2018
ANNUAL
REPORT
CORPORATE OFFICE
PROPERTIES TRUST
Letter to
Shareholders
Dear fellow shareholders,
2018 marked our 20th year as a publicly traded office REIT.
Two decades ago, our Company consisted of 4.3 million square
feet of mostly generic suburban office properties in the Mid-
Atlantic region of the United States, and nine retail properties
totaling 639,000 square feet scattered primarily in the Midwest.
Our goal back then was to grow as rapidly as possible—and
primarily through acquiring more suburban office buildings.
That approach generated impressive annual FFO per share
growth, but it also left the Company with a 21 million square
foot portfolio that could no longer generate reliable cash flows,
a balance sheet that was bloated with debt, and a common
dividend that was not sustainable.
Upon joining the Company in 2011, I supported my predecessor
in launching an ambitious Strategic Reallocation Plan that would
transform our portfolio, balance sheet, and corporate culture.
Over the next seven years, we sold 11 million square feet, and
redeployed the $1.6 billion of proceeds into paying down debt
to achieve our investment grade rating, and into developing
mission critical properties for the U.S. Government and defense
contractors at our many proven Defense/IT locations. At the
end of 2018, our Company owned 18 million square feet: 16
million square feet of office properties in locations that directly
support our proven U.S. Government demand drivers, such as
the agencies at Fort Meade and at Redstone Arsenal; and two
million square feet in seven Regional Office buildings located in
Baltimore’s Inner Harbor and at two Metro-served locations in
Northern Virginia. Additionally, our balance sheet is strong, and
our common dividend is secure.
We continue to adhere to the following strategic tenets
to create shareholder value:
> Allocate capital to low risk, high value development in
durable demand locations, primarily at Defense/IT locations
> Achieve and maintain continuous access to capital to
support growth
> Manage assets to position the Company for long-term,
sustainable growth
Our disciplined approach to value creation resulted in 2018
being an excellent year. We placed 688,000 square feet of
developments into service that were 90% leased, as well
as Project EX, a highly confidential project that was 100%
Continued on Inside Back Cover
leased. We completed 1.1 million square feet of development
leasing—the second highest annual amount in our history
(see Figure 1). Four Data Center Shell build-to-suits totaling
798,000 square feet drove the bulk of activity for the year, and
we also completed the 160,000 square foot, full-building lease
with the U.S. Government for NoVA B, the third, 100%-leased
development in a secure Northern Virginia campus. We raised
$202 million of common equity during the year by drawing
proceeds from our forward equity sales agreement and by
using our At-the-Market stock program. In addition to Project
EX, we commenced six new developments, consisting of four
Data Center Shells (798,000 square feet), a 190,000 square
foot trophy office building in Washington, DC, and 8800
Redstone Gateway, a 76,000 square foot office building that
was 0% leased at year-end and which subsequently was 50%
pre-leased to a defense contractor in February 2019.
We also achieved Company-record levels of leasing in our
operating portfolio. The 2.5 million square feet of lease
renewals we completed was the greatest annual volume in
our 20-year history, and translated into a strong 78% tenant
retention rate; and we completed 596,000 square feet of
vacancy leasing—38% higher than our 2017 success.
FIGURE 1: Historical Development Leasing
)
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o
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i
m
(
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e
F
e
r
a
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S
1.4M
1.2M
1M
.8M
.6M
.4M
.2M
0
10 year average = 800,000 SF
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Continued from Inside Front Cover
FIGURE 2: DoD’s Recent Base Budget Authority
$700
$600
$617
$606
$529 $528 $530
$532
$521
$500
$496 $496 $497
)
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$400
$300
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: Tables 1-9 and 2-1 of the National Budget Estimates (Green Book); CRS
June 28, 2017 report, “Defense: FY 2018 Budget Request, Authorization, and
Appropriations;” May 2018 report by American Enterprise Institute, “Defense
Budget Peaks in 2019;” Capital Alpha Partners research; COPT’s IR Department
A healthy defense-spending environment underpinned our
leasing success in 2018, and should continue to fuel demand
in 2019. We attribute the majority of leasing we achieved to
demand related to the Department of Defense’s fiscal year
2017 budget. As Figure 2 shows, the DoD’s base budget
increased by $11 billion in 2017. The fiscal 2018 base budget
appropriation increased over the fiscal 2017 budget by $74
billion—or 14%, and we believe this bodes well for demand in
2019 and 2020. The fiscal 2019 appropriation increases the
DoD’s base budget by another 2%, and should fuel growth
in demand through 2021. The bipartisan support that exists
in Congress to fund National Defense is being driven by
the elevated military capability advancement of strategic
rivals to the U.S., and the realization that we need sustained
investment into our military to restore readiness and regain
uncontested dominance.
In summary, we celebrated our 20th anniversary by ringing the
closing bell at the New York Stock Exchange in September.
While not every employee was able to attend the event in
person, every employee has played an essential role in the
Company’s success. Their hard work and dedication within the
context of our focused strategy has positioned our Company
for sustained growth, which we expect to materialize as we
matriculate through 2019. The strong and growing demand for
our operating properties and our development locations should
accumulate into a fourth quarter run-rate that implies 3–4%
FFO growth and, we believe, positions us to enter 2020 with
solid momentum. Lastly, I also want to express my appreciation
to our dedicated shareholders for their confidence and
shared vision of our Company’s future.
Stephen E. Budorick
President + Chief Executive Officer
Stephen E. Budorick
President + Chief Executive Officer
(pictured front row, fourth from left)
Paul R. Adkins
EVP + Chief Operating Officer
(pictured front row, second from left)
Anthony Mifsud
EVP + Chief Financial Officer
(pictured front row, third from left)
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, 2018
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 every Interactive Data File required to be submitted 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 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, a smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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
Emerging growth company
Corporate Office Properties, L.P.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Corporate Office Properties Trust
Corporate Office Properties, L.P.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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 $2.7 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, 2018. 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, 2019, 110,263,078 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 $84.4 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, 2018.
Portions of the proxy statement of Corporate Office Properties Trust for its 2019 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, 2018 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, 2018, COPT owned
approximately 98.8% of the outstanding common units in COPLP; 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 and limited liability
companies (“LLCs”); 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 and LLCs. 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 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 9, Prepaid Expenses and Other Assets, Net of COPT and subsidiaries and COPLP and subsidiaries;
• Note 13, Equity of COPT and subsidiaries;
• Note 14, Equity of COPLP and subsidiaries;
• Note 19, Earnings per Share of COPT and subsidiaries and Earnings per Unit of COPLP and subsidiaries; and
• Note 21, 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
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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;
security breaches relating to cyber attacks, cyber intrusions or other factors; 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, 2018, our properties included the following:
•
•
•
•
163 properties totaling 18.1 million square feet comprised of 15.1 million square feet in 145 office properties and 3.0
million square feet in 18 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 (six office properties and four data center shells) that we estimate will
total approximately 1.3 million square feet upon completion, including two partially-operational properties; and
approximately 900 acres of land controlled for future development that we believe could be developed into approximately
11.7 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, 2018, COPT owned 98.8%
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 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’
Audit, Nominating and Corporate Governance, Compensation and Investment Committees, as well as our Corporate
6
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.
Business and Growth Strategies
Our primary goal is to create value and 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 mass production. Our office and data center shell portfolio is significantly concentrated in
Defense/IT Locations, which as of December 31, 2018 accounted for 154 of the portfolio’s 163 properties, or 87.9% of its
annualized rental revenue, and we control developable land 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”), critical power supply and operational redundancy.
Data center shells, which are properties leased to tenants to be operated as data centers in which the tenants fund the costs
for the critical power, fiber connectivity and data center infrastructure, have been a significant growth driver for our Defense/IT
Locations in recent years. From 2013 through 2018, we placed into service 17 data center shells totaling 2.8 million square
feet, and we had an additional four under construction totaling 731,000 square feet as of December 31, 2018. We enter into
long-term leases for these properties prior to commencing construction, 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:
•
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:
•
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;
•
• well-established relationships with the United States Government and its contractors;
•
extensive experience in developing:
•
•
high quality, highly-efficient office properties;
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
•
•
depth of knowledge, specialized skills and credentialed personnel in operating highly-specialized properties with high
security-oriented requirements.
Regional Office Strategy: While Defense/IT Locations are our primary focus, we focus secondarily on owning office
properties located in select urban/urban-like submarkets in the Greater Washington, DC/Baltimore region due to our strong
market knowledge in that region. We typically target submarkets with 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 of
7
office space. 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, 2018, we owned seven Regional Office properties,
representing 11.5% of our office and data center shell portfolio’s annualized rental revenue; these properties 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 other suburban properties not meeting 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) renewing tenant leases at increased rental rates
where market conditions permit; (3) leasing vacant space; (4) achievement of operating efficiencies by increasing economies of
scale and, where possible, aggregating vendor contracts to achieve volume pricing discounts; and (5) 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 property development and capital strategy.
We also aim to sustainably develop and operate our portfolio to create healthier work environments and reduce
consumption of resources 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 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 in the annual 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. We earned an overall score of “Green Star” on the GRESB survey in
each of the last four years, representing the highest quadrant of achievement on the survey.
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, joint venture structures for
certain investments and, to a lesser extent, issuances of preferred shares in COPT and preferred units in COPLP;
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• monitoring capacity available under revolving credit facilities and equity 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 sales of interests in properties 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, 2018, 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 sub-segment as of
December 31, 2018 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, 2018, Defense/IT Locations comprised 154 of our office and data center shell portfolio’s properties,
representing 88.0% of its square feet in operations, while Regional Office comprised seven of the portfolio’s properties, or
11.1% 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, 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, 2018, we had 378 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. 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 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 office 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 office 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, 2018, 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
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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 reduced or delayed
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 be affected by 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 decrease our likelihood of successfully renewing tenants at favorable terms or leasing vacant space in existing
properties or newly-constructed properties. In addition, such 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 need 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, prolonged government shutdown or general downturn of business.
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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, 2018, our 10 largest tenants accounted for 61.7% of our
total annualized rental revenue, the four largest of these tenants accounted for 50.0%, and the United States Government, our
largest tenant, accounted for 32.7%. 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,
2018; 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, 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, 2018, 87.9% 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.
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 office 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
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market conditions, including real estate lending conditions, are not favorable. Such illiquidity could limit our ability to fund
capital needs or quickly change our portfolio of properties in response to changes in economic or other conditions. 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 operating 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 of actual costs exceeding our budgets,
conditions occurring that delay or preclude project completion and projected leasing not occurring. 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 pursue acquisitions of
existing commercial real estate properties as part of our property development and acquisition strategy. 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.
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.
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.
Data center space in certain of our properties may be difficult to reposition for alternative uses. Certain of our
properties contain data center space, which is highly specialized space containing extensive electrical and mechanical systems
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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. A few of our properties are pledged by us to support repayment of indebtedness. Any foreclosure on such
properties could result in loss of income and/or assets.
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.
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, 2018, 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 a negative outlook by the
credit rating agencies would have a materially 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 development activities and acquisitions. 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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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 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.
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.
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
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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.
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.
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 or 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
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.
15
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
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 annual taxable income. 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. We cannot predict whether, when or to what extent 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 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, revenue 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;
•
the level of institutional investor interest in COPT;
16
general economic and business conditions;
prevailing interest rates;
our financial performance;
our underlying asset value;
•
•
•
•
• market perception of our financial condition, performance, dividends and growth potential; and
•
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, 2018
(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
34
22
87
13
7
21
8
12
6
154
7
2
163
1
3,816
2,665
1,623
8,104
1,999
953
1,252
669
1,991
962
15,930
2,007
157
18,094
19.25 MW
87.8 % $
94.9 %
92.5 %
91.1 %
91.3 %
100.0 %
90.5 %
99.0 %
100.0 %
100.0 %
93.6 %
89.2 %
77.2 %
93.0%
87.6%
$
$
133,339
71,473
42,557
247,369
59,926
51,721
31,301
14,047
29,474
5,515
439,353
57,232
3,196
499,781
23,117
522,898
517,383
$39.78
28.26
28.33
33.50
32.84
54.27
27.62
21.22
14.80
11.47
29.84
31.96
26.33
$30.04
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, 2018.
(2) Annualized rental revenue is the monthly contractual base rent as of December 31, 2018 (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, 2018. 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 $29.83 for our total office and data center shell portfolio,
$33.31 for the Fort Meade/BW Corridor (our largest Defense/IT Location sub-segment) and $31.37 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, 2018 (dollars and square feet in thousands):
Property and Location
Under Construction
Fort Meade/BW Corridor:
5801 University Research Court (2)
College Park, Maryland
Redstone Arsenal:
4100 Market Street
Huntsville, Alabama
4000 Market Street (2)
Huntsville, Alabama
8800 Redstone Gateway
Huntsville, Alabama
Subtotal / Average
Data Center Shells:
IN 1
Northern Virginia
DC 23
Northern Virginia
MP 1
Northern Virginia
IN 2
Northern Virginia
Subtotal / Average
Regional Office:
2100 L Street
Washington, DC
Total Under Construction
Under Redevelopment
Fort Meade/BW Corridor:
6950 Columbia Gateway
Columbia, Maryland
Estimated
Rentable
Square Feet
Upon
Completion
Percentage
Leased
Calendar
Quarter
Anticipated to
be Operational
Costs
Incurred to
Date (1)
Estimated
Costs to
Complete (1)
71
36
43
76
155
150
149
216
216
731
100 %
2Q 19
$
16,070
$
2,774
59 %
4Q 19
40 %
4Q 19
0 %
25 %
3Q 20
4,898
6,973
992
12,863
2,561
2,126
16,333
21,020
100 %
1Q 19
13,362
5,383
100 %
2Q 19
4,902
16,445
100 %
2Q 19
25,306
10,774
100 %
100 %
2Q 19
7,298
50,868
22,302
54,904
190
1,147
43 %
80%
1Q 21
82,619
91,381
162,420
170,079
106
0%
2Q 20
$
11,642
$
13,492
(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, 2018. Therefore, the properties and their occupied square feet are
included in our operating property statistics, including the information set forth on the previous page.
19
The following table provides certain information about land that we owned or controlled as of December 31, 2018, 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
Total land owned/controlled for future development
Other land owned/controlled
Total Land Owned/Controlled
Estimated
Developable
Square Feet
Acres
196
19
131
346
59
49
44
414
10
922
10
932
150
1,082
2,106
290
1,440
3,836
1,965
785
109
3,928
216
10,839
900
11,739
1,638
13,377
(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.
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, 2018 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
2019: Office and Data Center Shells
2,094
$
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
Wholesale Data Center
2029: Office and Data Center Shells
Wholesale Data Center
2030: Office and Data Center Shells
2031: Office and Data Center Shells
2033: Office and Data Center Shells
2034: Office and Data Center Shells
2037: Office and Data Center Shells
2063: Office and Data Center Shells
Total Operating Properties
Total Office and Data Center Shells
N/A
2,127
N/A
1,476
N/A
1,372
N/A
1,756
N/A
1,835
2,097
1,163
652
952
N/A
810
N/A
31
216
240
—
—
64,081
2,014
72,597
16,837
46,172
116
44,146
1,941
56,995
1,981
45,060
70,983
31,514
13,522
21,272
224
19,670
4
660
3,143
7,381
2,323
137
—
16,821
16,821
$
$
125
522,898
499,781
12.3 %
0.4 %
13.9 %
3.2 %
8.8 %
— %
8.5 %
0.4 %
10.9 %
0.4 %
8.6 %
13.6 %
6.0 %
2.6 %
4.1 %
— %
3.8 %
— %
0.1 %
0.6 %
1.4 %
0.4 %
— %
— %
100.0%
100.0%
$30.61
N/A
34.14
N/A
31.29
N/A
32.16
N/A
32.46
N/A
26.54
35.02
27.10
20.75
22.34
N/A
24.28
N/A
21.47
14.54
30.75
N/A
N/A
N/A
N/A
$30.04
(1) 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 2019, we believe that the weighted average annualized
rental revenue per occupied square foot for such leases as of December 31, 2018 was, on average, approximately 1% to 3%
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 number of
holders of record of COPT’s common shares was 457 as of January 31, 2019. This number does not include shareholders
whose shares were held of record by a brokerage house or clearing agency, but does include any such brokerage house or
clearing agency as one record holder.
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 January 31, 2019, there were 29 holders of
record of COPLP’s common units.
Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended December 31, 2018, 8,988 of COPLP’s common units were exchanged for 8,988 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, 2013 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
12/31/13
$ 100.00
$ 100.00
$ 100.00
12/31/14
$ 124.69
$ 113.69
$ 128.03
12/31/15
$ 100.48
$ 115.26
$ 131.64
12/31/16
$ 149.31
$ 129.05
$ 143.00
12/31/17
$ 144.45
$ 157.22
$ 155.41
12/31/18
$ 108.56
$ 150.33
$ 149.12
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, 2014 through 2018. 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
Operating 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
Interest expense
Interest and other income
Gain on sales of real estate (1)
(Loss) gain on early extinguishment of debt
Income from continuing operations before equity in income
of unconsolidated entities and income taxes
Equity in income of unconsolidated entities
Income tax benefit (expense)
Income from continuing operations
Discontinued operations (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 attributable to COPT common shareholders
Basic earnings per common share (4)
Income from continuing operations
Net income
Diluted earnings per common share (4)
Income from continuing operations
Net income
2018
2017
2016
2015
2014
$ 517,253
60,859
578,112
$ 509,980
102,840
612,820
$525,964
48,364
574,328
$ 519,064
106,402
625,466
$ 479,725
106,748
586,473
201,035
190,964
197,530
194,494
179,934
137,116
58,326
2,367
28,900
5,840
433,584
(75,385)
4,358
2,340
(258)
134,228
99,618
15,123
30,837
6,213
476,983
(76,983)
6,318
9,890
(513)
132,719
45,481
101,391
36,553
8,244
521,918
(83,163)
5,444
59,679
(1,110)
140,025
102,696
23,289
31,361
13,507
505,372
(89,074)
4,517
68,047
85,275
136,086
100,058
1,416
31,794
5,573
454,861
(92,393)
4,923
10,671
(9,552)
75,583
2,697
363
78,643
—
78,643
(6,342)
72,301
—
—
$ 72,301
74,549
1,490
(1,098)
74,941
—
74,941
(6,196)
68,745
(6,219)
(6,847)
$ 55,679
33,260
752
(244)
33,768
—
33,768
(4,878)
28,890
(14,297)
(17)
$ 14,576
188,859
62
(199)
188,722
156
188,878
(10,578)
178,300
(14,210)
—
$ 164,090
45,261
229
(310)
45,180
26
45,206
(4,951)
40,255
(15,939)
(1,769)
$ 22,547
$
$
$
$
0.69
0.69
0.69
0.69
$
$
$
$
0.56
0.56
0.56
0.56
$
$
$
$
0.15
0.15
0.15
0.15
$
$
$
$
1.74
1.74
1.74
1.74
$
$
$
$
0.25
0.25
0.25
0.25
Weighted average common shares outstanding – basic
Weighted average common shares outstanding – diluted
103,946
104,125
98,969
99,155
94,502
94,594
93,914
97,667
88,092
88,263
24
2018
2017
2016
2015
2014
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 December 31):
Cash flows provided by (used in):
$3,250,626
$3,656,005
$1,823,909
$2,002,697
26,260
$
$1,627,048
$3,141,105
$3,595,205
$1,828,333
$2,103,773
23,125
$
$1,468,307
$3,073,362
$3,798,998
$1,904,001
$2,163,242
22,979
$
$1,612,777
$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
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)
$ 230,121
$ 234,270
71,174
$ 180,482
$ (232,918) $ (89,363) $
49,555
$
$
71,839
$ 211,942
$ 215,800
1.97
$
2.01
$
1.10
$
$ (338,546) $ (155,088) $ 156,338
$ 169,787
$
55,230
$ 249,454
$ 199,170
$ 195,824
$ 207,356
2.55
$
1.94
$
2.01
$
2.02
$
1.10
$
1.10
$
$
14,157
$ 178,601
$ 197,157
1.82
$
2.01
$
1.10
$
$ 203,457
$ 205,733
$ (309,072) $ (210,740)
$ (41,509)
$
22,115
$ 155,296
$ 173,110
1.69
$
1.88
$
1.10
$
163
18,094
159
17,345
164
17,190
177
18,053
173
16,790
(1) Reflects gain from sales of properties and unconsolidated real estate joint ventures not associated with discontinued operations.
(2) Includes income derived from 31 operating properties disposed in 2013.
(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 and the Series H Preferred Shares in 2014.
(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.
Note: Prior period amounts include retrospective adjustments in connection with our adoption of recent accounting pronouncements in
2018 to: revise the recognition pattern for a gain related to the partial sale of a real estate asset; remove the effect of changes in
restricted cash from being reported as either operating or investing activities on our statements of cash flows; and revise the
classification of certain cash receipts and cash payments on our statements of cash flows. Refer to the section of Note 2 to the
consolidated financial statements entitled “Recent Accounting Pronouncements” for additional information.
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
Operating 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
Interest expense
Interest and other income
Gain on sales of real estate (1)
(Loss) gain on early extinguishment of debt
Income from continuing operations before equity in income of
unconsolidated entities and income taxes
Equity in income of unconsolidated entities
Income tax benefit (expense)
Income from continuing operations
Discontinued operations (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 attributable to COPLP common unitholders
Basic earnings per common unit (4)
Income from continuing operations
Net income
Diluted earnings per common unit (4)
Income from continuing operations
Net income
2018
2017
2016
2015
2014
$ 517,253
60,859
578,112
$ 509,980
102,840
612,820
$ 525,964
48,364
574,328
$ 519,064
106,402
625,466
$ 479,725
106,748
586,473
201,035
190,964
197,530
194,494
179,934
137,116
58,326
2,367
28,900
5,840
433,584
(75,385)
4,358
2,340
(258)
134,228
99,618
15,123
30,837
6,213
476,983
(76,983)
6,318
9,890
(513)
132,719
45,481
101,391
36,553
8,244
521,918
(83,163)
5,444
59,679
(1,110)
140,025
102,696
23,289
31,361
13,507
505,372
(89,074)
4,517
68,047
85,275
136,086
100,058
1,416
31,794
5,573
454,861
(92,393)
4,923
10,671
(9,552)
75,583
2,697
363
78,643
—
78,643
(3,940)
74,703
(660)
—
$ 74,043
74,549
1,490
(1,098)
74,941
—
74,941
(3,646)
71,295
(6,879)
(6,847)
$ 57,569
33,260
752
(244)
33,768
—
33,768
(3,715)
30,053
(14,957)
(17)
$ 15,079
188,859
62
(199)
188,722
156
188,878
(3,520)
185,358
(14,870)
—
$ 170,488
45,261
229
(310)
45,180
26
45,206
(3,276)
41,930
(16,599)
(1,769)
$ 23,562
$
$
$
$
0.69
0.69
0.69
0.69
$
$
$
$
0.56
0.56
0.56
0.56
$
$
$
$
0.15
0.15
0.15
0.15
$
$
$
$
1.74
1.74
1.74
1.74
$
$
$
$
0.25
0.25
0.25
0.25
Weighted average common units outstanding – basic
Weighted average common units outstanding – diluted
106,414
106,593
102,331
102,517
98,135
98,227
97,606
97,667
91,989
92,160
26
2018
2017
2016
2015
2014
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 December 31):
Cash flows provided by (used in):
$3,250,626
$3,652,137
$1,823,909
$1,998,829
26,260
$
$1,627,048
$3,141,105
$3,590,589
$1,828,333
$2,099,157
23,125
$
$1,468,307
$3,073,362
$3,793,561
$1,904,001
$2,157,805
22,979
$
$1,612,777
$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
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)
$ 234,270
71,174
$ 230,121
$ 180,482
$ (232,918) $ (89,363) $
$
$
$
49,555
73,581
1.10
57,120
1.10
$
$
$ (338,546) $ (155,088) $ 156,338
$ 169,782
$
1.10
$
$
14,660
1.10
$ 203,457
$ 205,733
$ (309,072) $ (210,740)
$ (41,509)
23,130
$
1.10
$
163
18,094
159
17,345
164
17,190
177
18,053
173
16,790
(1) Reflects gain from sales of properties and unconsolidated real estate joint ventures not associated with discontinued operations.
(2) Includes income derived from 31 operating properties disposed in 2013.
(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 and the Series H Preferred Units in 2014.
(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.
Note: Prior period amounts include retrospective adjustments in connection with our adoption of recent accounting pronouncements in
2018 to: revise the recognition pattern for a gain related to the partial sale of a real estate asset; remove the effect of changes in
restricted cash from being reported as either operating or investing activities on our statements of cash flows; and revise the
classification of certain cash receipts and cash payments on our statements of cash flows. Refer to the section of Note 2 to the
consolidated financial statements entitled “Recent Accounting Pronouncements” for additional information.
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 reduced or delayed
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;
security breaches relating to cyber attacks, cyber intrusions or other factors; and
environmental requirements.
We undertake no obligation to update or supplement forward-looking statements.
Overview
In 2018, we completed leasing on 4.2 million square feet, representing only the second time in the Company’s history that
our annual leasing volume exceeded 4.0 million square feet. This leasing volume was highlighted by a historically:
•
•
high volume of square feet renewed, which contributed to a tenant retention rate of 78.4% for the year (defined below in
the section entitled “Occupancy and Leasing”); and
near high volume of development space leasing driven primarily by demand for Data Center Shell space.
We believe that this leasing activity is reflective of strengthening demand for space in our Defense/IT Locations driven
primarily by:
•
a healthier and more predictable defense spending environment and bipartisan support to fund defense. Clarity regarding
defense funding tends to improve the government’s process for awarding contracts to prospective tenants, which improves
our ability to lease space in Defense/IT Locations properties. We believe that the government’s successive increases in
defense funding for fiscal years 2016 and 2017 served to bring such clarity relative to prior years and, in turn, fueled much
of the growth in demand for office space by the United States Government and its contractors that we observed in 2018. In
addition, despite the government starting its fiscal year 2018 under yet another budget Continuing Resolution, the fiscal
year: 2018 budget was ultimately signed into law during the year; and 2019 Department of Defense appropriations were
28
•
enacted in September 2018, representing the first time in ten years that the department received its annual appropriations
on time. These budgets included increased funding levels for the Department of Defense's discretionary base budget
authority of 14% from fiscal year 2017 to 2018 and 2% from fiscal year 2018 to 2019; and
continued strong demand for data center shell space. Data center shells have been a significant growth driver for our
Defense/IT Locations in recent years. Development leasing of data center shells totaled 798,000 square feet in 2018,
743,000 square feet in 2017 and 728,000 square feet in 2016. All of this leasing pertained to properties in Northern
Virginia, one of the largest data center markets in the world, and represented further expansion of our relationship with an
existing tenant.
After ending 2017 with our office and data center shell portfolio 93.6% occupied, our highest year-end occupancy since
2005, we ended 2018 with the portfolio 93.0% occupied. This decrease in occupancy was due primarily to the addition in 2018
of unoccupied space in a newly-constructed property targeted for United States Government use that has taken longer than
expected to lease. Our Same Properties (defined below) were 93.0% occupied as of December 31, 2018, an increase from
92.1% as of December 31, 2017, with average occupancy of 91.5% in 2018.
We had an active year for development activities in 2018, with 688,000 square feet placed in service in six newly-
constructed and one redeveloped Defense/IT Location properties, including 514,000 square feet of data center shell space.
These properties were 90.3% leased as of December 31, 2018. We also placed into service land that was 100% leased under a
long-term contract as of December 31, 2018. As of December 31, 2018, we had ten properties under construction or
redevelopment that we estimate will total approximately 1.3 million square feet upon completion, including two partially-
operational properties.
From a capital perspective in 2018:
• we had cash outlays of $160.0 million during the year to fund construction, development and redevelopment costs initially
funded primarily from borrowings under our Revolving Credit Facility;
• COPT issued:
5.9 million common shares under forward equity sale agreements originated in 2017 for net proceeds of $172.5
million; and
992,000 common shares at a weighted average price of $30.46 per share under its existing at-the-market (“ATM”)
stock offering program (the “2016 ATM Program”) for net proceeds of $29.8 million.
COPT contributed the net proceeds from these issuances to COPLP in exchange for an equal number of units in COPLP.
The proceeds were used primarily to repay borrowings under our Revolving Credit Facility; and
• we ended 2018 with $1.82 billion in debt, which was virtually unchanged from year end 2017.
While net operating income (“NOI”) from real estate operations, our segment performance measure discussed further
below, decreased by approximately $3 million from 2017 to 2018 in total and for our Same Properties, these results varied
significantly between our segments. Most notably, and as discussed further in the section below entitled “Results of
Operations,” our Same Properties NOI from real estate operations increased $3.7 million for our Defense/IT Locations
properties but decreased $5.7 million for our Regional Office properties. Our net income increased $3.7 million from 2017 to
2018, which included: a $12.8 million decrease in impairment losses; offset in part by a $7.6 million decrease in gain on sales
of real estate.
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
29
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, for purposes of amounts reported as of December 31, 2017 and 2016, 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 were 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 indemnified it for up to $20 million in
losses it could incur related to a potential defined capital event occurring on the property; our financial guaranty to the
buyer expired on October 1, 2018, resulting in no losses to us. Accordingly, we did not recognize the sale of this property
for accounting purposes until the expiration of the guaranty on October 1, 2018.
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, 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.
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
30
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 Operating 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 Operating 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
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 virtually all 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.
31
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; or at fair value through net income (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 fair value
method of accounting when we own an equity 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
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.
32
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.
General Dynamics Corporation (1)
The Boeing Company (1)
CACI International Inc.
Northrop Grumman Corporation (1)
CareFirst Inc.
Booz Allen Hamilton, Inc.
University of Maryland
Wells Fargo & Company (1)
Science Applications International Corp. (1)
The Raytheon Company (1)
Miles and Stockbridge, PC
KEYW Corporation
Kratos Defense and Security Solutions (1)
Transamerica Life Insurance Company
The MITRE Corporation
Accenture Federal Services, LLC
AT&T Corporation (1)
International Business Machines Corp.
Harris Corporation
CSRA Inc. (1)
Subtotal of 20 largest tenants
All remaining tenants
Total
Total annualized rental revenue
(1) Includes affiliated organizations.
Percentage of Annualized Rental
Revenue of Operating Properties
for 20 Largest Tenants as of December 31,
2018
2017
2016
32.7%
8.9%
4.7%
3.8%
2.4%
2.3%
2.2%
2.0%
1.4%
1.3%
1.3%
1.1%
1.1%
1.0%
1.0%
0.9%
0.8%
0.7%
0.7%
0.7%
N/A
N/A
71.0%
29.0%
100.0%
31.7%
7.6%
3.5%
4.2%
1.5%
2.2%
2.1%
2.0%
1.0%
1.7%
0.9%
1.1%
1.1%
1.2%
1.0%
0.9%
0.9%
0.7%
1.2%
N/A
N/A
2.3%
68.8%
31.2%
100.0%
29.8%
5.6%
4.1%
4.1%
1.5%
4.6%
2.2%
1.9%
1.0%
1.5%
0.9%
1.2%
1.0%
1.2%
0.9%
1.0%
0.9%
N/A
1.2%
N/A
1.0%
2.2%
67.8%
32.2%
100.0%
$ 522,898
$ 501,212
$ 492,363
The United States Government’s concentration increased each of the last two years due primarily to its occupancy of newly-
constructed properties in 2018 and 2017 and our disposition in 2017 of properties in which it was not a tenant.
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,
Number of Properties as of
December 31,
2018
2017
2016
2018
2017
2016
49.5%
12.0%
10.3%
6.3%
2.8%
7.0%
87.9%
11.5%
0.6%
100.0%
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%
87
13
7
21
8
18
154
7
2
163
87
12
7
21
7
15
149
7
3
159
86
12
7
21
7
13
146
13
5
164
The changes reflected above between year end 2017 and 2018 were attributable primarily to growth in our Data Center Shells
sub-segment from newly-constructed properties placed in service and increased occupancy in our Northern Virginia Defense/IT
sub-segment. The changes reflected above between year end 2016 and 2017 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; the Data Center Shells sub-segment’s concentration was unchanged between year end 2016 and 2017 because the
growth from newly-constructed properties placed in service was offset by the 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,
2017
2016
2018
93.0%
93.6%
92.1%
91.1%
91.3%
100.0%
90.5%
99.0%
100.0%
93.6%
89.2%
77.2%
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%
Average contractual annualized rental rate per square foot at year end (1)
$ 30.04
$ 29.84
$ 30.16
(1) Includes estimated expense reimbursements. The decrease between year end 2016 and 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, 2017
Vacated upon lease expiration (1)
Occupancy for new leases (2)
Constructed or redeveloped (3)
Removed from operations (4)
Other changes
December 31, 2018
Rentable
Square Feet
Occupied
Square Feet
(in thousands)
17,345
—
—
1,018
(241)
(28)
18,094
16,227
(789)
578
811
—
(6)
16,821
(1) Includes lease terminations and space reductions occurring in connection with lease renewals.
(2) Excludes occupancy of vacant square feet acquired or developed.
(3) Includes the addition of 330,000 square feet in two properties that were completed in 2016 but reported as construction projects through
December 31, 2017 since they were held for future lease to the United States Government. These square feet were 48.5% occupied as of
December 31, 2018 and unoccupied as of December 31, 2017.
(4) Includes the removal of one property for which we have no leasing plan or intention to allocate future capital and one property
reclassified as redevelopment.
The decrease in occupancy rate from December 31, 2017 to December 31, 2018, in total and for the Fort Meade/BW Corridor
sub-segment, was due in large part to the addition in 2018 of unoccupied space in a newly-constructed property targeted for
United States Government use that has taken longer than expected to lease. With regard to other segment occupancy trends:
• Northern Virginia Defense/IT and Navy Support Locations: Occupancy increased due to progress we made in leasing
previously vacant space in these sub-segments;
• Regional Office: Includes properties in Baltimore City and two sub-markets in Northern Virginia. While total occupancy
in this segment decreased only slightly from year end 2017 to 2018, occupancy decreases in our Northern Virginia
submarkets (which were 79.5% occupied as of December 31, 2018) more than offset the effect of an increase in Baltimore
City (which was 93.4% occupied as of December 31, 2018). As of December 31, 2018, we had scheduled lease
expirations in 2019 for 22,000 square feet, constituting 4% of these Northern Virginia sub-markets’ occupied square feet.
• Other: As of December 31, 2018, our Other segment included two properties totaling 157,000 square feet in Aberdeen,
Maryland that we are not expecting to hold long-term.
In 2018, we completed 4.2 million square feet of leasing, including 1.1 million square feet of construction and
redevelopment space. Our construction and redevelopment leasing was highlighted by five data center shells in Northern
Virginia totaling 798,000 square feet and an office property in our Northern Virginia Defense/IT sub-segment totaling 159,000
square feet.
In 2018, we renewed leases on 2.5 million square feet, representing 78.4% of the square footage of our lease expirations
(including the effect of early renewals). The annualized rents of these renewals (totaling $31.74 per square foot) decreased on
average by approximately 2.0% and the GAAP rents (totaling $32.58 per square foot) increased on average by approximately
6.8% relative to the leases previously in place for the space. The renewed leases had a weighted average lease term of
approximately 3.8 years and the per annum average estimated tenant improvements and lease costs associated with completing
the leasing was approximately $2.09 per square foot.
In 2018, we also completed 596,000 square feet in leasing of vacant space. The annualized rents of this leasing totaled
$23.48 per square foot and the GAAP rents totaled $23.82 per square foot; these leases had a weighted average lease term of
approximately 7.4 years and the per annum average estimated tenant improvements and lease costs associated with completing
this leasing was approximately $5.72 per square foot.
35
Wholesale Data Center
Our 19.25 megawatt wholesale data center had 16.86 megawatts leased as of December 31, 2018 and 2017.
Lease Expirations
The table below sets forth as of December 31, 2018 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
2019
2020
2021
2022
2023
Thereafter
Total
8.5% 7.0% 5.9% 3.8% 8.6%
1.4% 1.0% 0.6% 0.9% 0.9%
0.0% 2.2% 0.0% 0.0% 0.0%
0.9% 1.8% 1.4% 0.6% 0.5%
0.2% 1.0% 0.7% 0.0% 0.0%
0.5% 0.0% 0.0% 0.0% 0.0%
0.7% 0.7% 0.2% 3.1% 0.9%
0.1% 0.1% 0.1% 0.0% 0.0%
0.4% 3.2% 0.0% 0.4% 0.4%
12.7% 17.0% 8.9% 8.8% 11.3%
13.5% 47.3%
6.7% 11.5%
9.9%
7.7%
6.0%
0.8%
2.7%
0.8%
6.2%
6.7%
5.3% 10.9%
0.6%
0.3%
4.4%
0.0%
41.3% 100.0%
For our office and data center shell properties, our weighted average lease term as of December 31, 2018 was
approximately 4.9 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 2019 was, on average, approximately 1% to 3% higher than estimated
current market rents for the related space, with specific results varying by segment. Our wholesale data center had scheduled
lease expirations in 2020 for 73% of its annualized rental revenue.
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; 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,” 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; and
disposed (including a property reported as held for sale since December 31, 2017, the sale of which in 2017 was not
recognized for accounting purposes until the expiration of the guaranty on October 1, 2018); and
•
•
•
our wholesale data center.
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
36
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 net 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 net income 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, 2018 and 2017
2018
For the Years Ended December 31,
2017
(in thousands)
Variance
Revenues
Revenues from real estate operations
Construction contract and other service revenues
Total revenues
Operating 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
Interest expense
Interest and other income
Gain on sales of real estate
Loss on early extinguishment of debt
Equity in income of unconsolidated entities
Income tax benefit (expense)
Net income
$
517,253
60,859
578,112
$
509,980
102,840
612,820
$
7,273
(41,981)
(34,708)
201,035
137,116
58,326
2,367
28,900
5,840
433,584
(75,385)
4,358
2,340
(258)
2,697
363
78,643
$
190,964
134,228
99,618
15,123
30,837
6,213
476,983
(76,983)
6,318
9,890
(513)
1,490
(1,098)
74,941
$
10,071
2,888
(41,292)
(12,756)
(1,937)
(373)
(43,399)
1,598
(1,960)
(7,550)
255
1,207
1,461
3,702
$
37
NOI from Real Estate Operations
For the Years Ended December 31,
2017
(Dollars in thousands, except per square foot data)
Variance
2018
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
357,076
3,231
95,002
455,309
28,788
31,892
140
1,124
517,253
(175,318)
(8,851)
(16,342)
16
(540)
(201,035)
$
354,984
2,911
94,430
452,325
11,545
28,875
14,652
2,583
509,980
(169,446)
(3,690)
(13,551)
(2,834)
(1,443)
(190,964)
$
2,092
320
572
2,984
17,243
3,017
(14,512)
(1,459)
7,273
(5,872)
(5,161)
(2,791)
2,850
903
(10,071)
Same Properties UJV NOI allocable to COPT
4,818
4,805
13
NOI from real estate operations
Same Properties
Constructed and redeveloped properties placed in service
Wholesale data center
Dispositions
Other
Same Properties NOI from real estate operations by segment
Defense/IT Locations
Regional Office
Other
Same Properties rent statistics
Average occupancy rate
Average straight-line rent per occupied square foot (1)
284,809
19,937
15,550
156
584
321,036
252,215
30,784
1,810
284,809
91.5%
25.72
$
$
$
$
$
$
$
$
287,684
7,855
15,324
11,818
1,140
323,821
248,501
36,521
2,662
287,684
91.6%
25.51
(2,875)
12,082
226
(11,662)
(556)
(2,785)
3,714
(5,737)
(852)
(2,875)
-0.1%
0.21
$
$
$
$
(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 147 properties, comprising 89.6% of our office and data center shell portfolio’s
square footage as of December 31, 2018. This pool of properties included the following changes from the pool used for
purposes of comparing 2017 and 2016 in our 2017 Annual Report on Form 10-K: the addition of 14 properties placed in service
and 100% operational on or before January 1, 2017 (including six unconsolidated real estate joint venture properties
and two properties added to our rentable square feet in 2018 that were previously reported as construction projects since they
were held for future lease to the United States Government); and the removal of one property in 2018 for which we have no
leasing plan or intention to allocate future capital and one property reclassified as redevelopment.
38
As reflected above, our decrease in Same Properties NOI from real estate operations was due to a 15.7% decrease in our
Regional Office segment from 2017 to 2018, offset in part by a 1.5% increase in our Defense/IT Locations from 2017 to 2018.
The decrease in the Regional Office segment was due primarily to decreased occupancy in the segment’s Northern Virginia
submarkets and an increase in operating expenses, net of tenant recovery revenue, in our Baltimore City properties.
Our NOI from constructed and redeveloped properties placed in service included 16 properties and land under a long-term
contract placed in service in 2017 and 2018.
Our property operating expense included bad debt expense of $339,000 in 2018 and $378,000 in 2017, each representing
0.07% of our revenue from real estate operations for the respective years.
NOI from Service Operations
Construction contract and other service revenues
Construction contract and other service expenses
NOI from service operations
$
$
60,859
58,326
2,533
2018
2017
(in thousands)
$ 102,840
99,618
3,222
$
Variance
$ (41,981)
(41,292)
(689)
$
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. 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 income relative to our real
estate operations.
Impairment Losses
As discussed further below, the decrease in impairment losses was attributable primarily to impairment losses recognized
in our Aberdeen, Maryland (“Aberdeen”) portfolio in 2017.
2018
In the fourth quarter of 2018, we abandoned plans to redevelop a property in our Fort Meade/BW Corridor sub-segment
after we completed leasing on the property that did not require any redevelopment. Accordingly, we recognized an impairment
loss of $2.4 million representing pre-development costs associated with the property.
2017
In the fourth quarter of 2017, our assessment of weakening leasing prospects and expected enduring vacancy in our
Aberdeen portfolio indicated that these properties could be impaired. We 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 of 2017.
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.
39
General, Administrative and Leasing Expenses
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,
2018
2017
Construction, development, redevelopment, capital and tenant improvements
Leasing and other
Total
$
$
$
(in thousands)
8,163
2,912
11,075
$
7,879
1,396
9,275
The increase in capitalized costs for leasing and other from 2017 to 2018 was due to our implementation of an enterprise
resource planning software package.
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 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,
2017
2018
(in thousands)
53,190
$
6,766
11,257
2,928
3,216
2,419
2,436
(5,229)
76,983
53,254
6,933
11,216
1,954
(407)
5,873
2,491
(5,929)
75,385
64
167
(41)
(974)
(3,623)
3,454
55
(700)
(1,598)
$
$
Our average outstanding debt was $1.9 billion in 2018 and 2017, and our weighted average effective interest rate on debt was
approximately 4.1% in 2018 and 2017.
Gain on Sales of Real Estate
Gains on sales of real estate decreased due to fewer disposition transactions in 2018 relative to 2017.
40
Comparison of Statements of Operations for the Years Ended December 31, 2017 and 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
Operating 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
Interest expense
Interest and other income
Gain on sales of real estate
Loss on early extinguishment of debt
Equity in income of unconsolidated entities
Income tax expense
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
(76,983)
6,318
9,890
(513)
1,490
(1,098)
74,941
$
197,530
132,719
45,481
101,391
36,553
8,244
521,918
(83,163)
5,444
59,679
(1,110)
752
(244)
33,768
$
(6,566)
1,509
54,137
(86,268)
(5,716)
(2,031)
(44,935)
6,180
874
(49,789)
597
738
(854)
41,173
$
41
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
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
343,425
2,911
92,732
439,068
24,112
28,875
14,652
3,273
509,980
(166,099)
(6,601)
(13,551)
(2,834)
(1,879)
(190,964)
$
336,254
2,279
94,763
433,296
7,749
26,869
54,531
3,519
525,964
(166,196)
(2,330)
(11,512)
(15,495)
(1,997)
(197,530)
$
7,171
632
(2,031)
5,772
16,363
2,006
(39,879)
(246)
(15,984)
97
(4,271)
(2,039)
12,661
118
6,566
UJV NOI allocable to COPT
4,805
2,145
2,660
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 NOI from real estate operations by segment
Defense/IT Locations
Regional Office
Other
Same Properties rent statistics
Average occupancy rate
Average straight-line rent per occupied square foot (1)
272,969
17,511
15,324
11,818
4,805
1,394
323,821
234,146
36,521
2,302
272,969
92.4%
25.99
$
$
$
$
267,100
5,419
15,357
39,036
2,145
1,522
330,579
226,258
38,522
2,320
267,100
91.4%
25.76
5,869
12,092
(33)
(27,218)
2,660
(128)
(6,758)
7,888
(2,001)
(18)
5,869
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 134 properties, comprising 82.4% of our office and data center shell portfolio’s
square footage as of December 31, 2017. This pool of properties changed from the pool used for purposes of comparing 2017
and 2016 in our 2017 Annual Report on Form 10-K due to the addition of two properties with qualifying ground leases
reclassified to same office and the removal of one property reclassified as redevelopment.
42
As reflected above, our decrease in Same Properties NOI from real estate operations was due to a 3.5% increase in our
Defense/IT Locations from 2016 to 2017, offset in part by a 5.2% decrease in our Regional Office segment from 2016 to 2017.
These changes were due primarily to occupancy changes in the respective segments.
Our NOI from constructed properties placed in service included 17 properties placed in service in 2016 and 2017.
Our property operating expense included bad debt expense of $378,000 in 2017 and none in 2016.
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.
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.
Refer to 2017 impairment losses described above in our explanation for 2018 losses as compared to 2017.
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
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;
43
•
•
$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.
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, compared to $732,000 in such costs recognized in 2017. 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
$
$
44
$
(in thousands)
7,879
1,396
9,275
$
7,418
1,115
8,533
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 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,
2017
2016
Variance
$ 53,190
6,766
11,257
2,928
3,216
2,419
2,436
(5,229)
$ 76,983
(in thousands)
$ 53,129
12,487
10,543
4,573
4,230
1,511
2,413
(5,723)
$ 83,163
$
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 was approximately 4.1% in 2017 and 2016.
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.
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
45
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 and nonrecurring improvements;
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 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.
46
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, 2014 through
2018 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 FFO available to common shares and common unit holders
Redeemable noncontrolling interests
Diluted FFO available to common shares and common unit holders
Operating property acquisition costs
Gain on sales of non-operating properties
Impairment losses on non-operating properties
Income tax expense associated with FFO comparability
(Gain) loss on interest rate derivatives
Loss (gain) on early extinguishment of debt
Issuance costs associated with redeemed preferred shares
Demolition costs on redevelopment and nonrecurring improvements
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
Weighted average common shares
Conversion of weighted average common units
Weighted average common shares/units - Basic FFO
Dilutive effect of share-based compensation awards
Dilutive effect of forward equity sale agreements
Redeemable noncontrolling interests
Weighted average common shares/units - Diluted FFO
2018
For the Years Ended December 31,
2015
2016
2017
(Dollars and shares in thousands, except per share data)
$ 33,768
132,719
938
$ 74,941
134,228
2,252
$ 188,878
140,025
—
$ 45,206
136,086
—
2014
$ 78,643
137,116
2,256
6
(2,340)
215,681
(660)
(3,768)
—
—
(851)
210,402
1,540
211,942
—
—
2,361
—
—
258
—
462
793
—
(16)
10,455
(4,491)
217,385
(660)
(3,675)
(6,219)
(6,847)
(814)
199,170
—
199,170
—
(5,399)
4,668
800
(234)
513
6,847
294
732
—
(35)
83,346
(52,482)
198,289
(660)
(4,020)
(14,297)
(17)
(694)
178,601
—
178,601
—
(7,197)
18,045
—
(378)
1,110
17
578
6,454
4,110
(64,062)
268,951
(660)
(3,586)
(14,210)
—
(1,041)
249,454
—
249,454
4,134
(3,985)
19,413
—
386
(85,655)
—
1,396
—
1,370
(5,117)
177,545
(660)
(3,216)
(15,939)
(1,769)
(665)
155,296
—
155,296
—
(5,578)
49
—
—
9,668
1,769
—
1,056
—
10,456
10,928
(73)
225
(78)
$ 215,800
$ 207,356
$ 197,157
$ 195,824
$ 173,110
103,946
2,468
106,414
134
45
936
107,529
98,969
3,362
102,331
132
54
—
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
Diluted FFO per share
Diluted FFO per share, as adjusted for comparability
$
$
1.97
2.01
$
$
1.94
2.02
$
$
1.82
2.01
$
$
2.55
2.01
$
$
1.69
1.88
Denominator for diluted EPS
Weighted average common units
Redeemable noncontrolling interests
Denominator for diluted FFO per share measures
Dividends on unrestricted common shares
Common unit distributions
Dividends and distributions for payout ratios
104,125
2,468
936
107,529
99,155
3,362
—
102,517
94,594
3,633
—
98,227
97,667
—
—
97,667
88,263
3,897
—
92,160
$ 116,285
2,498
$ 118,783
$ 109,489
3,661
$ 113,150
$ 104,811
3,990
$ 108,801
$ 103,552
4,046
$ 107,598
$ 97,512
4,270
$ 101,782
FFO payout ratio
Diluted FFO payout ratio
Diluted FFO payout ratio, as adjusted for comparability
55.1%
56.0%
55.0%
52.1%
56.8%
54.6%
54.9%
60.9%
55.2%
40.0%
43.1%
54.9%
57.3%
65.5%
58.8%
48
Property Additions
The table below sets forth the major components of our additions to properties for 2018 and 2017:
Construction, development and redevelopment
Tenant improvements on operating properties (1)
Capital improvements on operating properties
Variance
For the Years Ended December 31,
2017
2018
(in thousands)
$ 204,278
32,978
22,292
$ 259,548
$ 169,671
31,876
22,977
$ 224,524
$ (34,607)
(1,102)
685
$ (35,024)
(1) Tenant improvement costs incurred on newly-constructed properties are classified in this table as construction, development and
redevelopment.
Cash Flows
Net cash flow from operating activities decreased $49.6 million from 2017 to 2018 due primarily to our payment in 2018
of construction costs on a contract that the customer pre-funded to us in prior years.
Net cash flow used in investing activities increased $143.6 million from 2017 to 2018 due to a $180.8 million decrease in
property sales in 2018 relative to 2017, offset in part by a $40.5 million decrease in cash outlays for construction, development
and redevelopment.
Net cash flow provided by financing activities in 2018 was $49.6 million and included the following:
net proceeds from the issuance of common shares (or units) of $202.1 million; offset in part by
dividends and/or distributions to equity holders of $118.0 million;
payments on a capital lease obligation of $15.4 million; and
net repayments of debt borrowings of $3.8 million;
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.
•
•
•
•
•
•
•
•
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 that 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, 2018, COPT owned 98.8% 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 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 that 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, development activities and acquisitions.
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, 2018, COPLP had $8.1
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 for joint venture financing. 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 sales of
interests in properties. The lenders’ aggregate commitment under the facility is $800.0 million, with the ability for COPLP to
increase the lenders’ aggregate commitment to $1.25 billion, provided that there is no default under the facility and subject to
the approval of the lenders. The facility matures in March 2023, and may be extended by two six-month periods at COPLP’s
option, provided that there is no default under the facility and COPLP pays an extension fee of 0.075% of the total availability
under the facility for each extension period. As of December 31, 2018, the maximum borrowing capacity under this facility
totaled $800.0 million, of which $587.0 million was available.
As of December 31, 2018, COPT had forward equity sale agreements in place with 1.6 million shares available for future
issuance with a settlement value of $46.4 million that we expect to use to fund development costs in March 2019.
In November 2018, COPT replaced its 2016 ATM Program with a new program under which it may offer and sell common
shares in at-the-market stock offerings having an aggregate gross sales price of up to $300 million (the “2018 ATM Program”).
Under the 2018 ATM Program, COPT may also, at its discretion, sell common shares under forward equity sales agreements.
The use of a forward equity sales agreement would enable us to lock in a price on a sale of common shares when the agreement
is executed but defer receiving the proceeds from the sale until a later date.
We believe that COPLP’s liquidity and capital resources are adequate for its near-term and longer-term requirements
without necessitating property sales. However, we may dispose of interests in properties opportunistically or when capital
markets otherwise warrant.
50
The following table summarizes our contractual obligations as of December 31, 2018 (in thousands):
2019
2020
2021
2022
2023
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)
Development and redevelopment
obligations (5)(6)
Third-party construction obligations (6)
(7)
Tenant and other capital improvements
(3)(6)(8)
Capital lease obligation (principal and
interest)
Operating leases (3)
Other obligations (3)
Total contractual cash obligations
$
— $
4,387
75,758
235,068
38,753
12,133
4,023
75,510
$ 300,000
3,875
68,443
$ 263,578
4,033
63,068
$ 626,578
3,012
37,450
$ 613,252
3,633
27,566
$ 1,815,541
22,963
347,795
6,012
9,110
—
—
25,478
13,080
5,590
—
—
—
—
—
—
—
—
—
241,080
47,863
44,148
—
1,320
330
$ 381,094
660
1,294
232
$ 122,054
—
1,278
182
$ 379,368
—
1,164
178
$ 332,021
—
1,119
178
$ 668,337
—
83,373
800
$ 728,624
660
89,548
1,900
$ 2,611,498
(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 $14.6 million. As of December 31, 2018, maturities included $213.0 million in 2023 that may be extended to 2024,
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, 2018 for the terms of such debt. For variable rate debt, the
amounts reflected above used December 31, 2018 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 operating activities.
We expect to spend $250 million to $300 million on construction and development costs and approximately $65 million on
improvements and leasing costs for operating properties (including the commitments set forth in the table above) in 2019. 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 operating activities.
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,
2018, we were compliant with these covenants.
Off-Balance Sheet Arrangements
We had no material off-balance sheet arrangements during 2018.
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, 2018 our debt obligations and weighted average interest rates on debt
maturing each year (dollars in thousands):
2019
2020
2021
2022
2023
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)
$
$
$
$
3,991
4.36%
396
4.20%
3,718
3.96%
$ 303,875
$
3.70%
4,033
3.98%
$ 416,590
$ 616,885
$ 1,349,092
3.70%
5.00%
4.30%
12,438
$
4.20%
— $ 263,578
—%
3.66%
$ 213,000
$
3.49%
— $ 489,412
—%
3.60%
(1) Represents principal maturities only and therefore excludes net discounts and deferred financing costs of $14.6 million.
(2) As of December 31, 2018, maturities included $213.0 million in 2023 that may be extended to 2024, subject to certain conditions.
(3) The amounts reflected above used interest rates as of December 31, 2018 for variable rate debt.
The fair value of our debt was $1.9 billion as of December 31, 2018 and 2017. If interest rates had been 1% lower, the fair
value of our fixed-rate debt would have increased by approximately $56 million as of December 31, 2018 and $68 million as of
December 31, 2017.
See Note 11 to our consolidated financial statements for information pertaining to interest rate swap contracts in place as of
December 31, 2018 and 2017 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 $1.7 million in 2018 and $1.3 million in 2017 if the applicable LIBOR rate was 1% higher. Interest expense
in 2018 was more sensitive to a change in interest rates than 2017 due primarily to our having a higher average variable-rate
debt balance in 2018.
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, 2018. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that COPT’s
disclosure controls and procedures as of December 31, 2018 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 Report on Internal Control Over Financial Reporting
Management’s 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, 2018. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that
COPLP’s disclosure controls and procedures as of December 31, 2018 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 Report on Internal Control Over Financial Reporting
Management’s 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 2019 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
10.2.1*
10.2.2*
10.3.1*
10.3.2*
10.3.3*
Articles Supplementary of Corporate Office Properties Trust 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 May 15,
2018 (filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 and
incorporated herein by reference).
Amended and Restated Bylaws of Corporate Office Properties Trust, as amended through May 2017 (filed with
the Company’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 Company's Registration Statement on Form S-4 (Commission File No. 333-45649) and incorporated
herein by reference).
Third Amended and Restated Limited Partnership Agreement of Corporate Office Properties, L.P. (filed with the
Company’s Current Report on Form 8-K dated December 6, 2018 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).
54
EXHIBIT
NO.
10.4.1*
10.4.2*
10.5.1*
10.5.2*
10.6*
10.7*
10.8*
10.9*
DESCRIPTION
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).
First Amendment to the Corporate Office Properties Trust 2017 Omnibus Equity and Incentive Plan (filed with
the Company’s Current Report on Form 8-K dated December 6, 2018 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).
Form of Corporate Office Properties Trust Performance-Based Restricted Share Unit Award Certificate (2017
Omnibus Equity and Incentive Plan) (filed with the Company’s Annual Report on Form 10-K for the year ended
December 31, 2017 and incorporated herein by reference).
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).
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).
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).
10.10*
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).
10.11
10.12
10.13
10.14
10.15
10.16
10.17
Amended and Restated Registration Rights Agreement, dated March 16, 1998, for the benefit of certain
shareholders of the Company (filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998 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).
10.18.1
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).
55
EXHIBIT
NO.
10.18.2
10.18.3
10.18.4
10.19
21.1
21.2
23.1
23.2
31.1
31.2
31.3
31.4
32.1
32.2
32.3
32.4
101.INS
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 with the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 and
incorporated herein by reference).
Third Amendment to Term Loan Agreement, dated as of November 7, 2018, 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).
Credit Agreement, dated as of October 10, 2018, by and among Corporate Office Properties, L.P.; Corporate
Office Properties Trust; KeyBank National Association; KeyBanc Capital Markets, Inc.; JPMorgan Chase Bank,
N.A.; Citibank, N.A.; Wells Fargo Bank, National Association; Barclays Bank PLC; Merrill Lynch, Pierce,
Fenner & Smith Incorporated; Bank of America, N.A.; U.S. Bank National Association; Capital One National
Association; Manufacturers and Traders Trust Company; PNC Bank, National Association; Regions Bank; and
TD Bank, N.A. (filed with the Company’s Current Report on Form 8-K dated October 16, 2018 and
incorporated herein by reference).
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).
XBRL Instance Document (filed herewith).
56
EXHIBIT
NO.
DESCRIPTION
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).
* - 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.
57
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 21, 2019
Date: February 21, 2019
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
58
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/ David M. Jacobstein
(David M. Jacobstein)
/s/ Steven D. Kesler
(Steven D. Kesler)
/s/ C. Taylor Pickett
(C. Taylor Pickett)
/s/ Lisa G. Trimberger
(Lisa G. Trimberger)
Chairman of the Board and Trustee
February 21, 2019
President and Chief Executive Officer and Trustee February 21, 2019
Executive Vice President and Chief Financial
Officer (Principal Financial Officer)
February 21, 2019
Senior Vice President, Controller and Chief
Accounting Officer (Principal Accounting Officer)
February 21, 2019
February 21, 2019
February 21, 2019
February 21, 2019
February 21, 2019
February 21, 2019
February 21, 2019
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
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.
Date: February 21, 2019
Date: February 21, 2019
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:
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/ David M. Jacobstein
(David M. Jacobstein)
/s/ Steven D. Kesler
(Steven D. Kesler)
/s/ C. Taylor Pickett
(C. Taylor Pickett)
/s/ Lisa G. Trimberger
(Lisa G. Trimberger)
Chairman of the Board and Trustee
February 21, 2019
President and Chief Executive Officer and Trustee February 21, 2019
Executive Vice President and Chief Financial
Officer (Principal Financial Officer)
February 21, 2019
Senior Vice President, Controller and Chief
Accounting Officer (Principal Accounting Officer)
February 21, 2019
February 21, 2019
February 21, 2019
February 21, 2019
February 21, 2019
February 21, 2019
February 21, 2019
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
61
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Management’s Reports on 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, 2018 and 2017
Consolidated Statements of Operations for the Years Ended December 31, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2018, 2017
and 2016
Consolidated Statements of Equity for the Years Ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and 2016
Consolidated Financial Statements of Corporate Office Properties, L.P.
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Operations for the Years Ended December 31, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2018, 2017
and 2016
Consolidated Statements of Equity for the Years Ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
Financial Statements Schedules
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
Schedule II - Valuation and Qualifying Accounts for the Years Ended December 31, 2018, 2017 and
F-63
2016
Schedule III - Real Estate and Accumulated Depreciation as of December 31, 2018
F-64
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, 2018. 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, 2018 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, 2018 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, 2018 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, 2018. 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, 2018 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, 2018 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, 2018 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 accompanying consolidated balance sheets of Corporate Office Properties Trust and its subsidiaries (the
“Company”) as of December 31, 2018 and 2017, and the related consolidated statements of operations, of comprehensive
income, of equity and of cash flows for each of the three years in the period ended December 31, 2018, including the related
notes and financial statement schedules 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, 2018, 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, 2018 and 2017, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2018 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, 2018, 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 21, 2019
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 accompanying consolidated balance sheets of Corporate Office Properties, L.P. and its subsidiaries (the
“Company”) as of December 31, 2018 and 2017, and the related consolidated statements of operations, of comprehensive
income, of equity and of cash flows for each of the three years in the period ended December 31, 2018, including the related
notes and financial statement schedules 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, 2018, 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, 2018 and 2017, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2018 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, 2018, 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 21, 2019
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
Investment in unconsolidated real estate joint venture
Accounts receivable (net of allowance for doubtful accounts of $830 and $607, respectively)
Deferred rent receivable (net of allowance of $264 and $364, respectively)
Intangible assets on real estate acquisitions, net
Deferred leasing costs (net of accumulated amortization of $31,994 and $29,560, respectively)
Investing receivables
Interest rate derivatives
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
Deferred property sale
Capital lease obligation
Other liabilities
Total liabilities
Commitments and contingencies (Note 20)
Redeemable noncontrolling interests
Equity:
Corporate Office Properties Trust’s shareholders’ equity:
Common Shares of beneficial interest ($0.01 par value; 150,000,000 shares authorized; shares
issued and outstanding of 110,241,868 at December 31, 2018 and 101,292,299 at December 31,
2017)
Additional paid-in capital
Cumulative distributions in excess of net income
Accumulated other comprehensive (loss) income
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,
2018
2017
$ 2,847,265
403,361
3,250,626
—
8,066
39,845
26,277
89,350
43,470
50,191
56,982
5,617
85,581
$ 3,656,005
$ 2,737,611
403,494
3,141,105
42,226
12,261
41,787
31,802
86,710
59,092
48,322
57,493
3,073
71,334
$ 3,595,205
$ 1,823,909
92,855
30,079
30,856
9,125
—
660
15,213
2,002,697
$ 1,828,333
108,137
25,648
28,921
11,682
43,377
15,853
41,822
2,103,773
26,260
23,125
1,102
2,431,355
(846,808)
(238)
1,585,411
1,013
2,201,047
(802,085)
2,167
1,402,142
19,168
8,800
13,669
41,637
1,627,048
$ 3,656,005
45,097
8,800
12,268
66,165
1,468,307
$ 3,595,205
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
Operating 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
Interest expense
Interest and other income
Gain on sales of real estate
Loss on early extinguishment of debt
Income before equity in income of unconsolidated entities and income taxes
Equity in income of unconsolidated entities
Income tax benefit (expense)
Net income
Net income 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 attributable to COPT common shareholders
Earnings per common share: (1)
Net income attributable to COPT common shareholders - basic
Net income attributable to COPT common shareholders - diluted
For the Years Ended December 31,
2018
2017
2016
$ 407,686
109,567
60,859
578,112
$ 405,722
104,258
102,840
612,820
$ 417,711
108,253
48,364
574,328
201,035
137,116
58,326
2,367
28,900
5,840
433,584
(75,385)
4,358
2,340
(258)
75,583
2,697
363
78,643
(1,742)
(660)
(3,940)
72,301
—
—
72,301
0.69
0.69
190,964
134,228
99,618
15,123
30,837
6,213
476,983
(76,983)
6,318
9,890
(513)
74,549
1,490
(1,098)
74,941
(1,890)
(660)
(3,646)
68,745
(6,219)
(6,847)
55,679
0.56
0.56
$
$
$
$
$
$
197,530
132,719
45,481
101,391
36,553
8,244
521,918
(83,163)
5,444
59,679
(1,110)
33,260
752
(244)
33,768
(507)
(660)
(3,711)
28,890
(14,297)
(17)
14,576
0.15
0.15
$
$
$
(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
(in thousands)
Net income
Other comprehensive (loss) income
Unrealized (loss) gain on interest rate derivatives
(Gain) loss on interest rate derivatives recognized in interest expense
Equity in other comprehensive income (loss) of equity method investee
Other comprehensive (loss) income
Comprehensive income
Comprehensive income attributable to noncontrolling interests
Comprehensive income attributable to COPT
For the Years Ended December 31,
2018
78,643
2017
74,941
2016
33,768
$
$
$
(2,373)
(407)
210
(2,570)
76,073
(6,453)
69,620
$
684
3,304
39
4,027
78,968
(6,325)
72,643
$
(2,915)
4,230
(184)
1,131
34,899
(4,902)
29,997
$
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, 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 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, 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)
Cumulative effect of accounting change for adoption of hedge accounting guidance
Balance at December 31, 2017, as adjusted
Conversion of common units to common shares (1,904,615 shares)
Redemption of common units
Common shares issued under forward equity sale agreements (5,907,000 shares)
Common shares issued under at-the-market program (991,664 shares)
Share-based compensation (146,290 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
Balance at December 31, 2018 (110,241,868 common shares outstanding)
Preferred
Shares
Common
Shares
$
$ 199,083
(26,583)
—
—
—
—
—
—
—
—
—
—
—
—
172,500
(172,500)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
$
945
—
1
37
2
—
—
—
—
—
—
—
—
—
985
—
3
17
6
—
2
—
—
—
—
—
—
—
—
1,013
—
1,013
19
—
59
10
1
—
—
—
—
—
—
—
1,102
Additional
Paid-in
Capital
$ 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
—
2,201,047
27,394
—
172,235
29,722
6,962
(1,702)
(2,466)
—
—
—
—
(1,837)
$ 2,431,355
Cumulative
Distributions in
Excess of Net
Income
Accumulated
Other
Comprehensive
Income (Loss)
Noncontrolling
Interests
Total
$
$
(657,172) $
(17)
—
—
—
—
—
28,890
(119,526)
—
—
—
—
—
(747,825)
(6,847)
—
—
—
—
—
—
—
68,745
(116,158)
—
—
—
—
(802,085)
(276)
(802,361)
—
—
—
—
—
—
—
72,301
(116,748)
—
—
—
(846,808) $
(2,838) $
—
—
—
—
—
—
1,107
—
—
—
—
—
—
(1,731)
—
—
—
—
—
—
—
—
3,898
—
—
—
—
—
2,167
276
2,443
—
—
—
—
—
—
—
(2,681)
—
—
—
—
(238) $
72,039
—
(1,167)
—
—
—
2,158
2,659
—
(4,650)
1,244
(16)
—
—
72,267
—
(4,636)
—
—
—
—
—
1,486
3,987
—
(4,322)
(2,617)
—
—
66,165
—
66,165
(27,413)
(339)
—
—
—
—
2,466
3,930
—
(3,157)
(15)
—
41,637
$ 1,616,564
(26,583)
—
109,053
7,453
(2,466)
—
32,656
(119,526)
(4,650)
1,244
(16)
(621)
(331)
1,612,777
(172,500)
—
49,944
19,668
150
6,095
(1,973)
—
76,630
(116,158)
(4,322)
(2,617)
626
(13)
1,468,307
—
1,468,307
—
(339)
172,294
29,732
6,963
(1,702)
—
73,550
(116,748)
(3,157)
(15)
(1,837)
$ 1,627,048
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
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
Other debt proceeds
Repayments of debt
Revolving Credit Facility
Scheduled principal amortization
Other debt repayments
Deferred financing costs paid
Payments on capital lease obligations
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 provided by (used in) financing activities
Net (decrease) increase in cash and cash equivalents and restricted cash
Cash and cash equivalents and restricted cash
Beginning of year
End of year
For the Years Ended December 31,
2018
2017
2016
$ 528,066
33,579
(197,647)
(79,386)
(27,006)
(72,460)
(7,679)
(21)
3,036
180,482
$ 510,551
102,531
(186,577)
(82,707)
(32,673)
(73,079)
(9,725)
(31)
1,831
230,121
$ 514,098
76,824
(196,352)
(46,318)
(34,877)
(77,982)
(2,760)
(5)
1,642
234,270
(159,994)
(35,098)
(24,223)
—
—
(10,926)
(2,677)
(232,918)
(200,504)
(33,409)
(22,882)
180,839
—
(14,581)
1,174
(89,363)
(161,519)
(34,275)
(26,345)
262,866
43,089
(10,296)
(2,346)
71,174
381,000
13,406
352,000
—
495,500
255,000
(294,000)
(4,240)
(100,000)
(8,292)
(15,379)
202,065
—
(114,286)
—
(3,699)
(1,382)
(1,702)
(3,936)
49,555
(2,881)
(226,000)
(4,062)
(200,000)
(500)
—
69,534
(199,083)
(109,174)
(9,305)
(4,426)
(8,215)
(1,973)
2,658
(338,546)
(197,788)
(539,000)
(5,595)
(322,907)
(825)
—
109,069
—
(104,135)
(14,210)
(4,619)
(15,206)
(2,466)
(5,694)
(155,088)
150,356
14,831
11,950
212,619
14,831
62,263
$ 212,619
$
$
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
Other
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable
(Increase) decrease in prepaid expenses and other assets, net
(Decrease) increase in accounts payable, accrued expenses and other liabilities
Increase (decrease) in rents received in advance and security deposits
Net cash provided by operating activities
Reconciliation of cash and cash equivalents and restricted cash:
Cash and cash equivalents at beginning of period
Restricted cash at beginning of period
Cash and cash equivalents and restricted cash at beginning of period
Cash and cash equivalents at end of period
Restricted cash at end of period
Cash and cash equivalents and restricted cash at end of period
Supplemental schedule of non-cash investing and financing activities:
Increase (decrease) 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
Non-cash changes from recognition of property sale previously accounted for as
financing arrangement:
Decrease in assets held for sale, net
Decrease in deferred property sale
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
Increase in fair value of derivatives applied to accumulated other comprehensive
income and noncontrolling interests
Decrease in redeemable noncontrolling interests and increase in other liabilities in
connection with distribution payable to redeemable 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
Increase (decrease) in redeemable noncontrolling interests and decrease (increase)
in equity to carry redeemable noncontrolling interests at fair value
For the Years Ended December 31,
2018
2017
2016
$
78,643
$
74,941
$
33,768
139,063
2,367
3,393
(4,621)
(2,340)
6,376
(2,733)
136,501
15,116
4,307
(2,651)
(9,890)
5,615
(4,216)
134,870
101,341
5,885
(145)
(59,679)
6,843
(2,605)
5,673
(987)
(49,179)
4,827
$ 180,482
2,783
7,219
4,309
(3,913)
$ 230,121
(5,262)
(16,559)
43,163
(7,350)
$ 234,270
12,261
2,570
14,831
8,066
3,884
11,950
6,570
$
$
$
$
$
$
$
$ 209,863
2,756
$ 212,619
$
$
60,310
1,953
62,263
$
$
12,261
2,570
14,831
$ 209,863
2,756
$ 212,619
$ (10,654) $
$
16,127
— $
5,950
—
— $
— $
22,600
$ (42,226) $
$
43,377
$
— $
— $
—
—
$
$
$
$
$
$
$
$
$
$
$
$
— $
— $
— $
— $
— $ (114,597)
44,373
— $
59,534
— $
4,211
— $
2,915
$
3,845
$
1,315
— $
210
$
— $
$
30,856
27,413
2,466
1,837
$
$
$
— $
39
$
— $
$
28,921
6,675
(184)
26,583
31,335
4,636
1,486
$
$
1,167
2,158
(626) $
621
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
Investment in unconsolidated real estate joint venture
Accounts receivable (net of allowance for doubtful accounts of $830 and $607, respectively)
Deferred rent receivable (net of allowance of $264 and $364, respectively)
Intangible assets on real estate acquisitions, net
Deferred leasing costs (net of accumulated amortization of $31,994 and $29,560, respectively)
Investing receivables
Interest rate derivatives
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
Deferred property sale
Capital lease obligation
Other liabilities
Total liabilities
Commitments and contingencies (Note 20)
Redeemable noncontrolling interests
Equity:
Corporate Office Properties, L.P.’s equity:
Preferred units held by limited partner, 352,000 preferred units outstanding at December 31,
2018 and 2017
Common units, 110,241,868 and 101,292,299 held by the general partner and 1,332,886 and
3,250,878 held by limited partners at December 31, 2018 and 2017, respectively
Accumulated other comprehensive (loss) income
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,
2018
2017
$ 2,847,265
403,361
3,250,626
—
8,066
39,845
26,277
89,350
43,470
50,191
56,982
5,617
81,713
$ 3,652,137
$ 2,737,611
403,494
3,141,105
42,226
12,261
41,787
31,802
86,710
59,092
48,322
57,493
3,073
66,718
$ 3,590,589
$ 1,823,909
92,855
30,079
30,856
9,125
—
660
11,345
1,998,829
$ 1,828,333
108,137
25,648
28,921
11,682
43,377
15,853
37,206
2,099,157
26,260
23,125
8,800
8,800
1,604,655
(121)
1,613,334
13,714
1,627,048
$ 3,652,137
1,445,022
2,173
1,455,995
12,312
1,468,307
$ 3,590,589
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
Operating 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
Interest expense
Interest and other income
Gain on sales of real estate
Loss on early extinguishment of debt
Income before equity in income of unconsolidated entities and income taxes
Equity in income of unconsolidated entities
Income tax benefit (expense)
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 attributable to COPLP common unitholders
Earnings per common unit: (1)
Net income attributable to COPLP common unitholders - basic
Net income attributable to COPLP common unitholders - diluted
For the Years Ended December 31,
2018
2017
2016
$ 407,686
109,567
60,859
578,112
$ 405,722
104,258
102,840
612,820
$ 417,711
108,253
48,364
574,328
201,035
137,116
58,326
2,367
28,900
5,840
433,584
(75,385)
4,358
2,340
(258)
75,583
2,697
363
78,643
(3,940)
74,703
(660)
—
74,043
0.69
0.69
190,964
134,228
99,618
15,123
30,837
6,213
476,983
(76,983)
6,318
9,890
(513)
74,549
1,490
(1,098)
74,941
(3,646)
71,295
(6,879)
(6,847)
57,569
0.56
0.56
$
$
$
197,530
132,719
45,481
101,391
36,553
8,244
521,918
(83,163)
5,444
59,679
(1,110)
33,260
752
(244)
33,768
(3,715)
30,053
(14,957)
(17)
15,079
0.15
0.15
$
$
$
$
$
$
(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
(in thousands)
Net income
Other comprehensive (loss) income
Unrealized (loss) gain on interest rate derivatives
(Gain) loss on interest rate derivatives recognized in interest expense
Equity in other comprehensive income (loss) of equity method investee
Other comprehensive (loss) income
Comprehensive income
Comprehensive income attributable to noncontrolling interests
Comprehensive income attributable to COPLP
For the Years Ended December 31,
2018
78,643
2017
74,941
$
$
2016
33,768
$
(2,373)
(407)
210
(2,570)
76,073
(3,940)
72,133
$
684
3,304
39
4,027
78,968
(3,646)
75,322
$
(2,915)
4,230
(184)
1,131
34,899
(3,715)
31,184
$
See accompanying notes to consolidated financial statements.
F-16
Accumulated
Other
Comprehensive
Income (Loss)
$
(2,985) $
—
Noncontrolling
Interests in
Subsidiaries
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
Reclassification of preferred units to be redeemed to liability
Issuance of common units resulting from public issuance of common shares
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
Cumulative effect of accounting change for adoption of hedge accounting
guidance
Balance at December 31, 2017, as adjusted
Redemption of common units
Issuance of common units resulting from common shares issued under COPT
forward equity sale agreements
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
Distributions to noncontrolling interests in subsidiaries
Adjustment to arrive at fair value of redeemable noncontrolling interests
Balance at December 31, 2018
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
—
—
—
—
—
—
—
—
—
—
352,000
—
—
—
—
—
—
—
—
—
—
—
352,000
—
352,000
—
Amount
$ 8,800
—
Units
7,431,667
(531,667)
Amount
$199,083
(26,583)
Units
98,208,903
—
Amount
$1,400,745
—
—
—
—
660
(660)
—
—
—
—
8,800
—
—
—
—
—
—
—
14,297
— (14,297)
—
—
—
—
—
—
—
—
6,900,000
172,500
(172,500)
— (6,900,000)
—
—
—
109,053
3,721,227
7,453
158,912
(2,466)
—
—
15,096
— (109,219)
—
—
—
—
(621)
—
(331)
—
1,419,710
102,089,042
—
—
49,944
1,678,913
—
—
—
—
660
(660)
—
—
—
8,800
—
8,800
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
19,668
591,042
—
150
5,000
—
6,095
179,180
—
(1,973)
—
—
—
64,416
6,219
— (113,601)
(6,219)
—
—
—
626
—
—
(13)
—
—
1,445,022
— 104,543,177
—
—
— 104,543,177
(13,377)
—
(276)
1,444,746
(339)
—
5,907,000
172,294
—
—
—
1,131
—
—
—
—
—
(1,854)
—
—
—
—
—
—
4,027
—
—
—
—
2,173
276
2,449
—
—
—
—
—
—
—
—
—
—
—
352,000
—
—
—
660
(660)
—
—
$ 8,800
—
—
—
—
—
—
—
— $
29,732
991,664
—
6,963
146,290
—
(1,702)
—
—
74,043
—
—
— (119,245)
—
—
—
—
—
(1,837)
—
$1,604,655
— 111,574,754
$
—
—
—
(2,570)
—
—
—
(121) $
See accompanying notes to consolidated financial statements.
F-17
Total
Equity
$1,616,564
(26,583)
109,053
7,453
(2,466)
32,656
(124,176)
1,244
(16)
(621)
(331)
1,612,777
(172,500)
49,944
19,668
150
6,095
(1,973)
76,630
(120,480)
(2,617)
626
(13)
1,468,307
—
1,468,307
(339)
10,921
—
—
—
—
1,472
—
1,244
(16)
—
—
13,621
—
—
—
—
—
—
1,308
—
(2,617)
—
—
12,312
—
12,312
—
—
172,294
—
—
—
1,417
—
(15)
—
13,714
29,732
6,963
(1,702)
73,550
(119,905)
(15)
(1,837)
$1,627,048
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
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
Other debt proceeds
Repayments of debt
Revolving Credit Facility
Scheduled principal amortization
Other debt repayments
Deferred financing costs paid
Payments on capital lease obligations
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 provided by (used in) financing activities
Net (decrease) increase in cash and cash equivalents and restricted cash
Cash and cash equivalents and restricted cash
Beginning of year
End of year
For the Years Ended December 31,
2018
2017
2016
$ 528,066
33,579
(197,647)
(79,386)
(27,006)
(72,460)
(7,679)
(21)
3,036
180,482
$ 510,551
102,531
(186,577)
(82,707)
(32,673)
(73,079)
(9,725)
(31)
1,831
230,121
$ 514,098
76,824
(196,352)
(46,318)
(34,877)
(77,982)
(2,760)
(5)
1,642
234,270
(159,994)
(35,098)
(24,223)
—
—
(10,926)
(2,677)
(232,918)
(200,504)
(33,409)
(22,882)
180,839
—
(14,581)
1,174
(89,363)
(161,519)
(34,275)
(26,345)
262,866
43,089
(10,296)
(2,346)
71,174
381,000
13,406
352,000
—
495,500
255,000
(294,000)
(4,240)
(100,000)
(8,292)
(15,379)
202,065
—
(117,325)
(660)
(1,382)
(1,702)
(3,936)
49,555
(2,881)
(226,000)
(4,062)
(200,000)
(500)
—
69,534
(199,083)
(112,940)
(9,965)
(8,215)
(1,973)
2,658
(338,546)
(197,788)
(539,000)
(5,595)
(322,907)
(825)
—
109,069
—
(108,094)
(14,870)
(15,206)
(2,466)
(5,694)
(155,088)
150,356
14,831
11,950
212,619
14,831
62,263
$ 212,619
$
$
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
Other
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable
(Increase) decrease in prepaid expenses and other assets, net
(Decrease) increase in accounts payable, accrued expenses and other liabilities
Increase (decrease) in rents received in advance and security deposits
Net cash provided by operating activities
Reconciliation of cash and cash equivalents and restricted cash:
Cash and cash equivalents at beginning of period
Restricted cash at beginning of period
Cash and cash equivalents and restricted cash at beginning of period
Cash and cash equivalents at end of period
Restricted cash at end of period
Cash and cash equivalents and restricted cash at end of period
Supplemental schedule of non-cash investing and financing activities:
Increase (decrease) 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
Non-cash changes from recognition of property sale previously accounted for as
financing arrangement:
Decrease in assets held for sale, net
Decrease in deferred property sale
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
Increase in fair value of derivatives applied to accumulated other comprehensive
income and noncontrolling interests
Decrease in redeemable noncontrolling interests and increase in other liabilities in
connection with distribution payable to redeemable noncontrolling interests
Equity in other comprehensive income (loss) of an equity method investee
Reclassification of preferred units to be redeemed to liability
Distributions payable
Increase (decrease) in redeemable noncontrolling interests and decrease (increase)
in equity to carry redeemable noncontrolling interests at fair value
For the Years Ended December 31,
2018
2017
2016
$
78,643
$
74,941
$
33,768
139,063
2,367
3,393
(4,621)
(2,340)
6,376
(2,733)
136,501
15,116
4,307
(2,651)
(9,890)
5,615
(4,216)
134,870
101,341
5,885
(145)
(59,679)
6,843
(2,605)
5,673
(1,735)
(48,431)
4,827
$ 180,482
2,783
6,398
5,130
(3,913)
$ 230,121
(5,262)
(16,885)
43,489
(7,350)
$ 234,270
$
$
$
$
$
$
$
12,261
2,570
14,831
$ 209,863
2,756
$ 212,619
$
$
60,310
1,953
62,263
8,066
3,884
11,950
$
$
12,261
2,570
14,831
$ 209,863
2,756
$ 212,619
6,570
$ (10,654) $
$
16,127
— $
5,950
—
— $
— $
22,600
$ (42,226) $
$
43,377
$
— $
— $
—
—
$
$
$
$
$
$
$
$
$
$
— $
— $
— $
— $
— $ (114,597)
44,373
— $
59,534
— $
4,211
— $
2,915
$
3,845
$
1,315
— $
210
$
— $
$
30,856
— $
39
$
— $
$
28,921
6,675
(184)
26,583
31,335
1,837
$
(626) $
621
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, 2018, our properties
included the following (all references to number of properties, square footage, acres and megawatts are unaudited):
•
•
•
•
163 properties totaling 18.1 million square feet comprised of 15.1 million square feet in 145 office properties and 3.0
million square feet in 18 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 (six office properties and four data center shells) that we estimate will
total approximately 1.3 million square feet upon completion, including two partially-operational properties; and
approximately 900 acres of land controlled for future development that we believe could be developed into approximately
11.7 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, 2018, COPT owned 98.8%
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.
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
F-20
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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.
When we own an equity investment in an entity and cannot exert significant influence over its operations:
•
•
prior to January 1, 2018, we used the cost method of accounting; and
effective January 1, 2018, we measure the investment at fair value, with changes recognized through net income. For an
investment without a readily determinable fair value, we measure the investment at cost, less any impairments, plus or
minus changes resulting from observable price changes for an identical or similar investment of the same issuer.
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
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Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
We assess each of our properties for indicators of impairment quarterly or when circumstances indicate that a property may
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 (which is included in the line entitled “Prepaid
expenses and other assets, net” on our consolidated balance sheets), 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 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.
Deferred Financing Costs
We defer costs of financing arrangements and recognize these costs as interest expense over the related debt terms on a
straight-line basis, which approximates the amortization that would occur under the effective interest method of amortization.
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
Real Estate Operations Revenue
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
F-24
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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
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.
Construction Contract and Other Service Revenues
We enter into construction contracts to complete various design and construction services primarily for our United States
Government tenants. The revenues and expenses from these services consist primarily of subcontracted costs that are
reimbursed to us by our customers along with a fee. These services are an ancillary component of our overall operations, with
small operating margins relative to the revenue. We review each contract to determine the performance obligations and allocate
the transaction price based on the standalone selling price, as discussed further below. We recognize revenue under these
contracts as services are performed in an amount that reflects the consideration we expect to receive in exchange for those
services. Our performance obligations are satisfied over time as work progresses. Revenue recognition is determined using the
input method based on costs incurred as of point in time relative to the total estimated costs at completion to measure progress
toward satisfying our performance obligations. We believe incurred costs of work performed best depicts the transfer of control
of the services being transferred to the customer.
In determining whether the performance obligations of each construction contract should be accounted for separately
versus together, we consider numerous factors that may require significant judgment, including: whether the components
contracted are substantially the same with the same pattern of transfer; whether the customer could contract with another party
to perform construction based on our design project; and whether the customer can elect not to move forward after the design
phase of the contract. Most of our contracts have a single performance obligation as the promise to transfer the services is not
separately identifiable from other obligations in the contracts and, therefore, are not distinct. Some contracts have multiple
performance obligations, most commonly due to having distinct project phases for design and construction for which our
customer is making decisions and managing separately. In these cases, we allocate the transaction price between these
performance obligations based on the relative standalone selling prices, which we determine by evaluating: the relative costs of
each performance obligation; the expected operating margins (which typically do not vary significantly between obligations);
and amounts set forth in the contracts for each obligation. Contract modifications, such as change orders, are routine for our
construction contracts and are generally determined to be additions to the existing performance obligations because they would
have been part of the initial performance obligations if they were identified at the initial contract date.
We have three main types of compensation arrangements for our construction contracts: guaranteed maximum price
(“GMP”); firm fixed price (“FFP”); and cost-plus fee.
F-25
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
• GMP contracts provide for revenue equal to costs incurred plus a fee equal to a percentage of such costs, up to a maximum
contract amount. We generally enter into GMP contracts for projects that are significant in nature based on the size of the
project and total fees, and for which the full scope of the project has not been determined as of the contract date. GMP
contracts are lower risk to us than FFP contracts since the costs and revenue move proportionately to one another.
FFP contracts provide for revenue equal to a fixed fee. These contracts are typically lower in value and scope relative to
GMP contracts, and are generally entered into when the scope of the project is well defined. Typically, we assume more
risk with FFP contracts than GMP contracts since the revenue is fixed and we could realize losses or less than expected
profits if we incur more costs than originally estimated. However, these types of contracts offer the opportunity for
additional profits when we complete the work for less than originally estimated.
•
• Cost-plus fee contracts provide for revenue equal to costs incurred plus a fee equal to a percentage of such costs but, unlike
GMP contracts, do not have a maximum contract amount. Similar to GMP contracts, cost-plus fee contracts are low risk to
us since the costs and revenue move proportionately to one another.
Construction contract cost estimates are based primarily on contracts in place with subcontractors to complete most of the
work, but may also include assumptions, such as performance of subcontractors and cost and availability of materials, to project
the outcome of future events over the course of the project. We review and update these estimates regularly as a significant
change could affect the profitability of our construction contracts. We recognize adjustments in estimated profit on contracts
under the cumulative catch-up method as the modification does not create a new performance obligation. Under this method,
the impact of the adjustment on profit recorded to date on a contract is recognized in the period the adjustment is identified.
Revenue and profit in future periods are recognized using the adjusted estimate. If at any time the estimate of contract
profitability indicates an anticipated loss on the contract, we recognize the total loss in the quarter it is identified.
Our timing of revenue recognition for construction contracts generally differs from the timing of invoicing to customers.
We recognize such revenue as we satisfy our performance obligations. Payment terms and conditions vary by contract type.
Under most of our contracts, we bill customers monthly, as work progresses, in accordance with the contract terms, with
payment due in 30 days, although customers occasionally pay in advance of services being provided. We have determined that
our contracts generally do not include a significant financing component. The primary purpose of the timing of our invoicing is
for convenience, not to receive financing from our customers or to provide customers with financing. Additionally, the timing
of transfer of the services is often at the discretion of the customer.
Under most of our contracts, we bill customers one month subsequent to revenue recognition, resulting in contract assets
representing unbilled construction revenue.
Our contract liabilities consist of advance payments from our customers or billings in excess of construction contract
revenue recognized.
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.
Prior to our adoption of guidance issued by the FASB effective January 1, 2018, we: deferred only the effective portion of
changes in fair value of the designated cash flow hedges to accumulated other comprehensive income (“AOCI”) or loss
(“AOCL”), reclassifying such deferrals to interest expense as interest expense was recognized on the hedged forecasted
transactions; and recognized the ineffective portion of the change in fair value of interest rate derivatives directly in interest
expense. Effective January 1, 2018, we defer all changes in the fair value of designated cash flow hedges to AOCI or AOCL,
reclassifying such deferrals to interest expense as interest expense is recognized on the hedged forecasted transactions. When
an interest rate swap designated as a cash flow hedge no longer qualifies for hedge accounting and the hedged transactions are
probable not to occur, 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.
F-26
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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.
Refer to the section below entitled “Recent Accounting Pronouncements” for additional disclosure pertaining to the effect
of the new hedge accounting guidance that we adopted effective January 1, 2018 and Note 11 for additional disclosure
pertaining to our interest rate derivatives.
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.
F-27
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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.
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
Return of capital
Common Shares
For the Years Ended December 31,
2017
86.5%
13.5%
2018
83.1%
16.9%
2016
48.0%
52.0%
2018
Preferred Shares
For the Years Ended December 31,
2017
100.0% 100.0%
0.0%
N/A
N/A
0.0%
2016
We distributed all of COPT’s REIT taxable income in 2018, 2017 and 2016 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 $47 million lower than
the amount reported on our consolidated balance sheet as of December 31, 2018 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, including restricted cash and marketable
securities that were reclassified to the line entitled “prepaid expenses and other assets, net” on our consolidated balance sheets
after having been reported on a separate line in our Quarterly Reports on Form 10-Q filed in prior years and previous Annual
Reports on Form 10-K.
Recent Accounting Pronouncements
We adopted guidance issued by the Financial Accounting Standards Board (“FASB”) effective January 1, 2018 regarding
the recognition of revenue from contracts with customers (“Topic 606”). Under this guidance, an entity recognizes 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 determined that Topic
606 is applicable to our construction contract and other service revenues, which includes predominantly construction and design
projects performed primarily for tenants of our properties. We used the modified retrospective method for contracts that were
not completed as of January 1, 2018. Under this method, the cumulative effect of initially applying the guidance is recognized
as an adjustment to the opening balance of retained earnings as of the date of initial application. Our adoption of Topic 606
effective January 1, 2018 did not affect our consolidated financial statements other than additional disclosure provided in
accordance with the guidance. We did not elect to use any of the practical expedients provided for under the guidance. As
F-28
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
discussed further below, Topic 606 will also apply to lease revenue deemed to be non-lease components (such as common area
maintenance and provision of utilities) once the new guidance setting forth principles for the recognition, measurement,
presentation and disclosure of leases goes into effect on January 1, 2019.
We adopted, prospectively effective January 1, 2018, guidance issued by the FASB 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. Our adoption of this guidance had no effect
on our consolidated financial statements.
We adopted, retrospectively effective January 1, 2018, guidance issued by the FASB pertaining to reporting on the
statement of cash flows 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; and
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. As a result of our adoption of
this guidance, the change in restricted cash is no longer reported as either operating or investing activities on our statements
of cash flows. Our restricted cash primarily consists of cash escrowed under mortgage debt for capital improvements and
real estate taxes and certain tenant security deposits.
Our adoption of this guidance had the following effects on our consolidated statements of cash flows for the years ended
December 31, 2017 and December 31, 2016 (in thousands):
Net cash provided by operating
activities
Net cash (used in) provided by
investing activities
Net cash used in financing activities
Net (decrease) increase in cash and
cash equivalents and restricted cash
Beginning of period cash and cash
equivalents and restricted cash
End of period cash and cash
equivalents and restricted cash
For the Year Ended December 31, 2017
For the Year Ended December 31, 2016
As Previously
Reported
Impact of
Adoption
As
Adjusted
As Previously
Reported
Impact of
Adoption
As
Adjusted
$ 230,654
$
(533) $ 230,121
$ 232,538
$
1,732
$ 234,270
(89,710) $
$
$ (338,546) $
$
(89,363) $
$
347
— $ (338,546) $ (154,434) $
71,449
(275) $
71,174
(654) $ (155,088)
$ (197,602) $
(186) $ (197,788) $ 149,553
$ 209,863
$
12,261
$
$
2,756
$ 212,619
$
60,310
2,570
$
14,831
$ 209,863
$
$
$
803
$ 150,356
1,953
$
62,263
2,756
$ 212,619
We adopted guidance issued by the FASB that clarifies the scope of provisions and accounting for nonfinancial asset
derecognition, including partial sales of real estate assets, effective January 1, 2018 using the full retrospective method. 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
F-29
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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 are now 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 the previous guidance that meets the criteria for immediate full gain recognition
under the new guidance; as a result, we retrospectively recognized an additional $18 million in income in 2016 that was being
amortized into income in subsequent periods under the previous guidance. The recognition pattern for our other sales of real
estate were not changed by this new guidance. The full retrospective method requires adjustment of each reporting period
presented at the time of adoption.
The tables below set forth the impact of the adoption of this guidance for amounts previously reported on the consolidated
financial statements of COPT and subsidiaries (in thousands, except per share data):
As of December 31, 2017
As of December 31, 2016
Consolidated Balance Sheets
Investment in unconsolidated real estate joint venture
Cumulative distributions in excess of net income
Noncontrolling interests in subsidiaries
Consolidated Statements of Operations and
Comprehensive Income
Gain on sales of real estate
Income before equity in income of unconsolidated
entities and income taxes
Equity in income of unconsolidated entities
Net income
Net (income) loss attributable to noncontrolling
interests - Common units in COPLP
Net income attributable to COPT
Net income (loss) attributable to COPT common
shareholders
Earnings per common share - basic and diluted
Comprehensive income
Comprehensive income attributable to COPT
$
$
$
$
$
$
$
$
$
$
As
Previously
Reported
Impact of
Adoption
$
$ 16,721
$ (818,190) $ 16,105
616
$
65,549
25,066
$
As
Previously
Reported
As
Impact of
Adjusted
Adoption
$ 41,787
$ 18,113
$(802,085) $ (765,276) $ 17,451
662
$ 66,165
25,548
71,605
$
$
$
As
Adjusted
$
43,661
$ (747,825)
72,267
$
For the Year Ended December 31, 2017
For the Year Ended December 31, 2016
As
Previously
Reported
9,890
Impact of
Adoption
$
— $
As
Adjusted
9,890
74,549
2,882
76,333
— $ 74,549
$
$ (1,392) $
1,490
$ (1,392) $ 74,941
As
Previously
Reported
$
$
$
$
40,986
14,567
1,332
15,655
Impact of
Adoption
$ 18,693
As
Adjusted
59,679
$
$ 18,693
$
$ 18,113
$
(580) $
$
33,260
752
33,768
(1,936) $
70,091
46
$
(1,890) $
$
155
11,439
$
$ 17,451
(662) $
$
(507)
28,890
$ (1,346) $ 68,745
57,025
0.57
80,360
73,989
(0.01) $
$ (1,346) $ 55,679
$
0.56
$ (1,392) $ 78,968
$ (1,346) $ 72,643
$
$
$
$
(2,875) $ 17,451
0.18
(0.03) $
$ 18,113
$ 17,451
16,786
12,546
$
$
$
$
14,576
0.15
34,899
29,997
The tables below set forth the impact of the adoption of this guidance for amounts previously reported on the consolidated
financial statements of COPLP and subsidiaries (in thousands, except per unit data):
Consolidated Balance Sheets
Investment in unconsolid. real estate joint venture
Common units
As of December 31, 2017
As of December 31, 2016
As
Previously
Reported
$
25,066
$1,428,301
Impact of
Adoption
$ 16,721
$ 16,721
As
Adjusted
As
Previously
Reported
$
41,787
$1,445,022
$
25,548
$1,401,597
Impact of
Adoption
$ 18,113
$ 18,113
As
Adjusted
$
43,661
$1,419,710
F-30
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
For the Year Ended December 31, 2017
For the Year Ended December 31, 2016
Consolidated Statements of Operations and
Comprehensive Income
Gain on sales of real estate
Income before equity in income of unconsolidated
entities and income taxes
Equity in income of unconsolidated entities
Net income
Net income attributable to COPLP
Net income (loss) attributable to COPLP common
unitholders
Earnings per common unit - basic and diluted
Comprehensive income
Comprehensive income attributable to COPLP
As
Previously
Reported
$
$
$
$
$
$
$
$
$
9,890
74,549
2,882
76,333
72,687
58,961
0.57
80,360
76,714
Impact of
Adoption
$
— $
As
Adjusted
9,890
— $ 74,549
$
$ (1,392) $
1,490
$ (1,392) $ 74,941
$ (1,392) $ 71,295
(0.01) $
$ (1,392) $ 57,569
$
0.56
$ (1,392) $ 78,968
$ (1,392) $ 75,322
$
$
$
$
$
$
$
$
$
As
Previously
Reported
40,986
14,567
1,332
15,655
11,940
Impact of
Adoption
$ 18,693
As
Adjusted
59,679
$
$ 18,693
$
$ 18,113
$ 18,113
$
(580) $
$
$
33,260
752
33,768
30,053
15,079
0.15
34,899
31,184
(3,034) $ 18,113
0.19
(0.04) $
$ 18,113
$ 18,113
16,786
13,071
$
$
$
$
Adoption of this guidance had no impact to cash provided by or used in operating, financing or investing activities on our
consolidated statements of cash flows for the years ended December 31, 2017 and December 31, 2016.
We early adopted guidance issued by the FASB effective January 1, 2018 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. We
adopted this guidance using the modified retrospective transition method under which we eliminated $276,000 in previously-
recorded cumulative hedge ineffectiveness as of January 1, 2018 by means of a cumulative-effect adjustment to our beginning
balance of accumulated other comprehensive income (“AOCI”), with a corresponding adjustment to the beginning balance of:
cumulative distributions in excess of net income for COPT and subsidiaries; and common units for COPLP and subsidiaries.
We adopted amendments by the Securities and Exchange Commission to its rules effective November 5, 2018 to simplify
or eliminate outdated, duplicative or overlapping disclosure requirements. The amendments also expanded certain disclosure
requirements, such as requiring (effective January 1, 2019) current and comparative quarter and year-to-date reporting of
changes in shareholders’ equity in interim periods. The resulting changes in disclosure were not material to the consolidated
financial statements included herein.
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.
We adopted this guidance on January 1, 2019 using a modified retrospective transition approach under which we apply the
guidance effective January 1, 2019, with a cumulative-effect adjustment as of such date, and not adjust prior comparative
reporting periods. 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. The guidance also permits lessors to elect a practical expedient (by class of underlying asset) to avoid
separating non-lease components that otherwise would need to be accounted for under the recently-adopted revenue accounting
guidance (such as common area maintenance and provision of utilities) from the associated lease component if (1) the non-lease
components have the same timing and pattern of transfer as the associated lease component and (2) the lease component, if
accounted for separately, would be classified as an operating lease. Once this practical expedient is adopted, the lessor would
be able to account for the combination of the lease component and non-lease components as an operating lease as long as the
lease component is the predominant component of the combined components. We elected each of these practical expedients.
Below is a summary of the effects of this guidance on our accounting and reporting.
F-31
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
• Real estate leases in which we are the lessor:
Balance sheet reporting: 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 be expensing future non-incremental
costs in connection with new or extended tenant leases the recognition of which would have been deferred under
current accounting; these deferrals totaled $1.2 million in 2018 and $1.1 million in each of 2017 and 2016.
• Leases in which we are the lessee:
Our most significant leases as lessee are ground leases. We will be required to recognize right-of-use assets and lease
liabilities for the present value of these minimum lease payments. These types of leases will 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, we elected to apply the package of practical expedients under which we will continue to account
for our existing ground leases as operating leases upon adoption of the guidance. Upon adoption of this guidance on
January 1, 2019, in connection with our ground leases, we recognized right-of-use assets and offsetting lease liabilities
totaling approximately $14 million to $19 million, and also reclassified amounts previously presented elsewhere on
our balance sheet in connection with these leases to the right-of-use assets.
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 2018, the FASB issued guidance that modifies disclosure requirements for fair value measurements. This
guidance is effective for us beginning January 1, 2020. Early adoption is permitted for this guidance, and entities are permitted
to early adopt with respect to any removed or modified disclosures while delaying adoption of additional disclosure
requirements until the effective date. We do not expect the adoption of this guidance to have a material impact on our
consolidated financial statements.
In August 2018, the FASB issued guidance that aligns the requirements for capitalizing implementation costs incurred in a
hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or
obtain internal-use software. FASB guidance did not previously address the accounting for such implementation costs. The
guidance is effective for us beginning January 1, 2020, with early adoption permitted. We do not expect the adoption of this
guidance to have a material impact on our consolidated financial statements.
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.
F-32
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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 sheets using quoted
market prices, as are other marketable securities that we hold. The balance of the plan, which was fully funded, totaled $3.9
million as of December 31, 2018 and $4.6 million as of December 31, 2017, and is included in the line entitled “prepaid
expenses and other assets, net” on COPT’s consolidated balance sheets. 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 are classified in Level 1 of the fair value hierarchy,
while the offsetting liability 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,
2018 and 2017, 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. The fair values of our investing receivables, as disclosed in Note 8, were 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, refer to Note 8 for investing receivables, Note 10 for debt and Note 11 for interest
rate derivatives.
F-33
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 subsidiaries that are accounted for at fair value on a
recurring basis as of December 31, 2018 and 2017 and the hierarchy level of inputs used in measuring their respective fair
values under applicable accounting standards (in thousands):
Description
December 31, 2018:
Assets:
Marketable securities in deferred compensation plan (1)
Mutual funds
Other
Interest rate derivatives
Total assets
Liabilities:
Deferred compensation plan liability (2)
Interest rate derivatives (2)
Total liabilities
December 31, 2017:
Assets:
Marketable securities in deferred compensation plan (1)
Mutual funds
Other
Interest rate derivatives
Total assets
Liabilities:
Deferred compensation plan liability (2)
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$
$
$
$
$
$
$
3,819
49
—
3,868
$
$
— $
—
— $
— $
—
5,617
5,617
$
3,868
5,459
9,327
$
$
4,547
69
—
4,616
$
$
— $
—
3,073
3,073
$
— $
4,616
$
— $
—
—
— $
— $
—
— $
— $
—
—
— $
— $
3,819
49
5,617
9,485
3,868
5,459
9,327
4,547
69
3,073
7,689
4,616
(1) Included in the line entitled “prepaid expenses and other assets, net” on COPT’s consolidated balance sheet.
(2) Included in the line entitled “other liabilities” on COPT’s consolidated balance sheet.
COPLP and Subsidiaries
The tables below set forth financial assets and liabilities of COPLP and subsidiaries that are accounted for at fair value on a
recurring basis as of December 31, 2018 and 2017 and the hierarchy level of inputs used in measuring their respective fair
values under applicable accounting standards (in thousands):
Description
December 31, 2018:
Assets:
Interest rate derivatives
Liabilities:
Interest rate derivatives (1)
December 31, 2017:
Assets:
Interest rate derivatives
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$
$
$
— $
— $
5,617
5,459
$
$
— $
— $
5,617
5,459
— $
3,073
$
— $
3,073
(1) Included in the line entitled “other liabilities” on COPLP’s consolidated balance sheet.
F-34
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
2017 Nonrecurring Fair Value Measurements
As part of our closing process for each quarter 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 of 2017.
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.
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)
Total
Description
Assets:
Operating properties, net
Projects in development or held
for future development
$
$
— $
— $
— $
— $
3,850
1,755
$
$
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.
F-35
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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;
$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
F-36
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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.
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 24% of our rental revenue in 2018, 22% in 2017 and 21% in 2016 (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 Northern Virginia Defense/IT reportable sub-segments
(see Note 17). No other individual tenants accounted for 10% or more of our revenue from real estate operations. We also
derived 95% of our construction contract revenue from the United States Government in 2018, 98% in 2017 and 87% in 2016.
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,
$
2018
503,274
3,241,894
(897,903)
$ 2,847,265
$
2017
455,680
3,068,124
(786,193)
$ 2,737,611
Properties 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
December 31,
2018
207,760
195,601
403,361
$
$
2017
240,825
162,669
403,494
$
$
F-37
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Our property held for sale as of December 31, 2017 was 11751 Meadowville Lane, an operating property totaling 193,000
square feet in Chester, Virginia (in our Data Center Shells sub-segment). We contractually closed on the sale of this property on
October 27, 2017 for $44.0 million. 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; our financial guaranty to the buyer expired on October 1, 2018, resulting in no losses to us. We accounted for this
transaction as a financing arrangement. Accordingly, we did not recognize the sale of this property for accounting purposes
until the expiration of the guaranty on October 1, 2018, and we reported the sales proceeds as a liability on the consolidated
balance sheets as of December 31, 2017 in the line entitled “deferred property sale.” In the fourth quarter of 2018, we
recognized a gain on this sale of $1.5 million. The table below sets forth the components of this property’s assets as of
December 31, 2017 (in thousands):
Properties, net
Deferred rent receivable
Deferred leasing costs, net
Assets held for sale, net
2018 Construction Activities
$
$
38,670
3,237
319
42,226
In 2018, we placed into service 666,000 square feet in six newly-constructed properties (including two partially-
operational properties), 22,000 square feet in one redeveloped property and land under a long-term contract. As of
December 31, 2018, we had nine properties under construction (including two partially-operational properties), or which we
were contractually committed to construct, that we estimate will total 1.1 million square feet upon completion and one property
under redevelopment that we estimate will total 106,000 square feet upon completion.
In the fourth quarter of 2018, we abandoned plans to redevelop a property in our Fort Meade/BW Corridor sub-segment
after we completed leasing on the property that did not require any redevelopment. Accordingly, we recognized an impairment
loss of $2.4 million representing pre-development costs associated with the property.
2017 Dispositions
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
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
Gain on
Sale
—
—
12
799,000
$ 125,829
$
5,636
(1) This sale also included land.
We also sold 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.
F-38
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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
City, State
Philadelphia,
PA
White Marsh,
MD
Hanover, MD
8007, 8013, 8015, 8019 and
8023-8027 Corporate Drive (1)
1302, 1304 and 1306 Concourse
White Marsh,
MD
Linthicum, MD
Drive
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
Regional Office
Fort Meade/
BW Corridor
Northern
Virginia
Defense/IT
Regional Office
9/9/2016
9/21/2016
9/29/2016
10/19/2016
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.
We also sold:
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
•
•
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.
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, 2018 (dollars in thousands):
LW Redstone Company, LLC 3/23/2010
Date
Acquired
Nominal
ownership
% as of
12/31/2018
85%
Nature of Activity
December 31, 2018 (1)
Encumbered
Assets
Total
Liabilities
Total
Assets
Development and operation of real estate (2)
$ 169,533
$
72,800
$
50,530
M Square Associates, LLC
Stevens Investors, LLC
6/26/2007
8/11/2015
50%
95%
Development and operation of real estate (3)
Development of real estate (4)
75,339
83,118
43,631
82,618
43,869
16,017
$ 327,990
$
199,049
$ 110,416
(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.
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. We had advanced
$40.0 million to the City through December 31, 2018 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 acquire 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 751,000 square feet of construction commencement through December 31, 2018. Our partner has
the right to receive some or all of the consideration for the acquisition of its interests in the form of common units in
COPLP;
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; and
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
F-40
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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 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 20.
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. Under the terms of the joint venture
agreement, we and our partner receive returns in proportion to our investments in the 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 $39.8 million
as of December 31, 2018 and $41.8 million as of December 31, 2017.
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, 2018
December 31, 2017
Gross
Carrying
Amount
132,276
60,028
8,880
13,841
1,333
216,358
$
$
Accumulated
Amortization
117,520
$
39,703
1,507
13,164
994
172,888
$
Net
Carrying
Amount
Gross
Carrying
Amount
$
$
14,756
20,325
7,373
677
339
43,470
$
$
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
$
$
21,462
27,830
7,595
1,852
353
59,092
Amortization of the intangible asset categories set forth above totaled $15.6 million in 2018, $19.3 million in 2017 and $20.0
million in 2016. The approximate weighted average amortization periods of the categories set forth above follow: in-place
lease value: seven years; tenant relationship value: nine years; below-market cost arrangements: 33 years; above-market leases:
six years; and other: 24 years. The approximate weighted average amortization period for all of the categories combined is 12
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: $8.3 million for 2019; $5.5
million for 2020; $5.3 million for 2021; $3.8 million for 2022; and $3.4 million for 2023.
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,
2018
53,961
3,021
56,982
$
$
2017
54,472
3,021
57,493
$
$
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 1, will be repaid using the real estate taxes generated by the properties constructed by
F-41
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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, 2018 or
December 31, 2017. The fair value of these receivables was approximately $58.2 million as of December 31, 2018 and $58.3
million as of December 31, 2017.
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
Non-real estate equity investments
Deferred financing costs, net (1)
Restricted cash
Construction contract costs incurred in excess of billings
Deferred tax asset, net
Other assets
Total for COPLP and subsidiaries
Marketable securities in deferred compensation plan
Total for COPT and subsidiaries
December 31,
2018
25,658
21,258
8,630
5,940
4,733
3,884
3,189
2,084
6,337
81,713
3,868
85,581
$
$
2017
24,670
19,011
5,256
5,056
1,202
2,570
4,884
1,892
2,177
66,718
4,616
71,334
$
$
(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,
2018
2017
$
$
4,354
28
2
427
(2,727)
2,084
$
$
3,209
7
49
43
(1,416)
1,892
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
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 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, 2018 net deferred tax asset.
F-42
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
10.
Debt, Net
Debt Summary
Our debt consisted of the following (dollars in thousands):
Carrying Value (1) as of
December 31,
2018
December 31,
2017
December 31, 2018
Stated Interest Rates
Scheduled Maturity
Mortgage and Other Secured Debt:
Fixed rate mortgage debt (2)
$
147,141
$
150,723
3.82% - 7.87% (3)
Variable rate secured loans (4)
Total mortgage and other secured debt
Revolving Credit Facility (6)
Term Loan Facilities (8)
Unsecured Senior Notes (10)
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
23,282
170,423
213,000
248,273
347,986
247,136
298,815
297,109
1,167
2019-2026
2020-2022
13,115
LIBOR + 1.85% to 2.35% (5)
163,838
126,000
LIBOR + 0.775% to 1.45% (7)
March 2023 (6)
347,959
LIBOR + 0.85% to 1.65% (9)
2022
347,551
246,645
298,322
296,731
1,287
3.60% (11)
5.25% (12)
3.70% (13)
5.00% (14)
0% (15)
May 2023
February 2024
June 2021
July 2025
May 2026
$
1,823,909
$
1,828,333
(1) The carrying values of our debt other than the Revolving Credit Facility reflect net deferred financing costs of $7.2 million as of
December 31, 2018 and $5.0 million as of December 31, 2017.
(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 $281,000 as of December 31, 2018 and $349,000 as of December 31, 2017.
(3) The weighted average interest rate on our fixed rate mortgage debt was 4.17% as of December 31, 2018.
(4) Includes a construction loan with $98.4 million in remaining borrowing capacity as of December 31, 2018.
(5) The weighted average interest rate on our variable rate secured debt was 4.47% as of December 31, 2018.
(6) As discussed further below, we entered into a credit agreement on October 10, 2018 to replace our existing revolving credit facility with
a new facility.
(7) The weighted average interest rate on the Revolving Credit Facility was 3.49% as of December 31, 2018.
(8) As discussed below, we have the ability to borrow an additional $150.0 million in the aggregate under the remaining term loan facility,
provided that there is no default under the facilities and subject to the approval of the lenders.
(9) The interest rate on the remaining term loan facility was 3.60% as of December 31, 2018.
(10) Refer to the paragraphs below for further disclosure.
(11) The carrying value of these notes reflects an unamortized discount totaling $1.4 million as of December 31, 2018 and $1.7 million as of
December 31, 2017. The effective interest rate under the notes, including amortization of the issuance costs, was 3.70%.
(12) The carrying value of these notes reflects an unamortized discount totaling $2.6 million as of December 31, 2018 and $3.0 million as of
December 31, 2017. The effective interest rate under the notes, including amortization of the issuance costs, was 5.49%.
(13) The carrying value of these notes reflects an unamortized discount totaling $943,000 as of December 31, 2018 and $1.3 million as of
December 31, 2017. The effective interest rate under the notes, including amortization of the issuance costs, was 3.85%.
(14) The carrying value of these notes reflects an unamortized discount totaling $2.4 million as of December 31, 2018 and $2.7 million as of
December 31, 2017. The effective interest rate under the notes, including amortization of the issuance costs, was 5.15%
(15) 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 $294,000 as of December 31,
2018 and $373,000 as of December 31, 2017.
All debt is owed by COPLP. While COPT is not directly obligated by any debt, it has guaranteed COPLP’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 fixed charge coverage, minimum unencumbered interest
coverage ratio, minimum debt service and maximum secured indebtedness ratio. In addition, the terms 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
F-43
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
such payments or distributions may prompt failure of debt covenants. As of December 31, 2018, we were within the
compliance requirements of these financial covenants.
Our debt matures on the following schedule (in thousands):
2019
2020
2021
2022
2023
Thereafter
Total
$
4,387
16,156
303,875
267,611
629,590
616,885
$
1,838,504 (1)
(1) Represents scheduled principal amortization and maturities only and therefore excludes net discounts and deferred financing costs of
$14.6 million.
We capitalized interest costs of $5.9 million in 2018, $5.2 million in 2017 and $5.7 million in 2016.
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, 2018
December 31, 2017
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
$
$
1,191,046
148,308
484,555
1,823,909
$
$
1,219,603
147,106
486,497
1,853,206
$
$
1,189,249
152,010
487,074
1,828,333
$
$
1,229,398
152,485
485,694
1,867,577
On October 10, 2018, we entered into a credit agreement with a group of lenders to replace our existing unsecured
revolving credit facility with a new facility (the prior facility and new facility are referred to collectively herein as our
“Revolving Credit Facility”). The lenders’ aggregate commitment under the new facility is $800.0 million, with the ability for
us to increase the lenders’ aggregate commitment to $1.25 billion, provided that there is no default under the facility and subject
to the approval of the lenders. The new facility matures on March 10, 2023, 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 new facility is based on
LIBOR plus 0.775% to 1.450%, as determined by the credit ratings assigned to COPLP by Standard & Poor’s Ratings Services,
Moody’s Investors Service, Inc. or Fitch Ratings Ltd. (collectively, the “Ratings Agencies”). The new 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,
2018, the maximum borrowing capacity under this facility totaled $800.0 million, of which $587.0 million was available.
Weighted average borrowings under our Revolving Credit Facility totaled $188.1 million in 2018 and $97.8 million in
2017. The weighted average interest rate on our Revolving Credit Facility was 3.08% in 2018 and 2.44% in 2017.
Term Loan Facilities
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 0.85% to 1.65%, as determined by the credit ratings assigned to COPLP
by the Ratings Agencies.
F-44
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
In addition to the term loan discussed above, we also had the following term loans that were repaid prior to December 31,
2018:
•
•
for a term loan originating in 2012, we repaid $200.0 million in May 2017 and the remaining balance of $100.0 million in
November 2018; and
for a term loan originating in 2012, we repaid the remaining balance of $120.0 million in 2016.
In connection with our new Revolving Credit Facility discussed above, we have the ability to borrow up to $500.0 million
under new term loans from the facility’s lender group provided that there is no default under the facility and subject to the
approval of the lenders.
Unsecured Senior Notes
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.
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 of interest rate risk (dollars in thousands):
$
Notional
Amount
100,000
12,834 (1)
100,000
100,000
50,000
75,000
75,000
Fixed Rate
Floating Rate Index
1.7300% One-Month LIBOR
1.3900% One-Month LIBOR
1.9013% One-Month LIBOR
1.9050% One-Month LIBOR
1.9079% One-Month LIBOR
3.1760% Three-Month LIBOR
3.1920% Three-Month LIBOR
Effective
Date
9/1/2015
10/13/2015
9/1/2016
9/1/2016
9/1/2016
6/30/2020
6/30/2020
Expiration
Date
8/1/2019
10/1/2020
12/1/2022
12/1/2022
12/1/2022
6/30/2030
6/30/2030
Fair Value at December 31,
2018
2017
$
$
472
239
1,968
1,967
971
(2,676)
(2,783)
158
$
$
252
213
1,046
1,051
511
—
—
3,073
(1) The notional amount of this instrument is scheduled to amortize to $12.1 million.
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
Interest rate derivatives
Other liabilities
$
Fair Value at December 31,
2018
2017
$
5,617
(5,459)
3,073
—
F-45
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The table below presents the effect of our interest rate derivatives on our consolidated statements of operations and
comprehensive income (in thousands):
Derivatives in Hedging Relationships
Interest rate derivatives
Amount of (Loss) Gain Recognized
in AOCI on Derivatives
Amount of Gain (Loss) Reclassified from
AOCI into Interest Expense on Statement
of Operations
For the Years Ended December 31,
For the Years Ended December 31,
2018
2017
2016
2018
2017
2016
$ (2,373) $
684
$ (2,915) $
407
$
(3,304) $
(4,230)
Over the next 12 months, we estimate that approximately $2.1 million of gains will be reclassified from AOCI as a decrease 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, 2018, the fair value of interest rate derivatives in a liability position related to these agreements was $5.5 million,
excluding the effects of accrued interest and credit valuation adjustments. As of December 31, 2018, we had not posted any
collateral related to these agreements. We are not in default with any of these provisions. If we breached any of these
provisions, we could be required to settle our obligations under the agreements at their termination value of $5.5 million.
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 for these redeemable noncontrolling interests (in thousands):
For the Years Ended December 31,
2017
2016
2018
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
$
$
23,125
186
(1,411)
2,523
1,837
26,260
$
$
22,979
—
(1,566)
2,338
(626)
23,125
$
$
19,218
22,779
(21,881)
2,242
621
22,979
We determine the fair value of the 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, occupancy projections and estimated operating and development expenditures.
13.
Equity - COPT and Subsidiaries
Preferred Shares
As of December 31, 2018, 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
F-46
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
•
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; 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 September 2016, COPT established an at-the-market (“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 (the “2016 ATM Program”). COPT issued the following common shares under this ATM program:
• 992,000 shares in 2018 at a weighted average price of $30.46 per share. Net proceeds from the shares issued totaled $29.8
million, after payment of $0.5 million in commissions to sales agents;
• 591,000 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; and
• 3.7 million 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.
COPT contributed the net proceeds from these issuances to COPLP in exchange for an equal number of units in COPLP.
In November 2018, COPT replaced its 2016 ATM Program with a new program under which it may offer and sell common
shares in at-the-market stock offerings having an aggregate gross sales price of up to $300 million (the “2018 ATM Program”).
Under the 2018 ATM Program, COPT may also, at its discretion, sell common shares under forward equity sales agreements.
As of December 31, 2018, COPT has not issued any shares under the 2018 ATM Program.
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. COPT issued the following common
shares under these forward equity sale agreements:
•
•
5.9 million shares in 2018 for net proceeds of $172.5 million; and
1.7 million shares in 2017 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.
COPT’s remaining capacity under the forward equity sale agreements was 1.6 million common shares, with a settlement value
of $46.4 million as of December 31, 2018.
Certain 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 1.9 million in 2018, 339,513 in 2017 and 87,000 in 2016.
COPT declared dividends per common share of $1.10 in 2018, 2017 and 2016.
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 in Note 2 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.
F-47
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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.
Following the completion of these redemptions in 2017, COPT held no preferred units in COPLP.
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.
Common Units
COPT owned 98.8% of COPLP’s common units as of December 31, 2018 and 96.9% as of December 31, 2017.
From 2016 through 2018, COPT acquired additional common units through the following common share issuances under
its 2016 ATM Program:
•
•
•
992,000 shares in 2018 at a weighted average price of $30.46 per share. Net proceeds from the shares issued totaled $29.8
million, after payment of $0.5 million in commissions to sales agents;
591,000 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; and
3.7 million shares 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.
In 2018 and 2017, COPT also acquired additional common units through the following common share issuances under its
forward equity sale agreements:
•
•
5.9 million shares in 2018 for net proceeds of $172.5 million; and
1.7 million shares in 2017 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
F-48
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
forth in the partnership agreement). Certain 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 1.9 million in 2018, 339,513 in 2017 and 87,000 in
2016. In addition, we redeemed 13,377 common units for cash payments totaling $339,000 in 2018.
COPLP declared distributions per common unit of $1.10 in 2018, 2017 and 2016.
15.
Share-Based Compensation and Other Compensation Matters
Share-Based Compensation Plans
In May 2017, COPT adopted the 2017 Omnibus Equity and Incentive Plan (the “2017 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. In November 2018, we amended the 2017 Plan to provide for the future grant of awards
in the form of Profit Interest Units, which will be similar to restricted shares and PSUs, except that upon vesting recipients will
receive common units in COPLP. 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, 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.
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.
The table below sets forth our reporting for share based compensation cost (in thousands):
For the Years Ended December 31,
2018
2017
2016
General, administrative and leasing expenses
Property operating expenses
Capitalized to development activities
Share-based compensation cost
$
$
5,415
961
587
6,963
$
$
4,649
966
480
6,095
$
$
5,816
1,027
610
7,453
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 6% for restricted shares.
As of December 31, 2018, unrecognized compensation costs related to unvested awards included:
•
•
•
$7.9 million on restricted shares expected to be recognized over a weighted average period of approximately two years;
$1.7 million on PSUs expected to be recognized over a weighted average performance period of approximately two years;
and
$137,000 on deferred share awards expected to be recognized through May 2019.
Our TRS is subject to Federal and state income taxes. We realized a windfall tax loss of $13,000 in 2017 and $331,000 in
2016 on options exercised and vesting restricted shares in connection with employees of that subsidiary.
F-49
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Restricted Shares
The following table summarizes restricted shares under the share-based compensation plans for 2016, 2017 and 2018:
Unvested as of December 31, 2015
Granted
Forfeited
Vested
Unvested as of December 31, 2016
Granted
Forfeited
Vested
Unvested as of December 31, 2017
Granted
Forfeited
Vested
Unvested as of December 31, 2018
Unvested shares as of December 31,
2018 that are expected to vest
Weighted
Average
Grant Date
Fair Value
27.58
24.77
25.31
27.19
26.20
33.84
27.80
26.27
30.37
25.62
30.02
29.49
28.38
28.35
Shares
378,200
231,937
(22,907)
(215,983)
371,247
239,479
(27,056)
(158,044)
425,626
219,716
(25,419)
(181,238)
438,685
413,273
$
$
$
The aggregate intrinsic value of restricted shares that vested was $4.6 million in 2018, $5.3 million in 2017 and $5.4
million in 2016.
PSUs
We made the following grants of PSUs to executives from 2014 through 2018 (dollars in thousands):
Grant Date
3/6/2014
3/5/2015
3/1/2016
1/1/2017
1/1/2018
Number of
PSUs
Granted
49,103
45,656
26,299
39,351
59,110
Performance
Period
Commencement
Date
1/1/2014
1/1/2015
1/1/2016
1/1/2017
1/1/2018
Performance
Period End Date
12/31/2016
12/31/2017
12/31/2018
12/31/2019
12/31/2020
Grant Date
Fair Value
1,723
1,678
1,005
1,415
1,890
$
$
$
$
$
Number of PSUs
Outstanding as of
December 31, 2018
—
—
24,850
39,351
59,110
In 2017, we also 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 or greater
Below 25th
Earned PSUs Payout %
200% of PSUs granted
100% of PSUs granted
50% of PSUs granted
0% of PSUs granted
F-50
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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 will settle the award by issuing fully-vested COPT
shares equal to the number of earned PSUs in settlement of the award plan and either:
•
•
for awards granted January 1, 2017 and prior thereto, issuing fully-vested COPT shares equal to 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; or
for awards issued subsequent to January 1, 2017, paying cash equal to 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.
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 the 2014 and 2015 PSUs issued to a former executive 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 a former executive 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 a former executive who departed on August 31, 2016, we issued 2,248
common shares on October 30, 2016 in settlement of such PSUs;
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; and
for the 2015 PSUs issued to executives that vested on December 31, 2017, we issued 13,328 common shares in settlement
of the PSUs on February 22, 2018.
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 2016, 2017 and 2018 are set forth below:
Grant Date
3/1/2016
1/1/2017
1/1/2018
Grant Date
Fair Value
Per Share
38.21
38.43
31.97
$
$
$
Baseline
Common
Share Value
23.90
$
31.22
$
29.20
$
Expected
Volatility of
Common Shares
20.4%
19.0%
17.0%
Risk-free
Interest Rate
0.96%
1.47%
2.04%
Deferred Share Awards
We made the following grants of deferred share awards to nonemployee members of our Board of Trustees in 2016, 2017
and 2018 (dollars in thousands, except per share data):
Year of Grant
2016
2017
2018
Number of
Deferred Share
Awards Granted
24,944
10,032
13,832
Aggregate
Grant Date
Fair Value
671
326
388
$
$
$
Grant Date Fair
Value Per Share
26.89
$
32.47
$
28.08
$
F-51
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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 2016, 2017 and 2018 (dollars in thousands, except per share data):
Number of common shares issued
Grant date fair value per share
Aggregate intrinsic value
Options
For the Years Ended December 31,
2018
5,515
29.32
154
$
$
2017
15,590
26.89
508
$
$
2016
12,028
26.70
322
$
$
We have not issued options since 2009, and all of our options were vested and fully expensed prior to 2018. 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
425,347
201,100
60,000
30,000
Weighted
Average
Exercise Price
Per Share
$42.75
$43.35
$35.17
$32.52
Weighted Average
Remaining
Contractual Term
(in Years)
1
1
1
0.4
Aggregate
Intrinsic
Value
$ —
31
$
$ —
$ —
December 31, 2015
December 31, 2016
December 31, 2017
December 31, 2018
The aggregate intrinsic value of options exercised was $18,000 in 2017. No options were exercised in 2018 or 2016.
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, our previous President and Chief Executive Officer, left the Company to pursue
other interests, and he was not nominated for reelection as a Trustee. In addition, other executives departed the Company to
pursue other interests effective March 31, 2016 and August 31, 2016. We recognized executive transition costs of
approximately $6.5 million in 2016 primarily for termination benefits in connection with these departures.
16.
Operating Leases
We lease our properties to tenants under operating leases with various expiration dates extending to the year 2063. Gross
minimum future rentals on noncancelable leases in our properties as of December 31, 2018 were as follows (in thousands):
Year Ending December 31,
2019
2020
2021
2022
2023
Thereafter
$
400,617
337,646
280,369
246,329
194,888
523,932
$ 1,983,781
F-52
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, 2018 and 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; during 2017 and 2016, this segment also included suburban properties not meeting 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; 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-53
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):
Operating Property Segments
Defense/Information Technology Locations
Navy
Support
Locations
Lackland
Air Force
Base
Redstone
Arsenal
Northern
Virginia
Defense/IT
Fort
Meade/BW
Corridor
Data
Center
Shells
Total
Defense/IT
Locations
Regional
Office
Operating
Wholesale
Data Center
Other
Total
Year Ended December 31, 2018
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, 2018
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
$ 248,927
(82,975)
—
$ 165,952
38,612
$
$
35,648
$1,279,571
$
53,518
(20,330)
—
33,188
$
7,956
$
$
10,231
$ 399,339
$ 46,286
(26,888)
—
$ 19,398
$
$ 14,718
$139,731
$
$ 31,927
(13,536)
—
$
$ 18,391
6,535
$
(116) $
14,745
(6,050)
—
8,695
573
4,167
$ 108,010
— $
$
$188,911
$ 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
F-54
$ 25,650
(3,225)
4,818
$ 27,243
$
$ 99,191
$353,165
$ 421,053
(153,004)
4,818
$ 272,867
53,676
$ 163,839
$ 2,468,727
— $
$ 24,320
(2,709)
4,805
$ 26,416
$
$107,854
$301,996
$ 408,122
(146,558)
4,805
$ 266,369
44,352
$ 202,185
$ 2,398,989
— $
$ 23,836
(2,674)
2,145
$ 23,307
$
$103,367
$227,796
$ 406,210
(148,705)
2,145
$ 259,650
57,131
$ 184,943
$ 2,326,302
— $
$ 61,181
(30,253)
—
$ 30,928
$ 19,730
$
$ 395,380
$
$
— $
$
31,892
(16,342)
—
15,550
856
2,304
$ 216,640
$ 68,262
(28,982)
—
$ 39,280
$ 25,299
$
$ 400,512
$
$
— $
$
28,875
(13,551)
—
15,324
3,580
8
$ 224,422
$ 517,253
$ 3,127
(201,035)
(1,436)
4,818
—
$ 321,036
$ 1,691
$
74,742
$
480
$ — $ 166,143
$3,084,862
$ 4,115
$ 4,721
(1,873)
—
$ 2,848
110
$
$
18
$ 4,082
$ 509,980
(190,964)
4,805
$ 323,821
$
73,341
$ 202,211
$3,028,005
$ 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)
2,145
$ 330,579
70,324
$
(8) $ 184,640
$3,022,360
$
$
$
$ 231,954
$ 21,293
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
Total revenues
For the Years Ended December 31,
2018
$ 517,253
60,859
$ 578,112
2017
$ 509,980
102,840
$ 612,820
2016
$ 525,964
48,364
$ 574,328
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 income (loss) of unconsolidated non-real estate entities
Equity in income of unconsolidated entities
For the Years Ended December 31,
2016
2017
2018
$
4,818
$
4,805
$
2,145
(3,314)
1,193
2,697
$
(3,310)
(5)
1,490
$
(1,413)
20
752
$
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,
2016
2017
2018
$ 48,364
$ 102,840
$ 60,859
(45,481)
(99,618)
(58,326)
2,883
3,222
2,533
$
$
$
Construction contract and other service revenues
Construction contract and other service expenses
NOI from service operations
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 NOI from real estate operations for reportable segments and NOI from service
operations to net income as reported on our consolidated statements of operations (in thousands):
NOI from real estate operations
NOI from service operations
Interest and other income
Gain on sales of real estate
Equity in income of unconsolidated entities
Income tax benefit (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
Less: UJV NOI allocable to COPT included in equity in income of
unconsolidated entities
Loss on early extinguishment of debt
Net income
For the Years Ended December 31,
2016
2017
2018
$ 330,579
$ 323,821
$ 321,036
2,883
3,222
2,533
5,444
6,318
4,358
59,679
9,890
2,340
752
1,490
2,697
(244)
(1,098)
363
(132,719)
(134,228)
(137,116)
(101,391)
(15,123)
(2,367)
(36,553)
(30,837)
(28,900)
(8,244)
(6,213)
(5,840)
(83,163)
(76,983)
(75,385)
(4,818)
(258)
$ 78,643
(4,805)
(513)
$ 74,941
(2,145)
(1,110)
$ 33,768
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,
2018
$ 3,084,862
410,671
160,472
$ 3,656,005
2017
$ 3,028,005
411,041
156,159
$ 3,595,205
The accounting policies of the segments are the same as those used to prepare our consolidated financial statements. In the
segment reporting presented above, we did not allocate interest expense, depreciation and amortization, impairment losses, gain
on sales of real estate, loss on early extinguishment of debt 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.
Construction Contract and Other Service Revenues
We disaggregate our construction contract and other service revenues by compensation arrangement and by service type as
we believe it best depicts the nature, timing and uncertainty of our revenue. The table below reports construction contract and
other service revenues by compensation arrangement (in thousands):
Construction contract revenues:
GMP
FFP
Cost-plus fee
Other
For the Years Ended December 31,
2018
2017
2016
$
$
34,050
20,327
5,540
942
60,859
$
$
78,401
22,607
801
1,031
102,840
$
$
22,405
24,571
464
924
48,364
F-56
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The table below reports construction contract and other service revenues by service type (in thousands):
Construction contract revenues:
Construction
Design
Other
For the Years Ended December 31,
2017
2016
2018
$
$
57,986
1,931
942
60,859
$
$
94,471
7,338
1,031
102,840
$
$
46,989
451
924
48,364
We recognized revenue of $349,000, $586,000 and $483,000 in 2018, 2017 and 2016, respectively, from performance
obligations satisfied (or partially satisfied) in previous periods.
Accounts receivable related to our construction contract services is included in accounts receivable, net on our consolidated
balance sheets. The beginning and ending balances of accounts receivable related to our construction contracts were as follows
(in thousands):
Beginning balance
Ending balance
For the Years Ended December 31,
2018
2017
$
$
4,577
6,701
$
$
4,131
4,577
Contract assets, which we refer to herein as construction costs in excess of billings, are included in prepaid expenses and other
assets, net reported on our consolidated balance sheets. The beginning and ending balances of our contract assets were as
follows (in thousands):
Beginning balance
Ending balance
For the Years Ended December 31,
2018
2017
$
$
4,884
3,189
$
$
10,350
4,884
Contract liabilities are included in other liabilities reported on our consolidated balance sheets. Changes in contract liabilities
were as follows (in thousands):
Beginning balance
Ending balance
Portion of beginning balance recognized in revenue during the year
$
$
$
27,402
568
27,296
$
$
$
32,650
27,402
32,650
For the Years Ended December 31,
2018
2017
The change in the contract liabilities balance reported above for 2018 was due primarily to our satisfaction of performance
obligations during the period on a contract on which we previously received advance payments from a customer.
Revenue allocated to the remaining performance obligations under existing contracts as of December 31, 2018 that will be
recognized as revenue in future periods was $58.1 million, all of which we expect to recognize in 2019.
We have no deferred incremental costs incurred to obtain or fulfill our construction contracts or other service revenues, and
had no impairment losses on construction contracts receivable or unbilled construction revenue in 2018, 2017 and 2016.
F-57
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
19.
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 COPT’s forward equity sale agreements
and our 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.
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:
Net income attributable to COPT
Preferred share dividends
Issuance costs associated with redeemed preferred shares
Income attributable to share-based compensation awards
Numerator for basic and diluted EPS on net income attributable to COPT
common shareholders
Denominator (all weighted averages):
Denominator for basic EPS (common shares)
Dilutive effect of share-based compensation awards
Dilutive effect of forward equity sale agreements
Denominator for diluted EPS (common shares)
Basic EPS
Diluted EPS
For the Years Ended December 31,
2016
2017
2018
$
$
72,301
—
—
(462)
68,745
(6,219)
(6,847)
(449)
$
28,890
(14,297)
(17)
(419)
$
71,839
$
55,230
$
14,157
103,946
134
45
104,125
0.69
0.69
$
$
98,969
132
54
99,155
0.56
0.56
$
$
94,502
92
—
94,594
0.15
0.15
$
$
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 redeemable noncontrolling interests
Conversion of Series I preferred units
Conversion of Series K preferred shares
Weighted Average Shares Excluded from
Denominator for the Years Ended
December 31,
2018
2017
2016
2,468
936
176
—
3,362
689
176
—
3,633
809
176
434
The following share-based compensation securities were also excluded from the computation of diluted EPS because their
effect was antidilutive:
• weighted average restricted shares and deferred share awards of 452,000 for 2018, 433,000 for 2017 and 385,000 for 2016;
and
• weighted average options of 42,000 for 2018, 70,000 for 2017 and 285,000 for 2016.
F-58
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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 COPT’s forward equity sale agreements and our
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.
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:
Net income attributable to COPLP
Preferred unit distributions
Issuance costs associated with redeemed preferred units
Income attributable to share-based compensation awards
Numerator for basic and diluted EPU on net income attributable to COPLP
common unitholders
Denominator (all weighted averages):
Denominator for basic EPU (common units)
Dilutive effect of share-based compensation awards
Dilutive effect of forward equity sale agreements
Denominator for diluted EPU (common units)
Basic EPU
Diluted EPU
For the Years Ended December 31,
2018
2017
2016
$
$
74,703
(660)
—
(462)
71,295
(6,879)
(6,847)
(449)
$
30,053
(14,957)
(17)
(419)
$
73,581
$
57,120
$
14,660
106,414
134
45
106,593
0.69
0.69
$
$
102,331
132
54
102,517
0.56
0.56
$
$
98,135
92
—
98,227
0.15
0.15
$
$
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 redeemable noncontrolling interests
Conversion of Series I preferred units
Conversion of Series K preferred units
Weighted Average Units Excluded from
Denominator for the Years Ended
December 31,
2018
2017
2016
936
176
—
689
176
—
809
176
434
The following share-based compensation securities were also excluded from the computation of diluted EPU because their
effect was antidilutive:
• weighted average restricted units and deferred share awards of 452,000 for 2018, 433,000 for 2017 and 385,000 for 2016;
and
• weighted average options of 42,000 for 2018, 70,000 for 2017 and 285,000 for 2016.
F-59
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
20.
Commitments and Contingencies
Litigation and Claims
In the normal course of business, we are subject to legal actions and other claims. We record losses for specific legal
proceedings and claims when we determine that a loss is probable and the amount of loss can be reasonably estimated.
Management believes that it is reasonably possible that we could incur losses pursuant to such claims but do not believe such
losses would materially affect our financial position, liquidity or results of operations. 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.
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.
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. While we are obligated to fund, through a
special tax, any future shortfalls between debt service of the bonds and real estate taxes available to repay the bonds, as of
December 31, 2018, we do not expect any such future fundings will be required.
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, 2018 follow (in
thousands):
Year Ending December 31,
2019
2020
2021
2022
2023
Thereafter
$
1,320
1,294
1,278
1,164
1,119
83,373
$ 89,548
Capital Lease
On May 25, 2017, we entered into a ground lease on land under development in Washington, DC through 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 in 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 and have since paid down most
of this liability. The remaining capital lease obligation as of December 31, 2018 was $660,000, which is due in 2020.
F-60
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Contractual Obligations
We had amounts remaining to be incurred under various contractual obligations as of December 31, 2018 that included the
following (excluding amounts incurred and therefore reflected as liabilities reported on our consolidated balance sheets):
•
•
•
•
development and redevelopment obligations of $241.1 million;
tenant and other capital improvements of $44.1 million;
third party construction obligations of $47.9 million; and
other obligations of $1.9 million.
F-61
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
21.
Quarterly Data (Unaudited)
The tables below set forth selected quarterly information for the years ended December 31, 2018 and 2017 (in thousands, except per share/unit data).
COPT and Subsidiaries
Revenues
Net income
Net income attributable to noncontrolling interests
Net income attributable to COPT
Preferred share dividends
Issuance costs associated with redeemed preferred shares
Net income attributable to COPT common shareholders
Basic EPS
Diluted EPS
COPLP and Subsidiaries
Revenues
Net income
Net income attributable to noncontrolling interests
Net income attributable to COPLP
Preferred unit distributions
Issuance costs associated with redeemed preferred units
Net income attributable to COPLP common unitholders
Basic EPU
Diluted EPU
For the Year Ended December 31, 2018
For the Year Ended December 31, 2017
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$ 155,476
$ 18,780
(1,630)
17,150
—
—
$ 17,150
$ 146,743
$ 21,085
(1,651)
19,434
—
—
$ 19,434
$ 137,411
$ 20,322
(1,625)
18,697
—
—
$ 18,697
$ 138,482
$ 18,456
(1,436)
17,020
—
—
$ 17,020
$ 139,801
$ 22,740
(1,721)
21,019
(3,180)
—
$ 17,839
$ 151,435
$ 18,859
(1,333)
17,526
(3,039)
(6,847)
7,640
$
$ 157,017
$ 22,334
(1,755)
20,579
—
—
$ 20,579
$ 164,567
$ 11,008
(1,387)
9,621
—
—
9,621
$
$
$
0.17
0.17
$
$
0.19
0.19
$
$
0.18
0.18
$
$
0.16
0.16
$
$
0.18
0.18
$
$
0.08
0.08
$
$
0.21
0.21
$
$
0.10
0.10
$ 155,476
$ 18,780
(921)
17,859
(165)
—
$ 17,694
$ 146,743
$ 21,085
(878)
20,207
(165)
—
$ 20,042
$ 137,411
$ 20,322
(1,080)
19,242
(165)
—
$ 19,077
$ 138,482
$ 18,456
(1,061)
17,395
(165)
—
$ 17,230
$ 139,801
$ 22,740
(934)
21,806
(3,345)
—
$ 18,461
$ 151,435
$ 18,859
(907)
17,952
(3,204)
(6,847)
7,901
$
$ 157,017
$ 22,334
(897)
21,437
(165)
—
$ 21,272
$ 164,567
$ 11,008
(908)
10,100
(165)
—
9,935
$
$
$
0.17
0.17
$
$
0.19
0.19
$
$
0.18
0.18
$
$
0.16
0.16
$
$
0.18
0.18
$
$
0.08
0.08
$
$
0.21
0.21
$
$
0.10
0.10
F-62
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Schedule II—Valuation and Qualifying Accounts
Years Ended December 31, 2018, 2017 and 2016
(in thousands)
Accounts Receivables-Allowance for doubtful
accounts
Year ended December 31, 2018
Year ended December 31, 2017
Year ended December 31, 2016
Allowance for Deferred Rent Receivable
Year ended December 31, 2018
Year ended December 31, 2017
Year ended December 31, 2016
Allowance for Deferred Tax Asset
Year ended December 31, 2018
Year ended December 31, 2017
Year ended December 31, 2016
Balance at
Beginning
of Year
Charged to
Costs and
Expenses (1)
Charged to
Other
Accounts (2)
Deductions (3)
Balance at
End of
Year
$
$
$
$
$
$
$
$
$
607
603
1,525
364
373
1,962
1,416
2,062
2,062
$
$
$
$
$
$
$
$
$
$
319
$
368
(17) $
— $
(36) $
$
235
(96) $
(328) $
(1,140) $
— $
— $
— $
(100) $
(9) $
(1,589) $
— $
— $
— $
830
607
603
264
364
373
$
668
(646) $
— $
— $
— $
— $
— $
— $
— $
2,084
1,416
2,062
(1) Amounts charged to costs and expenses are net of recoveries. The change in the allowance for deferred tax asset
was due primarily to: for 2018, additional losses reported for tax purposes during the year that we do not expect to
realize; and for 2017, 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-63
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Schedule III—Real Estate and Accumulated Depreciation
December 31, 2018
(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
1200 Redstone Gateway (O)
1201 M Street (O)
1201 Winterson Road (O)
1220 12th Street, SE (O)
1243 Winterson Road (L)
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)
$
48,473 $ 26,715 $
58,343 $
8,065 $ 26,715 $
66,408 $
93,123 $
10,390
10,917
—
12,616
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
364
—
—
2,130
—
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
22,389
49,785
16,601
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
67
8,175
8,358
14,402
51,990
20,365
13,615
16,930
113
246
3,323
2,542
F-64
5
6
118
—
8,619
488
7,355
—
3,962
4,666
5,584
4,108
1,516
4,592
8,191
6,075
206
2,806
1,487
4,815
3,039
—
3,433
3,108
7,817
—
—
364
—
—
2,130
—
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
15,417
15,729
3,979
27,964
4,415
5,753
— 14,071
—
—
—
—
1,441
259
393
393
20,538
19,599
3,227
22,389
58,404
17,089
49,819
—
11,585
16,925
15,652
11,625
5,136
10,168
20,177
15,825
4,070
32,983
25,654
14,353
18,992
67
11,608
11,466
22,219
67,407
36,094
17,594
16,930
113
246
3,323
2,542
20,538
19,599
3,591
22,389
58,404
19,219
49,819
630
13,491
19,842
18,169
15,309
6,041
11,554
23,076
18,309
5,020
36,490
29,061
16,751
22,723
1,644
13,180
13,081
25,655
95,371
40,509
23,347
31,001
1,554
505
3,716
2,935
(13,232)
(2,978)
(2,435)
(1,401)
(2,824)
(14,892)
(4,665)
(13,674)
—
(6,697)
(9,325)
(9,639)
(6,036)
(2,971)
(5,295)
(10,176)
(8,783)
(414)
(10,850)
(9,577)
(8,006)
(7,982)
—
(5,964)
(6,416)
(10,959)
(22,475)
(13,957)
(8,680)
(5,390)
(13)
(11)
(98)
(116)
1973/2011
2013
2014
2002
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
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)
Initial Cost
Gross Amounts Carried
At Close of Period
Building
and Land
Improvements
Costs
Capitalized
Subsequent
to Acquisition
Building
and Land
Improvements
Total
(3)(4)
Accumulated
Depreciation
(5)
Year Built or
Renovated
Date
Acquired (6)
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 (O)
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
Land
613
1,856
522
688
773
436
—
—
—
—
—
—
— 10,486
—
—
—
—
8,275
—
134
113
13,577
56,351
—
—
—
—
—
—
—
—
—
1,422
1,362
1,094
2,243
692
8,057
2,791
— 20,304
—
—
—
—
—
—
4,078
—
—
—
—
—
—
—
—
—
—
—
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
2,582
7,154
2,090
2,860
3,094
1,742
42,339
34,353
—
1,711
1,402
19,446
5,492
5,594
5,685
4,929
10,419
3,051
34,588
12,193
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
39,990
26,531
27,797
7,741
38,156
28,426
F-65
Land
613
1,856
522
688
773
436
894
2,170
976
2,188
1,794
716
29,880
20,778
10,486
8,275
—
265
204
—
134
113
3,476
9,324
3,066
5,048
4,888
2,458
72,219
55,131
—
1,976
1,606
4,089
11,180
3,588
5,736
5,661
2,894
82,705
63,406
—
2,110
1,719
— 56,351
19,446
75,797
2,881
1,867
2,550
2,522
7,983
571
10,557
1
711
5,557
5,034
2,282
1,218
2,801
8,697
867
1,201
777
1,814
1,239
2,330
—
4,088
—
—
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
8,373
7,461
8,235
7,451
18,402
3,622
45,145
12,194
35,154
22,891
20,300
23,893
30,490
17,398
40,309
12,968
60,366
30,464
26,731
23,831
28,538
39,990
30,619
27,797
7,741
38,301
28,986
8,373
8,883
9,597
8,545
20,645
4,314
53,202
14,985
55,458
24,989
22,037
26,144
34,353
22,009
49,046
12,968
61,883
33,112
30,142
27,091
29,960
42,362
30,880
30,935
8,995
41,049
31,171
(1,635)
(3,624)
(1,112)
(2,517)
(2,197)
(972)
(32,435)
(20,770)
—
(381)
(271)
—
(866)
(3,598)
(4,040)
(2,658)
(6,799)
(1,695)
(10,084)
(6,467)
(4,939)
(10,541)
(10,559)
(12,299)
(11,349)
(8,280)
(20,174)
(1,113)
(13,166)
(8,381)
(8,441)
(7,357)
(5,245)
(2,956)
(8,677)
(2,999)
(781)
(6,475)
(9,182)
2002
2000
2002
1990
1996
2002
1989/1995
1976/2004
2012
2010
2010
(8)
2016
2000
1998
1997
1984/1997
1984
1985
2000
1999
2005
2001
2002
2004
2000
1990
2009
2009
2007
2005
2006
2010
2016
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 (L)
Columbia, 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)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
20,875
22,085
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
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
6,820
4,612
23,257
27,751
21,563
1,464
1,619
3,794
880
3,506
13,808
5,796
7,199
11,558
29,608
20,072
4,550
15,936
22,771
31,906
7,019
12,631
23,239
4,969
34,090
5,039
19,098
5,696
1,711
12,461
3,561
9,916
15,738
12,103
747
6,093
F-66
65
1,900
—
—
—
119
108
127
1,691
1,065
208
270
2,123
471
1,831
1,977
34
—
1,327
210
—
783
405
7,509
1,622
1,550
4,285
122
1,535
4,921
3,441
154
4,981
3,830
7,330
3,220
6,479
—
3,319
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
21,688
24,727
23,018
6,820
4,612
23,376
27,859
21,690
3,155
2,684
4,002
1,150
5,629
14,279
7,627
9,176
11,592
29,608
21,399
4,760
15,936
23,554
32,311
14,528
14,253
24,789
9,254
34,212
6,574
24,019
9,137
1,865
17,442
7,391
17,246
18,958
18,582
747
9,412
23,755
27,332
24,674
6,820
4,612
25,207
30,229
23,542
3,972
3,089
4,436
1,494
6,938
16,551
9,033
10,376
13,470
31,643
21,399
4,760
15,936
23,554
32,311
16,283
15,150
27,472
10,496
35,965
7,023
26,826
10,561
2,540
18,705
8,281
20,791
22,554
21,713
3,783
11,470
(5,935)
(7,047)
(4,805)
(7)
—
(3,497)
(3,340)
(3,680)
(1,079)
(1,137)
(1,624)
(423)
(2,750)
(2,455)
(3,664)
(3,052)
(4,116)
(934)
(4,886)
(1,313)
(240)
(5,680)
(7,165)
(7,484)
(4,111)
(7,598)
(5,506)
(8,373)
(2,946)
(11,156)
(5,875)
(521)
(9,484)
(4,272)
(9,035)
(10,912)
(7,126)
—
(3,746)
2007
2006
2010
2018 (8)
(8)
2012
2013
2011
1986
1986
1989/2015
1989
1997
2011
2002
2005
2004
2017
2009
2007
2018 (8)
2008
2008
1988
1988/2016
2006-2007
1990
2009
2001
2002
1992
2008
2001
1991
1999
1998 (8)
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
7015 Albert Einstein Drive (O)
Columbia, MD
412
Initial Cost
Gross Amounts Carried
At Close of Period
Encumbrances
(2)
Land
Building
and Land
Improvements
Costs
Capitalized
Subsequent
to Acquisition
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
—
—
—
—
729
902
919
1,829
7125 Columbia Gateway Drive (O)
Columbia, MD
— 20,487
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)
8800 Redstone Gateway (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)
9651 Hornbaker Road (D)
Arundel Preserve (L)
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
Huntsville, AL
Linthicum, MD
Linthicum, MD
Linthicum, MD
Linthicum, MD
Linthicum, MD
Manassas, VA
Hanover, MD
Bethlehem Tech. Park - DC 18 (O)
Manassas, VA
Bethlehem Tech. Park - DC 19 (O)
Manassas, VA
Bethlehem Tech. Park - DC 20 (O)
Manassas, VA
—
—
—
—
—
—
—
—
—
6,121
—
—
—
—
6,713
—
17,786
—
—
—
—
—
—
—
—
—
—
—
—
—
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
6,050
— 13,401
—
—
—
3,599
3,708
3,599
3,094
3,684
3,763
11,823
46,994
4,359
4,700
3,518
7,158
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
76,593
25,925
12,642
3,764
4,280
9,442
992
4,772
4,437
4,861
4,748
3,756
251,367
9,583
26,636
16,606
24,062
F-67
2,018
3,416
3,095
4,480
18,044
2,559
353
2,843
2,608
813
1,824
2,490
1,704
—
5
4,538
—
4,578
1,250
—
4,428
567
300
200
6,437
2,453
4,233
9,301
—
3,450
3,383
2,901
1,446
4,438
4,689
Land
729
902
919
1,829
20,487
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
6,050
Building
and Land
Improvements
Total
(3)(4)
Accumulated
Depreciation
(5)
Year Built or
Renovated
Date
Acquired (6)
5,112
7,100
6,858
16,303
65,038
6,918
5,053
6,361
9,766
4,242
6,212
9,496
4,800
7,269
8,353
27,168
21,419
10,878
5,138
9,223
7,544
34,743
76,893
26,125
19,079
6,217
8,513
18,743
992
8,222
7,820
7,762
6,194
8,194
5,841
8,002
7,777
18,132
85,525
8,268
5,757
7,465
11,108
5,274
8,033
12,228
6,083
9,057
8,353
31,257
22,786
12,357
6,110
9,223
9,109
38,568
83,280
30,982
21,396
7,727
10,231
20,746
992
9,387
8,976
8,977
7,116
9,133
256,056
262,106
9,583
26,636
16,606
24,062
22,984
30,235
20,314
27,661
(2,747)
(3,553)
(4,070)
(7,496)
(23,141)
(3,396)
(1,540)
(3,658)
(3,137)
(1,557)
(2,570)
(4,050)
(2,026)
(934)
(963)
(11,024)
(2,916)
(4,427)
(2,566)
(813)
(2,699)
(7,395)
(11,016)
(2,023)
(4,777)
(2,926)
(4,021)
(9,936)
—
(4,582)
(3,955)
(4,170)
(2,828)
(4,642)
(50,191)
—
(964)
(865)
(965)
2000
2000
2000
2001
1973/1999
1989
1990/2016
1990
1994/2018
1991
2000
2000
2000
1996/2013
2013
1986
2013
1991/1996
1984
2015
1990
2009
2012
2015
2005-2006
2002
2002
1981
(8)
1984
1984
1985
1984
1983
2010
(7)
2017
2016
2017
8/30/2001
8/30/2001
8/30/2001
8/30/2001
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
3/23/2010
7/2/2001
7/2/2001
4/30/1998
7/2/2001
4/30/1998
9/14/2010
7/2/2007
6/17/2016
6/9/2016
6/9/2016
— 13,401
—
—
—
3,599
3,708
3,599
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)
Property (Type) (1)
Location
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)
Lexington Park, MD
IN 1 (O)
IN 2 (O)
M Square Research Park (L)
MP 1 (O)
MP 2 (O)
MR Land (L)
Northern Virginia
Northern Virginia
College Park, MD
Northern Virginia
Northern Virginia
Northern Virginia
—
—
— 12,034
— 12,034
— 17,285
—
—
—
—
—
—
—
—
—
—
6,100
6,387
978
705
1,815
2,627
—
9,426
9,426
9,038
National Business Park North (L)
Annapolis Junction, MD
— 28,060
North Gate Business Park (L)
Northwest Crossroads (L)
NOVA Office A (O) (9)
NOVA Office B (O) (9)
NOVA Office D (O) (9)
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)
Project EX (O) (10)
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)
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
Confidential-USA
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
—
—
—
—
—
—
—
—
1,755
7,430
2,096
739
6,587
1,637
7,828
7,828
— 12,156
— 12,156
—
6,078
— 18,517
—
—
—
—
8,958
—
1,129
4,052
— 14,020
—
—
—
—
—
—
—
1,964
1,964
1,964
— 16,418
—
7,141
—
—
— 12,034
— 12,034
— 17,285
1,192
—
—
—
—
—
—
—
—
—
6,100
6,387
978
705
1,815
2,627
—
9,426
9,426
9,038
— 28,060
—
—
—
—
—
6,531
—
—
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
—
—
—
8,958
—
1,129
4,052
14,020
—
—
1,964
1,964
1,964
— 16,418
—
7,141
4,883
17,917
17,659
8,179
11,642
3,722
178
730
4,883
29,951
29,693
25,464
17,742
10,109
1,156
1,435
11,532
13,347
4,655
3,202
15,865
25,191
55
47,371
—
847
46,840
33,881
40,525
12,031
19,999
18,755
17,175
17,043
16,408
14,505
5,744
21,807
—
1,833
38,817
1,066
1,955
21,178
21,298
30,573
12,097
1,576
7,282
3,202
25,291
34,617
9,093
75,431
1,755
8,277
48,936
34,620
47,112
13,668
27,827
26,583
29,331
29,199
22,486
33,022
14,702
21,807
1,129
5,885
52,837
1,066
1,955
23,142
23,262
32,537
28,515
8,717
—
(245)
(210)
—
(5,053)
—
—
—
—
—
—
—
—
—
—
—
—
(4,577)
(1,817)
(1,417)
(3,898)
(560)
(515)
(1,180)
(1,135)
(930)
—
—
—
—
—
(11,532)
(268)
(444)
(4,316)
(4,342)
(2,908)
—
—
(8)
2018
2018
(7)
2006
(7)
(7)
(7)
(8)
(8)
(7)
(8)
2018
(7)
(7)
(7)
(7)
2015
2016
2017
6/9/2016
12/28/2017
12/28/2017
10/27/2009
10/27/2009
9/20/2004
3/16/2005
3/24/2004
8/31/2016
8/31/2016
1/29/2008
11/20/2017
11/20/2017
11/8/2018
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)
2018
(7)
(7)
(7)
1982/2008
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
7/16/2008
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
4,883
17,917
17,659
8,179
10,450
3,722
178
730
11,532
4,655
3,202
15,865
25,191
55
47,371
—
847
46,840
33,881
40,525
5,500
19,999
18,755
17,175
17,043
16,408
14,505
5,744
21,807
—
1,833
38,804
1,066
1,884
21,178
21,298
30,573
12,097
1,576
F-68
Property (Type) (1)
Location
Other Developments, including
intercompany eliminations (V)
Various
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)
—
8
121
373
8
494
502
(77)
Various
Various
$
174,043 $ 711,034 $
3,002,155 $
435,340 $ 711,034 $
3,437,495 $ 4,148,529 $
(897,903)
(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 Revolving Credit Facility of $213.0 million, term loan facilities of $248.3 million, unsecured senior notes of $1.2 billion, unsecured notes payable of $1.2 million, and deferred financing costs, net of
premiums, on the remaining loans of $3.6 million.
(3) The aggregate cost of these assets for Federal income tax purposes was approximately $3.5 billion as of December 31, 2018.
(4) As discussed in Note 5 to our Consolidated Financial Statements, we recognized an impairment loss of $2.4 million in connection with an operating property still owned as of December 31, 2018.
(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 as of December 31, 2018.
(8) Under construction or redevelopment as of December 31, 2018.
(9) The carrying amounts of these properties exclude allocated costs of the garage being constructed to support the properties.
(10) This property represents land under a long-term contract.
The following table summarizes our changes in cost of properties for the years ended December 31, 2018, 2017 and 2016 (in thousands):
Beginning balance
Improvements and other additions
Sales
Impairments
Other dispositions
Ending balance
2018
2017
2016
$ 3,980,813
$ 3,874,715
$ 4,158,616
224,524
(53,547)
(2,493)
(768)
259,548
(138,216)
(15,116)
(118)
251,960
(268,038)
(143,502)
(124,321)
$ 4,148,529
$ 3,980,813
$ 3,874,715
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
2018
2017
2016
$
801,038
$
715,951
$
718,680
112,610
(14,845)
(132)
(768)
107,772
(22,567)
—
(118)
105,763
(56,607)
(42,161)
(9,724)
$
897,903
$
801,038
$
715,951
F-69
CORPORATE
INFORMATION
ANNUAL
MEETING
The 2019 Annual Meeting
of Shareholders will be held
at 9:30 a.m. Eastern Time on
May 9, 2019, at Corporate
Office Properties Trust’s
headquarters, located at
6711 Columbia Gateway Drive,
Columbia, Maryland 21046.
BOARD OF
TRUSTEES
Thomas F. Brady
Chairman
Stephen E. Budorick
Robert L. Denton, Sr.
Philip L. Hawkins
David M. Jacobstein
Steven D. Kesler
C. Taylor Pickett
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