, and for
performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2017. Internal
control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in
accordance with authorizations of our management and trustees; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial
statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Management performed an assessment of the effectiveness of our internal control over financial reporting as of
December 31, 2017 based upon criteria in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). Based on our assessment, management determined that our internal
control over financial reporting was effective as of December 31, 2017 based on the criteria in Internal Control - Integrated
Framework (2013) issued by the COSO.
The effectiveness of our internal control over financial reporting as of December 31, 2017 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
F-3
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of Corporate Office Properties Trust:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the consolidated financial statements, including the related notes and financial statement schedules, of
Corporate Office Properties Trust and its subsidiaries as listed in the accompanying index (collectively referred to as the
“consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of
December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2017 and December 31, 2016, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2017 in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included
in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express
opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting
based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United
States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material
respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
F-4
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Baltimore, Maryland
February 16, 2018
We have served as the Company’s auditor since 1997.
F-5
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Unitholders of Corporate Office Properties, L.P.:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the consolidated financial statements, including the related notes and financial statement schedules, of
Corporate Office Properties, L.P. and its subsidiaries as listed in the accompanying index (collectively referred to as the
“consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of
December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2017 and December 31, 2016, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2017 in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included
in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express
opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting
based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United
States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material
respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
F-6
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Baltimore, Maryland
February 16, 2018
We have served as the Company’s auditor since 2013.
F-7
Corporate Office Properties Trust and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
Assets
Properties, net:
Operating properties, net
Projects in development or held for future development
Total properties, net
Assets held for sale, net
Cash and cash equivalents
Restricted cash and marketable securities
Investment in unconsolidated real estate joint venture
Accounts receivable (net of allowance for doubtful accounts of $607 and $603, respectively)
Deferred rent receivable (net of allowance of $364 and $373, respectively)
Intangible assets on real estate acquisitions, net
Deferred leasing costs (net of accumulated amortization of $29,560 and $65,988, respectively)
Investing receivables
Prepaid expenses and other assets, net
Total assets
Liabilities and equity
Liabilities:
Debt, net
Accounts payable and accrued expenses
Rents received in advance and security deposits
Dividends and distributions payable
Deferred revenue associated with operating leases
Redeemable preferred shares of beneficial interest
Deferred property sale
Capital lease obligation
Other liabilities
Total liabilities
Commitments and contingencies (Note 19)
Redeemable noncontrolling interests
Equity:
Corporate Office Properties Trust’s shareholders’ equity:
Preferred Shares of beneficial interest at liquidation preference
Common Shares of beneficial interest ($0.01 par value; shares authorized of 150,000,000 at
December 31, 2017 and 125,000,000 at December 31, 2016; shares issued and outstanding of
101,292,299 at December 31, 2017 and 98,498,651 at December 31, 2016)
Additional paid-in capital
Cumulative distributions in excess of net income
Accumulated other comprehensive income (loss)
Total Corporate Office Properties Trust’s shareholders’ equity
Noncontrolling interests in subsidiaries:
Common units in COPLP
Preferred units in COPLP
Other consolidated entities
Noncontrolling interests in subsidiaries
Total equity
Total liabilities, redeemable noncontrolling interests and equity
See accompanying notes to consolidated financial statements.
F-8
December 31,
2017
2016
$ 2,737,611
403,494
3,141,105
42,226
12,261
7,186
25,066
31,802
86,710
59,092
48,322
57,493
67,221
$ 3,578,484
$ 2,671,831
401,531
3,073,362
94,654
209,863
8,193
25,548
34,438
90,219
78,351
41,214
52,279
72,764
$ 3,780,885
$ 1,828,333
108,137
25,648
28,921
11,682
—
43,377
15,853
41,822
2,103,773
$ 1,904,001
108,682
29,798
31,335
12,666
26,583
—
—
50,177
2,163,242
23,125
22,979
—
172,500
1,013
2,201,047
(818,190)
2,167
1,386,037
985
2,116,581
(765,276)
(1,731)
1,523,059
44,481
8,800
12,268
65,549
1,451,586
$ 3,578,484
49,228
8,800
13,577
71,605
1,594,664
$ 3,780,885
Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
Revenues
Rental revenue
Tenant recoveries and other real estate operations revenue
Construction contract and other service revenues
Total revenues
Expenses
Property operating expenses
Depreciation and amortization associated with real estate operations
Construction contract and other service expenses
Impairment losses
General, administrative and leasing expenses
Business development expenses and land carry costs
Total operating expenses
Operating income
Interest expense
Interest and other income
(Loss) gain on early extinguishment of debt
Income (loss) from continuing operations before equity in income of
unconsolidated entities and income taxes
Equity in income of unconsolidated entities
Income tax expense
Income (loss) from continuing operations
Discontinued operations
Income (loss) before gain on sales of real estate
Gain on sales of real estate
Net income
Net (income) loss attributable to noncontrolling interests:
Common units in COPLP
Preferred units in COPLP
Other consolidated entities
Net income attributable to COPT
Preferred share dividends
Issuance costs associated with redeemed preferred shares
Net income (loss) attributable to COPT common shareholders
Net income attributable to COPT:
Income from continuing operations
Discontinued operations, net
Net income attributable to COPT
Basic earnings per common share (1)
Income (loss) from continuing operations
Net income (loss) attributable to COPT common shareholders
Diluted earnings per common share (1)
Income (loss) from continuing operations
Net income (loss) attributable to COPT common shareholders
For the Years Ended December 31,
2017
2016
2015
$ 405,722
104,258
102,840
612,820
$ 417,711
108,253
48,364
574,328
$ 420,340
98,724
106,402
625,466
190,964
134,228
99,618
15,123
30,837
6,213
476,983
135,837
(76,983)
6,318
(513)
64,659
2,882
(1,098)
66,443
—
66,443
9,890
76,333
(1,936)
(660)
(3,646)
70,091
(6,219)
(6,847)
57,025
70,091
—
70,091
0.57
0.57
0.57
0.57
197,530
132,719
45,481
101,391
36,553
8,244
521,918
52,410
(83,163)
5,444
(1,110)
(26,419)
1,332
(244)
(25,331)
—
(25,331)
40,986
15,655
194,494
140,025
102,696
23,289
31,361
13,507
505,372
120,094
(89,074)
4,517
85,275
120,812
62
(199)
120,675
156
120,831
68,047
188,878
155
(660)
(3,711)
11,439
(14,297)
(17)
(6,403)
(660)
(3,515)
178,300
(14,210)
—
(2,875) $ 164,090
11,439
—
11,439
$ 178,147
153
$ 178,300
(0.03) $
(0.03) $
(0.03) $
(0.03) $
1.74
1.74
1.74
1.74
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(1) Basic and diluted earnings per common share are calculated based on amounts attributable to common shareholders of Corporate Office
Properties Trust.
See accompanying notes to consolidated financial statements.
F-9
Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Comprehensive Income/Loss
(in thousands)
Net income
Other comprehensive income (loss)
For the Years Ended December 31,
2017
76,333
$
2016
15,655
2015
$ 188,878
$
Unrealized gain (loss) on interest rate derivatives
Loss on interest rate derivatives recognized in interest expense (effective
portion)
684
(2,915)
(4,739)
3,216
4,230
3,599
Loss on interest rate derivatives recognized in interest expense (ineffective
portion)
Equity in other comprehensive income (loss) of equity method investee
Other comprehensive income (loss)
Comprehensive income
Comprehensive income attributable to noncontrolling interests
Comprehensive income attributable to COPT
88
39
4,027
80,360
(6,371)
73,989
$
—
(184)
1,131
16,786
(4,240)
12,546
—
(264)
(1,404)
187,474
(10,715)
$ 176,759
$
See accompanying notes to consolidated financial statements.
F-10
Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Equity
(Dollars in thousands)
Balance at December 31, 2014 (93,255,284 common shares outstanding)
Conversion of common units to common shares (160,160 shares)
Common shares issued under at-the-market program (890,241 shares)
Exercise of share options (76,474 shares)
Share-based compensation (149,353 shares issued, net of redemptions)
Redemption of vested equity awards
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP
Comprehensive income
Dividends
Distributions to owners of common and preferred units in COPLP
Contributions from noncontrolling interests in other consolidated entities
Distributions to noncontrolling interest in other consolidated entities
Adjustment to arrive at fair value of redeemable noncontrolling interests
Tax loss from share-based compensation
Balance at December 31, 2015 (94,531,512 common shares outstanding)
Reclassification of preferred shares to be redeemed to liability (531,667 shares)
Conversion of common units to common shares (87,000 shares)
Common shares issued under at-the-market program (3,721,227 shares)
Share-based compensation (158,912 shares issued, net of redemptions)
Redemption of vested equity awards
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP
Comprehensive income
Dividends
Distributions to owners of common and preferred units in COPLP
Contributions from noncontrolling interests in other consolidated entities
Distributions to noncontrolling interests in other consolidated entities
Adjustment to arrive at fair value of redeemable noncontrolling interests
Tax loss from share-based compensation
Balance at December 31, 2016 (98,498,651 common shares outstanding)
Redemption of preferred shares (6,900,000 shares)
Conversion of common units to common shares (339,513 shares)
Common shares issued under forward equity sale agreements (1,678,913 shares)
Common shares issued under at-the-market program (591,042 shares)
Exercise of share options (5,000 shares)
Share-based compensation (179,180 shares issued, net of redemptions)
Redemption of vested equity awards
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP
Comprehensive income
Dividends
Distributions to owners of common and preferred units in COPLP
Distributions to noncontrolling interests in other consolidated entities
Adjustment to arrive at fair value of redeemable noncontrolling interests
Tax loss from share-based compensation
Balance at December 31, 2017 (101,292,299 common shares outstanding)
Preferred
Shares
Common
Shares
$
$ 199,083
—
—
—
—
—
—
—
—
—
—
—
—
—
199,083
(26,583)
—
—
—
—
—
—
—
—
—
—
—
—
172,500
(172,500)
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
$
933
2
9
—
1
—
—
—
—
—
—
—
—
—
945
—
1
37
2
—
—
—
—
—
—
—
—
—
985
—
3
17
6
—
2
—
—
—
—
—
—
—
—
1,013
Additional
Paid-in
Capital
$ 1,969,968
2,149
26,526
2,008
7,397
(2,462)
(682)
—
—
—
—
—
116
(513)
2,004,507
17
1,166
109,016
7,451
(2,466)
(2,158)
—
—
—
—
—
(621)
(331)
2,116,581
6,847
4,633
49,927
19,662
150
6,093
(1,973)
(1,486)
—
—
—
—
626
(13)
$ 2,201,047
Cumulative
Distributions in
Excess of Net
Income
Accumulated
Other
Comprehensive
Income (Loss)
Noncontrolling
Interests
$
$
(717,264) $
—
—
—
—
—
—
178,300
(118,208)
—
—
—
—
—
(657,172)
(17)
—
—
—
—
—
11,439
(119,526)
—
—
—
—
—
(765,276)
(6,847)
—
—
—
—
—
—
—
70,091
(116,158)
—
—
—
—
(818,190) $
(1,297) $
—
—
—
—
—
—
(1,541)
—
—
—
—
—
—
(2,838)
—
—
—
—
—
—
1,107
—
—
—
—
—
—
(1,731)
—
—
—
—
—
—
—
—
3,898
—
—
—
—
—
2,167
$
69,461
(2,151)
—
—
—
—
682
8,488
—
(4,706)
300
(35)
—
—
72,039
—
(1,167)
—
—
—
2,158
1,997
—
(4,650)
1,244
(16)
—
—
71,605
—
(4,636)
—
—
—
—
—
1,486
4,033
—
(4,322)
(2,617)
—
—
65,549
Total
$ 1,520,884
—
26,535
2,008
7,398
(2,462)
—
185,247
(118,208)
(4,706)
300
(35)
116
(513)
1,616,564
(26,583)
—
109,053
7,453
(2,466)
—
14,543
(119,526)
(4,650)
1,244
(16)
(621)
(331)
1,594,664
(172,500)
—
49,944
19,668
150
6,095
(1,973)
—
78,022
(116,158)
(4,322)
(2,617)
626
(13)
$ 1,451,586
See accompanying notes to consolidated financial statements.
F-11
Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities
Revenues from real estate operations received
Construction contract and other service revenues received
Property operating expenses paid
Construction contract and other service expenses paid
General, administrative, leasing, business development and land carry costs paid
Interest expense paid
Lease incentives paid
Income taxes paid
Other
Net cash provided by operating activities
Cash flows from investing activities
Construction, development and redevelopment
Acquisitions of operating properties and related intangible assets
Tenant improvements on operating properties
Other capital improvements on operating properties
Proceeds from dispositions of properties
Proceeds from partial sales of properties, net of related debt
Leasing costs paid
Other
Net cash (used in) provided by investing activities
Cash flows from financing activities
Proceeds from debt
Revolving Credit Facility
Unsecured senior notes
Other debt proceeds
Repayments of debt
Revolving Credit Facility
Scheduled principal amortization
Other debt repayments
Deferred financing costs paid
Net proceeds from issuance of common shares
Redemption of preferred shares
Common share dividends paid
Preferred share dividends paid
Distributions paid to noncontrolling interests in COPLP
Distributions paid to redeemable noncontrolling interests
Redemption of vested equity awards
Other
Net cash (used in) provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents
Beginning of year
End of year
For the Years Ended December 31,
2017
2016
2015
$ 510,985
102,531
(186,478)
(82,707)
(32,673)
(73,079)
(9,725)
(31)
1,831
230,654
$ 514,098
76,824
(197,254)
(46,318)
(34,877)
(78,158)
(2,760)
(5)
988
232,538
$ 503,503
117,107
(190,281)
(124,481)
(38,113)
(65,816)
(1,724)
(8)
3,821
204,008
(200,504)
—
(33,409)
(22,882)
180,839
—
(14,581)
827
(89,710)
352,000
—
—
(226,000)
(3,862)
(200,200)
(500)
69,534
(199,083)
(109,174)
(9,305)
(4,426)
(8,215)
(1,973)
2,658
(338,546)
(197,602)
(161,519)
—
(34,275)
(26,345)
262,866
43,681
(10,296)
(2,663)
71,449
495,500
—
255,000
(539,000)
(5,395)
(323,107)
(825)
109,069
—
(104,135)
(14,210)
(4,619)
(15,206)
(2,466)
(5,040)
(154,434)
149,553
(234,346)
(202,866)
(29,413)
(23,147)
193,735
—
(13,710)
2,215
(307,532)
522,000
296,580
164,000
(561,500)
(6,728)
(155,307)
(7,522)
28,567
—
(103,638)
(14,210)
(4,752)
(2,993)
(2,462)
5,722
157,757
54,233
209,863
12,261
60,310
$ 209,863
$
$
6,077
60,310
See accompanying notes to consolidated financial statements.
F-12
Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(in thousands)
Reconciliation of net income to net cash provided by operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and other amortization
Impairment losses
Amortization of deferred financing costs and net debt discounts
Increase in deferred rent receivable
Gain on sales of real estate
Share-based compensation
Loss (gain) on early extinguishment of debt
Other
Changes in operating assets and liabilities:
For the Years Ended December 31,
2017
2016
2015
$
76,333
$
15,655
$ 188,878
136,501
15,116
4,307
(2,651)
(9,890)
5,615
513
(6,121)
134,870
101,341
5,885
(145)
(40,986)
6,843
456
(4,295)
142,231
23,523
5,588
(14,969)
(68,047)
6,574
(86,028)
528
Decrease (increase) in accounts receivable
Decrease (increase) in restricted cash and marketable securities
Decrease (increase) in prepaid expenses and other assets, net
Increase (decrease) in accounts payable, accrued expenses and other liabilities
(Decrease) increase in rents received in advance and security deposits
Net cash provided by operating activities
2,783
2,015
5,737
4,309
(3,913)
$ 230,654
(5,262)
(365)
(17,272)
43,163
(7,350)
$ 232,538
1,331
(1,241)
2,853
(3,620)
6,407
$ 204,008
Supplemental schedule of non-cash investing and financing activities:
(Decrease) increase in accrued capital improvements, leasing and other investing
activity costs
Increase in property in connection with capital lease obligation
Increase in property and redeemable noncontrolling interests in connection with
property contributed into a joint venture
Decrease in redeemable noncontrolling interests and increase in other liabilities in
connection with distribution payable to redeemable noncontrolling interests
Non-cash changes from partial sale of properties, net of debt:
Decrease in properties, net
Increase in investment in unconsolidated real estate joint venture
Decrease in debt
Other net decreases in assets and liabilities
Debt assumed on acquisition of operating property
Other liabilities assumed on acquisition of operating properties
Decrease in property in connection with surrender of property in settlement of
debt
Decrease in debt in connection with surrender of property in settlement of debt
Increase in property and redeemable noncontrolling interests in connection with
property contribution by redeemable noncontrolling interests in a joint venture
Increase (decrease) in fair value of derivatives applied to accumulated other
comprehensive income (loss) and noncontrolling interests
Equity in other comprehensive income (loss) of an equity method investee
Reclassification of preferred shares to be redeemed to liability
Dividends/distributions payable
Decrease in noncontrolling interests and increase in shareholders’ equity in
connection with the conversion of common units into common shares
Adjustments to noncontrolling interests resulting from changes in COPLP
ownership
(Decrease) increase in redeemable noncontrolling interests and (increase)
decrease in equity to carry redeemable noncontrolling interests at fair value
$ (10,654) $
$
16,127
$
5,950
$ (14,797)
—
— $
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
— $
22,600
— $
6,675
$
$
—
—
— $ (114,597) $
$
— $
$
— $
$
— $
— $
— $
— $
— $
25,680
59,534
3,619
—
—
—
—
55,490
5,179
— $
— $
— $
— $ (82,738)
— $ (150,000)
— $
1,415
$
3,845
39
$
— $
$
28,921
1,315
$
(184) $
$
$
26,583
31,335
4,636
1,486
$
$
1,167
2,158
(626) $
621
$
$
$
(1,140)
(264)
—
30,178
2,151
682
(116)
See accompanying notes to consolidated financial statements.
F-13
Corporate Office Properties, L.P. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except unit data)
Assets
Properties, net:
Operating properties, net
Projects in development or held for future development
Total properties, net
Assets held for sale, net
Cash and cash equivalents
Restricted cash and marketable securities
Investment in unconsolidated real estate joint venture
Accounts receivable (net of allowance for doubtful accounts of $607 and $603, respectively)
Deferred rent receivable (net of allowance of $364 and $373, respectively)
Intangible assets on real estate acquisitions, net
Deferred leasing costs (net of accumulated amortization of $29,560 and $65,988, respectively)
Investing receivables
Prepaid expenses and other assets, net
Total assets
Liabilities and equity
Liabilities:
Debt, net
Accounts payable and accrued expenses
Rents received in advance and security deposits
Distributions payable
Deferred revenue associated with operating leases
Redeemable preferred units of general partner, 531,667 units outstanding at December 31, 2016
Deferred property sale
Capital lease obligation
Other liabilities
Total liabilities
Commitments and contingencies (Note 19)
Redeemable noncontrolling interests
Equity:
Corporate Office Properties, L.P.’s equity:
Preferred units
General partner, preferred units outstanding of 6,900,000 at December 31, 2016
Limited partner, 352,000 preferred units outstanding at December 31, 2017 and 2016
Common units, 101,292,299 and 98,498,651 held by the general partner and 3,250,878 and
3,590,391 held by limited partners at December 31, 2017 and 2016, respectively
Accumulated other comprehensive income (loss)
Total Corporate Office Properties, L.P.’s equity
Noncontrolling interests in subsidiaries
Total equity
Total liabilities, redeemable noncontrolling interests and equity
See accompanying notes to consolidated financial statements.
December 31,
2017
2016
$ 2,737,611
403,494
3,141,105
42,226
12,261
2,570
25,066
31,802
86,710
59,092
48,322
57,493
67,221
$ 3,573,868
$ 2,671,831
401,531
3,073,362
94,654
209,863
2,756
25,548
34,438
90,219
78,351
41,214
52,279
72,764
$ 3,775,448
$ 1,828,333
108,137
25,648
28,921
11,682
—
43,377
15,853
37,206
2,099,157
$ 1,904,001
108,682
29,798
31,335
12,666
26,583
—
—
44,740
2,157,805
23,125
22,979
—
8,800
172,500
8,800
1,428,301
2,173
1,439,274
12,312
1,451,586
$ 3,573,868
1,401,597
(1,854)
1,581,043
13,621
1,594,664
$ 3,775,448
F-14
Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per unit data)
Revenues
Rental revenue
Tenant recoveries and other real estate operations revenue
Construction contract and other service revenues
Total revenues
Expenses
Property operating expenses
Depreciation and amortization associated with real estate operations
Construction contract and other service expenses
Impairment losses
General, administrative and leasing expenses
Business development expenses and land carry costs
Total operating expenses
Operating income
Interest expense
Interest and other income
(Loss) gain on early extinguishment of debt
Income (loss) from continuing operations before equity in income of
unconsolidated entities and income taxes
Equity in income of unconsolidated entities
Income tax expense
Income (loss) from continuing operations
Discontinued operations
Income (loss) before gain on sales of real estate
Gain on sales of real estate
Net income
Net income attributable to noncontrolling interests in consolidated entities
Net income attributable to COPLP
Preferred unit distributions
Issuance costs associated with redeemed preferred units
Net income (loss) attributable to COPLP common unitholders
Net income attributable to COPLP:
Income from continuing operations
Discontinued operations, net
Net income attributable to COPLP
Basic earnings per common unit (1)
Income (loss) from continuing operations
Net income (loss) attributable to COPLP common unitholders
Diluted earnings per common unit (1)
Income (loss) from continuing operations
Net income (loss) attributable to COPLP common unitholders
For the Years Ended December 31,
2017
2016
2015
$ 405,722
104,258
102,840
612,820
$ 417,711
108,253
48,364
574,328
$ 420,340
98,724
106,402
625,466
190,964
134,228
99,618
15,123
30,837
6,213
476,983
135,837
(76,983)
6,318
(513)
64,659
2,882
(1,098)
66,443
—
66,443
9,890
76,333
(3,646)
72,687
(6,879)
(6,847)
58,961
72,687
—
72,687
0.57
0.57
0.57
0.57
$
$
$
$
$
$
$
197,530
132,719
45,481
101,391
36,553
8,244
521,918
52,410
(83,163)
5,444
(1,110)
194,494
140,025
102,696
23,289
31,361
13,507
505,372
120,094
(89,074)
4,517
85,275
(26,419)
1,332
(244)
(25,331)
—
(25,331)
40,986
15,655
(3,715)
11,940
(14,957)
(17)
120,812
62
(199)
120,675
156
120,831
68,047
188,878
(3,520)
185,358
(14,870)
—
(3,034) $ 170,488
11,940
—
11,940
$ 185,199
159
$ 185,358
(0.04) $
(0.04) $
(0.04) $
(0.04) $
1.74
1.74
1.74
1.74
$
$
$
$
$
$
$
(1) Basic and diluted earnings per common unit are calculated based on amounts attributable to common unitholders of Corporate Office
Properties, L.P.
See accompanying notes to consolidated financial statements.
F-15
Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Comprehensive Income/Loss
(in thousands)
Net income
Other comprehensive income (loss)
For the Years Ended December 31,
2017
76,333
$
2016
15,655
2015
$ 188,878
$
Unrealized gain (loss) on interest rate derivatives
Loss on interest rate derivatives recognized in interest expense (effective
portion)
684
(2,915)
(4,739)
3,216
4,230
3,599
Loss on interest rate derivatives recognized in interest expense (ineffective
portion)
Equity in other comprehensive income (loss) of equity method investee
Other comprehensive income (loss)
Comprehensive income
Comprehensive income attributable to noncontrolling interests
Comprehensive income attributable to COPLP
88
39
4,027
80,360
(3,646)
76,714
$
—
(184)
1,131
16,786
(3,715)
13,071
—
(264)
(1,404)
187,474
(3,720)
$ 183,754
$
See accompanying notes to consolidated financial statements.
F-16
Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Equity
(Dollars in thousands)
Limited Partner
Preferred Units
General Partner
Preferred Units
Common Units
Units
352,000
Amount
$ 8,800
Units
7,431,667
Amount
$199,083
Units
97,092,835
Amount
$1,305,219
Accumulated
Other
Comprehensive
Income (Loss)
$
(1,381) $
Noncontrolling
Interests in
Subsidiaries
Balance at December 31, 2014
Issuance of common units resulting from common shares issued under COPT
at-the-market program
Issuance of common units resulting from exercise of share options
Share-based compensation (units net of redemption)
Redemptions of vested equity awards
Comprehensive income
Distributions to owners of common and preferred units
Contributions from noncontrolling interests in subsidiaries
Distributions to noncontrolling interests in subsidiaries
Adjustment to arrive at fair value of redeemable noncontrolling interests
Tax loss from share-based compensation
Balance at December 31, 2015
Reclassification of preferred units to be redeemed to liability
Issuance of common units resulting from common shares issued under COPT
at-the-market program
Share-based compensation (units net of redemption)
Redemptions of vested equity awards
Comprehensive income
Distributions to owners of common and preferred units
Contributions from noncontrolling interests in subsidiaries
Distributions to noncontrolling interests in subsidiaries
Adjustment to arrive at fair value of redeemable noncontrolling interests
Tax loss from share-based compensation
Balance at December 31, 2016
Redemption of preferred units resulting from redemption of preferred shares
Issuance of common units resulting from COPT forward equity sale agreements
Issuance of common units resulting from common shares issued under COPT
at-the-market program
Issuance of common units resulting from exercise of share options
Share-based compensation (units net of redemption)
Redemptions of vested equity awards
Comprehensive income
Distributions to owners of common and preferred units
Distributions to noncontrolling interests in subsidiaries
Adjustment to arrive at fair value of redeemable noncontrolling interests
Tax loss from share-based compensation
Balance at December 31, 2017
—
—
—
—
—
—
—
—
—
—
352,000
—
—
—
—
—
—
—
—
—
—
352,000
—
—
—
—
—
—
—
—
—
—
—
352,000
—
—
—
—
660
(660)
—
—
—
—
8,800
—
—
—
—
—
—
—
—
—
—
14,210
— (14,210)
—
—
—
—
—
—
—
—
199,083
7,431,667
(26,583)
(531,667)
26,535
890,241
2,008
76,474
7,398
149,353
(2,462)
—
—
170,488
— (108,044)
—
—
—
—
116
—
(513)
—
1,400,745
98,208,903
—
—
—
—
—
660
(660)
—
—
—
—
8,800
—
—
—
—
—
—
14,297
—
— (14,297)
—
—
—
—
—
—
—
—
172,500
6,900,000
(172,500)
— (6,900,000)
—
—
—
3,721,227
109,053
158,912
7,453
—
(2,466)
(3,017)
—
— (109,219)
—
—
—
—
(621)
—
(331)
—
1,401,597
102,089,042
—
—
49,944
1,678,913
—
—
—
—
660
(660)
—
—
—
$ 8,800
—
—
—
—
—
—
—
—
—
— $
—
19,668
591,042
—
150
5,000
—
6,095
179,180
—
(1,973)
—
6,219
—
65,808
(6,219)
— (113,601)
—
—
—
626
—
—
(13)
—
—
$1,428,301
— 104,543,177
$
—
—
—
—
(1,604)
—
—
—
—
—
(2,985)
—
—
—
—
1,131
—
—
—
—
—
(1,854)
—
—
—
—
—
—
4,027
—
—
—
—
2,173
$
Total
Equity
$1,520,884
26,535
2,008
7,398
(2,462)
185,247
(122,914)
300
(35)
116
(513)
1,616,564
(26,583)
109,053
7,453
(2,466)
14,543
(124,176)
1,244
(16)
(621)
(331)
1,594,664
(172,500)
49,944
19,668
150
6,095
(1,973)
78,022
(120,480)
(2,617)
626
(13)
$1,451,586
9,163
—
—
—
—
1,493
—
300
(35)
—
—
10,921
—
—
—
—
1,472
—
1,244
(16)
—
—
13,621
—
—
—
—
—
—
1,308
—
(2,617)
—
—
12,312
See accompanying notes to consolidated financial statements.
F-17
Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities
Revenues from real estate operations received
Construction contract and other service revenues received
Property operating expenses paid
Construction contract and other service expenses paid
General, administrative, leasing, business development and land carry costs paid
Interest expense paid
Lease incentives paid
Income taxes paid
Other
Net cash provided by operating activities
Cash flows from investing activities
Construction, development and redevelopment
Acquisitions of operating properties and related intangible assets
Tenant improvements on operating properties
Other capital improvements on operating properties
Proceeds from dispositions of properties
Proceeds from partial sales of properties, net of related debt
Leasing costs paid
Other
Net cash (used in) provided by investing activities
Cash flows from financing activities
Proceeds from debt
Revolving Credit Facility
Unsecured senior notes
Other debt proceeds
Repayments of debt
Revolving Credit Facility
Scheduled principal amortization
Other debt repayments
Deferred financing costs paid
Net proceeds from issuance of common units
Redemption of preferred units
Common unit distributions paid
Preferred unit distributions paid
Distributions paid to redeemable noncontrolling interests
Redemption of vested equity awards
Other
Net cash (used in) provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents
Beginning of year
End of year
For the Years Ended December 31,
2017
2016
2015
$ 510,985
102,531
(186,478)
(82,707)
(32,673)
(73,079)
(9,725)
(31)
1,831
230,654
$ 514,098
76,824
(197,254)
(46,318)
(34,877)
(78,158)
(2,760)
(5)
988
232,538
$ 503,503
117,107
(190,281)
(124,481)
(38,113)
(65,816)
(1,724)
(8)
3,821
204,008
(200,504)
—
(33,409)
(22,882)
180,839
—
(14,581)
827
(89,710)
352,000
—
—
(226,000)
(3,862)
(200,200)
(500)
69,534
(199,083)
(112,940)
(9,965)
(8,215)
(1,973)
2,658
(338,546)
(197,602)
(161,519)
—
(34,275)
(26,345)
262,866
43,681
(10,296)
(2,663)
71,449
495,500
—
255,000
(539,000)
(5,395)
(323,107)
(825)
109,069
—
(108,094)
(14,870)
(15,206)
(2,466)
(5,040)
(154,434)
149,553
(234,346)
(202,866)
(29,413)
(23,147)
193,735
—
(13,710)
2,215
(307,532)
522,000
296,580
164,000
(561,500)
(6,728)
(155,307)
(7,522)
28,567
—
(107,730)
(14,870)
—
(2,462)
2,729
157,757
54,233
209,863
12,261
60,310
$ 209,863
$
$
6,077
60,310
See accompanying notes to consolidated financial statements.
F-18
Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(in thousands)
Reconciliation of net income to net cash provided by operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and other amortization
Impairment losses
Amortization of deferred financing costs and net debt discounts
Increase in deferred rent receivable
Gain on sales of real estate
Share-based compensation
Loss (gain) on early extinguishment of debt
Other
Changes in operating assets and liabilities:
For the Years Ended December 31,
2017
2016
2015
$
76,333
$
15,655
$ 188,878
136,501
15,116
4,307
(2,651)
(9,890)
5,615
513
(6,121)
134,870
101,341
5,885
(145)
(40,986)
6,843
456
(4,295)
142,231
23,523
5,588
(14,969)
(68,047)
6,574
(86,028)
528
Decrease (increase) in accounts receivable
Decrease (increase) in restricted cash and marketable securities
Decrease (increase) in prepaid expenses and other assets, net
Increase (decrease) in accounts payable, accrued expenses and other liabilities
(Decrease) increase in rents received in advance and security deposits
Net cash provided by operating activities
2,783
1,194
5,737
5,130
(3,913)
$ 230,654
(5,262)
(691)
(17,272)
43,489
(7,350)
$ 232,538
1,331
(1,360)
2,853
(3,501)
6,407
$ 204,008
Supplemental schedule of non-cash investing and financing activities:
(Decrease) increase in accrued capital improvements, leasing and other investing
activity costs
Increase in property in connection with capital lease obligation
Increase in property and redeemable noncontrolling interests in connection with
property contributed into a joint venture
Decrease in redeemable noncontrolling interests and increase in other liabilities in
connection with distribution payable to redeemable noncontrolling interests
Non-cash changes from partial sale of properties, net of debt:
Decrease in properties, net
Increase in investment in unconsolidated real estate joint venture
Decrease in debt
Other net decreases in assets and liabilities
Debt assumed on acquisition of operating property
Other liabilities assumed on acquisition of operating properties
Decrease in property in connection with surrender of property in settlement of
debt
Decrease in debt in connection with surrender of property in settlement of debt
Increase in property and redeemable noncontrolling interests in connection with
property contribution by redeemable noncontrolling interests in a joint venture
Increase (decrease) in fair value of derivatives applied to accumulated other
comprehensive income (loss) and noncontrolling interests
Equity in other comprehensive income (loss) of an equity method investee
Reclassification of preferred units to be redeemed to liability
Distributions payable
(Decrease) increase in redeemable noncontrolling interests and (increase)
decrease in equity to carry redeemable noncontrolling interests at fair value
$ (10,654) $
$
16,127
$
5,950
$ (14,797)
—
— $
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
— $
22,600
— $
6,675
$
$
—
—
25,680
59,534
3,619
— $ (114,597) $
$
— $
$
— $
— $
$
— $
— $
— $
— $
—
—
—
—
55,490
5,179
— $
— $
— $
— $ (82,738)
— $ (150,000)
— $
1,415
$
3,845
$
39
— $
$
28,921
1,315
$
(184) $
$
$
26,583
31,335
(1,140)
(264)
—
30,178
(626) $
621
$
(116)
See accompanying notes to consolidated financial statements.
F-19
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements
1.
Organization
Corporate Office Properties Trust (“COPT”) and subsidiaries (collectively, the “Company”) is a fully-integrated and self-
managed real estate investment trust (“REIT”). Corporate Office Properties, L.P. (“COPLP”) and subsidiaries (collectively, the
“Operating Partnership”) is the entity through which COPT, the sole general partner of COPLP, conducts almost all of its
operations and owns almost all of its assets. Unless otherwise expressly stated or the context otherwise requires, “we”, “us”
and “our” as used herein refer to each of the Company and the Operating Partnership. We own, manage, lease, develop and
selectively acquire office and data center properties. The majority of our 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 we believe are growing, durable priority missions (“Defense/IT Locations”). We also own 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”). As of December 31, 2017, our properties
included the following (all references to number of properties, square footage, acres and megawatts are unaudited):
•
•
•
•
159 properties totaling 17.3 million square feet comprised of 144 office properties and 15 single-tenant data center shell
properties (“data center shells”). We owned six of these data center shells through an unconsolidated real estate joint
venture;
a wholesale data center with a critical load of 19.25 megawatts;
ten properties under construction or redevelopment (seven office properties and three data center shells) that we estimate
will total approximately 1.1 million square feet upon completion, including two partially operational properties and two
properties completed and held for future lease to the United States Government; and
approximately 1,000 acres of land controlled for future development that we believe could be developed into
approximately 13.0 million square feet and 150 acres of other land.
COPLP owns real estate directly and through subsidiary partnerships and limited liability companies (“LLCs”). In addition to
owning real estate, COPLP also owns subsidiaries that provide real estate services such as property management and
construction and development services primarily for our properties but also for third parties. Some of these services are
performed by a taxable REIT subsidiary (“TRS”).
Equity interests in COPLP are in the form of common and preferred units. As of December 31, 2017, COPT owned 96.9%
of the outstanding COPLP common units (“common units”); the remaining common units and all of the outstanding COPLP
preferred units (“preferred units”) were owned by third parties. Common units not owned by COPT carry certain redemption
rights. The number of common units owned by COPT is equivalent to the number of outstanding common shares of beneficial
interest (“common shares”) of COPT, and the entitlement of all common units to quarterly distributions and payments in
liquidation is substantially the same as those of COPT common shareholders. Similarly, in the case of any series of preferred
units held by COPT, there is a series of preferred shares of beneficial interest (“preferred shares”) in COPT that is equivalent in
number and carries substantially the same terms as such series of COPLP preferred units. COPT’s common shares are publicly
traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “OFC”.
Because COPLP is managed by COPT, and COPT conducts substantially all of its operations through COPLP, we refer to
COPT’s executive officers as COPLP’s executive officers; similarly, although COPLP does not have a board of trustees, we
refer to COPT’s Board of Trustees as COPLP’s Board of Trustees.
2.
Summary of Significant Accounting Policies
Basis of Presentation
The COPT consolidated financial statements include the accounts of COPT, the Operating Partnership, their subsidiaries and
other entities in which COPT has a majority voting interest and control. The COPLP consolidated financial statements include
the accounts of COPLP, its subsidiaries and other entities in which COPLP has a majority voting interest and control. We also
consolidate certain entities when control of such entities can be achieved through means other than voting rights (“variable
interest entities” or “VIEs”) if we are deemed to be the primary beneficiary of such entities. We eliminate all intercompany
balances and transactions in consolidation.
F-20
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
We use the equity method of accounting when we own an interest in an entity and can exert significant influence over but
cannot control the entity’s operations. We discontinue equity method accounting if our investment in an entity (and net
advances) is reduced to zero unless we have guaranteed obligations of the entity or are otherwise committed to provide further
financial support for the entity.
We use the cost method of accounting when we own an interest in an entity and cannot exert significant influence over its
operations.
Use of Estimates in the Preparation of Financial Statements
We make estimates and assumptions when preparing financial statements under generally accepted accounting principles
(“GAAP”). These estimates and assumptions affect various matters, including:
•
•
•
the reported amounts of assets and liabilities in our consolidated balance sheets at the dates of the financial statements;
the disclosure of contingent assets and liabilities at the dates of the financial statements; and
the reported amounts of revenues and expenses in our consolidated statements of operations during the reporting periods.
Significant estimates are inherent in the presentation of our financial statements in a number of areas, including the
evaluation of the collectability of accounts and deferred rent receivable, the allocation of property acquisition costs, the
determination of estimated useful lives of assets, the determination of lease terms, the evaluation of impairment of long-lived
assets, the amount of impairment losses recognized, the amount of revenue recognized relating to tenant improvements, the level
of expense recognized in connection with share-based compensation and the determination of accounting method for
investments. Actual results could differ from these and other estimates.
Acquisitions of Operating Properties
Upon completion of operating property acquisitions, we allocate the purchase price to tangible and intangible assets and
liabilities associated with such acquisitions based on our estimates of their fair values. We determine these fair values by using
market data and independent appraisals available to us and making numerous estimates and assumptions. We allocate operating
property acquisitions to the following components:
•
•
•
•
•
properties based on a valuation performed under the assumption that the property is vacant upon acquisition (the “if-vacant
value”). The if-vacant value is allocated between land and buildings or, in the case of properties under development,
construction in progress. We also allocate additional amounts to properties for in-place tenant improvements based on our
estimate of improvements per square foot provided under market leases that would be attributable to the remaining non-
cancelable terms of the respective leases;
above- and below-market lease intangible assets or liabilities based on the present value (using an interest rate which reflects
the risks associated with the leases acquired) of the difference between: (1) the contractual amounts to be received pursuant
to the in-place leases; and (2) our estimate of fair market lease rates for the corresponding space, measured over a period
equal to the remaining non-cancelable term of the lease. The capitalized above- and below-market lease values are
amortized as adjustments to rental revenue over the remaining lease terms of the respective leases, and to renewal periods in
the case of below-market leases;
in-place lease value based on our estimates of: (1) the present value of additional income to be realized as a result of leases
being in place on the acquired properties; and (2) costs to execute similar leases. Our estimate of additional income to be
realized includes carrying costs, such as real estate taxes, insurance and other operating expenses, and revenues during the
expected lease-up periods considering current market conditions. Our estimate of costs to execute similar leases includes
leasing commissions, legal and other related costs;
tenant relationship value based on our evaluation of the specific characteristics of each tenant’s lease and our overall
relationship with that respective tenant. Characteristics we consider in determining these values include the nature and
extent of our existing business relationships with the tenant, growth prospects for developing new business with the tenant,
the tenant’s credit quality and expectations of lease renewals, among other factors; and
above- and below-market cost arrangements (such as real estate tax treaties or above- or below-market ground leases) based
on the present value of the expected benefit from any such arrangements in place on the property at the time of acquisition.
F-21
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Intangible Assets and Deferred Revenue on Real Estate Acquisitions
We amortize the intangible assets and deferred revenue on real estate acquisitions discussed above as follows:
Asset Type
Above- and below-market leases
In-place lease value
Tenant relationship value
Above- and below-market cost arrangements
Amortization Period
Related lease terms
Related lease terms
Estimated period of time that tenant will lease
space in property
Term of arrangements
We recognize the amortization of acquired above-market and below-market leases as adjustments to rental revenue. We
recognize the amortization of above- and below-market cost arrangements as adjustments to property operating expenses. We
recognize the amortization of other intangible assets on property acquisitions as amortization expense.
Properties
We report properties to be developed or held and used in operations at our depreciated cost, reduced for impairment losses.
The preconstruction stage of the development or redevelopment of an operating property includes efforts and related costs to
secure land control and zoning, evaluate feasibility and complete other initial tasks which are essential to development.
We capitalize direct and indirect project costs (including related compensation and other indirect costs), interest expense and
real estate taxes associated with properties, or portions thereof, undergoing construction, development and redevelopment
activities. In capitalizing interest expense, if there is a specific borrowing for a property undergoing construction, development
and redevelopment activities, we apply the interest rate of that borrowing to the average accumulated expenditures that do not
exceed such borrowing; for the portion of expenditures exceeding any such specific borrowing, we apply our weighted average
interest rate on other borrowings to the expenditures. We continue to capitalize costs while construction, development or
redevelopment activities are underway until a property becomes “operational,” which occurs when lease terms commence
(generally when the tenant has control of the leased space and we have delivered the premises to the tenant as required under the
terms of such lease), but no later than one year after the cessation of major construction activities. When leases commence on
portions of a newly-constructed or redeveloped property in the period prior to one year from the cessation of major construction
activities, we consider that property to be “partially operational.” When a property is partially operational, we allocate the costs
associated with the property between the portion that is operational and the portion under construction. We start depreciating
newly-constructed and redeveloped properties as they become operational.
Most of our leases involve some form of improvements to leased space. When we are required to provide improvements
under the terms of a lease, we determine whether the improvements constitute landlord assets or tenant assets. If the
improvements are landlord assets, we capitalize the cost of the improvements and recognize depreciation expense associated
with such improvements over the shorter of the useful life of the assets or the term of the lease and recognize any payments from
the tenant as rental revenue over the term of the lease. If the improvements are tenant assets, we defer the cost of improvements
funded by us as a lease incentive asset and amortize it as a reduction of rental revenue over the term of the lease. In determining
whether improvements constitute landlord or tenant assets, we consider numerous factors, including: whether the improvements
are unique to the tenant or reusable by other tenants; whether the tenant is permitted to alter or remove the improvements without
our consent or without compensating us for any lost fair value; whether the ownership of the improvements remains with us or
remains with the tenant at the end of the lease term; and whether the economic substance of the lease terms is properly reflected.
We depreciate our fixed assets using the straight-line method over their estimated useful lives as follows:
Buildings and building improvements
Land improvements
Tenant improvements on operating properties
Equipment and personal property
Estimated Useful Lives
10-40 years
10-20 years
Related lease term
3-10 years
We assess each of our properties for indicators of impairment quarterly or when circumstances indicate that a property may
F-22
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
be impaired. If our analyses indicate that the carrying values of operating properties, properties in development or land held for
future development may be impaired, we perform a recovery analysis for such properties. For long-lived assets to be held and
used, we analyze recoverability based on the estimated undiscounted future cash flows expected to be generated from the
operations and eventual disposition of the assets over, in most cases, a ten-year holding period. If we believe there is a
significant possibility that we might dispose of the assets earlier, we analyze recoverability using a probability weighted analysis
of the estimated undiscounted future cash flows expected to be generated from the operations and eventual disposition of the
assets over the various possible holding periods. If the recovery analysis indicates that the carrying value of a tested property is
not recoverable from estimated future cash flows, it is written down to its estimated fair value and an impairment loss is
recognized. If and when our plans change, we revise our recoverability analyses to use the cash flows expected from the
operations and eventual disposition of each asset using holding periods that are consistent with our revised plans. Changes in
holding periods may require us to recognize significant impairment losses.
Fair values are estimated based on contract prices, indicative bids, discounted cash flow analyses, yield analyses or sales
comparison approach. Estimated cash flows used in such analyses are based on our plans for the property and our views of
market and economic conditions. The estimates consider factors such as current and future rental rates, occupancies for the tested
property and comparable properties, estimated operating and capital expenditures and recent sales data for comparable
properties; most of these factors are influenced by market data obtained from real estate leasing and brokerage firms and our
direct experience with the properties and their markets.
When we determine that a property is held for sale, we stop depreciating the property and estimate the property’s fair value,
net of selling costs; if we then determine that the estimated fair value, net of selling costs, is less than the net book value of the
property, we recognize an impairment loss equal to the difference and reduce the net book value of the property. For periods in
which a property is classified as held for sale, we classify the assets of the property as held for sale on our consolidated balance
sheet for such periods.
When we dispose of, or classify as held for sale, a component or group of components that represents a strategic shift having
a major effect on our operations and financial results (such as a major geographical area of operations, a major line of business
or a major equity method investment), we classify the associated results of operations as discontinued operations. We had no
properties newly classified as discontinued operations in the last three years.
Sales of Interests in Real Estate
We recognize gains from sales of interests in real estate using the full accrual method, provided that various criteria relating
to the terms of sale and any subsequent involvement by us with the real estate sold are met.
Cash and Cash Equivalents
Cash and cash equivalents include all cash and liquid investments that mature three months or less from when they are
purchased. Cash equivalents are reported at cost, which approximates fair value. We maintain our cash in bank accounts in
amounts that may exceed Federally insured limits at times. We have not experienced any losses in these accounts in the past and
believe that we are not exposed to significant credit risk because our accounts are deposited with major financial institutions.
Investments in Marketable Securities
We classify marketable securities as trading securities when we have the intent to sell such securities in the near term, and
classify other marketable securities as available-for-sale securities. We determine the appropriate classification of investments in
marketable securities at the acquisition date and re-evaluate the classification at each balance sheet date. We report investments
in marketable securities classified as trading securities at fair value, with unrealized gains and losses recognized through
earnings; on our consolidated statements of cash flows, we classify cash flows from these securities as operating activities.
F-23
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Accounts and Deferred Rents Receivable and Investing Receivables
We maintain allowances for estimated losses resulting from the failure of our customers or borrowers to satisfy their
payment obligations. We use judgment in estimating these allowances based primarily upon the payment history and credit
status of the entities associated with the individual receivables. We write off these receivables when we believe the facts and
circumstances indicate that continued pursuit of collection is no longer warranted. When cash is received in connection with
receivables for which we have established allowances, we reduce the amount of losses previously recognized.
We evaluate the collectability of both interest and principal of loans whenever events or changes in circumstances indicate
such amounts may not be recoverable. A loan is impaired when it is probable that we will be unable to collect all amounts due
according to the existing contractual terms. When a loan is impaired, the amount of the loss accrual is calculated by comparing
the carrying amount of the investment to the present value of expected future cash flows discounted at the loan’s effective
interest rate and the value of any collateral under such loan.
Interest on impaired loans is recognized when received in cash.
Deferred Leasing and Financing Costs
We defer costs incurred to obtain new tenant leases or extend existing tenant leases, including related compensation costs.
We amortize these costs evenly over the lease terms. We classify leasing costs paid as an investing activity on our statements of
cash flows since such costs are necessary in order for us to generate long-term future cash flows from our properties. When
tenant leases are terminated early, we expense any unamortized deferred leasing costs associated with those leases over the
shortened term of the lease.
We defer costs of financing arrangements and recognize these costs as interest expense over the related loan terms on a
straight-line basis, which approximates the amortization that would occur under the effective interest method of amortization.
We amortize deferred costs of line-of-credit arrangements ratably over the terms of such arrangements. We expense any
unamortized loan costs when loans are retired early. We present deferred costs of financing arrangements as a direct deduction
from the related debt liability, except for costs attributable to line-of-credit arrangements and interest rate derivatives, which we
present in the balance sheet in the line entitled “prepaid expenses and other assets, net”.
Noncontrolling Interests
COPT’s consolidated noncontrolling interests are comprised of interests in COPLP not owned by COPT (discussed further
in Note 14) and interests in consolidated real estate joint ventures not owned by us (discussed further in Note 6). COPLP’s
consolidated noncontrolling interests are comprised primarily of interests in our consolidated real estate joint ventures. Also
included in COPLP’s consolidated noncontrolling interests are interests in several real estate entities owned directly by COPT, or
a wholly owned subsidiary of COPT, that generally do not exceed 1% of interests in such entities. We evaluate whether
noncontrolling interests are subject to redemption features outside of our control. For noncontrolling interests that are currently
redeemable for cash at the option of the holders of such interests or deemed probable to eventually become redeemable, we
classify such interests as redeemable noncontrolling interests in the mezzanine section of our consolidated balance sheets; we
adjust these interests each period to the greater of their fair value or carrying amount (initial amount as adjusted for allocations of
income and losses and contributions and distributions), with a corresponding offset to additional paid-in capital on COPT’s
consolidated balance sheets or common units on COPLP’s balance sheet, and only recognize reductions in such interests to the
extent of their carrying amount. Our other noncontrolling interests are reported in the equity section of our consolidated balance
sheets. The amounts reported for noncontrolling interests on our consolidated statements of operations represent the portion of
these entities’ income or losses not attributable to us.
Revenue Recognition
We recognize minimum rents, net of abatements, on a straight-line basis over the noncancelable term of tenant leases. A
lease term commences when: (1) the tenant has control of the leased space (legal right to use the property); and (2) we have
delivered the premises to the tenant as required under the terms of such lease. The noncancelable term of a lease includes
periods when a tenant: (1) may not terminate its lease obligation early without incurring a penalty in such an amount that the
continuation of the lease appears reasonably assured; (2) possesses renewal rights and the tenant’s failure to exercise such rights
imposes a penalty on the tenant material enough such that renewal appears reasonably assured; or (3) possesses bargain renewal
F-24
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
options for such periods. We report the amount by which our minimum rental revenue recognized on a straight-line basis under
leases exceeds the contractual rent billings associated with such leases as deferred rent receivable on our consolidated balance
sheets. Amounts by which our minimum rental revenue recognized on a straight-line basis under leases are less than the
contractual rent billings associated with such leases are reported in liabilities as deferred revenue associated with operating
leases on our consolidated balance sheets.
In connection with a tenant’s entry into, or modification of, a lease, if we make cash payments to, or on behalf of, the tenant
for purposes other than funding the construction of landlord assets, we defer the amount of such payments as lease incentives.
As discussed above, when we are required to provide improvements under the terms of a lease, we determine whether the
improvements constitute landlord assets or tenant assets; if the improvements are tenant assets, we defer the cost of
improvements funded by us as a lease incentive asset. We amortize lease incentives as a reduction of rental revenue over the
term of the lease.
We recognize tenant recovery revenue in the same periods in which we incur the related expenses. Tenant recovery revenue
includes payments from tenants as reimbursement for property taxes, utilities and other property operating expenses.
We recognize fees received for lease terminations as revenue and write off against such revenue any (1) deferred rents
receivable, and (2) deferred revenue, lease incentives and intangible assets that are amortizable into rental revenue associated
with the leases; the resulting net amount is the net revenue from the early termination of the leases. When a tenant’s lease for
space in a property is terminated early but the tenant continues to lease such space under a new or modified lease in the property,
the net revenue from the early termination of the lease is recognized evenly over the remaining life of the new or modified lease
in place on that property.
We recognize fees for services provided by us once services are rendered, fees are determinable and collectability is assured.
We recognize revenue under construction contracts using the percentage of completion method when the revenue and costs for
such contracts can be estimated with reasonable accuracy; when these criteria do not apply to a contract, we recognize revenue
on that contract using the completed contract method. Under the percentage of completion method, we recognize a percentage
of the total estimated revenue on a contract based on the cost of services provided on the contract as of a point in time relative to
the total estimated costs on the contract.
Interest Rate Derivatives
Our primary objectives in using interest rate derivatives are to add stability to interest expense and to manage exposure to
interest rate movements. To accomplish this objective, we primarily use interest rate swaps as part of our interest rate risk
management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a
counterparty in exchange for our making fixed-rate payments over the life of the agreements without exchange of the underlying
notional amount. Derivatives are used to hedge the cash flows associated with interest rates on existing debt as well as future
debt. We recognize all derivatives as assets or liabilities on our consolidated balance sheet at fair value. We defer the effective
portion of changes in fair value of the designated cash flow hedges to accumulated other comprehensive income (“AOCI”) or
loss (“AOCL”) and reclassify such deferrals to interest expense as interest expense is recognized on the hedged forecasted
transactions. We recognize the ineffective portion of the change in fair value of interest rate derivatives directly in interest
expense. When an interest rate swap designated as a cash flow hedge no longer qualifies for hedge accounting, we recognize
changes in fair value of the hedge previously deferred to AOCI or AOCL, along with any changes in fair value occurring
thereafter, through earnings. We do not use interest rate derivatives for trading or speculative purposes. We manage counter-
party risk by only entering into contracts with major financial institutions based upon their credit ratings and other risk factors.
We use standard market conventions and techniques such as discounted cash flow analysis, option pricing models,
replacement cost and termination cost in computing the fair value of derivatives at each balance sheet date. We made an
accounting policy election to use an exception provided for in the applicable accounting guidance with respect to measuring
counterparty credit risk for derivative instruments; this election enables us to measure the fair value of groups of assets and
liabilities associated with derivative instruments consistently with how market participants would price the net risk exposure as
of the measurement date.
Please refer to the section below entitled “Recent Accounting Pronouncements” for disclosure pertaining to the effect of new
hedge accounting guidance that we adopted effective January 1, 2018 and Note 11 for additional disclosure pertaining to our
interest rate derivatives.
F-25
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Expense Classification
We classify as property operations expense costs incurred for property taxes, ground rents, utilities, property management,
insurance, repairs, exterior and interior maintenance and tenant revenue collection losses, as well as associated labor and indirect
costs attributable to these costs.
We classify as general, administrative and leasing expenses costs incurred for corporate-level management, public company
administration, asset management, leasing, investor relations, marketing and corporate-level insurance (including general
business and director and officers) and leasing prospects, as well as associated labor and indirect costs attributable to these
expenses.
Share-Based Compensation
We issue three forms of share-based compensation: restricted COPT common shares (“restricted shares”), deferred share
awards (also known as restricted share units) and performance share units (also known as performance share awards) (“PSUs”).
We also issued options to purchase COPT common shares (“options”) in prior years. We account for share-based compensation
in accordance with authoritative guidance provided by the FASB that establishes standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods or services, focusing primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions. The guidance requires us to measure the cost of
employee services received in exchange for an award of equity instruments based generally on the fair value of the award on the
grant date; such cost is then recognized over the period during which the employee is required to provide service in exchange for
the award. No compensation cost is recognized for equity instruments for which employees do not render the requisite service.
The guidance also requires that share-based compensation be computed based on awards that are ultimately expected to vest; as
a result, future forfeitures of awards are estimated at the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. If an award is voluntarily cancelled by an employee, we recognize the previously
unrecognized cost associated with the original award on the date of such cancellation. We capitalize costs associated with share-
based compensation attributable to employees engaged in construction and development activities.
When we adopted the authoritative guidance on accounting for share-based compensation, we elected to adopt the
alternative transition method for calculating the tax effects of share-based compensation. This method enabled us to use a
simplified method to establishing the beginning balance of the additional paid-in capital pool related to the tax effects of
employee share-based compensation that was available to absorb tax deficiencies recognized subsequent to the adoption of this
guidance.
We compute the fair value of restricted shares and deferred share awards based on the fair value of COPT common shares
on the grant date. We compute the fair value of PSUs using a Monte Carlo model. Significant assumptions used for that model
include the following: the baseline common share value is the market value on the grant date; the risk-free interest rate is based
on the U.S. Treasury yield curve in effect at the time of grant; and expected volatility is based on historical volatility of COPT’s
common shares.
Income Taxes
COPT elected to be treated as a REIT under Sections 856 through 860 of the Internal Revenue Code. To qualify as a REIT,
COPT must meet a number of organizational and operational requirements, including a requirement that it distribute at least 90%
of the Company’s adjusted taxable income to its shareholders. As a REIT, COPT generally will not be subject to Federal income
tax on taxable income that it distributes to its shareholders. If COPT fails to qualify as a REIT in any tax year, it will be subject
to Federal income tax on its taxable income at regular corporate rates and may not be able to qualify as a REIT for four
subsequent tax years.
COPLP is a limited partnership and is not subject to federal income tax. Its partners are required to report their respective
share of the Operating Partnership’s taxable income on their respective tax returns. COPT’s share of the Operating Partnership’s
taxable income is reported on COPT’s income tax return.
F-26
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
For Federal income tax purposes, dividends to shareholders may be characterized as ordinary income, capital gains or return
of capital. The characterization of dividends paid on COPT’s common and preferred shares during each of the last three years
was as follows:
Ordinary income
Long-term capital gain
Return of capital
Common Shares
For the Years Ended December 31,
2016
48.0%
0.0%
52.0%
2017
86.5%
0.0%
13.5%
2015
38.3%
61.7%
0.0%
Preferred Shares
For the Years Ended December 31,
2016
100%
0.0%
0.0%
2017
100.0%
0.0%
0.0%
2015
38.3%
61.7%
0.0%
However, dividends paid on January 15, 2016 (with a record date of December 31, 2015) on COPT’s common and preferred
shares were allocated to 2015 for Federal income tax purposes and characterized based on the percentages set forth above for
2015.
We distributed all of COPT’s REIT taxable income in 2017, 2016 and 2015 and, as a result, did not incur Federal income tax
in those years.
The net basis of our consolidated assets and liabilities for tax reporting purposes was approximately $150 million higher
than the amount reported on our consolidated balance sheet as of December 31, 2017 which was primarily related to differences
in basis for net properties, intangible assets on property acquisitions and deferred rent receivable.
We are subject to certain state and local income and franchise taxes. The expense associated with these state and local taxes
is included in general and administrative expense and property operating expenses on our consolidated statements of operations.
We did not separately state these amounts on our consolidated statements of operations because they are insignificant.
Reclassification
We reclassified certain amounts from prior periods to conform to the current period presentation of our consolidated
financial statements with no effect on previously reported net income or equity.
Recent Accounting Pronouncements
We adopted guidance issued by the Financial Accounting Standards Board (“FASB”) effective January 1, 2017 intended to
simplify various aspects related to the accounting and presentation for employee share-based payment transactions, including the
income tax consequences, classification of awards as either equity or liabilities and classification on the consolidated statement
of cash flows. In connection with our adoption of this policy, we made an entity-wide accounting policy election to continue to
account for potential future award forfeitures by estimating the number of awards that are expected to vest. Our adoption of this
guidance did not have a material impact on our consolidated financial statements.
We adopted guidance issued by the FASB prospectively effective January 1, 2017 that clarifies the definition of a business
used by entities in determining whether transactions should be accounted for as acquisitions (or disposals) of assets or
businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and
consolidation. Under the new guidance, we expect that the majority of our future operating property acquisitions will be
accounted for as asset acquisitions, whereas under the previous guidance our recent acquisitions were accounted for as business
combinations; we believe that the primary effect of this change will be that transaction costs associated with future acquisitions
will be capitalized rather than expensed as incurred. This guidance had no effect on our consolidated financial statements upon
adoption.
In May 2014, the FASB issued guidance regarding the recognition of revenue from contracts with customers. Under this
guidance, an entity will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires
improved disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with
customers. We adopted this guidance effective January 1, 2018 using the modified retrospective method, under which the
cumulative effect of initially applying the guidance is recognized at the date of initial application. Our adoption of this guidance
beginning on January 1, 2018 will not have a material effect on our consolidated financial statements. However, as discussed
F-27
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
further below, once the new guidance setting forth principles for the recognition, measurement, presentation and disclosure of
leases goes into effect on January 1, 2019, the new revenue standard may apply to executory costs and other components of
revenue due under leases that are deemed to be non-lease components (such as common area maintenance and provision of
utilities), which could affect our recognition pattern for such revenue.
In January 2016, the FASB issued guidance that requires entities to measure equity investments at fair value through net
income, except for those that result in consolidation or are accounted for under the equity method of accounting. For equity
investments without readily determinable fair values, the guidance permits the application of a measurement alternative using the
cost of the investment, less any impairments, plus or minus changes resulting from observable price changes for an identical or
similar investment of the same issuer. We adopted this guidance effective January 1, 2018. We do not expect the adoption of
this guidance to have a material impact on our consolidated financial statements.
In February 2016, the FASB issued guidance that sets forth principles for the recognition, measurement, presentation and
disclosure of leases. This guidance requires lessees to apply a dual approach, classifying leases as either finance or operating
leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. The
resulting classification determines whether the lease expense is recognized based on an effective interest method or straight-line
basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a
term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for
similar to existing guidance for operating leases. The guidance requires lessors of real estate to account for leases using an
approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases.
This guidance is effective for reporting periods beginning January 1, 2019 using a modified retrospective transition approach at
the time of adoption. Early adoption is also permitted for this guidance. In addition, the guidance permits lessees and lessors to
elect to apply a package of practical expedients that allow them not to reassess upon adoption: the lease classification for any
expired or existing leases; their deferred recognition of incremental direct costs of leasing for any expired or existing leases; and
whether any expired or existing contracts are, or contain, leases. While we are still completing our assessment of the impact of
this guidance, below is a summary of the anticipated primary effects of this guidance on our accounting and reporting.
• Real estate leases in which we are the lessor:
Balance sheet reporting: We believe that we will apply an approach under the new guidance that is similar to the current
accounting for operating leases, in which we will continue to recognize the underlying leased asset as property on our
balance sheet.
Deferral of non-incremental lease costs: Under the new lease guidance, we will no longer be able to defer the
recognition of non-incremental costs in connection with new or extended tenant leases; these deferrals totaled $1.1
million in 2017, $1.1 million in 2016 and $1.2 million in 2015. Upon adoption of the new guidance, we would expense
previously deferred non-incremental lease costs for existing leases unless we elect the package of practical expedients,
in which case such costs would remain deferred and amortized over the remaining lease terms.
Lease revenue reporting: We believe that the new revenue standard will apply to executory costs and other components
of revenue deemed to be non-lease components (such as common area maintenance and provision of utilities), even
when the revenue for such activities is not separately stipulated in the lease. In that case, we would separate the lease
components of revenue due under leases from the non-lease components, and the revenue from the non-lease
components previously recognized on a straight-line basis under current lease guidance would be recognized under the
new revenue guidance as the related services are delivered. As a result, while the total revenue recognized over time
would not differ under the new guidance, the recognition pattern could be different. We are in the process of evaluating
the significance of the difference in the recognition pattern that would result from this change.
• Leases in which we are the lessee:
Our most significant leases as lessee are ground leases we have for certain properties; as of December 31, 2017, our
future minimum rental payments under these leases totaled $89.9 million, with various expiration dates extending to the
year 2100. While we are still in the process of evaluating these leases under the new guidance, we believe that we will
be required to recognize a right-of-use asset and a lease liability for the present value of these minimum lease payments.
We also believe that these types of leases most likely would be classified as finance leases under the new guidance
which would result in the interest component of each lease payment being recorded as interest expense and the right-of-
use asset being amortized into expense using the straight-line method over the life of the lease; however, if we elect to
apply the package of practical expedients, we will continue to account for our existing ground leases as operating leases
upon adoption of the guidance.
F-28
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
In June 2016, the FASB issued guidance that changes how entities measure credit losses for most financial assets and certain
other instruments that are not measured at fair value through net income. The guidance replaces the current incurred loss model
with an expected loss approach, resulting in a more timely recognition of such losses. The guidance will apply to most financial
assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity
debt securities, net investments in leases, and off-balance-sheet credit exposures (e.g. loan commitments). Under the new
guidance, an entity will recognize its estimate of expected credit losses as an allowance, as the guidance requires that financial
assets be measured on an amortized cost basis and to be presented at the net amount expected to be collected. The guidance is
effective for us beginning January 1, 2020, with early adoption permitted after December 2018. We are currently assessing the
financial impact of this guidance on our consolidated financial statements.
In August 2016, the FASB issued guidance that clarifies how entities should classify certain cash receipts and cash payments
on the statement of cash flows with the objective of reducing the existing diversity in practice related to eight specific cash flow
issues. The areas addressed in the new guidance relate to debt prepayment costs, settlement of zero-coupon debt instruments,
contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims,
proceeds from the settlement of corporate-owned and bank-owned life insurance policies, distributions received from equity
method investments, beneficial interest in securitization transactions and separately identifiable cash flows and application of the
predominance principle. We adopted this guidance effective January 1, 2018 using a retrospective transition method. We do not
expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In November 2016, the FASB issued guidance that requires the statement of cash flows to explain the change during the
period in the total of cash, cash equivalents and amounts described as restricted cash or restricted cash equivalents. Under the
new guidance, amounts described as restricted cash and restricted cash equivalents will be included with cash and cash
equivalents when reconciling the beginning of period and end of period total amounts shown on the statement of cash flows.
Our restricted cash primarily consists of cash escrowed under mortgage debt for capital improvements and real estate taxes and
cash restricted in connection with our deferred compensation plan and certain tenant security deposits. We adopted this guidance
effective January 1, 2018 using a retrospective transition method. Upon our adoption of this guidance, changes in our restricted
cash that we currently report as either operating or investing activities on our statements of cash flows will no longer be reported
as such. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In February 2017, the FASB issued guidance clarifying the scope of asset derecognition provisions and accounting for
partial sales of nonfinancial assets. The new guidance requires recognition of a sale of real estate and resulting gain or loss when
control transfers and the buyer has the ability to direct use of, or obtain substantially all of the remaining benefit from, the asset
(which generally will occur on the closing date); the factor of continuing involvement is no longer a specific consideration for
the timing of recognition. The new guidance eliminates the need to consider adequacy of buyer investment, which was replaced
by additional judgments regarding collectability and intent and/or ability to pay. The new guidance also requires an entity to
derecognize nonfinancial assets and in-substance nonfinancial assets once it transfers control of such assets. When an entity
transfers its controlling interest in a nonfinancial asset, but retains a noncontrolling ownership interest, the entity is required to
measure any non-controlling interest it receives or retains at fair value and recognize a full gain or loss on the transaction; as a
result, sales and partial sales of real estate assets will now be subject to the same derecognition model as all other nonfinancial
assets. We had a transaction in July 2016 accounted for as a partial sale under existing guidance that would meet the criteria for
immediate full gain recognition under the new guidance; this would result in an additional $18 million in income being
recognized in 2016 that is currently being amortized into income in subsequent periods under existing guidance. We do not
believe that the recognition pattern for our other sales of real estate will be changed by the new guidance. We adopted this
guidance effective January 1, 2018, and expect to use the full retrospective method, under which we would retrospectively
restate each reporting period presented at the time of adoption.
In August 2017, the FASB issued guidance that makes targeted improvements to hedge accounting. This new guidance
simplifies the application of hedge accounting and better aligns financial reporting for hedging activities with companies’
economic objectives in undertaking those activities. Under the new guidance, all changes in the fair value of highly effective
cash flow hedges will be recorded in other comprehensive income instead of income. The new guidance also eases the
administrative burden of hedge documentation requirements and assessing hedge effectiveness. While we are required to adopt
this guidance no later than January 1, 2019, we expect to adopt this guidance effective January 1, 2018. We do not expect the
adoption of this guidance to have a material impact on our consolidated financial statements.
F-29
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
3.
Fair Value Measurements
Accounting standards define fair value as the exit price, or the amount that would be received upon sale of an asset or paid
to transfer a liability in an orderly transaction between market participants as of the measurement date. The standards also
establish a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use
of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs
market participants would use in valuing the asset or liability developed based on market data obtained from sources
independent of us. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use
in valuing the asset or liability developed based upon the best information available in the circumstances. The hierarchy of
these inputs is broken down into three levels: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets
or liabilities; Level 2 inputs include (1) quoted prices for similar assets or liabilities in active markets, (2) quoted prices for
identical or similar assets or liabilities in inactive markets and (3) inputs (other than quoted prices) that are observable for the
asset or liability, either directly or indirectly; and Level 3 inputs are unobservable inputs for the asset or liability.
Categorization within the valuation hierarchy is based upon the lowest level of input that is most significant to the fair value
measurement.
Recurring Fair Value Measurements
COPT has a non-qualified elective deferred compensation plan for Trustees and certain members of our management team
that permits participants to defer up to 100% of their compensation on a pre-tax basis and receive a tax-deferred return on such
deferrals. The assets held in the plan (comprised primarily of mutual funds and equity securities) and the corresponding
liability to the participants are measured at fair value on a recurring basis on COPT’s consolidated balance sheet using quoted
market prices, as are other marketable securities that we hold. The balance of the plan, which was fully funded, totaled $4.6
million as of December 31, 2017 and $5.4 million as of December 31, 2016, and is included in the accompanying COPT
consolidated balance sheets in the line entitled restricted cash and marketable securities. The offsetting liability associated with
the plan is adjusted to fair value at the end of each accounting period based on the fair value of the plan assets and reported in
other liabilities on COPT’s consolidated balance sheets. The assets of the plan and other marketable securities that we hold are
classified in Level 1 of the fair value hierarchy. The liability associated with the plan is classified in Level 2 of the fair value
hierarchy.
The fair values of our interest rate derivatives are determined using widely accepted valuation techniques, including a
discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the
derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate market data and
implied volatilities in such interest rates. While we determined that the majority of the inputs used to value our derivatives fall
within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our interest rate derivatives utilize
Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default. However, as of December 31,
2017 and 2016, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our
derivatives and determined that these adjustments are not significant. As a result, we determined that our interest rate derivative
valuations in their entirety are classified in Level 2 of the fair value hierarchy.
The carrying values of cash and cash equivalents, restricted cash, accounts receivable, other assets (excluding investing
receivables) and accounts payable and accrued expenses are reasonable estimates of their fair values because of the short
maturities of these instruments. As discussed in Note 8, we estimated the fair values of our investing receivables based on the
discounted estimated future cash flows of the loans (categorized within Level 3 of the fair value hierarchy); the discount rates
used approximate current market rates for loans with similar maturities and credit quality, and the estimated cash payments
include scheduled principal and interest payments. For our disclosure of debt fair values in Note 10, we estimated the fair value
of our unsecured senior notes based on quoted market rates for publicly-traded debt (categorized within Level 2 of the fair
value hierarchy) and estimated the fair value of our other debt based on the discounted estimated future cash payments to be
made on such debt (categorized within Level 3 of the fair value hierarchy); the discount rates used approximate current market
rates for loans, or groups of loans, with similar maturities and credit quality, and the estimated future payments include
scheduled principal and interest payments. Fair value estimates are made as of a specific point in time, are subjective in nature
and involve uncertainties and matters of significant judgment. Settlement at such fair value amounts may not be possible and
may not be a prudent management decision.
For additional fair value information, please refer to Note 8 for investing receivables, Note 10 for debt and Note 11 for
interest rate derivatives.
F-30
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
COPT and Subsidiaries
The tables below set forth financial assets and liabilities of COPT and its subsidiaries that are accounted for at fair value on
a recurring basis as of December 31, 2017 and 2016 and the hierarchy level of inputs used in measuring their respective fair
values under applicable accounting standards (in thousands):
Description
December 31, 2017:
Assets:
Marketable securities in deferred compensation plan (1)
Mutual funds
Other
Interest rate derivatives (2)
Total assets
Liabilities:
Deferred compensation plan liability (3)
December 31, 2016:
Assets:
Marketable securities in deferred compensation plan (1)
Mutual funds
Other
Interest rate derivatives (2)
Total assets
Liabilities:
Deferred compensation plan liability (3)
Interest rate derivatives
Redeemable preferred shares of beneficial interest (4)
Total liabilities
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
Total
$
$
$
$
$
$
$
4,547
69
—
4,616
$
$
— $
—
3,073
3,073
$
— $
—
—
— $
4,547
69
3,073
7,689
— $
4,616
$
— $
4,616
5,346
91
—
5,437
$
$
— $
—
—
— $
— $
—
158
158
$
5,437
1,572
26,583
33,592
$
$
— $
—
—
— $
— $
—
—
— $
5,346
91
158
5,595
5,437
1,572
26,583
33,592
(1) Included in the line entitled “restricted cash and marketable securities” on COPT’s consolidated balance sheet.
(2) Included in the line entitled “prepaid expenses and other assets, net” on COPT’s consolidated balance sheet.
(3) Included in the line entitled “other liabilities” on COPT’s consolidated balance sheet.
(4) See disclosure regarding our Series K Preferred Shares in Note 13.
F-31
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
COPLP and Subsidiaries
The tables below set forth financial assets and liabilities of COPLP and its subsidiaries that are accounted for at fair value
on a recurring basis as of December 31, 2017 and 2016 and the hierarchy level of inputs used in measuring their respective fair
values under applicable accounting standards (in thousands):
Description
December 31, 2017:
Assets:
Interest rate derivatives (1)
December 31, 2016:
Assets:
Interest rate derivatives (1)
Liabilities:
Interest rate derivatives
Redeemable preferred units of general partner (2)
Total liabilities
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
Total
$
$
$
$
— $
3,073
$
— $
3,073
— $
— $
—
— $
158
1,572
26,583
28,155
$
$
$
— $
158
— $
—
— $
1,572
26,583
28,155
(1) Included in the line entitled “prepaid expenses and other assets, net” on COPLP’s consolidated balance sheet.
(2) See disclosure regarding our Series K Preferred Units in Note 14.
2017 Nonrecurring Fair Value Measurements
As part of our closing process for each of the four quarters in 2017, we conducted our review of our portfolio of long-lived
assets to be held and used for indicators of impairment and found there to be no impairment losses in the first, second and third
quarters. In the fourth quarter of 2017, our assessment of weakening leasing prospects and expected enduring vacancy in our
Aberdeen, Maryland (“Aberdeen”) portfolio indicated that these properties could be impaired. We have performed recovery
analyses on the properties considering weakening tenant demand, high vacancy and low investor demand for office properties
in the surrounding submarkets and concluded that the carrying values of these properties were not likely to be recovered from
the expected undiscounted cash flows from the operation and eventual disposition of these properties. Accordingly, we
recognized $9.0 million of impairment losses on the operating properties in Aberdeen (included in our Other segment). In
addition, and also considering these conditions, we determined that we would not likely recover the carrying amount of land in
this submarket and recognized a $4.7 million impairment loss on it. We previously recognized impairment losses on these
properties in the second quarter of 2016 as discussed below. We determined that the declines in values that have occurred since
the initial losses were recognized were due to declining market conditions.
For the respective quarters in 2017, we also performed recoverability analyses for our properties classified as held for sale,
which resulted in impairment losses of $1.6 million in the second quarter of 2017. These impairment losses were primarily on
properties in White Marsh, Maryland (“White Marsh”) (included in our Regional Office and Other segments) that we
reclassified to held for sale during the period and adjusted to fair value less costs to sell. These properties were sold in the third
quarter.
Changes in the expected future cash flows due to changes in our plans for specific properties (especially our expected
holding period) could result in the recognition of impairment losses. In addition, because properties held for sale are carried at
the lower of carrying value or estimated fair values less costs to sell, declines in their estimated fair values due to market
conditions and other factors could result in the recognition of impairment losses.
F-32
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The table below sets forth the fair value hierarchy of the valuation technique we used to determine nonrecurring fair value
measurements of properties as of December 31, 2017 (in thousands):
Fair Values as of December 31, 2017
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Description
Assets:
Operating properties, net
Projects in development or held
for future development
$
$
— $
— $
— $
3,850
— $
1,755
Total
$
$
3,850
1,755
The table below sets forth quantitative information about significant unobservable inputs used for the Level 3 fair value
measurements reported above as of December 31, 2017 (dollars in thousands):
Valuation Technique
Discounted cash flow
Fair Values on
Measurement Date
$
3,850 Discount rate
Unobservable Input
Comparable sales analysis
$
1,755 Comparable sales prices
Terminal capitalization rate
(1) Only one fair value applied for this unobservable input.
2016 Nonrecurring Fair Value Measurements
Range (Weighted Average)
14% - 16% (14%)
12% (1)
N/A
In the first quarter of 2016, we set a goal to raise cash from sales of properties in 2016 considerably in excess of the $96.8
million in assets held for sale at December 31, 2015. The specific properties we would sell to achieve this goal had not been
identified when the goal was established. Throughout 2016, we engaged in the process of identifying properties we would sell.
In the first quarter of 2016, we reclassified: most of our properties in Greater Philadelphia (included in our Regional Office
segment); two properties in the Fort Meade/BW Corridor sub-segment; and our remaining land holdings in Colorado Springs,
Colorado (“Colorado Springs”) to held for sale and recognized $2.4 million of impairment losses. As of March 31, 2016, we
had $225.9 million of assets held for sale.
During the second quarter of 2016, as part of our closing process, we conducted our quarterly review of our portfolio for
indicators of impairment considering the refined investment strategy of our then newly-appointed Chief Executive Officer and
the goals of the asset sales program and concluded that we would: (1) not hold our operating properties in Aberdeen; (2) not
develop commercial properties on land in Frederick, Maryland; (3) sell specific properties in our Northern Virginia Defense/IT
and Fort Meade/BW Corridor sub-segments; and (4) sell the remaining operating property in Greater Philadelphia that had not
previously been classified as held for sale. Accordingly, we performed recoverability analyses for each of these properties and
recorded the following impairment losses:
•
•
•
•
$34.4 million on operating properties in Aberdeen. After shortening our estimated holding period for these properties, we
determined that the carrying amount of the properties would not likely be recovered from the operation and eventual
dispositions of the properties during the shortened holding period. Accordingly, we adjusted the properties to their
estimated fair values;
$4.4 million on land in Aberdeen. In performing our analysis related to the operating properties in Aberdeen, we
determined that the weakening leasing and overall commercial real estate conditions in that market indicated that our land
holdings in the market may be impaired. As a result, we determined that the carrying amount of the land was not
recoverable and adjusted the land to its estimated fair value;
$8.2 million on land in Frederick, Maryland. We determined that the carrying amount of the land would not likely be
recovered from its sale and adjusted the land to its estimated fair value;
$14.1 million on operating properties in our Northern Virginia and Fort Meade/BW Corridor sub-segments that we
reclassified to held for sale during the period whose carrying amounts exceeded their estimated fair values less costs to sell;
F-33
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
•
•
$6.2 million on the property in Greater Philadelphia that we reclassified to held for sale during the period and adjusted to
fair value less costs to sell; and
$2.4 million primarily on land in Colorado Springs and operating properties in White Marsh (included in our Regional
Office Segment) classified as held for sale whose carrying amounts exceeded their estimated fair values less costs to sell
based on updated negotiations with prospective buyers.
There were no property sales in the second quarter of 2016 and as of June 30, 2016, we had $300.6 million of assets held for
sale.
During the third quarter of 2016, as part of our closing process, we conducted our quarterly review of our portfolio for
indicators of impairment considering refinements to our disposition strategy made during the third quarter of 2016 to sell an
additional operating property in our Northern Virginia Defense/IT sub-segment, an additional operating property in our Fort
Meade/BW Corridor sub-segment and our remaining operating properties and land in White Marsh that had not previously been
classified as held for sale. In connection with our determinations that we planned to sell these properties, we performed
recoverability analyses for each of these properties and recorded the following impairment losses:
•
•
$13.3 million on the operating property in our Northern Virginia Defense/IT sub-segment. Communication with a major
tenant in the building during the quarter led us to conclude that there was significant uncertainty with respect to the tenant
renewing its lease expiring in 2019. As a result of this information and continuing sub-market weakness, we determined
that this property no longer met our long-term hold strategy and we placed it into our asset sales program. Accordingly, we
adjusted the carrying amount of the property to its estimated fair value less costs to sell; and
$2.9 million on the other properties that we reclassified as held for sale, primarily associated with a land parcel in White
Marsh. As of June 30, 2016, this land was under a sales contract subject to a re-zoning contingency. During the third
quarter, we were denied favorable re-zoning and the contract was canceled. As a result, we determined this property will
be sold as is, reclassified it to held for sale and adjusted its carrying value to its estimated fair value less costs to sell.
During our review we also recognized additional impairment losses of $11.5 million on properties previously classified as held
for sale. Approximately $10.0 million of these losses pertained to properties in White Marsh due to our assessment that certain
significant tenants will likely exercise lease termination rights and to reflect market conditions. The remainder of these losses
pertained primarily to properties in San Antonio, Texas (included in our Other segment), where prospective purchasers reduced
offering prices late in the third quarter. We executed property sales of $210.7 million in the third quarter of 2016 (discussed
further in Note 5), and had $161.5 million of assets held for sale as of September 30, 2016.
We executed property sales of $54.1 million in the fourth quarter of 2016 (discussed further in Note 5), and had $94.7
million of assets held for sale as of December 31, 2016. As part of our closing process for the fourth quarter, we conducted our
quarterly review of our portfolio for indicators of impairment and found there to be no impairment losses for the quarter other
than additional impairment losses of $1.3 million on properties previously classified as held for sale in White Marsh, where
prospective purchasers reduced offering prices, and $0.3 million of losses on properties that were sold during the period.
Changes in the expected future cash flows due to changes in our plans for specific properties (especially our expected
holding period) could result in the recognition of additional impairment losses. In addition, because properties held for sale are
carried at the lower of carrying value or estimated fair values less costs to sell, declines in their estimated fair values due to
market conditions and other factors could result in the recognition of additional impairment losses.
F-34
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
2015 Nonrecurring Fair Value Measurements
In 2015, we recognized the following impairment losses resulting from nonrecurring fair value measurements:
•
•
•
•
$12.8 million on land in Colorado Springs. We classified some of this land as held for sale in the fourth quarter of 2015, at
which time we adjusted the land to its estimated fair value less costs to sell. Due to the impairment loss on the land held
for sale, we updated our estimates of fair value for other land owned in Colorado Springs and determined that the carrying
value of some of this land exceeded such land’s estimated fair value, which resulted in recognition of an additional
impairment loss;
$6.6 million on land in Aberdeen. After concluding during the fourth quarter that we no longer expected to develop
operating properties on the land, we determined that the carrying amount of the land would not likely be recovered from
the sale of this property over the likely remaining holding period. Accordingly, we adjusted the land to its estimated fair
value;
$2.6 million on operating properties in White Marsh (included in our Regional Office segment) that we decided to sell and
whose carrying amounts exceeded their estimated fair values less costs to sell. These properties were reclassified as held
for sale during the year; and
$1.3 million on an operating property in Northern Virginia (included in our Regional Office segment) that we sold on July
27, 2015 following receipt of an unsolicited offer. This property’s carrying value exceeded its fair value less costs to sell.
4.
Concentration of Revenue
A large concentration of our revenue from real estate operations was earned from our largest tenant, the United States
Government, including 22% of our rental revenue in 2017, 21% in 2016 and 20% in 2015 (continuing and discontinued
operations, and excluding tenant recoveries and other real estate operations revenue). Our rental revenue from the United
States Government was earned primarily from properties in the Fort Meade/BW Corridor, Lackland Air Force Base and Navy
Support Locations business sub-segments (see Note 17). No other individual tenants accounted for 10% or more of our revenue
from real estate operations. We also derived more than 80% of our construction contract revenue from the United States
Government in 2017, 2016 and 2015.
We derived large concentrations of our revenue from real estate operations from certain business segments as set forth in
Note 17.
5.
Properties, Net
Operating properties, net consisted of the following (in thousands):
Land
Buildings and improvements
Less: Accumulated depreciation
Operating properties, net
December 31,
$
2017
455,680
3,068,124
(786,193)
$ 2,737,611
$
2016
433,311
2,944,905
(706,385)
$ 2,671,831
F-35
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Projects we had in development or held for future development consisted of the following (in thousands):
Land
Development in progress, excluding land
Projects in development or held for future development
Our properties held for sale included:
December 31,
2017
240,825
162,669
403,494
$
$
2016
195,521
206,010
401,531
$
$
•
•
as of December 31, 2017: 11751 Meadowville Lane, a property in our Data Center Shells sub-segment, the sale of which
was not recognized for accounting purposes, as discussed below; and
as of December 31, 2016: eight operating properties in White Marsh (included primarily in our Regional Office segment);
one operating property in our Northern Virginia Defense/IT sub-segment; and land in White Marsh and Northern Virginia.
The table below sets forth the components of assets held for sale (in thousands):
Properties, net
Deferred rent receivable
Intangible assets on real estate acquisitions, net
Deferred leasing costs, net
Lease incentives, net
Assets held for sale, net
2017 Dispositions
December 31,
2017
2016
$
$
38,670
3,237
—
319
—
42,226
$
$
85,402
4,241
338
3,636
1,037
94,654
In 2017, we sold the following operating properties (dollars in thousands):
Project Name
3120 Fairview Park Drive
City, State
Falls Church,
VA
1334 Ashton Road
Hanover, MD
Remaining White Marsh
Properties (1)
201 Technology Drive
White Marsh,
MD
Lebanon, VA
7320 Parkway Drive
Hanover, MD
Segment
Northern
Virginia
Defense/IT
Fort Meade/
BW Corridor
Regional Office
and Other
Data Center
Shells
Fort Meade/
BW Corridor
(1) This sale also included land.
Gain on
Sale
—
—
Date of Sale
2/15/2017
Number
of
Buildings
1
Total
Rentable
Square Feet
190,000
Transaction
Value
$ 39,000
$
6/9/2017
7/28/2017
10/27/2017
12/15/2017
1
8
1
1
37,000
2,300
412,000
47,500
1,180
103,000
29,500
3,625
57,000
7,529
831
12
799,000
$ 125,829
$
5,636
F-36
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
We also sold:
•
•
11751 Meadowville Lane, an operating property totaling 193,000 square feet in Chester, Virginia (in our Data Center Shells
sub-segment), for $44.0 million on October 27, 2017. We provided a financial guaranty to the buyer under which we
provided an indemnification for up to $20 million in losses it could incur related to a potential defined capital event
occurring on the property by June 30, 2019. We accounted for this transaction as a financing arrangement. Accordingly,
we did not recognize the sale of this property for accounting purposes (and will not until the guaranty expires) and we
reported the sales proceeds as a liability on the balance sheet as of December 31, 2017 on the line entitled deferred property
sale. In addition, we reported this property as held for sale as of December 31, 2017. We do not expect to incur any losses
under this financial guaranty; and
other land for $14.3 million and recognized a gain on sale of $4.2 million.
2017 Construction Activities
In 2017, we placed into service 1.1 million square feet in eight newly constructed properties (including a partially
operational property) and 94,000 square feet in three redeveloped properties. As of December 31, 2017, we had nine properties
under construction, or for which we were contractually committed to construct, that we estimate will total 1.1 million square
feet upon completion (including a partially operational property and two properties completed and held for future lease to the
United States Government) and one partially operational property under redevelopment that we estimate will total 22,000
square feet upon completion.
2016 Dispositions
In 2016, we sold the following operating properties (dollars in thousands):
Project Name
Arborcrest Corporate
Campus (1)
8003 Corporate Drive
1341 & 1343 Ashton Road
8007, 8013, 8015, 8019 and
8023-8027 Corporate
Drive (1)
1302, 1304 and 1306
Concourse Drive
City, State
Philadelphia,
PA
White Marsh,
MD
Hanover, MD
White Marsh,
MD
Linthicum, MD
2900 Towerview Road
Herndon, VA
4940 Campbell Boulevard
1560 A and B Cable Ranch
Road
1331 Ashton Road
White Marsh,
MD
San Antonio,
TX
Hanover, MD
900 Elkridge Landing Road
Linthicum, MD
Segment
Regional Office
Date of Sale
8/4/2016
Regional Office
8/17/2016
Fort Meade/
BW Corridor
9/9/2016
Regional Office
9/21/2016
Fort Meade/
BW Corridor
Northern
Virginia
Defense/IT
9/29/2016
10/19/2016
Regional Office
11/17/2016
Other
11/30/2016
Fort Meade/
BW Corridor
Fort Meade/
BW Corridor
12/19/2016
12/22/2016
(1) This sale also included land.
Number
of
Buildings
4
Total
Rentable
Square Feet
654,000
Transaction
Value
$ 142,800
Gain on
Sale
$
4,742
1
2
5
3
1
1
2
1
1
18,000
25,000
2,400
2,900
—
848
130,000
14,513
1,906
299,000
48,100
8,375
151,000
12,100
50,000
5,200
120,000
10,300
29,000
101,000
2,625
7,800
—
—
—
—
—
21
1,577,000
$ 248,738
$
15,871
F-37
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
We also sold:
•
•
a 50% interest in six triple-net leased, single-tenant data center properties in Virginia by contributing them into a newly-
formed joint venture, GI-COPT DC Partnership LLC (“GI-COPT”), for an aggregate property value of $147.6 million on
July 21, 2016. We obtained $60.0 million in non-recourse mortgage loans on the properties through the joint venture
immediately prior to the sale of our interest and received the net proceeds. Our partner in the joint venture acquired the
50% interest in the joint venture from us for $44.3 million. We account for our 50% interest in the joint venture using the
equity method of accounting as described further in Note 6. We recognized a gain on the sale of our interest of $17.9
million; and
other land for $21.8 million and recognized a gain on sale of $7.2 million.
2016 Construction Activities
In 2016, we placed into service 639,000 square feet in six newly constructed properties and 61,000 square feet in three
redeveloped properties.
2015 Acquisitions
In 2015, we acquired the following operating properties:
•
•
•
250 W. Pratt Street, a 367,000 square foot office property in Baltimore, Maryland (included in our Regional Office
segment) that was 96.2% leased, for $61.8 million on March 19, 2015;
2600 Park Tower Drive, a 237,000 square foot office property in Vienna, Virginia (included in our Northern Virginia
Defense/IT segment) that was 100% leased, for $80.5 million on April 15, 2015; and
100 Light Street, a 558,000 square foot office property in Baltimore, Maryland (included in our Regional Office segment)
that was 93.5% leased, and its structured parking garage, 30 Light Street, for $121.2 million on August 7, 2015. In
connection with that acquisition, we assumed a $55.0 million mortgage loan with a fair value at assumption of $55.5
million.
The table below sets forth the allocation of the aggregate purchase price of these properties to the value of the acquired assets
and liabilities (in thousands):
Land, operating properties
Building and improvements
Intangible assets on real estate acquisitions
Total assets
Below-market leases
Total acquisition cost
$
55,076
139,540
75,729
270,345
(6,808)
$ 263,537
Intangible assets recorded in connection with these acquisitions included the following (dollars in thousands):
Tenant relationship value
In-place lease value
Above-market leases
Below-market cost arrangements
These properties contributed:
Weighted
Average
Amortization
Period (in Years)
12
7
4
40
10
$
$
31,183
35,139
6,720
2,687
75,729
•
•
revenues of $38.1 million in 2017, $36.9 million in 2016 and $20.2 million in 2015; and
net income from continuing operations of $1.9 million in 2017, $2.2 million in 2016 and $1.2 million in 2015.
F-38
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
We expensed operating property acquisition costs of $4.1 million in 2015 that were included in business development expenses
and land carry costs on our consolidated statements of operations.
We accounted for these acquisitions as business combinations. We included the results of operations for the acquisitions in
our consolidated statements of operations from their respective purchase dates through December 31, 2017. The following
table presents pro forma information for COPT and subsidiaries as if these acquisitions had occurred on January 1, 2014. This
pro forma information also includes adjustments to reclassify the operating property acquisition costs disclosed above to the
year ended December 31, 2014 from the 2015 periods in which they were actually incurred. The pro forma financial
information was prepared for comparative purposes only and is not necessarily indicative of what would have occurred had
these acquisitions been made at that time or of results which may occur in the future (in thousands, except per shares amounts).
Pro forma total revenues
Pro forma net income attributable to COPT common shareholders
Pro forma EPS:
Basic
Diluted
2015 Dispositions
For the Year
Ended
December 31,
2015
(Unaudited)
641,982
167,079
1.77
1.77
$
$
$
$
In 2015, we completed dispositions of the following operating properties (dollars in thousands):
Project Name
1550 Westbranch Drive
15000 and 15010 Conference
City, State
McLean, VA
Chantilly, VA
Center Drive
Segment
Regional Office
Northern
Virginia
Defense/IT
Date of
Disposition
7/27/2015
8/28/2015
Number
of
Buildings
1
2
Total
Rentable
Square Feet
160,000
665,000
Transaction
Value (1)
$
27,800
167,335
Gain on
Disposition
—
$
—
13200 Woodland Park Road
9900, 9910 and 9920
Franklin Square Drive
Herndon, VA
White Marsh,
MD
Regional Office
Regional Office
10/27/2015
11/9/2015
9690 Deereco Road and 375
Timonium, MD Regional Office
12/17/2015
W. Padonia Road
1
3
2
9
397,000
135,000
84,000
24,150
42,515
6,468
240,000
44,500
15,050
1,597,000
$ 347,785
$
64,033
(1) Each of these properties were sold except for 15000 and 15010 Conference Center Drive, the disposition of which was completed in
connection with a debt extinguishment, as discussed further below.
We also sold land in 2015 for $18.1 million and recognized gains of $4.0 million on the sales.
On August 28, 2015, ownership in 15000 and 15010 Conference Center Drive was transferred to the mortgage lender on a
$150.0 million nonrecourse mortgage loan that was secured by the properties and we removed the debt obligation and accrued
interest from our balance sheet. Upon completion of this transfer, we recognized a gain on early extinguishment of debt of
$84.8 million, representing the difference between the mortgage loan and accrued interest payable extinguished over the
carrying value of the properties transferred as of the transfer date and related closing costs.
2015 Construction Activities
In 2015, we placed into service 897,000 square feet in seven newly constructed properties and 170,000 square feet in two
redeveloped properties.
F-39
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
6.
Real Estate Joint Ventures
Consolidated Real Estate Joint Ventures
We consolidate the real estate joint ventures described below because of our: (1) power to direct the matters that most
significantly impact their activities, including development, leasing and management of the properties constructed by the VIEs;
and (2) right to receive returns on our fundings and, in many cases, the obligation to fund the activities of the ventures to the
extent that third-party financing is not obtained, both of which could be potentially significant to the VIEs.
The table below sets forth information pertaining to our investments in consolidated real estate joint ventures as of
December 31, 2017 (dollars in thousands):
Date
Acquired
LW Redstone Company, LLC 3/23/2010
Nominal
Ownership
% as of
12/31/2017
85%
M Square Associates, LLC
Stevens Investors, LLC
6/26/2007
8/11/2015
50%
95%
Nature of Activity
Development and operation of real estate (2)
Development and operation of real estate (3)
Development of real estate (4)
(1) Excludes amounts eliminated in consolidation.
(2) This joint venture’s properties are in Huntsville, Alabama.
(3) This joint venture’s properties are in College Park, Maryland.
(4) This joint venture’s property is in Washington, DC.
December 31, 2017 (1)
Encumbered
Assets
$
75,569
45,384
—
Total
Liabilities
51,180
$
45,745
19,905
Total
Assets
$ 158,891
73,116
71,976
$ 303,983
$
120,953
$ 116,830
In January 2016, our partner in Stevens Investors, LLC contributed to the joint venture, for a value of $22.6 million,
interests in contracts controlling land to be developed (including a purchase agreement and a ground lease). Our partner
subsequently received cash distributions from the joint venture that we funded of $6.7 million in 2017 and $13.4 million in
2016.
With regard to our consolidated joint ventures:
•
•
•
For LW Redstone, LLC, we anticipate funding certain infrastructure costs (up to a maximum of $76.0 million excluding
accrued interest thereon) due to be reimbursed by the City of Huntsville as discussed further in Note 8. As of
December 31, 2017, we had advanced $37.8 million to the City to fund such costs. We also expect to fund additional
development and construction costs through equity contributions to the extent that third party financing is not obtained.
Our partner was credited with a $9.0 million capital account upon formation and is not required to make any future equity
contributions. While net cash flow distributions to the partners vary depending on the source of the funds distributed, cash
flows are generally distributed as follows:
•
cumulative preferred returns on capital invested to fund the project’s infrastructure costs on a pro rata basis to us and
our partner;
cumulative preferred returns on our capital invested to fund the project’s vertical construction;
return of our invested capital;
return of our partner’s capital;
any remaining residual 85% to us and 15% to our partner.
•
•
•
•
Our partner has the right to require us to acquire its interest for fair value beginning in March 2020; accordingly, we
classify the fair value of our partner’s interest as redeemable noncontrolling interests in the mezzanine section of our
consolidated balance sheets. We have the right to purchase our partner’s interest at fair value upon the earlier of five years
following the project’s achievement of a construction commencement threshold of 4.4 million square feet or March 2040;
the project had achieved 674,000 square feet of construction commencement through December 31, 2017;
For M Square Associates, LLC, net cash flows of this entity will be distributed to the partners as follows: (1) member loans
and accrued interest; (2) our preferred return and capital contributions used to fund infrastructure costs; (3) the partners’
preferred returns and capital contributions used to fund all other costs, including the base land value credit, in proportion to
the accrued returns and capital accounts; and (4) residual amounts distributed 50% to each member.
For Stevens Investors, LLC, net cash flows of this entity will be distributed to the partners as follows: (1) member loans
and accrued interest; (2) pro rata return of the partners’ capital; (3) pro rata return of the partners’ respective unpaid
preferred returns; and (4) varying splits of 85% to 60% to us and the balance to our partners as we reach specified return
hurdles. Our partners have the right to require us to acquire some or all of their interests for fair value for a defined period
F-40
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
of time following the construction completion and stabilization (as defined in the operating agreement) of the joint
venture’s office property; accordingly, we classify the fair value of our partners’ interest as redeemable noncontrolling
interests in the mezzanine section of our consolidated balance sheets. Our partners have the right to receive some or all of
the consideration for the acquisition of their interests in the form of common units in COPLP.
We disclose the activity of our redeemable noncontrolling interests in Note 12.
The ventures discussed above include only ones in which parties other than COPLP and COPT own interests. Our
commitments and contingencies pertaining to our real estate joint ventures are disclosed in Note 19.
Unconsolidated Real Estate Joint Venture
As described further in Note 5, on July 21, 2016, we sold a 50% interest in six triple-net leased, single-tenant data center
properties in Virginia by contributing them into GI-COPT, a newly-formed joint venture. We account for our 50% interest in
the joint venture using the equity method of accounting. We had an investment balance in GI-COPT of $25.1 million as of
December 31, 2017 and $25.5 million as of December 31, 2016. Our balance was lower than our share of the joint venture’s
equity by $16.7 million as of December 31, 2017 and $18.1 million as of December 31, 2016 due to a difference between our
cost basis and our share of the underlying equity in the net assets upon formation of the joint venture. In 2016 and 2017, we
amortized this basis difference into equity in income from unconsolidated entities based on the lives of the underlying assets.
In connection with our adoption of guidance pertaining to the accounting for partial sales of nonfinancial assets using the full
retrospective method, effective January 1, 2018, we will retrospectively restate each reporting period presented to: fully
recognize in 2016 the difference between our cost basis and our share of the underlying equity in the net assets upon formation
of the joint venture; and remove the amortization of this basis difference into equity in income from consolidated entities that
we recognized in 2016 and 2017.
Under the terms of the joint venture agreement, we and our partner receive returns in proportion to our investments in the
joint venture.
7.
Intangible Assets on Real Estate Acquisitions
Intangible assets on real estate acquisitions consisted of the following (in thousands):
In-place lease value
Tenant relationship value
Below-market cost arrangements
Above-market leases
Other
December 31, 2017
December 31, 2016
Gross
Carrying
Amount
132,276
60,028
15,102
13,944
1,333
222,683
$
$
Accumulated
Amortization
110,814
$
32,198
7,507
12,092
980
163,591
$
Net
Carrying
Amount
Gross
Carrying
Amount
$
$
21,462
27,830
7,595
1,852
353
59,092
$
$
132,647
60,028
15,102
13,944
1,333
223,054
Accumulated
Amortization
99,940
$
26,253
7,285
10,259
966
144,703
$
Net
Carrying
Amount
$
$
32,707
33,775
7,817
3,685
367
78,351
Amortization of the intangible asset categories set forth above totaled $19.3 million in 2017, $20.0 million in 2016 and $18.5
million in 2015. The approximate weighted average amortization periods of the categories set forth above follow: in-place
lease value: six years; tenant relationship value: eight years; below-market cost arrangements: 34 years; above-market leases:
three years; and other: 25 years. The approximate weighted average amortization period for all of the categories combined is 11
years. The estimated amortization (to amortization associated with real estate operations, rental revenue and property operating
expenses) associated with the intangible asset categories set forth above for the next five years is: $14.5 million for 2018; $8.1
million for 2019; $5.7 million for 2020; $5.5 million for 2021; and $4.1 million for 2022.
F-41
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
8.
Investing Receivables
Investing receivables, including accrued interest thereon, consisted of the following (in thousands):
Notes receivable from City of Huntsville
Other investing loans receivable
December 31,
2017
54,472
3,021
57,493
$
$
2016
49,258
3,021
52,279
$
$
Our notes receivable from the City of Huntsville funded infrastructure costs in connection with our LW Redstone Company,
LLC joint venture (see Note 6) and carry an interest rate of 9.95%. These notes and the accrued and unpaid interest thereon,
which is compounded annually on March 1st, will be repaid using the real estate taxes generated by the properties constructed
by the joint venture. When these tax revenues are sufficient to cover the debt service on a certain increment of municipal
bonds, the City of Huntsville will be required to issue bonds to repay the notes receivable and the accrued and unpaid interest
thereon. Each note has a maturity date of the earlier of 30 years from the date issued or the expiration of the tax increment
district comprising the constructed properties in 2045.
We did not have an allowance for credit losses in connection with our investing receivables as of December 31, 2017 or
December 31, 2016. The fair value of these receivables approximated their carrying amounts as of December 31, 2017 and
December 31, 2016.
9.
Prepaid Expenses and Other Assets, Net
Prepaid expenses and other assets, net consisted of the following (in thousands):
Prepaid expenses
Lease incentives, net
Furniture, fixtures and equipment, net
Construction contract costs incurred in excess of billings
Interest rate derivatives
Non-real estate equity method investments
Deferred tax asset, net
Deferred financing costs, net (1)
Other assets
Prepaid expenses and other assets, net
December 31,
2017
24,670
19,011
5,256
4,884
3,073
2,412
1,892
1,202
4,821
67,221
$
$
2016
24,432
18,276
5,204
10,350
158
2,355
3,036
3,128
5,825
72,764
$
$
(1) Represents deferred costs, net of accumulated amortization, attributable to our Revolving Credit Facility and interest rate derivatives.
Deferred tax asset, net reported above includes the following tax effects of temporary differences and carry forwards of our
TRS (in thousands):
Operating loss carry forward
Share-based compensation
Accrued payroll
Property
Valuation allowance
Deferred tax asset, net
December 31,
2017
2016
$
$
3,209
7
49
43
(1,416)
1,892
$
$
5,084
13
101
(100)
(2,062)
3,036
We recognize a valuation allowance on our deferred tax asset if we believe all or some portion of the asset may not be realized.
An increase or decrease in the valuation allowance resulting from a change in circumstances that causes a change in our
F-42
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
judgment about the realizability of our deferred tax asset is included in income. The deferred tax asset valuation allowance is
due to a decrease in future projected operating income in our TRS resulting primarily from our dispositions of certain properties
to which the TRS provided amenity services and our planned reduction in amenity services provided by the TRS at certain other
properties. We believe it is more likely than not that the results of future operations in our TRS will generate sufficient taxable
income to realize our December 31, 2017 net deferred tax asset.
10.
Debt, Net
Debt Summary
Our debt consisted of the following (dollars in thousands):
Carrying Value (1) as of
December 31,
2017
December 31,
2016
Stated Interest Rates as of
Scheduled Maturity as of
December 31, 2017
December 31, 2017
Mortgage and Other Secured Debt:
Fixed rate mortgage debt (2)
$
150,723
$
154,143
3.82% - 7.87% (3)
Variable rate secured loans
Total mortgage and other secured debt
Revolving Credit Facility (5)
Term Loan Facilities (6)
Unsecured Senior Notes (5)
3.600%, $350,000 aggregate principal
5.250%, $250,000 aggregate principal
3.700%, $300,000 aggregate principal
5.000%, $300,000 aggregate principal
Unsecured note payable
Total debt, net
13,115
163,838
126,000
347,959
347,551
246,645
298,322
296,731
1,287
2019-2026
October 2020
13,448
167,591
LIBOR + 1.85% (4)
— LIBOR + 0.875% to 1.60%
547,494
LIBOR + 0.90% to 1.85% (7)
May 2019
2020-2022
347,128
246,176
297,843
296,368
1,401
3.60% (8)
5.25% (9)
3.70% (10)
5.00% (11)
0% (12)
May 2023
February 2024
June 2021
July 2025
May 2026
$
1,828,333
$
1,904,001
(1) The carrying values of our debt other than the Revolving Credit Facility reflect net deferred financing costs of $5.0 million as of
December 31, 2017 and $6.1 million as of December 31, 2016.
(2) Certain of the fixed rate mortgages carry interest rates that, upon assumption, were above or below market rates and therefore were
recorded at their fair value based on applicable effective interest rates. The carrying values of these loans reflect net unamortized
premiums totaling $349,000 as of December 31, 2017 and $422,000 as of December 31, 2016.
(3) The weighted average interest rate on our fixed rate mortgage debt was 4.19% as of December 31, 2017.
(4) The interest rate on our variable rate secured debt was 3.21% as of December 31, 2017.
(5) Refer to the paragraphs below for further disclosure.
(6) As discussed below, we have the ability to borrow an additional $350.0 million in the aggregate under these term loan facilities, provided
that there is no default under the facilities and subject to the approval of the lenders.
(7) The weighted average interest rate on these loans was 2.73% as of December 31, 2017.
(8) The carrying value of these notes reflects an unamortized discount totaling $1.7 million as of December 31, 2017 and $2.0 million as of
December 31, 2016. The effective interest rate under the notes, including amortization of the issuance costs, was 3.70%.
(9) The carrying value of these notes reflects an unamortized discount totaling $3.0 million as of December 31, 2017 and $3.4 million as of
December 31, 2016. The effective interest rate under the notes, including amortization of the issuance costs, was 5.49%.
(10) The carrying value of these notes reflects an unamortized discount totaling $1.3 million as of December 31, 2017 and $1.7 million as of
December 31, 2016. The effective interest rate under the notes, including amortization of the issuance costs, was 3.85%.
(11) Refer to the paragraphs below for further disclosure.
(12) This note carries an interest rate that, upon assumption, was below market rates and it therefore was recorded at its fair value based on
applicable effective interest rates. The carrying value of this note reflects an unamortized discount totaling $373,000 as of December 31,
2017 and $460,000 as of December 31, 2016.
All debt is owed by the Operating Partnership. While COPT is not directly obligated by any debt, it has guaranteed the
Operating Partnership’s Revolving Credit Facility, Term Loan Facilities and Unsecured Senior Notes.
Certain of our debt instruments require that we comply with a number of restrictive financial covenants, including
maximum leverage ratio, unencumbered leverage ratio, minimum net worth, minimum fixed charge coverage, minimum
unencumbered interest coverage ratio, minimum debt service and maximum secured indebtedness ratio. In addition, the terms
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Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
of some of COPLP’s debt may limit its ability to make certain types of payments and other distributions to COPT in the event
of default or when such payments or distributions may prompt failure of debt covenants. As of December 31, 2017, we were
within the compliance requirements of these financial covenants.
Our debt matures on the following schedule (in thousands):
2018
2019
2020
2021
2022
Thereafter
Total
$
$
4,241
130,387
116,156
303,875
254,033
1,033,475
1,842,167 (1)
(1) Represents scheduled principal amortization and maturities only and therefore excludes net discounts and deferred financing costs of
$13.8 million.
We capitalized interest costs of $5.2 million in 2017, $5.7 million in 2016 and $7.2 million in 2015.
The following table sets forth information pertaining to the fair value of our debt (in thousands):
Fixed-rate debt
Unsecured Senior Notes
Other fixed-rate debt
Variable-rate debt
Revolving Credit Facility
December 31, 2017
December 31, 2016
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
$
$
1,189,249
152,010
487,074
1,828,333
$
$
1,229,398
152,485
485,694
1,867,577
$
$
1,187,515
155,544
560,942
1,904,001
$
$
1,220,282
156,887
558,437
1,935,606
On May 6, 2015, we entered into a credit agreement with a group of lenders for which KeyBanc Capital Markets and J.P.
Morgan Securities LLC acted as joint lead arrangers and joint book runners, KeyBank National Association acted as
administrative agent and JPMorgan Chase Bank, N.A. acted as syndication agent (the “Consolidated Credit Agreement”) to
amend, restate and consolidate the terms of our existing unsecured revolving credit facility (the “Revolving Credit Facility”)
and one of our term loan facilities discussed below. The lenders’ aggregate commitment under the Revolving Credit Facility is
$800.0 million, with the ability for us to increase the lenders’ aggregate commitment to $1.3 billion, provided that there is no
default under the facility and subject to the approval of the lenders. The facility matures on May 6, 2019, with the ability for us
to further extend such maturity by two six-month periods at our option, provided that there is no default under the facility and
we pay an extension fee of 0.075% of the total availability under the facility for each extension period. The interest rate on the
facility is based on LIBOR (customarily the 30-day rate) plus 0.875% to 1.600%, as determined by the credit ratings assigned to
COPLP by Standard & Poor’s Rating Services, Moody’s Investors Services, Inc. or Fitch Ratings Ltd. (collectively, the
“Ratings Agencies”). The facility also carries a quarterly fee that is based on the lenders’ aggregate commitment under the
facility multiplied by a per annum rate of 0.125% to 0.300%, as determined by the credit ratings assigned to COPLP by the
Ratings Agencies. As of December 31, 2017, the maximum borrowing capacity under this facility totaled $800.0 million, of
which $674.0 million was available.
Weighted average borrowings under our Revolving Credit Facility totaled $97.8 million in 2017 and $90.3 million in 2016.
The weighted average interest rate on our Revolving Credit Facility was 2.44% in 2017 and 1.64% in 2016.
Term Loan Facilities
Effective February 14, 2012, we entered into an unsecured term loan agreement under which we borrowed $250.0 million.
In connection with our entry into the Consolidated Credit Agreement on May 6, 2015 discussed above, we increased the loan
amount to $300.0 million, with a right for us to borrow up to an additional $200.0 million during the term, subject to certain
F-44
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
conditions. We repaid this term loan by $200.0 million in May 2017. The term loan matures on May 6, 2020, and carries a
variable interest rate based on the LIBOR rate (customarily the 30-day rate) plus 0.90% to 1.85%, as determined by the credit
ratings assigned to COPLP by the Ratings Agencies.
Effective December 17, 2015, we entered into an unsecured term loan agreement with an initial commitment of $250.0
million; we borrowed $100.0 million under this loan on December 17, 2015 and $150.0 million on December 28, 2016. We
also have the ability to borrow $150.0 million above the initial commitment, provided that there is no default under the loan and
subject to the approval of the lenders. The term loan matures on December 17, 2022, and carries a variable interest rate based
on the LIBOR rate (customarily the 30-day rate) plus 0.90% to 1.75%, as determined by the credit ratings assigned to COPLP
by the Ratings Agencies.
In addition to the term loans discussed above, we also had the following term loans that were repaid prior to December 31,
2017:
•
•
for a term loan originating in 2012, we repaid the remaining balance of $120.0 million in 2016; and
for a term loan originating in 2011, we repaid the remaining balance of $150.0 million in 2015.
Unsecured Senior Notes
On June 29, 2015, we issued $300.0 million of 5.000% Senior Notes at an initial offering price of 99.510% of their face
value, resulting in proceeds, after deducting underwriting discounts, but before other offering expenses of $296.6 million. The
carrying value of these notes reflects an unamortized discount totaling $2.7 million at December 31, 2017 and $3.0 million as of
December 31, 2016. The effective interest rate under the notes, including amortization of the issuance costs, was 5.15%.
We may redeem our unsecured senior notes, in whole at any time or in part from time to time, at our option, at a
redemption price equal to the greater of (1) the aggregate principal amount of the notes being redeemed or (2) the sum of the
present values of the remaining scheduled payments of principal and interest thereon (not including any portion of such
payments of interest accrued as of the date of redemption) discounted to its present value, on a semi-annual basis at an adjusted
treasury rate plus a spread (30 basis points for the 3.600% Senior Notes, 40 basis points for the 5.250% Senior Notes, 25 basis
points for the 3.700% Senior Notes and 45 basis points for the 5.000% Senior Notes), plus, in each case, accrued and unpaid
interest thereon to the date of redemption. However, in each case, if this redemption occurs on or after three months prior to the
maturity date, the redemption price will be equal to 100% of the principal amount of the notes being redeemed, plus accrued
and unpaid interest thereon to, but not including, the applicable redemption date. These notes are unconditionally guaranteed
by COPT.
(Losses) Gains on Early Extinguishment of Debt
Our (losses) gains on early extinguishment of debt included a gain of $84.8 million on August 28, 2015 pertaining to the
removal of a $150.0 million nonrecourse mortgage loan from our balance sheet as discussed further in Note 5.
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Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
11.
Interest Rate Derivatives
The following table sets forth the key terms and fair values of our interest rate swap derivatives, each of which was
designated as a cash flow hedge (dollars in thousands):
$
Notional
Amount
100,000
13,217 (1)
100,000
100,000
50,000
100,000 (2)
Fixed Rate
Floating Rate Index
Effective
Date
1.7300% One-Month LIBOR
9/1/2015
1.3900% One-Month LIBOR 10/13/2015
9/1/2016
1.9013% One-Month LIBOR
9/1/2016
1.9050% One-Month LIBOR
9/1/2016
1.9079% One-Month LIBOR
9/1/2015
1.6730% One-Month LIBOR
Expiration
Date
8/1/2019
10/1/2020
12/1/2022
12/1/2022
12/1/2022
8/1/2019
$
$
Fair Value at
December 31,
2017
2016
252
213
1,046
1,051
511
—
3,073
$
$
(848)
100
(23)
48
10
(701)
(1,414)
(1) The notional amount of this instrument is scheduled to amortize to $12.1 million.
(2) We cash settled this derivative and interest accrued thereon for $460,000 on May 1, 2017. Since the hedged transactions associated
with this derivative were still probable to occur as of the settlement date, amounts in accumulated other comprehensive loss
(“AOCL”) associated with this derivative will be reclassified to interest expense through August 2019.
The table below sets forth the fair value of our interest rate derivatives as well as their classification on our consolidated
balance sheets (in thousands):
Derivatives
Interest rate swaps designated as cash flow hedges
Interest rate swaps designated as cash flow hedges
Balance Sheet Location
Prepaid expenses and
other assets
Other liabilities
Fair Value at
December 31,
2017
$ 3,073
2016
$
158
—
(1,572)
The table below presents the effect of our interest rate derivatives on our consolidated statements of operations and
comprehensive income (in thousands):
For the Years Ended December 31,
2016
2015
2017
Unrealized gain (loss) recognized in AOCL (effective portion)
Loss reclassified from AOCL into interest expense (effective
portion)
Gain (loss) on derivatives recognized in interest expense
(ineffective portion)
Loss reclassified from AOCL into interest expense (ineffective
portion) (1)
$
684
$
(2,915) $
(4,739)
(3,216)
(4,230)
(3,599)
323
(88)
378
—
(386)
—
(1) Represents a loss recognized on certain interest rate swaps from the accelerated reclassification of amounts in AOCL on May 1,
2017, when we concluded that hedged forecasted transactions were probable not to occur.
Over the next 12 months, we estimate that approximately $460,000 of losses will be reclassified from AOCL as an increase to
interest expense.
We have agreements with each of our interest rate derivative counterparties that contain provisions under which, if we
default or are capable of being declared in default on defined levels of our indebtedness, we could also be declared in default on
our derivative obligations. Failure to comply with the loan covenant provisions could result in our being declared in default on
any derivative instrument obligations covered by the agreements. We are not in default with any of these provisions. As of
December 31, 2017, we did not have any derivatives in liability positions. As of December 31, 2017, we had not posted any
collateral related to these agreements.
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Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
12.
Redeemable Noncontrolling Interests
As discussed further in Note 6, our partners in two real estate joint ventures, LW Redstone Company, LLC and Stevens
Investors, LLC, have the right to require us to acquire their respective interests at fair value; accordingly, we classify the fair
value of our partners’ interests as redeemable noncontrolling interests in the mezzanine section of our consolidated balance
sheets. The table below sets forth the activity in these redeemable noncontrolling interests (in thousands):
For the Years Ended December 31,
2016
2015
2017
Beginning balance
Contributions from noncontrolling interests
Distributions to noncontrolling interests
Net income attributable to noncontrolling interests
Adjustment to arrive at fair value of interests
Ending balance
$
$
22,979
—
(1,566)
2,338
(626)
23,125
$
$
19,218
22,779
(21,881)
2,242
621
22,979
$
$
18,417
1,654
(2,964)
2,227
(116)
19,218
We determine the fair value of these interests based on unobservable inputs after considering the assumptions that market
participants would make in pricing the interest. We apply a discount rate to the estimated future cash flows allocable to our
partners from the properties underlying the respective joint ventures. Estimated cash flows used in such analyses are based on
our plans for the properties and our views of market and economic conditions, and consider items such as current and future
rental rates, occupancies for the properties and comparable properties and estimated operating and capital expenditures.
13.
Equity - COPT and Subsidiaries
Preferred Shares
As of December 31, 2017, COPT had 25.0 million preferred shares authorized and unissued at $0.01 par value per share.
In 2017, COPT redeemed all of its outstanding preferred shares, including:
•
•
the 5.600% Series K Cumulative Redeemable Preferred Shares (the “Series K Preferred Shares”) redeemed effective
January 21, 2017 at a price of $50.00 per share, or $26.6 million in the aggregate, plus accrued and unpaid dividends
thereon through the date of redemption. Concurrently with this redemption, COPLP redeemed its Series K Preferred Units
on the same terms. Since we made an irrevocable notification to holders of the Series K Preferred Shares in December
2016 of our intention to redeem such shares, we presented the liquidation preference of the shares as a liability on COPT’s
consolidated balance sheet as of December 31, 2016; we also recognized a $17,000 decrease to net income available to
common shareholders in 2016 pertaining to the original issuance costs incurred on the shares. The liability associated with
these shares as of December 31, 2016 is classified in Level 2 of the fair value hierarchy; and
the 7.375% Series L Cumulative Preferred Shares (the “Series L Preferred Shares”) redeemed effective June 27, 2017 at a
price of $25.00 per share, or $172.5 million in the aggregate, plus accrued and unpaid dividends thereon up to but not
including the date of redemption. Concurrently with this redemption, COPLP redeemed its Series L Preferred Units on the
same terms. We also recognized a $6.8 million decrease to net income available to common shareholders in 2017
pertaining to the original issuance costs incurred on the shares.
Common Shares
In October 2012, COPT established an at-the-market (“ATM”) stock offering program under which it could, from time to
time, offer and sell common shares in “at the market” stock offerings having an aggregate gross sales price of up to $150.0
million. COPT issued 890,241 common shares under this program in 2015 at a weighted average price of $30.29 per share.
Net proceeds from the shares issued totaled $26.6 million, after payment of $0.4 million in commissions to sales agents; COPT
contributed the net proceeds from these issuances to COPLP in exchange for an equal number of units in COPLP. As discussed
below, this program was replaced by a new ATM program established in 2016.
In September 2016, COPT established a new ATM stock offering program under which it may, from time to time, offer and
sell common shares in “at the market” stock offerings having an aggregate gross sales price of up to $200.0 million. This
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Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
program replaced the ATM stock offering program that we previously had in place. COPT issued the following common shares
under this ATM program:
• 3.72 million common shares in the three months ended December 31, 2016 at a weighted average price of $29.56 per share.
Net proceeds from the shares issued totaled $109.1 million, after payment of $0.9 million in commissions to sales agents;
and
• 591,000 common shares in 2017 at a weighted average price of $33.84 per share. Net proceeds from the shares issued
totaled $19.7 million, after payment of $0.3 million in commissions to sales agents.
COPT contributed the net proceeds from these issuances to COPLP in exchange for an equal number of units in COPLP.
COPT’s remaining capacity under this ATM program as of December 31, 2017 was an aggregate gross sales price of $70.0
million in common share sales.
On November 2, 2017, COPT entered into forward equity sale agreements to issue 9.2 million common shares at an initial
gross offering price of $285.2 million, or $31.00 per share, before underwriting discounts, commissions and offering expenses.
The forward sale price that we expect to receive upon physical settlement of the agreements will be subject to adjustment on a
daily basis based on a floating interest rate factor equal to the overnight bank funding rate less a spread, and will be decreased
on each of certain dates specified in the agreements during the term of the agreements. On December 27, 2017, COPT issued
1.7 million common shares under the agreements for net proceeds of $50.0 million. COPT contributed the net proceeds from
these issuances to COPLP in exchange for an equal number of units in COPLP.
Holders of COPLP common units converted their units into COPT common shares on the basis of one common share for
each common unit in the amount of 339,513 in 2017, 87,000 in 2016 and 160,160 in 2015.
COPT declared dividends per common share of $1.10 in 2017, 2016 and 2015.
See Note 15 for disclosure of common share activity pertaining to our share-based compensation plans.
14.
Equity - COPLP and Subsidiaries
General Partner Preferred Units
In 2017, COPLP redeemed all of the outstanding units of the following series of preferred units held by COPT:
•
•
the 5.600% Series K Preferred Shares effective on January 21, 2017. Since notification of this redemption occurred in
December 2016, we present the liquidation preference of the related units as a liability on COPLP’s consolidated balance
sheet as of December 31, 2016; we also recognized at a price of $50.00 per unit, or $26.6 million in the aggregate, plus
accrued and unpaid distributions thereon through the date of redemption, and recognized a $17,000 decrease to net income
available to common unitholders pertaining to the units’ original issuance costs at the time of redemption; and
the 7.375% Series L Cumulative Preferred Units on June 27, 2017 at a price of $25.00 per unit, or $172.5 million in the
aggregate, plus accrued and unpaid distributions thereon through the date of redemption, and recognized a $6.8 million
decrease to net income available to common unitholders pertaining to the units’ original issuance costs at the time of
redemption.
With the completion of these redemptions in 2017, no preferred units in COPLP are held by COPT.
Limited Partner Preferred Units
COPLP has 352,000 Series I Preferred Units issued to an unrelated party that have an aggregate liquidation preference of
$8.8 million ($25.00 per unit), plus any accrued and unpaid distributions of return thereon (as described below), and may be
redeemed for cash by COPLP at COPLP’s option any time after September 22, 2019. The owner of these units is entitled to a
priority annual cumulative return equal to 7.5% of their liquidation preference through September 22, 2019; the annual
cumulative preferred return increases for each subsequent five-year period, subject to certain maximum limits. These units are
convertible into common units on the basis of 0.5 common units for each Series I Preferred Unit; the resulting common units
would then be exchangeable for COPT common shares in accordance with the terms of COPLP’s agreement of limited
partnership.
F-48
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Common Units
COPT owned 96.9% of COPLP’s common units as of December 31, 2017 and 96.5% as of December 31, 2016.
From 2015 through 2017, COPT acquired additional common units through the following common share issuances under
ATM programs:
•
•
•
591,042 common shares in 2017 at a weighted average price of $33.84 per share. Net proceeds from the shares issued
totaled $19.7 million, after payment of $0.3 million in commissions to sales agents;
3.72 million common shares issued in 2016 at a weighted average price of $29.56 per share. Net proceeds from the shares
issued totaled $109.1 million, after payment of $0.9 million in commissions to sales agents; and
890,241 common shares issued in 2015 at a weighted average price of $30.29 per share. Net proceeds from the shares
issued totaled $26.6 million, after payment of $0.4 million in commissions to sales agents.
In December 2017, COPT also acquired additional common units from COPT’s issuance of 1.7 million common shares under
its forward equity sale agreements for net proceeds of $50.0 million.
Limited partners in COPLP holding common units have the right to require COPLP to redeem all or a portion of their
common units. COPLP (or COPT as the general partner) has the right, in its sole discretion, to deliver to such redeeming
limited partners for each partnership unit either one COPT common share (subject to anti-dilution adjustment) or a cash
payment equal to the then fair market value of such share (so adjusted) (based on the formula for determining such value set
forth in the partnership agreement). Limited partners holding common units redeemed their units into common shares on the
basis of one common share for each common unit in the amount of 339,513 in 2017, 87,000 in 2016 and 160,160 in 2015.
We declared distributions per common unit of $1.10 in 2017, 2016 and 2015.
15.
Share-Based Compensation and Other Compensation Matters
Share-Based Compensation Plans
In May 2017, COPT adopted the 2017 Omnibus Equity and Incentive Plan following the approval of such plan by our
common shareholders. COPT may issue equity-based awards under this plan to officers, employees, non-employee trustees and
any other key persons of us and our subsidiaries, as defined in the plan. The plan provides for a maximum of 3.4 million
common shares in COPT to be issued in the form of options, share appreciation rights, restricted share unit awards, restricted
share awards, unrestricted share awards, dividend equivalent rights and other equity-based awards and for the granting of cash-
based awards. This plan expires on May 11, 2027.
In May 2010, COPT adopted the Amended and Restated 2008 Omnibus Equity and Incentive Plan following the approval
of such plan by our common shareholders. This plan, which was replaced by the 2017 Plan in May 2017, provided for the
award of options, share appreciation rights, deferred share awards, restricted share awards, unrestricted share awards,
performance shares, dividend equivalent rights and other equity-based awards and for the granting of cash-based awards.
In March 1998, COPT adopted a long-term incentive plan for our Trustees and employees following the approval of such
plan by our common shareholders. This plan, which expired in March 2008, provided for the award of options, restricted
shares and dividend equivalents.
Awards under these plans to nonemployee Trustees generally vest on the first anniversary of the grant date provided that
the Trustee remains in his or her position. Awards granted to employees vest based on increments and over periods of time set
forth under the terms of the respective awards provided that the employees remain employed by us. Options expire ten years
after the date of grant. Shares for each of the share-based compensation plans are issued under registration statements on Form
S-8 that became effective upon filing with the Securities and Exchange Commission. In connection with awards of common
shares granted by COPT under such share-based compensation plans, COPLP issues to COPT an equal number of equity
instruments with identical terms.
F-49
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The table below sets forth our reporting for share based compensation cost (in thousands):
General, administrative and leasing expenses
Property operating expenses
Capitalized to development activities
Share-based compensation cost
For the Years Ended December 31,
2017
2016
2015
$
$
4,649
966
480
6,095
$
$
5,816
1,027
610
7,453
$
$
5,574
1,000
824
7,398
The amounts included in our consolidated statements of operations for share-based compensation reflected an estimate of
pre-vesting forfeitures of 0% for PSUs and deferred share awards and 0% to 5% for restricted shares.
As of December 31, 2017, unrecognized compensation costs related to unvested awards included:
•
•
•
$8.1 million on restricted shares expected to be recognized over a weighted average period of approximately three years;
$1.3 million on PSUs expected to be recognized over a weighted average performance period of approximately two years
and
$120,000 on deferred share awards expected to be recognized through May 2018.
Our TRS is subject to Federal and state income taxes. We realized a windfall tax loss of $13,000 in 2017, $331,000 in
2016 and $513,000 in 2015 on options exercised and vesting restricted shares in connection with employees of that subsidiary.
Restricted Shares
The following table summarizes restricted shares under the share-based compensation plans for 2015, 2016 and 2017:
Unvested as of December 31, 2014
Granted
Forfeited
Vested
Unvested as of December 31, 2015
Granted
Forfeited
Vested
Unvested as of December 31, 2016
Granted
Forfeited
Vested
Unvested as of December 31, 2017
Unvested shares as of December 31,
2017 that are expected to vest
Weighted
Average
Grant Date
Fair Value
26.19
28.69
26.05
26.07
27.58
24.77
25.31
27.19
26.20
33.84
27.80
26.27
30.37
30.31
Shares
390,507
201,024
(10,550)
(202,781)
378,200
231,937
(22,907)
(215,983)
371,247
239,479
(27,056)
(158,044)
425,626
402,870
$
$
$
The aggregate intrinsic value of restricted shares that vested was $5.3 million in 2017, $5.4 million in 2016 and $4.9
million in 2015.
F-50
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
PSUs
We made the following grants of PSUs to executives from 2013 through 2017 (dollars in thousands):
Grant Date
3/1/2013
3/6/2014
3/5/2015
3/1/2016
1/1/2017
Number of
PSUs
Granted
69,579
49,103
45,656
26,299
39,351
Performance
Period
Commencement
Date
1/1/2013
1/1/2014
1/1/2015
1/1/2016
1/1/2017
Performance
Period End Date
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
Grant Date
Fair Value
1,867
1,723
1,678
1,000
1,400
$
$
$
$
$
Number of PSUs
Outstanding as of
December 31, 2017
—
—
15,767
24,850
39,351
In 2017, we modified certain provisions of the PSUs granted in 2015, 2016 and 2017, resulting in incremental compensation
cost totaling $236,000 based on the difference between the pre-modification and post-modification award fair values on the date
of modification.
The PSUs each have three year performance periods concluding on the earlier of the respective performance period end
dates set forth above or the date of: (1) termination by us without cause, death or disability of the executive or constructive
discharge of the executive (collectively, “qualified termination”); or (2) a sale event. The number of PSUs earned (“earned
PSUs”) at the end of the performance period will be determined based on the percentile rank of COPT’s total shareholder return
relative to a peer group of companies, as set forth in the following schedule:
Percentile Rank
75th or greater
50th or greater
25th
Below 25th
Earned PSUs Payout %
200% of PSUs granted
100% of PSUs granted
50% of PSUs granted
0% of PSUs granted
If the percentile rank exceeds the 25th percentile and is between two of the percentile ranks set forth in the table above, then the
percentage of the earned PSUs will be interpolated between the ranges set forth in the table above to reflect any performance
between the listed percentiles. At the end of the performance period, we, in settlement of the award, will issue a number of
fully-vested COPT common shares equal to the sum of:
•
•
the number of earned PSUs in settlement of the award plan; plus
the aggregate dividends that would have been paid with respect to the common shares issued in settlement of the earned
PSUs through the date of settlement had such shares been issued on the grant date, divided by the share price on such
settlement date, as defined under the terms of the agreement.
If a performance period ends due to a sale event or qualified termination, the number of earned PSUs is prorated based on the
portion of the three-year performance period that has elapsed. If employment is terminated by the employee or by us for cause,
all PSUs are forfeited. PSUs do not carry voting rights.
Based on COPT’s total shareholder return relative to its peer group of companies:
•
•
•
•
•
for 2013 and 2014 PSUs issued to Stephen E. Riffee, our former Chief Financial Officer who departed on February 3,
2015, we issued 15,289 common shares on March 5, 2015 in settlement of such PSUs;
for the 2013 PSUs that vested on December 31, 2015, there was no payout value in connection with the vesting;
for the 2014 and 2015 PSUs issued to Wayne H. Lingafelter, our former Executive Vice President, Development &
Construction Services, who departed on March 31, 2016, we issued 10,326 common shares on May 30, 2016 in settlement
of such PSUs;
for the 2014 and 2015 PSUs issued to Roger A. Waesche, Jr., our former Chief Executive Officer, who departed on May 12,
2016, we issued 20,569 common shares on July 12, 2016 in settlement of such PSUs;
for the 2014, 2015 and 2016 PSUs issued to Karen M. Singer, our former General Counsel and Secretary, who departed on
August 31, 2016, we issued 2,248 common shares on October 30, 2016 in settlement of such PSUs; and
F-51
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
•
for the 2014 PSUs issued to Steven E. Budorick, our Chief Executive Officer, that vested on December 31, 2016, we issued
9,763 common shares in settlement of the PSUs on February 7, 2017.
We computed grant date fair values for PSUs using Monte Carlo models and are recognizing these values over the
performance periods. The grant date fair value and certain of the assumptions used in the Monte Carlo models for the PSUs
granted in 2015, 2016 and 2017 are set forth below:
Grant Date
3/5/2015
3/1/2016
1/1/2017
Grant Date
Fair Value
36.76
$
38.21
$
38.43
$
Baseline
Common
Share Value
29.28
$
23.90
$
31.22
$
Expected
Volatility of
Common Shares
19.9%
20.4%
19.0%
Risk-free
Interest Rate
0.99%
0.96%
1.47%
Deferred Share Awards
We made the following grants of deferred share awards to nonemployee members of our Board of Trustees in 2015, 2016
and 2017 (dollars in thousands, except per share amounts):
Year of Grant
2015
2016
2017
Number of
Deferred Share
Awards Granted
24,056
24,944
10,032
Aggregate
Grant Date
Fair Value
642
671
326
$
$
$
Grant Date Fair
Value Per Share
26.70
$
26.89
$
32.47
$
Deferred share awards vest on the first anniversary of the grant date, provided that the Trustee remains in his or her position.
We settle deferred share awards by issuing an equivalent number of common shares upon vesting of the awards or a later date
elected by the Trustee (generally upon cessation of being a Trustee). We issued the following common shares in settlement of
deferred shares in 2015, 2016 and 2017 (dollars in thousands, except per share amounts):
Number of common shares issued
Grant date fair value
Aggregate intrinsic value
Options
For the Years Ended December 31,
2017
15,590
26.89
508
$
$
2016
12,028
26.70
322
$
$
2015
15,485
26.77
413
$
$
We have not issued options since 2009, and all of our options were vested and fully expensed prior to 2017. The table
below sets forth information regarding our outstanding options as of the following dates (dollars in thousands, except per share
data):
Options
Outstanding
and
Exercisable
559,736
425,347
201,100
60,000
Weighted
Average
Exercise Price
Per Share
$39.60
$42.75
$43.35
$35.17
Weighted Average
Remaining
Contractual Term
(in Years)
2
1
1
1
Aggregate
Intrinsic
Value
$
167
$ —
$
31
$ —
December 31, 2014
December 31, 2015
December 31, 2016
December 31, 2017
The aggregate intrinsic value of options exercised was $18,000 in 2017 and $300,000 in 2015. No options were exercised in
2016.
F-52
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Executive Transition Costs
Our Board of Trustees appointed Stephen E. Budorick, our Executive Vice President and Chief Operating Officer since
September 2011, to become our President and Chief Executive Officer effective May 12, 2016, the date of the Company’s 2016
Annual Meeting of Shareholders. On that date, Roger A. Waesche, Jr., our President and Chief Executive Officer, left the
Company to pursue other interests, and he was not nominated for reelection as a Trustee. The Board appointed Mr. Budorick to
our Board of Trustees after the 2016 Annual Meeting of Shareholders. In addition, our Executive Vice President, Development
& Construction Services, Wayne H. Lingafelter, and our Senior Vice President, General Counsel and Secretary, Karen M.
Singer, departed the Company to pursue other interests effective March 31, 2016 and August 31, 2016, respectively. We
recognized executive transition costs of approximately $6.5 million in 2016 primarily for termination benefits in connection
with the departures of Mr. Waesche, Mr. Lingafelter and Ms. Singer.
16.
Operating Leases
We lease our properties to tenants under operating leases with various expiration dates extending to the year 2033. Gross
minimum future rentals on noncancelable leases in our properties as of December 31, 2017 were as follows (in thousands):
Year Ending December 31,
2018
2019
2020
2021
2022
Thereafter
$
372,420
329,760
260,238
207,727
175,123
484,444
$ 1,829,712
F-53
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
17.
Information by Business Segment
We have the following reportable segments: Defense/IT Locations; Regional Office; Wholesale Data Center; and Other. We also report on Defense/IT Locations sub-
segments, which include the following: Fort George G. Meade and the Baltimore/Washington Corridor (referred to herein as “Fort Meade/BW Corridor”); Northern Virginia
Defense/IT Locations; Lackland Air Force Base (in San Antonio); locations serving the U.S. Navy (“Navy Support Locations”), which included properties proximate to the
Washington Navy Yard, the Naval Air Station Patuxent River in Maryland and the Naval Surface Warfare Center Dahlgren Division in Virginia; Redstone Arsenal (in Huntsville);
and data center shells (properties leased to tenants to be operated as data centers in which the tenants generally fund the costs for the power, fiber connectivity and data center
infrastructure). As of December 31, 2017, our Regional Office segment included properties located in select urban/urban-like submarkets in the Greater Washington, DC/
Baltimore region with durable Class-A office fundamentals and characteristics; in prior reporting periods, this segment also included suburban properties that did not meet these
characteristics (that were since disposed).
We measure the performance of our segments through the measure we define as net operating income from real estate operations (“NOI from real estate operations”), which
includes: real estate revenues and property operating expenses from continuing and discontinued operations; and the net of revenues and property operating expenses of real estate
operations owned through unconsolidated real estate joint ventures (“UJVs”) that is allocable to COPT’s ownership interest (“UJV NOI allocable to COPT”). Amounts reported
for segment assets represent long-lived assets associated with consolidated operating properties (including the carrying value of properties, intangible assets, deferred leasing costs,
deferred rents receivable and lease incentives) and the carrying value of investments in UJVs owning operating properties. Amounts reported as additions to long-lived assets
represent additions to existing consolidated operating properties, excluding transfers from non-operating properties, which we report separately.
F-54
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The table below reports segment financial information for our reportable segments (in thousands):
Year Ended December 31, 2017
Revenues from real estate operations
Property operating expenses
UJV NOI allocable to COPT
NOI from real estate operations
Additions to long-lived assets
Transfers from non-operating properties
Segment assets at December 31, 2017
Year Ended December 31, 2016
Revenues from real estate operations
Property operating expenses
UJV NOI allocable to COPT
NOI from real estate operations
Additions to long-lived assets
Transfers from non-operating properties
Segment assets at December 31, 2016
Year Ended December 31, 2015
Revenues from real estate operations
Property operating expenses
NOI from real estate operations
Additions to long-lived assets
Transfers from non-operating properties
Segment assets at December 31, 2015
Operating Property Segments
Defense/Information Technology Locations
Navy
Support
Locations
Lackland
Air Force
Base
Redstone
Arsenal
Northern
Virginia
Defense/IT
Fort
Meade/BW
Corridor
$ 245,613
(80,697)
—
$ 164,916
26,659
$
$
43,370
$1,263,567
$
47,118
(16,938)
—
30,180
$
8,115
$
$
48,328
$ 402,076
$ 29,540
$ 47,209
(12,619)
(27,812)
—
—
$ 16,921
$ 19,397
8,451
71
$
$
474
$
— $
$194,476
$128,755
$
14,322
(5,783)
—
8,539
$
1,056
$
$
2,159
$ 108,119
$ 245,354
(83,684)
—
$ 161,670
26,267
$
$
49,937
$1,255,230
$
48,964
(17,824)
—
31,140
$
17,344
$
$
28,230
$ 404,438
$ 28,197
(12,690)
—
$ 15,507
9,168
$ 46,803
(27,357)
—
$ 19,446
— $
$
$
$
240
$196,486
$131,957
$
$
— $
$
13,056
(4,476)
—
8,580
4,352
3,169
$ 110,395
Data
Center
Shells
Total
Defense/IT
Locations
Regional
Office
Operating
Wholesale
Data Center
Other
Total
$ 24,320
(2,709)
5,188
$ 26,799
$
$107,854
$285,275
$ 408,122
(146,558)
5,188
$ 266,752
44,352
$ 202,185
$ 2,382,268
— $
$ 23,836
(2,674)
2,305
$ 23,467
$
$103,367
$209,683
$ 406,210
(148,705)
2,305
$ 259,810
57,131
$ 184,943
$ 2,308,189
— $
$ 68,262
(28,982)
—
$ 39,280
$ 25,299
$
$ 400,512
$
$
— $
$
28,875
(13,551)
—
15,324
3,580
8
$ 224,422
$ 4,721
(1,873)
—
$ 2,848
110
$
$
18
$ 4,082
$ 509,980
(190,964)
5,188
$ 324,204
$
73,341
$ 202,211
$3,011,284
$ 85,805
(34,095)
—
$ 51,710
$ 12,559
$
82
$ 442,811
$
$ 7,080
26,869
(3,218)
(11,512)
—
—
$ 3,862
15,357
299
335
$
(377) $
$ 525,964
(197,530)
2,305
$ 330,739
70,324
$
(8) $ 184,640
$3,004,247
$
$
$
$ 231,954
$ 21,293
$ 244,274
(83,309)
$ 160,965
31,883
$
$
45,560
$1,290,028
$
49,199
(20,107)
29,092
$
90,248
$
$
50,690
$ 411,196
$ 39,659
(22,004)
$ 17,655
$
$ 32,307
$134,381
$ 28,177
(13,229)
$ 14,948
7,656
— $
$
1,408
$196,090
$
11,228
(3,497)
7,731
$
883
$
$
13,190
$ 108,038
$ 21,746
(2,298)
$ 19,448
$
$ 51,492
$203,013
$ 394,283
(144,444)
$ 249,839
— $ 130,670
$ 194,647
$ 2,342,746
$ 98,165
(36,165)
$ 62,000
$ 204,139
$ 22,313
$ 608,471
$
19,032
(10,402)
8,630
$
132
$
$
89,745
$ 243,338
$ 7,588
(3,477)
$ 4,111
328
$
$
415
$ 70,914
$ 519,068
(194,488)
$ 324,580
$ 335,269
$ 307,120
$3,265,469
F-55
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The following table reconciles our segment revenues to total revenues as reported on our consolidated statements of
operations (in thousands):
Segment revenues from real estate operations
Construction contract and other service revenues
Less: Revenues from discontinued operations
Total revenues
For the Years Ended December 31,
2017
$ 509,980
102,840
—
$ 612,820
2016
$ 525,964
48,364
—
$ 574,328
2015
$ 519,068
106,402
(4)
$ 625,466
The following table reconciles our segment property operating expenses to property operating expenses as reported on our
consolidated statements of operations (in thousands):
Segment property operating expenses
Less: Property operating expenses from discontinued operations
Total property operating expenses
For the Years Ended December 31,
2015
2016
2017
$ 194,488
$ 197,530
$ 190,964
—
—
6
$ 194,494
$ 197,530
$ 190,964
The following table reconciles UJV NOI allocable to COPT to equity in income of unconsolidated entities as reported on
our consolidated statements of operations (in thousands):
UJV NOI allocable to COPT
Less: Income from UJV allocable to COPT attributable to depreciation and
amortization expense and interest expense
Add: Equity in (loss) income of unconsolidated non-real estate entities
Equity in income of unconsolidated entities
For the Years Ended December 31,
2015
2016
2017
$
5,188
$
2,305
$
(2,301)
(5)
2,882
$
(993)
20
1,332
$
$
—
—
62
62
As previously discussed, we provide real estate services such as property management and construction and development
services primarily for our properties but also for third parties. The primary manner in which we evaluate the operating
performance of our service activities is through a measure we define as net operating income from service operations (“NOI
from service operations”), which is based on the net of revenues and expenses from these activities. Construction contract and
other service revenues and expenses consist primarily of subcontracted costs that are reimbursed to us by the customer along
with a management fee. The operating margins from these activities are small relative to the revenue. We believe NOI from
service operations is a useful measure in assessing both our level of activity and our profitability in conducting such operations.
The table below sets forth the computation of our NOI from service operations (in thousands):
For the Years Ended December 31,
2015
2016
2017
$ 106,402
$ 48,364
$ 102,840
(102,696)
(45,481)
(99,618)
3,706
2,883
3,222
$
$
$
Construction contract and other service revenues
Construction contract and other service expenses
NOI from service operations
F-56
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The following table reconciles our NOI from real estate operations for reportable segments and NOI from service
operations to income from continuing operations as reported on our consolidated statements of operations (in thousands):
NOI from real estate operations
NOI from service operations
Interest and other income
Equity in income of unconsolidated entities
Income tax expense
Depreciation and other amortization associated with real estate operations
Impairment losses
General, administrative and leasing expenses
Business development expenses and land carry costs
Interest expense
NOI from discontinued operations
Less: UJV NOI allocable to COPT included in equity in income of
unconsolidated entities
(Loss) gain on early extinguishment of debt
COPT consolidated income (loss) from continuing operations
For the Years Ended December 31,
2015
2016
2017
$ 324,580
$ 330,739
$ 324,204
3,706
2,883
3,222
4,517
5,444
6,318
1,332
2,882
62
(199)
(244)
(1,098)
(140,025)
(132,719)
(134,228)
(23,289)
(101,391)
(15,123)
(31,361)
(36,553)
(30,837)
(13,507)
(8,244)
(6,213)
(89,074)
(83,163)
(76,983)
(10)
—
—
(5,188)
(513)
$ 66,443
(2,305)
(1,110)
—
85,275
$ (25,331) $ 120,675
The following table reconciles our segment assets to the consolidated total assets of COPT and subsidiaries (in thousands):
Segment assets
Non-operating property assets
Other assets
Total COPT consolidated assets
As of December 31,
2017
$ 3,011,284
411,041
156,159
$ 3,578,484
2016
$ 3,004,247
418,171
358,467
$ 3,780,885
The accounting policies of the segments are the same as those used to prepare our consolidated financial statements, except
that discontinued operations and UJV NOI allocable to COPT are not presented separately for segment purposes. In the
segment reporting presented above, we did not allocate interest expense, depreciation and amortization, impairment losses,
(loss) gain on early extinguishment of debt, gain on sales of real estate and equity in income of unconsolidated entities not
included in NOI to our real estate segments since they are not included in the measure of segment profit reviewed by
management. We also did not allocate general, administrative and leasing expenses, business development expenses and land
carry costs, interest and other income, income taxes and noncontrolling interests because these items represent general
corporate or non-operating property items not attributable to segments.
18.
Earnings Per Share (“EPS”) and Earnings Per Unit (“EPU”)
COPT and Subsidiaries EPS
We present both basic and diluted EPS. We compute basic EPS by dividing net income available to common shareholders
allocable to unrestricted common shares under the two-class method by the weighted average number of unrestricted common
shares outstanding during the period. Our computation of diluted EPS is similar except that:
•
•
the denominator is increased to include: (1) the weighted average number of potential additional common shares that
would have been outstanding if securities that are convertible into COPT common shares were converted; and (2) the effect
of dilutive potential common shares outstanding during the period attributable to our forward equity sale agreements and
share-based compensation using the treasury stock or if-converted methods; and
the numerator is adjusted to add back any changes in income or loss that would result from the assumed conversion into
common shares that we added to the denominator.
F-57
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Summaries of the numerator and denominator for purposes of basic and diluted EPS calculations are set forth below (in
thousands, except per share data):
Numerator:
Income (loss) from continuing operations
Gain on sales of real estate
Preferred share dividends
Issuance costs associated with redeemed preferred shares
Income from continuing operations attributable to noncontrolling interests
Income from continuing operations attributable to share-based
compensation awards
Numerator for basic EPS from continuing operations attributable to COPT
common shareholders
Dilutive effect of common units in COPLP on diluted EPS from
continuing operations
Numerator for diluted EPS from continuing operations attributable to
COPT common shareholders
Numerator for basic EPS from continuing operations attributable to COPT
common shareholders
Discontinued operations
Discontinued operations attributable to noncontrolling interests
Numerator for basic EPS on net income (loss) attributable to COPT
common shareholders
Dilutive effect of common units in COPLP
Numerator for diluted EPS on net income (loss) attributable to COPT
common shareholders
Denominator (all weighted averages):
Denominator for basic EPS (common shares)
Dilutive effect of forward equity sale agreements and share-based
compensation awards
Dilutive effect of common units
Denominator for diluted EPS (common shares)
Basic EPS:
For the Years Ended December 31,
2015
2016
2017
$
66,443
9,890
(6,219)
(6,847)
(6,242)
$ (25,331) $ 120,675
68,047
(14,210)
—
(10,575)
40,986
(14,297)
(17)
(4,216)
(449)
(419)
(706)
$
56,576
$
(3,294) $ 163,231
—
—
6,397
$
$
$
56,576
56,576
—
—
56,576
—
$
$
$
(3,294) $ 169,628
(3,294) $ 163,231
156
(3)
—
—
(3,294) $ 163,384
6,403
—
$
56,576
$
(3,294) $ 169,787
98,969
94,502
93,914
186
—
99,155
—
—
94,502
61
3,692
97,667
Income (loss) from continuing operations attributable to COPT common
shareholders
Net income (loss) attributable to COPT common shareholders
Diluted EPS:
Income (loss) from continuing operations attributable to COPT common
shareholders
Net income (loss) attributable to COPT common shareholders
$
$
$
$
0.57
0.57
0.57
0.57
$
$
$
$
(0.03) $
(0.03) $
(0.03) $
(0.03) $
1.74
1.74
1.74
1.74
Our diluted EPS computations do not include the effects of the following securities since the conversions of such securities
would increase diluted EPS for the respective periods (in thousands):
Conversion of common units
Conversion of Series I preferred units
Conversion of Series K preferred shares
Weighted Average Shares Excluded from
Denominator for the Years Ended
December 31,
2017
2016
2015
3,362
176
—
3,633
176
434
—
176
434
F-58
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The following share-based compensation securities were excluded from the computation of diluted EPS because their effect
was antidilutive:
• weighted average restricted shares and deferred share awards of 433,000 for 2017, 385,000 for 2016 and 410,000 for 2015;
and
• weighted average options of 70,000 for 2017, 285,000 for 2016 and 469,000 for 2015.
We had outstanding senior notes, which we redeemed in April 2015, with an exchange settlement feature, but such notes
did not affect our diluted EPS reported above since the weighted average closing price of COPT’s common shares during each
of the periods was less than the exchange prices per common share applicable for such periods.
COPLP and Subsidiaries EPU
We present both basic and diluted EPU. We compute basic EPU by dividing net income available to common unitholders
allocable to unrestricted common units under the two-class method by the weighted average number of unrestricted common
units outstanding during the period. Our computation of diluted EPU is similar except that:
•
•
the denominator is increased to include: (1) the weighted average number of potential additional common units that would
have been outstanding if securities that are convertible into our common units were converted; and (2) the effect of dilutive
potential common units outstanding during the period attributable to our forward equity sale agreements and share-based
compensation using the treasury stock or if-converted methods; and
the numerator is adjusted to add back any changes in income or loss that would result from the assumed conversion into
common units that we added to the denominator.
F-59
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Summaries of the numerator and denominator for purposes of basic and diluted EPU calculations are set forth below (in
thousands, except per unit data):
Numerator:
Income (loss) from continuing operations
Gain on sales of real estate, net
Preferred unit distributions
Issuance costs associated with redeemed preferred units
Income from continuing operations attributable to noncontrolling interests
Income from continuing operations attributable to share-based compensation
awards
Numerator for basic and diluted EPU from continuing operations attributable
to COPLP common unitholders
Discontinued operations
Discontinued operations attributable to noncontrolling interests
Numerator for basic and diluted EPU on net income (loss) attributable to
COPLP common unitholders
Denominator (all weighted averages):
Denominator for basic EPU (common units)
Dilutive effect of forward equity sale agreements and share-based
compensation awards
Denominator for diluted EPU (common units)
Basic EPU:
For the Years Ended December 31,
2017
2016
2015
$
$
66,443
9,890
(6,879)
(6,847)
(3,646)
$ (25,331) $ 120,675
68,047
(14,870)
—
(3,523)
40,986
(14,957)
(17)
(3,715)
(449)
(419)
(706)
$
58,512
—
—
(3,453) $ 169,623
156
3
—
—
$
58,512
$
(3,453) $ 169,782
102,331
98,135
97,606
186
102,517
—
98,135
61
97,667
Income (loss) from continuing operations attributable to COPLP common
unitholders
Net income (loss) attributable to COPLP common unitholders
Diluted EPU:
Income (loss) from continuing operations attributable to COPLP common
unitholders
Net income (loss) attributable to COPLP common unitholders
$
$
$
$
0.57
0.57
0.57
0.57
$
$
$
$
(0.04) $
(0.04) $
(0.04) $
(0.04) $
1.74
1.74
1.74
1.74
Our diluted EPU computations do not include the effects of the following securities since the conversions of such securities
would increase diluted EPU for the respective periods (in thousands):
Conversion of Series I preferred units
Conversion of Series K preferred units
Weighted Average Units Excluded from
Denominator for the Years Ended
December 31,
2017
2016
2015
176
—
176
434
176
434
The following share-based compensation securities were excluded from the computation of diluted EPU because their effect
was antidilutive:
• weighted average restricted units and deferred share awards of 433,000 for 2017, 385,000 for 2016 and 410,000 for 2015;
and
• weighted average options of 70,000 for 2017, 285,000 for 2016 and 469,000 for 2015.
We had outstanding senior notes, which we redeemed in April 2015, with an exchange settlement feature, but such notes
did not affect our diluted EPU reported above since the weighted average closing price of COPT’s common shares during each
of the periods was less than the exchange prices per common share applicable for such periods.
F-60
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
19.
Commitments and Contingencies
Litigation
In the normal course of business, we are involved in legal actions arising from our ownership and administration of
properties. We establish reserves for specific legal proceedings when we determine that the likelihood of an unfavorable
outcome is probable and the amount of loss can be reasonably estimated. Management does not anticipate that any liabilities
that may result from such proceedings will have a materially adverse effect on our financial position, operations or liquidity.
Our assessment of the potential outcomes of these matters involves significant judgment and is subject to change based on
future developments.
Environmental
We are subject to various Federal, state and local environmental regulations related to our property ownership and
operation. We have performed environmental assessments of our properties, the results of which have not revealed any
environmental liability that we believe would have a materially adverse effect on our financial position, operations or liquidity.
Tax Incremental Financing Obligation
In August 2010, Anne Arundel County, Maryland issued $30 million in tax incremental financing bonds to third-party
investors in order to finance public improvements needed in connection with our project known as National Business Park
North. The real estate taxes on increases in assessed value of a development district encompassing National Business Park
North are to be transferred to a special fund pledged to the repayment of the bonds. We recognized a $981,000 liability through
December 31, 2017 representing our estimated obligation to fund through a special tax any future shortfalls between debt
service on the bonds and real estate taxes available to repay the bonds.
Operating Leases
We are obligated as lessee under operating leases (mostly ground leases) with various expiration dates extending to the
year 2100. Future minimum rental payments due under the terms of these operating leases as of December 31, 2017 follow (in
thousands):
Year Ending December 31,
2018
2019
2020
2021
2022
Thereafter
$
1,283
1,267
1,259
1,263
1,149
84,611
$ 90,832
F-61
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Capital Lease
On May 25, 2017, we entered into a ground lease on land under development in Washington, DC for our Stevens Investors,
LLC joint venture. The lease has a 99-year term, and we possess an option to purchase the property for one dollar (estimated to
occur between 2019 and 2020). Upon inception of the lease, we recorded a $16.1 million capital lease liability on our
consolidated balance sheets based on the present value of the future minimum rental payments. Future minimum rental
payments due under the term of this lease as of December 31, 2017 follow (in thousands):
Year Ending December 31,
2018
2020
2022
Total minimum rental payments
Less: Amount representing interest
Capital lease obligation
Contractual Obligations
$ 15,829
135
75
16,039
(186)
$ 15,853
We had amounts remaining to be incurred under various contractual obligations as of December 31, 2017 that included the
following (excluding amounts incurred and therefore reflected as liabilities reported on our consolidated balance sheets):
•
•
•
•
new development and redevelopment obligations of $22.8 million;
capital expenditures for operating properties of $44.2 million;
third party construction and development of $35.8 million; and
other obligations of $0.9 million.
Environmental Indemnity Agreement
In connection with a lease and subsequent sale in 2008 and 2010 of three properties in Dayton, New Jersey, we agreed to
provide certain environmental indemnifications limited to $19 million in the aggregate. We have insurance coverage in place to
mitigate much of any potential future losses that may result from these indemnification agreements.
F-62
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
20.
Quarterly Data (Unaudited)
The tables below set forth selected quarterly information for the years ended December 31, 2017 and 2016 (in thousands, except per share/unit data).
For the Year Ended December 31, 2017
For the Year Ended December 31, 2016
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
COPT and Subsidiaries
$ 139,801
Revenues
$ 35,433
Operating income
$ 18,850
Income (loss) from continuing operations
$ 23,088
Net income (loss)
(1,733)
Net (income) loss attributable to noncontrolling interests
21,355
Net income (loss) attributable to COPT
(3,180)
Preferred share dividends
Issuance costs associated with redeemed preferred shares
—
Net income (loss) attributable to COPT common shareholders $ 18,175
$ 151,435
$ 36,618
$ 19,195
$ 19,207
(1,345)
17,862
(3,039)
(6,847)
7,976
$
$ 157,017
$ 38,939
$ 21,494
$ 22,682
(1,766)
20,916
—
—
$ 20,916
$ 164,567
$ 24,847
$
6,904
$ 11,356
(1,398)
9,958
—
—
9,958
$
$ 144,307
$ 30,464
8,096
$
8,096
$
(1,270)
6,826
(3,552)
—
3,274
$
$ 141,991
$ 145,927
$ 142,103
$ (27,021) $ 11,525
$ 37,442
$ (48,316) $ (4,829) $ 19,718
$ 26,603
$ (48,316) $ 29,272
(1,870)
(1,973)
24,733
27,299
(3,640)
(3,552)
(17)
—
$ 21,076
$ (50,972) $ 23,747
897
(47,419)
(3,553)
—
Basic EPS
Diluted EPS
$
$
0.18
0.18
$
$
0.08
0.08
$
$
0.21
0.21
$
$
0.10
0.10
$
$
0.03
0.03
$
$
(0.54) $
(0.54) $
0.25
0.25
$
$
0.22
0.22
COPLP and Subsidiaries
$ 139,801
Revenues
$ 35,433
Operating income
$ 18,850
Income (loss) from continuing operations
$ 23,088
Net income (loss)
(934)
Net income attributable to noncontrolling interests
22,154
Net income (loss) attributable to COPLP
(3,345)
Preferred unit distributions
Issuance costs associated with redeemed preferred units
—
Net income (loss) attributable to COPLP common unitholders $ 18,809
$ 151,435
$ 36,618
$ 19,195
$ 19,207
(907)
18,300
(3,204)
(6,847)
8,249
$
$ 157,017
$ 38,939
$ 21,494
$ 22,682
(897)
21,785
(165)
—
$ 21,620
$ 164,567
$ 24,847
$
6,904
$ 11,356
(908)
10,448
(165)
—
$ 10,283
$ 144,307
$ 30,464
8,096
$
8,096
$
(979)
7,117
(3,717)
—
3,400
$
$ 141,991
$ 145,927
$ 142,103
$ 37,442
$ (27,021) $ 11,525
$ (48,316) $ (4,829) $ 19,718
$ 26,603
$ (48,316) $ 29,272
(912)
(913)
25,691
28,359
(3,805)
(3,717)
(17)
—
$ 21,869
$ (52,945) $ 24,642
(911)
(49,227)
(3,718)
—
Basic EPU
Diluted EPU
$
$
0.18
0.18
$
$
0.08
0.08
$
$
0.21
0.21
$
$
0.10
0.10
$
$
0.03
0.03
$
$
(0.54) $
(0.54) $
0.25
0.25
$
$
0.22
0.22
F-63
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Schedule II—Valuation and Qualifying Accounts
Years Ended December 31, 2017, 2016 and 2015
(in thousands)
Accounts Receivables-Allowance for doubtful
accounts
Year ended December 31, 2017
Year ended December 31, 2016
Year ended December 31, 2015
Allowance for Deferred Rent Receivable
Year ended December 31, 2017
Year ended December 31, 2016
Year ended December 31, 2015
Allowance for Deferred Tax Asset
Year ended December 31, 2017
Year ended December 31, 2016
Year ended December 31, 2015
Balance at
Beginning
of Year
Charged to
Costs and
Expenses (1)
Charged to
Other
Accounts (2)
Deductions (3)
Balance at
End of
Year
$
$
$
$
$
$
$
$
$
603
1,525
717
373
1,962
1,418
2,062
2,062
2,062
$
$
$
$
$
$
$
$
$
368
$
(17) $
$
1,125
(36) $
$
235
$
98
(328) $
(1,140) $
(415) $
607
603
1,525
(9) $
(1,589) $
— $
— $
— $
$
544
— $
— $
— $
364
373
1,962
(646) $
— $
— $
— $
— $
— $
— $
— $
— $
1,416
2,062
2,062
(1) Amounts charged to costs and expenses are net of recoveries. Reduction in allowance for deferred tax asset was
the result of a decrease in the corporate tax rate.
(2) Allowances for certain accounts receivables were charged to service company revenue. Deferred rent receivable
allowances were charged to rental revenue.
(3) Deductions reflect adjustments to reserves due to actual write-offs of accounts.
F-64
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Schedule III—Real Estate and Accumulated Depreciation
December 31, 2017
(Dollars in thousands)
Property (Type) (1)
Location
100 Light Street (O)
1000 Redstone Gateway (O)
1100 Redstone Gateway (O)
Baltimore, MD
Huntsville, AL
Huntsville, AL
114 National Business Parkway (O)
Annapolis Junction, MD
11751 Meadowville Lane (O) (9)
1200 Redstone Gateway (O)
1201 M Street (O)
1201 Winterson Road (O)
1220 12th Street, SE (O)
1243 Winterson Road (L)
Richmond, VA
Huntsville, AL
Washington, DC
Linthicum, MD
Washington, DC
Linthicum, MD
131 National Business Parkway (O)
Annapolis Junction, MD
132 National Business Parkway (O)
Annapolis Junction, MD
133 National Business Parkway (O)
Annapolis Junction, MD
134 National Business Parkway (O)
Annapolis Junction, MD
1340 Ashton Road (O)
13450 Sunrise Valley Road (O)
13454 Sunrise Valley Road (O)
Hanover, MD
Herndon, VA
Herndon, VA
135 National Business Parkway (O)
Annapolis Junction, MD
1362 Mellon Road (O)
13857 McLearen Road (O)
Hanover, MD
Herndon, VA
140 National Business Parkway (O)
Annapolis Junction, MD
141 National Business Parkway (O)
Annapolis Junction, MD
14280 Park Meadow Drive (O)
1460 Dorsey Road (L)
Chantilly, VA
Hanover, MD
14840 Conference Center Drive (O)
Chantilly, VA
14850 Conference Center Drive (O)
Chantilly, VA
14900 Conference Center Drive (O)
Chantilly, VA
1501 South Clinton Street (O)
Baltimore, MD
15049 Conference Center Drive (O)
Chantilly, VA
15059 Conference Center Drive (O)
Chantilly, VA
1550 West Nursery Road (O)
1560 West Nursery Road (O)
1610 West Nursery Road (O)
1616 West Nursery Road (O)
1622 West Nursery Road (O)
Linthicum, MD
Linthicum, MD
Linthicum, MD
Linthicum, MD
Linthicum, MD
Initial Cost
Gross Amounts Carried
At Close of Period
Encumbrances
(2)
Land
Building
and Land
Improvements
Costs
Capitalized
Subsequent
to Acquisition
Building
and Land
Improvements
Total
(3)(4)
Accumulated
Depreciation
(5)
Land
Year Built or
Renovated
Date
Acquired (6)
$
49,378 $ 26,715 $
58,343 $
5,286 $ 26,715 $
63,629 $
90,344 $
10,730
11,222
—
—
12,973
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
364
1,305
—
—
1,288
—
630
1,906
2,917
2,517
3,684
905
1,386
2,899
2,484
950
3,507
3,407
2,398
3,731
1,577
1,572
1,615
3,436
— 27,964
—
—
4,415
5,753
— 14,071
—
—
—
—
1,441
259
393
393
20,533
19,593
3,109
52,098
22,389
49,785
16,433
42,464
—
7,623
12,259
10,068
7,517
3,620
5,576
11,986
9,750
3,864
30,177
24,167
9,538
15,953
33
8,175
8,358
14,402
51,990
20,365
13,615
16,930
113
246
2,919
2,477
F-65
5
—
118
112
—
8,590
460
5,820
—
3,868
4,124
5,544
3,691
1,470
4,553
7,071
6,075
206
1,768
1,487
4,815
2,628
—
3,092
3,072
6,239
—
—
364
1,305
—
—
1,288
—
630
1,906
2,917
2,517
3,684
905
1,386
2,899
2,484
950
3,507
3,407
2,398
3,731
1,577
1,572
1,615
3,436
13,670
14,994
3,645
27,964
4,415
5,753
— 14,071
—
—
—
—
1,441
259
393
393
20,538
19,593
3,227
52,210
22,389
58,375
16,893
48,284
—
11,491
16,383
15,612
11,208
5,090
10,129
19,057
15,825
4,070
31,945
25,654
14,353
18,581
33
11,267
11,430
20,641
65,660
35,359
17,260
16,930
113
246
2,919
2,477
20,538
19,593
3,591
53,515
22,389
58,375
18,181
48,284
630
13,397
19,300
18,129
14,892
5,995
11,515
21,956
18,309
5,020
35,452
29,061
16,751
22,312
1,610
12,839
13,045
24,077
93,624
39,774
23,013
31,001
1,554
505
3,312
2,870
(9,467)
(2,465)
(1,945)
(1,309)
(14,845)
(2,264)
(12,800)
(4,279)
(11,719)
—
(6,286)
(8,715)
(9,234)
(5,419)
(2,854)
(4,808)
(9,262)
(7,970)
(192)
(10,100)
(8,907)
(7,409)
(7,326)
—
(5,410)
(5,857)
(10,027)
(19,942)
(12,097)
(7,907)
(4,802)
(10)
(5)
(13)
(53)
1973
2013
2014
2002
2007
2013
2001
1985/2017
2003
(7)
1990
2000
1997
1999
1989
1998
1998
1998
2006
2007
2003
1990
1999
(7)
2000
2000
1999
2006
1997
2000
2009
2014
2016
2017
2016
8/7/2015
3/23/2010
3/23/2010
6/30/2000
9/15/2006
3/23/2010
9/28/2010
4/30/1998
9/28/2010
12/19/2001
9/28/1998
5/28/1999
9/28/1998
11/13/1998
4/28/1999
7/25/2003
7/25/2003
12/30/1998
2/10/2006
7/11/2012
12/31/2003
9/28/1998
9/29/2004
2/28/2006
7/25/2003
7/25/2003
7/25/2003
10/27/2009
8/14/2002
8/14/2002
10/28/2009
10/28/2009
4/30/1998
4/30/1998
4/30/1998
Property (Type) (1)
Location
Encumbrances
(2)
16442 Commerce Drive (O)
16480 Commerce Drive (O)
16501 Commerce Drive (O)
16539 Commerce Drive (O)
16541 Commerce Drive (O)
16543 Commerce Drive (O)
1751 Pinnacle Drive (O)
1753 Pinnacle Drive (O)
206 Research Boulevard (O)
209 Research Boulevard (O)
210 Research Boulevard (O)
2100 L Street (L)
2100 Rideout Road (O)
22289 Exploration Drive (O)
22299 Exploration Drive (O)
22300 Exploration Drive (O)
22309 Exploration Drive (O)
23535 Cottonwood Parkway (O)
250 W Pratt St (O)
2500 Riva Road (O)
2600 Park Tower Drive (O)
2691 Technology Drive (O)
2701 Technology Drive (O)
2711 Technology Drive (O)
2720 Technology Drive (O)
2721 Technology Drive (O)
2730 Hercules Road (O)
30 Light Street (O)
300 Sentinel Drive (O)
302 Sentinel Drive (O)
304 Sentinel Drive (O)
306 Sentinel Drive (O)
308 Sentinel Drive (O)
310 Sentinel Way (O)
Dahlgren, VA
Dahlgren, VA
Dahlgren, VA
Dahlgren, VA
Dahlgren, VA
Dahlgren, VA
McLean, VA
McLean, VA
Aberdeen, MD
Aberdeen, MD
Aberdeen, MD
Washington, DC
Huntsville, AL
Lexington Park, MD
Lexington Park, MD
Lexington Park, MD
Lexington Park, MD
California, MD
Baltimore, MD
Annapolis, MD
Vienna, VA
Annapolis Junction, MD
Annapolis Junction, MD
Annapolis Junction, MD
Annapolis Junction, MD
Annapolis Junction, MD
Annapolis Junction, MD
Baltimore, MD
Annapolis Junction, MD
Annapolis Junction, MD
Annapolis Junction, MD
Annapolis Junction, MD
Annapolis Junction, MD
Annapolis Junction, MD
310 The Bridge Street (O)
Huntsville, AL
312 Sentinel Way (O)
314 Sentinel Way (O)
316 Sentinel Way (O)
318 Sentinel Way (O)
Annapolis Junction, MD
Annapolis Junction, MD
Annapolis Junction, MD
Annapolis Junction, MD
Initial Cost
Gross Amounts Carried
At Close of Period
Land
613
1,856
522
688
773
436
—
—
—
—
—
—
— 10,486
—
—
—
—
8,275
—
134
113
— 55,615
—
—
—
—
—
—
—
—
—
1,422
1,362
1,094
2,243
692
8,057
2,791
— 20,304
—
—
—
—
—
—
4,153
—
—
—
—
—
—
—
—
—
—
—
2,098
1,737
2,251
3,863
4,611
8,737
—
1,517
2,648
3,411
3,260
1,422
2,372
261
3,138
1,254
2,748
2,185
Costs
Capitalized
Subsequent
to Acquisition
891
2,068
727
1,892
1,757
716
Land
613
1,856
522
688
773
436
27,048
16,648
10,486
8,275
—
175
86
—
134
113
— 55,615
2,881
1,829
2,308
1,489
7,967
537
6,942
1
517
5,563
4,398
1,899
1,218
1,270
8,697
629
925
468
202
961
2,396
—
3,762
—
—
145
560
—
1,422
1,362
1,094
2,243
692
8,057
2,791
20,304
2,098
1,737
2,251
3,863
4,611
8,737
—
1,517
2,648
3,411
3,260
1,422
2,372
261
3,138
1,254
2,748
2,185
Building
and Land
Improvements
2,582
7,425
2,090
2,860
3,094
1,742
42,339
34,353
132
1,711
1,402
9,073
5,003
5,719
5,791
5,038
10,419
3,051
34,588
12,145
34,443
17,334
15,266
21,611
29,272
14,597
31,612
12,101
59,165
29,687
24,917
22,592
26,208
38,865
26,531
27,797
7,741
38,156
28,426
F-66
Building
and Land
Improvements
Total
(3)(4)
Accumulated
Depreciation
(5)
Year Built or
Renovated
Date
Acquired (6)
3,473
9,493
2,817
4,752
4,851
2,458
69,387
51,001
132
1,886
1,488
9,073
7,884
7,548
8,099
6,527
18,386
3,588
41,530
12,146
34,960
22,897
19,664
23,510
30,490
15,867
40,309
12,730
60,090
30,155
25,119
23,553
28,604
38,865
30,293
27,797
7,741
38,301
28,986
4,086
11,349
3,339
5,440
5,624
2,894
79,873
59,276
132
2,020
1,601
64,688
7,884
8,970
9,461
7,621
20,629
4,280
49,587
14,937
55,264
24,995
21,401
25,761
34,353
20,478
49,046
12,730
61,607
32,803
28,530
26,813
30,026
41,237
30,554
30,935
8,995
41,049
31,171
(1,538)
(3,279)
(975)
(2,325)
(2,026)
(839)
(29,582)
(18,757)
(132)
(283)
(174)
—
(438)
(3,415)
(3,768)
(2,432)
(6,087)
(1,527)
(6,972)
(5,105)
(3,708)
(9,630)
(9,676)
(11,727)
(10,261)
(7,484)
(18,673)
(753)
(11,562)
(7,579)
(7,610)
(6,631)
(4,370)
(1,977)
(7,430)
(2,304)
(548)
(5,507)
(8,416)
2002
2000
2002
1990
1996
2002
1989/1995
1976/2004
2012
2010
2010
(7)
2016
2000
1998
1997
1984/1997
1984
1985
2000
1999
2005
2001
2002
2004
2000
1990
2009
2009
2007
2005
2006
2010
2016 (8)
2009
2014
2008
2011
2005
12/21/2004
12/28/2004
12/21/2004
12/21/2004
12/21/2004
12/21/2004
9/23/2004
9/23/2004
9/14/2007
9/14/2007
9/14/2007
8/11/2015
3/23/2010
3/24/2004
3/24/2004
11/9/2004
3/24/2004
3/24/2004
3/19/2015
3/4/2003
4/15/2015
5/26/2000
5/26/2000
11/13/2000
1/31/2002
10/21/1999
9/28/1998
8/7/2015
11/14/2003
11/14/2003
11/14/2003
11/14/2003
11/14/2003
11/14/2003
8/9/2011
11/14/2003
11/14/2003
11/14/2003
11/14/2003
Property (Type) (1)
Location
320 Sentinel Way (O)
322 Sentinel Way (O)
324 Sentinel Way (O)
4000 Market Street (O)
4100 Market Street (O)
Annapolis Junction, MD
Annapolis Junction, MD
Annapolis Junction, MD
Huntsville, AL
Huntsville, AL
410 National Business Parkway (O)
Annapolis Junction, MD
420 National Business Parkway (O)
Annapolis Junction, MD
430 National Business Parkway (O)
Annapolis Junction, MD
44408 Pecan Court (O)
44414 Pecan Court (O)
44417 Pecan Court (O)
44420 Pecan Court (O)
44425 Pecan Court (O)
45310 Abell House Lane (O)
46579 Expedition Drive (O)
46591 Expedition Drive (O)
California, MD
California, MD
California, MD
California, MD
California, MD
California, MD
Lexington Park, MD
Lexington Park, MD
4851 Stonecroft Boulevard (O)
Chantilly, VA
540 National Business Parkway (O)
Annapolis Junction, MD
5520 Research Park Drive (O)
5522 Research Park Drive (O)
Catonsville, MD
Catonsville, MD
5801 University Research Court (O)
College Park, MD
5825 University Research Court (O)
College Park, MD
5850 University Research Court (O)
College Park, MD
6700 Alexander Bell Drive (O)
6708 Alexander Bell Drive (O)
Columbia, MD
Columbia, MD
6711 Columbia Gateway Drive (O)
Columbia, MD
6716 Alexander Bell Drive (O)
Columbia, MD
6721 Columbia Gateway Drive (O)
Columbia, MD
6724 Alexander Bell Drive (O)
Columbia, MD
6731 Columbia Gateway Drive (O)
Columbia, MD
6740 Alexander Bell Drive (O)
Columbia, MD
6741 Columbia Gateway Drive (O)
Columbia, MD
6750 Alexander Bell Drive (O)
6760 Alexander Bell Drive (O)
Columbia, MD
Columbia, MD
6940 Columbia Gateway Drive (O)
Columbia, MD
6950 Columbia Gateway Drive (O)
Columbia, MD
7000 Columbia Gateway Drive (O)
Columbia, MD
7005 Columbia Gateway Drive (O)
Columbia, MD
Initial Cost
Gross Amounts Carried
At Close of Period
Encumbrances
(2)
Land
Building
and Land
Improvements
Costs
Capitalized
Subsequent
to Acquisition
—
1,900
—
—
—
119
108
126
1,490
1,033
148
168
1,881
147
1,680
1,226
21
—
1,018
210
—
666
405
6,866
1,605
1,278
3,754
102
1,374
4,872
3,321
124
3,959
3,358
7,095
3,238
5,085
—
2,178
Building
and Land
Improvements
Total
(3)(4)
Accumulated
Depreciation
(5)
Land
Year Built or
Renovated
Date
Acquired (6)
2,067
2,605
1,656
—
—
1,831
2,370
1,852
817
405
434
344
1,309
2,272
1,406
1,200
1,878
2,035
—
—
—
—
—
1,755
897
2,683
1,242
1,753
449
2,807
1,424
675
1,263
890
3,545
3,596
3,131
3,036
2,058
21,623
24,727
23,018
466
1,013
23,376
27,858
21,689
3,073
2,652
3,970
1,058
5,387
23,690
27,332
24,674
466
1,013
25,207
30,228
23,541
3,890
3,057
4,404
1,402
6,696
13,955
16,227
7,476
8,425
11,579
29,490
21,090
4,760
9,423
23,437
32,311
13,885
13,589
24,517
8,723
34,192
6,413
23,970
9,017
1,835
16,420
6,919
17,011
17,507
17,188
753
8,271
8,882
9,625
13,457
31,525
21,090
4,760
9,423
23,437
32,311
15,640
14,486
27,200
9,965
35,945
6,862
26,777
10,441
2,510
17,683
7,809
20,556
21,103
20,319
3,789
10,329
(5,391)
(6,286)
(4,229)
—
—
(2,904)
(2,635)
(3,127)
(838)
(954)
(1,448)
(368)
(2,419)
(2,094)
(3,421)
(2,652)
(3,827)
(260)
(4,260)
(1,185)
(36)
(5,020)
(6,306)
(6,916)
(3,839)
(6,817)
(5,129)
(7,514)
(2,670)
(10,176)
(5,698)
(466)
(8,761)
(3,932)
(8,164)
(8,787)
(6,178)
—
(3,343)
2007
2006
2010
(8)
(8)
2012
2013
2011
1986
1986
1989/2015
1989
1997
2011
2002
2005
2004
2017 (8)
2009
2007
(8)
2008
2008
1988
1988/2016
2006-2007
1990
2009
2001
2002
1992
2008
2001
1991
1999
1998
1999
(7)
1999
11/14/2003
11/14/2003
6/29/2006
3/23/2010
3/23/2010
6/29/2006
6/29/2006
6/29/2006
3/24/2004
3/24/2004
3/24/2004
11/9/2004
5/5/2004
8/30/2010
3/24/2004
3/24/2004
8/14/2002
6/29/2006
4/4/2006
3/8/2006
11/9/2016
1/29/2008
1/29/2008
5/14/2001
5/14/2001
9/28/2000
12/31/1998
9/28/2000
5/14/2001
3/29/2000
12/31/1998
9/28/2000
12/31/1998
12/31/1998
11/13/1998
10/22/1998
5/31/2002
6/26/2014
12/1/2005
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
21,284
22,517
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,067
2,605
1,656
—
—
1,831
2,370
1,852
817
405
434
344
1,309
2,272
1,406
1,200
1,878
2,035
—
—
—
—
—
1,755
897
2,683
1,242
1,753
449
2,807
1,424
675
1,263
890
3,545
3,596
3,131
3,036
2,058
21,623
22,827
23,018
466
1,013
23,257
27,750
21,563
1,583
1,619
3,822
890
3,506
13,808
5,796
7,199
11,558
29,490
20,072
4,550
9,423
22,771
31,906
7,019
11,984
23,239
4,969
34,090
5,039
19,098
5,696
1,711
12,461
3,561
9,916
14,269
12,103
753
6,093
F-67
7015 Albert Einstein Drive (O)
Columbia, MD
829
Initial Cost
Gross Amounts Carried
At Close of Period
Encumbrances
(2)
Land
Building
and Land
Improvements
Building
and Land
Improvements
Total
(3)(4)
Accumulated
Depreciation
(5)
Year Built or
Renovated
Date
Acquired (6)
Property (Type) (1)
Location
7061 Columbia Gateway Drive (O)
Columbia, MD
7063 Columbia Gateway Drive (O)
Columbia, MD
7065 Columbia Gateway Drive (O)
Columbia, MD
7067 Columbia Gateway Drive (O)
Columbia, MD
7125 Columbia Gateway Drive (L)
Columbia, MD
—
—
—
—
—
729
902
919
1,829
3,361
7125 Columbia Gateway Drive (O)
Columbia, MD
— 17,126
7130 Columbia Gateway Drive (O)
Columbia, MD
7134 Columbia Gateway Drive (O)
Columbia, MD
7138 Columbia Gateway Drive (O)
Columbia, MD
7142 Columbia Gateway Drive (O)
Columbia, MD
7150 Columbia Gateway Drive (O)
Columbia, MD
7150 Riverwood Drive (O)
7160 Riverwood Drive (O)
7170 Riverwood Drive (O)
7175 Riverwood Drive (O)
7200 Redstone Gateway (O)
7200 Riverwood Road (O)
7205 Riverwood Drive (O)
7272 Park Circle Drive (O)
7318 Parkway Drive (O)
7400 Redstone Gateway (O)
7467 Ridge Road (O)
7740 Milestone Parkway (O)
7770 Backlick Road (O)
7880 Milestone Parkway (O)
8621 Robert Fulton Drive (O)
8661 Robert Fulton Drive (O)
8671 Robert Fulton Drive (O)
870 Elkridge Landing Road (O)
891 Elkridge Landing Road (O)
901 Elkridge Landing Road (O)
911 Elkridge Landing Road (O)
938 Elkridge Landing Road (O)
939 Elkridge Landing Road (O)
940 Elkridge Landing Road (L)
9651 Hornbaker Road (D)
Arundel Preserve (L)
Bethlehem Tech. Park - DC 18 (O)
Bethlehem Tech. Park - DC 19 (O)
Columbia, MD
Columbia, MD
Columbia, MD
Columbia, MD
Huntsville, AL
Columbia, MD
Columbia, MD
Hanover, MD
Hanover, MD
Huntsville, AL
Hanover, MD
Hanover, MD
Springfield, VA
Hanover, MD
Columbia, MD
Columbia, MD
Columbia, MD
Linthicum, MD
Linthicum, MD
Linthicum, MD
Linthicum, MD
Linthicum, MD
Linthicum, MD
Linthicum, MD
Manassas, VA
Hanover, MD
Manassas, VA
Manassas, VA
—
—
—
—
—
—
—
—
—
6,303
—
—
—
—
6,914
—
18,203
—
—
—
—
—
—
—
—
—
—
—
—
—
1,350
704
1,104
1,342
1,032
1,821
2,732
1,283
1,788
—
4,089
1,367
1,479
972
—
1,565
3,825
6,387
4,857
2,317
1,510
1,718
2,003
1,165
1,156
1,215
922
939
842
6,050
— 13,401
—
—
3,599
3,708
Costs
Capitalized
Subsequent
to Acquisition
2,018
3,151
3,095
3,051
279
Land
729
902
919
1,829
3,361
15,786
17,126
2,534
353
2,729
2,608
813
1,774
2,455
1,465
—
5
4,532
—
4,578
1,239
—
4,264
567
142
62
537
2,453
4,052
8,735
3,466
2,704
2,191
1,446
4,438
—
3,868
1,350
704
1,104
1,342
1,032
1,821
2,732
1,283
1,788
—
4,089
1,367
1,479
972
—
1,565
3,825
6,387
4,857
2,317
1,510
1,718
2,003
1,165
1,156
1,215
922
939
842
3,094
3,684
3,763
11,823
2,354
46,994
4,359
4,707
3,518
4,657
3,429
4,388
7,006
3,096
7,269
8,348
22,630
21,419
6,300
3,888
9,223
3,116
34,176
76,315
24,677
12,642
3,764
4,280
9,442
4,772
4,437
4,861
4,748
3,756
4
249,142
9,578
25,992
16,362
F-68
5,112
6,835
6,858
14,874
2,633
62,780
6,893
5,060
6,247
7,265
4,242
6,162
9,461
4,561
7,269
8,353
27,162
21,419
10,878
5,127
9,223
7,380
34,743
76,457
24,739
13,179
6,217
8,332
18,177
8,238
7,141
7,052
6,194
8,194
4
5,841
7,737
7,777
16,703
5,994
79,906
8,243
5,764
7,351
8,607
5,274
7,983
12,193
5,844
9,057
8,353
31,251
22,786
12,357
6,099
9,223
8,945
38,568
82,844
29,596
15,496
7,727
10,050
20,180
9,403
8,297
8,267
7,116
9,133
846
(2,191)
(3,113)
(3,637)
(7,037)
2000
2000
2000
2001
— 1973/1999 (7)
(20,876)
(3,192)
(1,422)
(3,459)
(2,796)
(1,439)
(2,343)
(3,778)
(1,798)
(752)
(752)
(10,180)
(2,381)
(3,898)
(2,398)
(582)
(1,930)
(6,482)
(9,075)
(1,382)
(4,097)
(2,655)
(3,688)
(9,370)
(4,186)
(3,608)
(3,899)
(2,621)
(4,254)
—
(39,294)
—
(306)
(455)
1973/1999
1989
1990/2016
1990
1994 (8)
1991
2000
2000
2000
1996/2013
2013
1986
2013
1991/1996
1984
2015
1990
2009
2012
2015
2005-2006
2002
2002
1981
1984
1984
1985
1984
1983
(7)
2010
(7)
2017
2016
8/30/2001
8/30/2001
8/30/2001
8/30/2001
6/29/2006
6/29/2006
9/19/2005
9/19/2005
9/19/2005
9/19/2005
9/19/2005
1/10/2007
1/10/2007
1/10/2007
7/27/2005
3/23/2010
10/13/1998
7/27/2005
1/10/2007
4/16/1999
3/23/2010
4/28/1999
7/2/2007
3/10/2010
9/17/2013
6/10/2005
12/30/2003
12/30/2003
8/3/2001
7/2/2001
7/2/2001
4/30/1998
7/2/2001
4/30/1998
7/2/2001
9/14/2010
7/2/2007
6/17/2016
6/9/2016
6,050
253,010
259,060
— 13,401
—
—
3,599
3,708
9,578
25,992
16,362
22,979
29,591
20,070
Property (Type) (1)
Location
Bethlehem Tech. Park - DC 20 (O)
Manassas, VA
Bethlehem Tech. Park - DC 23 (O)
Manassas, VA
BLC 1 (O)
BLC 2 (O)
Canton Crossing Land (L)
Northern Virginia
Northern Virginia
Baltimore, MD
Canton Crossing Util Distr Ctr (O)
Baltimore, MD
Columbia Gateway - Southridge (L)
Columbia, MD
Dahlgren Technology Center (L)
Dahlgren, VA
Expedition VII (L)
Innovation Park (L)
M Square Research Park (L)
MR Land (L)
Lexington Park, MD
Manassas, VA
College Park, MD
Northern Virginia
National Business Park North (L)
Annapolis Junction, MD
North Gate Business Park (L)
Northwest Crossroads (L)
NOVA Office A (O) (10)
NOVA Office B (O) (10)
NOVA Office D (O)
Old Annapolis Road (O)
Paragon Park - DC 21 (O)
Paragon Park - DC 22 (O)
Patriot Point - DC 15 (O)
Patriot Point - DC 16 (O)
Patriot Point - DC 17 (O)
Patriot Ridge (L)
Redstone Gateway (L)
Route 15/Biggs Ford Road (L)
Sentry Gateway (L)
Sentry Gateway - T (O)
Sentry Gateway - V (O)
Sentry Gateway - W (O)
Sentry Gateway - X (O)
Sentry Gateway - Y (O)
Sentry Gateway - Z (O)
Westfields - Park Center (L)
Westfields Corporate Center (L)
Other Developments, including
intercompany eliminations (V)
Aberdeen, MD
San Antonio, TX
Chantilly, VA
Chantilly, VA
Chantilly, VA
Columbia, MD
Sterling, VA
Sterling, VA
Ashburn, VA
Ashburn, VA
Ashburn, VA
Springfield, VA
Huntsville, AL
Frederick, MD
San Antonio, TX
San Antonio, TX
San Antonio, TX
San Antonio, TX
San Antonio, TX
San Antonio, TX
San Antonio, TX
Chantilly, VA
Chantilly, VA
Various
Initial Cost
Gross Amounts Carried
At Close of Period
Encumbrances
(2)
—
—
Land
3,599
—
— 12,035
— 12,035
— 16,085
—
—
—
—
—
—
7,300
6,387
978
705
4,443
—
— 18,827
— 28,066
—
—
—
—
—
—
—
—
1,755
7,430
2,096
739
6,587
1,637
7,828
7,828
— 12,156
— 12,156
—
6,078
— 18,517
—
—
—
—
1,129
8,275
— 14,020
—
—
—
—
—
—
—
1,964
1,964
1,964
— 16,418
—
—
7,141
4
Building
and Land
Improvements
23,625
479
368
292
2,698
15,556
3,719
178
729
120
3,571
293
47,802
—
847
46,835
27,128
38,758
5,500
17,992
17,445
17,069
16,973
16,347
14,467
19,152
—
3,704
38,804
1,066
1,884
21,178
21,298
30,573
11,264
1,649
Costs
Capitalized
Subsequent
to Acquisition
—
—
Land
3,599
—
— 12,035
— 12,035
— 16,085
986
—
—
—
—
—
7,300
6,387
978
705
4,443
—
— 18,827
— 28,066
—
—
—
—
—
5,241
—
—
1,755
7,430
2,096
739
6,587
1,637
7,828
7,828
— 12,156
— 12,156
—
6,078
— 18,517
—
—
—
13
—
71
—
—
—
—
1,129
8,275
14,020
—
—
1,964
1,964
1,964
— 16,418
—
7,141
Building
and Land
Improvements
Total
(3)(4)
Accumulated
Depreciation
(5)
Year Built or
Renovated
Date
Acquired (6)
23,625
27,224
479
368
292
2,698
16,542
3,719
178
729
120
3,571
293
47,802
—
847
46,835
27,128
38,758
10,741
17,992
17,445
17,069
16,973
16,347
14,467
19,152
—
3,704
38,817
1,066
1,955
21,178
21,298
30,573
11,264
1,649
479
12,403
12,327
18,783
23,842
10,106
1,156
1,434
4,563
3,571
19,120
75,868
1,755
8,277
48,931
27,867
45,345
12,378
25,820
25,273
29,225
29,129
22,425
32,984
19,152
1,129
11,979
52,837
1,066
1,955
23,142
23,262
32,537
27,682
8,790
(370)
—
—
—
—
(4,475)
—
—
—
—
—
—
—
—
—
(3,403)
(1,128)
(437)
(3,509)
(100)
(68)
(752)
(709)
(520)
—
—
—
—
(10,561)
(241)
(392)
(3,787)
(3,810)
(2,144)
—
—
2017
(8)
(8)
(8)
(7)
2006
(7)
(7)
(7)
(7)
(7)
(7)
(7)
(7)
(7)
2015
2016 (8)
2017
6/9/2016
6/9/2016
12/28/2017
12/28/2017
10/27/2009
10/27/2009
9/20/2004
3/16/2005
3/24/2004
9/1/2016
1/29/2008
11/20/2017
6/29/2006
9/14/2007
1/20/2006
7/31/2002
7/31/2002
7/31/2002
1974/1985
12/14/2000
2017
2017
2016
2016
2016
(7)
(7)
(7)
(7)
1982/1985
2007
2009
2010
2010
2015
(7)
(7)
5/8/2017
5/8/2017
10/15/2015
10/15/2015
10/15/2015
3/10/2010
3/23/2010
8/28/2008
3/30/2005
3/30/2005
3/30/2005
3/30/2005
1/20/2006
1/20/2006
6/14/2005
7/18/2002
7/31/2002
283
256
4
539
543
(58)
Various
Various
$
164,506 $ 697,810 $
2,902,516 $
380,487 $ 697,810 $
3,283,003 $3,980,813 $
(801,038)
F-69
(1) A legend for the Property Type follows: (O) = Office or Data Center Shell Property; (L) = Land held or pre-construction; (D) = Wholesale Data Center; and (V) = Various.
(2) Excludes our term loan facilities of $348.0 million, unsecured senior notes of $1.2 billion, unsecured notes payable of $1.3 million, and deferred financing costs, net of premiums, on the remaining loans of $668,000.
(3) The aggregate cost of these assets for Federal income tax purposes was approximately $3.5 billion at December 31, 2017.
(4) As discussed in Note 3 to our Consolidated Financial Statements, we recognized impairment losses of $15.1 million primarily in connection with certain of our land and operating properties, including $13.7 million
related to land and operating properties still owned as of December 31, 2017.
(5) The estimated lives over which depreciation is recognized follow: Building and land improvements: 10-40 years; and tenant improvements: related lease terms.
(6) The acquisition date of multi-parcel properties reflects the date of the earliest parcel acquisition.
(7) Held or under pre-construction at December 31, 2017.
(8) Under construction or redevelopment at December 31, 2017.
(9) Classified as held for sale as of December 31, 2017.
(10) The carrying amounts of these properties under construction exclude allocated costs of the garage being constructed to support the properties.
The following table summarizes our changes in cost of properties for the years ended December 31, 2017, 2016 and 2015 (in thousands):
Beginning balance
Acquisitions of operating properties
Improvements and other additions
Sales
Impairments
Other dispositions
Ending balance
2017
2016
2015
$ 3,874,715
$ 4,158,616
$ 4,014,336
—
259,548
(138,216)
(15,116)
(118)
—
251,960
(268,038)
(143,502)
(124,321)
194,616
273,761
(172,628)
(29,548)
(121,921)
$ 3,980,813
$ 3,874,715
$ 4,158,616
The following table summarizes our changes in accumulated depreciation for the same time periods (in thousands):
Beginning balance
Depreciation expense
Sales
Impairments
Other dispositions
Ending balance
2017
2016
2015
$
715,951
$
718,680
$
703,083
107,772
(22,567)
—
(118)
105,763
(56,607)
(42,161)
(9,724)
112,695
(49,614)
(6,092)
(41,392)
$
801,038
$
715,951
$
718,680
F-70
(This page has been left blank intentionally.)
(This page has been left blank intentionally.)
ANNUAL
MEETING
The 2018 Annual Meeting
of Shareholders will be held
at 9:30 a.m. Eastern Time on
May 10, 2018, at Corporate
Office Properties Trust’s
headquarters, located at
6711 Columbia Gateway Drive,
Columbia, Maryland 21046.
C O R P O R A T E I N F O R M A T I O N
BOARD OF
TRUSTEES
Thomas F. Brady
Chairman
Stephen E. Budorick
Robert L. Denton, Sr.
Philip L. Hawkins
Elizabeth A. Hight
David M. Jacobstein
Steven D. Kesler
C. Taylor Pickett
Richard Szafranski
Lisa G. Trimberger
EXECUTIVE
OFFICERS
Stephen E. Budorick
President
+ Chief Executive Officer
Paul R. Adkins
Executive Vice President
+ Chief Operating Officer
Anthony Mifsud
Executive Vice President
+ Chief Financial Officer
INVESTOR
RELATIONS
For help with questions about
the Company, or for additional
corporate information, please
contact:
Stephanie Krewson-Kelly
Vice President, Investor Relations
Corporate Office Properties Trust
6711 Columbia Gateway Drive,
Suite 300
Columbia, Maryland 21046
Telephone: 443.285.5400
Facsimile: 443.285.7650
Email: ir@copt.com
EXECUTIVE
OFFICES
6711 Columbia Gateway Drive,
Suite 300
Columbia, Maryland 21046
Telephone: 443.285.5400
Facsimile: 443.285.7650
www.copt.com // NYSE: OFC