2019
Annual
Report
CORPORATE
OFFICE
PROPERTIES
TRUST
CORPORATE
INFORMATION
ANNUAL
MEETING
The 2020 Annual Meeting
of Shareholders will be held
at 9:30 a.m. Eastern Time on
May 21, 2020, 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
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
copt.com // NYSE: OFC
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Letter to
Shareholders
Dear fellow shareholders,
2019 was a year of tremendous achievement in
leasing, accessing capital, and operations. Continued
healthy defense spending and strong bipartisan support
to fund the U.S. military spurred unprecedented demand
for newly-developed and existing space throughout our
portfolio, as evidenced by the record 4.9 million square
feet of total leasing we completed during 2019. Included
in this total were 2.2 million square feet of development
leases, which exceeded our prior record set in 2012 by
one million square feet (see Figure 1) and was more than
double our initial goal of 900,000 square feet.
Last year’s historic volume of development leasing
reflected strength across all our demand drivers (see
Figure 2), as 1.2 million square feet were in data center
shell build-to-suits for cloud computing customers, and
one million square feet were new facilities for traditional
defense customers—including: NoVA C, a 348,000
square foot, build-to-suit facility for the U.S. Government
(“USG”) in a secure Northern Virginia campus; a 40,000
square foot lease with the USG at 100 Secured Gateway,
our first behind-the-fence development in the secure
portion of Redstone Gateway; and a build-to-suit lease
with Yulista Holding, LLC for a 366,000 square foot,
three-facility campus, also at Redstone Gateway.
In our operating portfolio, the 784,000 square feet
of vacant space we leased in 2019 was the highest
annual volume since 2010 and increased our core
portfolio to 93.1 percent leased at year-end. Demand
for existing space was driven by defense industry
expansions, as defense customers required additional
space to accommodate new and increased scopes of
work. This included the USG, which leased 164,000
square feet in our operating portfolio during 2019,
primarily in the Fort Meade/BW Corridor. Combined with
development leasing, we completed 586,000 square
feet of new and development leasing with the USG—
just shy of our best-ever annual volume achieved over
a decade ago.
Continued on Inside Back Cover
FIGURE 1: Historical–and Historic–Development Leasing
2.5M
2M
1.5M
1M
0.5M
0
10-year average = 1M SF
2010
2011
2012
2013
2014
2015 2016
2017
2018
2019
FIGURE 2: COPT’s Demand Drivers
Demand Driver(s)
COPT Asset(s)
Missions
Fort Meade/
BW Corridor
NBP
Arundel Preserve
Columbia Gateway
Airport Square
Cyber
Signals Intelligence
Info Assurance
DoD IT Function
Redstone Arsenal
Redstone Gateway
Missile Defense,
Aviation + Rocket Testing
Army Materiel Command
NASA Space Program
+ Others
Lackland AFB
USG Campus
Air Force Cyber + Others
Ft. Belvoir
Patriot Ridge
Geospatial Intelligence
NoVA Agencies
Westfields Portfolio
Washington Navy Yard
NAS Pax River
NSWCDD Dahlgren
Navy Support
Portfolio*
Intelligence Activities
FBI Cyber
NRO
NAVSEA
NAVAIR
NAVFAC
NAWCAD
MAE-East
Data Center Shells
Cloud Computing
NAP
*Maritime Plaza // Exploration + Expedition Office Parks (“Pax I”)
Wildewood Technology Park (“Pax II”) // Dahlgren Technology Center
Continued from Inside Front Cover
As our development leasing success accumulated
We expect our existing development pipeline to
during the year, we increased our capital raising
drive external growth. At year-end, we had 14 projects
objectives. In addition to issuing the final $46 million
under development and redevelopment totaling 2.4
under our 2017 forward equity agreements, we raised
million square feet that were 79 percent leased and
$311 million by selling a 90 percent interest in nine of
represent $709 million of investment. During 2020, we
our operational data center shells to a joint venture
expect to place 1.4 million fully-leased square feet into
with Blackstone Real Estate Income Trust, Inc. This
service. In addition to supporting moderate FFO per
disposition volume was more than double our original
share growth in 2020, the EBITDA from these projects
guidance, and the strong valuations our data center
significantly decreases our need for external capital
shells garnered clearly demonstrated the value creation
to fund growth on a leverage-neutral basis, and—
we achieve through development.
importantly—positions our Company to generate robust
Property operations in 2019 were also strong. Same-
FFO per share growth in 2021.
property cash net operating income (“NOI”) increased
The sudden advent of the COVID-19 pandemic and
3.9 percent versus 2018, modestly outperforming
related business disruptions thus far in 2020 has created
expectations, due to higher than budgeted operating
a challenging and tumultuous time for our country
margins and a strong tenant renewal rate of 76.7
and the world. We are making sure we protect all our
percent. During the year, we completed 1.9 million
stakeholders by cleaning buildings with extra care and
square feet of renewals and 2.4 percent annual rent
frequency, and protecting our employees with social
escalations. While most of the nearly 100 renewing
distancing measures. To-date we have not experienced
leases rolled flat-to-modestly down, four large,
and currently do not anticipate any material delays
long-term leases that escalated above market and
or disruptions in executing our 2020 plan. We have a
rolled down 13.6 percent, lowered our average
strong balance sheet and ample liquidity to complete
mark-to-market on renewals to negative 5.8 percent.
our development pipeline, maintain our dividend, and
Economically, renewing strong credit tenants at
continue delivering strong value for shareholders.
Against a backdrop of strong defense spending and
of leasing opportunities present and emerging in our
moderately lower rents generally is a better strategy for
long-term cash flow growth than allowing spaces to go
vacant, which incurs downtime and the higher capital
expenditures associated with re-tenanting space.
As our markets continue to strengthen, market rents
should increase and ultimately support modest cash
rent increases on most renewals.
robust demand for our locations, we believe the
outlook for 2020 is bright. The mid-point of our
guidance implies 2.5 percent FFO per share growth
over 2019 results, and our plan is very low risk. We
forecast solid same-property cash NOI growth to be
supported by strong renewal rates, modest cash rent
rolldowns on renewals, and a modest increase in same-
property occupancy. At the end of 2019, our same-
property portfolio was 91.9 percent occupied and 93.7
percent leased, so leasing gains achieved in 2019 will
drive higher occupancy in 2020.
In summary, our Company has never been in as strong a
position to deliver results for shareholders as it is today.
We have a finely-honed portfolio located in essential
locations that support aspects of national security. We
have a strong, flexible, investment grade rated balance
sheet that can support growth. And, we have a deep
bench of talented people to capitalize on the broad set
markets for you, our shareholders.
Stephen E. Budorick
President + Chief Executive Officer
Letter to
Shareholders
Dear fellow shareholders,
2019 was a year of tremendous achievement in
leasing, accessing capital, and operations. Continued
healthy defense spending and strong bipartisan support
to fund the U.S. military spurred unprecedented demand
for newly-developed and existing space throughout our
portfolio, as evidenced by the record 4.9 million square
feet of total leasing we completed during 2019. Included
in this total were 2.2 million square feet of development
leases, which exceeded our prior record set in 2012 by
one million square feet (see Figure 1) and was more than
double our initial goal of 900,000 square feet.
Last year’s historic volume of development leasing
reflected strength across all our demand drivers (see
Figure 2), as 1.2 million square feet were in data center
shell build-to-suits for cloud computing customers, and
one million square feet were new facilities for traditional
defense customers—including: NoVA C, a 348,000
square foot, build-to-suit facility for the U.S. Government
(“USG”) in a secure Northern Virginia campus; a 40,000
square foot lease with the USG at 100 Secured Gateway,
our first behind-the-fence development in the secure
portion of Redstone Gateway; and a build-to-suit lease
with Yulista Holding, LLC for a 366,000 square foot,
three-facility campus, also at Redstone Gateway.
In our operating portfolio, the 784,000 square feet
of vacant space we leased in 2019 was the highest
annual volume since 2010 and increased our core
portfolio to 93.1 percent leased at year-end. Demand
for existing space was driven by defense industry
expansions, as defense customers required additional
space to accommodate new and increased scopes of
work. This included the USG, which leased 164,000
square feet in our operating portfolio during 2019,
primarily in the Fort Meade/BW Corridor. Combined with
development leasing, we completed 586,000 square
feet of new and development leasing with the USG—
just shy of our best-ever annual volume achieved over
a decade ago.
Continued on Inside Back Cover
FIGURE 1: Historical–and Historic–Development Leasing
10-year average = 1M SF
2.5M
2M
1.5M
1M
0.5M
0
2010
2011
2012
2013
2014
2015 2016
2017
2018
2019
FIGURE 2: COPT’s Demand Drivers
Demand Driver(s)
COPT Asset(s)
Missions
Fort Meade/
BW Corridor
NBP
Arundel Preserve
Columbia Gateway
Airport Square
Cyber
Signals Intelligence
Info Assurance
DoD IT Function
Redstone Arsenal
Redstone Gateway
Missile Defense,
Aviation + Rocket Testing
Army Materiel Command
NASA Space Program
+ Others
Lackland AFB
USG Campus
Air Force Cyber + Others
Ft. Belvoir
Patriot Ridge
Geospatial Intelligence
NoVA Agencies
Westfields Portfolio
Intelligence Activities
Washington Navy Yard
Navy Support
NAS Pax River
NSWCDD Dahlgren
Portfolio*
MAE-East
Data Center Shells
Cloud Computing
*Maritime Plaza // Exploration + Expedition Office Parks (“Pax I”)
Wildewood Technology Park (“Pax II”) // Dahlgren Technology Center
FBI Cyber
NRO
NAVSEA
NAVAIR
NAVFAC
NAWCAD
NAP
Continued from Inside Front Cover
As our development leasing success accumulated
during the year, we increased our capital raising
objectives. In addition to issuing the final $46 million
under our 2017 forward equity agreements, we raised
$311 million by selling a 90 percent interest in nine of
our operational data center shells to a joint venture
with Blackstone Real Estate Income Trust, Inc. This
disposition volume was more than double our original
guidance, and the strong valuations our data center
shells garnered clearly demonstrated the value creation
we achieve through development.
Property operations in 2019 were also strong. Same-
property cash net operating income (“NOI”) increased
3.9 percent versus 2018, modestly outperforming
expectations, due to higher than budgeted operating
margins and a strong tenant renewal rate of 76.7
percent. During the year, we completed 1.9 million
square feet of renewals and 2.4 percent annual rent
escalations. While most of the nearly 100 renewing
leases rolled flat-to-modestly down, four large,
long-term leases that escalated above market and
rolled down 13.6 percent, lowered our average
mark-to-market on renewals to negative 5.8 percent.
Economically, renewing strong credit tenants at
moderately lower rents generally is a better strategy for
long-term cash flow growth than allowing spaces to go
vacant, which incurs downtime and the higher capital
expenditures associated with re-tenanting space.
As our markets continue to strengthen, market rents
should increase and ultimately support modest cash
rent increases on most renewals.
Against a backdrop of strong defense spending and
robust demand for our locations, we believe the
outlook for 2020 is bright. The mid-point of our
guidance implies 2.5 percent FFO per share growth
over 2019 results, and our plan is very low risk. We
forecast solid same-property cash NOI growth to be
supported by strong renewal rates, modest cash rent
rolldowns on renewals, and a modest increase in same-
property occupancy. At the end of 2019, our same-
property portfolio was 91.9 percent occupied and 93.7
percent leased, so leasing gains achieved in 2019 will
drive higher occupancy in 2020.
We expect our existing development pipeline to
drive external growth. At year-end, we had 14 projects
under development and redevelopment totaling 2.4
million square feet that were 79 percent leased and
represent $709 million of investment. During 2020, we
expect to place 1.4 million fully-leased square feet into
service. In addition to supporting moderate FFO per
share growth in 2020, the EBITDA from these projects
significantly decreases our need for external capital
to fund growth on a leverage-neutral basis, and—
importantly—positions our Company to generate robust
FFO per share growth in 2021.
The sudden advent of the COVID-19 pandemic and
related business disruptions thus far in 2020 has created
a challenging and tumultuous time for our country
and the world. We are making sure we protect all our
stakeholders by cleaning buildings with extra care and
frequency, and protecting our employees with social
distancing measures. To-date we have not experienced
and currently do not anticipate any material delays
or disruptions in executing our 2020 plan. We have a
strong balance sheet and ample liquidity to complete
our development pipeline, maintain our dividend, and
continue delivering strong value for shareholders.
In summary, our Company has never been in as strong a
position to deliver results for shareholders as it is today.
We have a finely-honed portfolio located in essential
locations that support aspects of national security. We
have a strong, flexible, investment grade rated balance
sheet that can support growth. And, we have a deep
bench of talented people to capitalize on the broad set
of leasing opportunities present and emerging in our
markets for you, our shareholders.
Stephen E. Budorick
President + Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark one)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
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)
Securities registered pursuant to Section 12(b) of the Act:
Registrant’s telephone number, including area code: (443) 285-5400
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Shares of beneficial interest, $0.01
par value
OFC
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 ☒ Yes ☐ No
Corporate Office Properties, L.P. ☒ Yes ☐ 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 ☐ Yes ☒ No
Corporate Office Properties, L.P. ☐ Yes ☒ 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 ☒ Yes ☐ No
Corporate Office Properties, L.P. ☒ Yes ☐ 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 ☒ Yes ☐ No
Corporate Office Properties, L.P. ☒ Yes ☐ No
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.
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 ☐ Yes ☒ No
Corporate Office Properties, L.P. ☐ Yes ☒ 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 $2.6 billion, as calculated using the closing price of such shares on the New York Stock Exchange as of June 28, 2019 and the number of
outstanding shares as of June 30, 2019. 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 28, 2020, 112,082,315 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 $27.7 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 as of June 28, 2019 and the number of outstanding units as of
June 30, 2019.
Portions of the proxy statement of Corporate Office Properties Trust for its 2020 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, 2019 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, 2019, COPT owned 98.7% 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.
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. 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 differences between the Company and the Operating Partnership, this report presents the following separate
sections for each of the Company and the Operating Partnership:
•
•
•
•
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 18, Earnings per Share of COPT and subsidiaries and Earnings per Unit of COPLP and subsidiaries; and
Note 20, Quarterly Data of COPT and subsidiaries and COPLP and subsidiaries.
consolidated financial statements;
the following notes to the consolidated financial statements:
•
•
•
•
•
•
“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.
ITEM 11.
ITEM 12.
ITEM 13.
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
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
ITEM 16.
FORM 10-K SUMMARY
SIGNATURES
PAGE
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51
4
FORWARD-LOOKING STATEMENTS
This Form 10-K 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. 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 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 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 (“USG”) 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, 2019, our properties included the following:
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170 properties totaling 19.2 million square feet comprised of 15.4 million square feet in 148 office properties and 3.7
million square feet in 22 single-tenant data center shell properties (“data center shells”). We owned 15 of these data center
shells through unconsolidated real estate joint ventures;
a wholesale data center with a critical load of 19.25 megawatts;
14 properties under development or redevelopment (ten office properties and four data center shells) that we estimate will
total approximately 2.5 million square feet upon completion, including one partially-operational property; and
approximately 900 acres of land controlled for future development that we believe could be developed into approximately
11.3 million square feet and 43 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, development
and construction 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, 2019, COPT owned 98.7%
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 common units to quarterly distributions and payments in
liquidation is substantially the same as that of COPT common shareholders. 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 at least 90% of its annual taxable income to its shareholders.
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’
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Audit, Nominating and Corporate Governance, Compensation and Investment Committees, as well as our Corporate
Governance Guidelines, Code of Business Conduct and Ethics and Code of Ethics for Financial Officers. We intend to make
available on our website any future amendments or waivers to our Code of Business Conduct and Ethics and Code of Ethics for
Financial Officers within four business days after any such amendments or waivers. The information on our Internet site is not
part of this report.
The SEC maintains an Internet website that contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC. This Internet website can be accessed at www.sec.gov.
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 in our Defense/IT Locations
properties. These properties are primarily occupied by USG 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, 2019 accounted for 161 of the portfolio’s 170 properties, representing 87.9% of its
annualized rental revenue, and we control developable land to accommodate future growth in this portfolio. These properties
generally have higher tenant renewal rates than is typical in commercial office space due in large part to: 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 for unique needs such as Secure
Compartmented Information Facility (“SCIF”), critical power supply and operational redundancy.
In recent years, data center shells have been a significant growth driver for our Defense/IT Locations. Data center shells
are properties leased to tenants to be operated as data centers in which we provide tenants with only the core building and basic
power, while the tenants fund the costs for the critical power, fiber connectivity and data center infrastructure. From 2013
through 2019, we placed into service 22 data center shells totaling 3.7 million square feet, and we had an additional four under
development totaling 950,000 square feet as of December 31, 2019. We enter into long-term leases for these properties prior to
commencing development, with triple-net structures and multiple extension options and rent escalators to provide future
growth. Additionally, our tenants’ funding of the costs to fully power and equip these properties significantly enhances the
value of these properties and creates high barriers to exit for such tenants.
We believe that our properties and team collectively complement our Defense/IT Locations strategy due to our:
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properties’ proximity to defense installations and other knowledge-based government demand drivers. Such proximity is
generally preferred and often required for our tenants to execute their missions. Specifically, our:
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office properties are proximate to such mission-critical facilities as Fort George G. Meade (which houses over 100
Department of Defense organizations and agencies, including ones engaged in signals intelligence, such as U.S. Cyber
Command and Defense Information Systems Agency) and Redstone Arsenal (one of the largest defense installations in
the United States, housing priority missions, such as Army procurement, missile defense, space exploration, and
research and development, testing and engineering of advanced weapons systems); and
data center shells are primarily in the Northern Virginia area, proximate to the MAE-East Corridor, which is a major
Network Access Point in the United States for interconnecting traffic between Internet service providers;
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well-established relationships with the USG and its contractors;
extensive experience in developing:
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high quality, highly-efficient office properties;
secured, specialized space, with the ability to satisfy the USG’s unique needs (including SCIF and ATFP
requirements); and
data center shells to customer specifications within very condensed timeframes to accommodate time-sensitive tenant
demand; and
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depth of knowledge, specialized skills and credentialed personnel in operating highly-specialized properties with unique
security-oriented requirements.
Regional Office Strategy: While Defense/IT Locations are our primary focus, we also own a portfolio of 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 believe that these submarkets possess the following favorable characteristics: (1) mixed-use,
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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
office space. As of December 31, 2019, 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.
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) maximizing tenant retention in order to minimize
space downtime and additional capital associated with space rollover; (3) increasing rental rates where market conditions
permit; (4) leasing vacant space; (5) achievement of operating efficiencies by increasing economies of scale and, where
possible, aggregating vendor contracts to achieve volume pricing discounts; and (6) redevelopment when we believe property
conditions and market demand warrant. We also 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 aim to sustainably develop and operate our portfolio to create healthier work environments and reduce consumption of
resources by: (1) developing 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 five 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 further
support that growth while serving 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 development. 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) our exposure to changes in interest rates; and (4) our total and secured debt levels
relative to our overall capital structure;
raising equity 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;
• monitoring capacity available under revolving credit facilities and equity offering programs to provide liquidity to fund
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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 to fund our investment activities and/or reduce overall debt; and
continuously evaluating the ability of our capital resources to accommodate our plans for growth.
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Industry Segments
As of December 31, 2019, 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:
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Fort George G. Meade and the Baltimore/Washington Corridor (referred to herein as “Fort Meade/BW Corridor”);
Northern Virginia Defense/IT Locations;
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Lackland Air Force Base in San Antonio, Texas;
locations serving the U.S. Navy (referred to herein as “Navy Support Locations”). Properties in this sub-segment as of
December 31, 2019 were proximate to the Washington Navy Yard in Washington, DC, the Naval Air Station Patuxent
River in Maryland and the Naval Surface Warfare Center Dahlgren Division in Virginia;
Redstone Arsenal in Huntsville, Alabama; and
data center shells in Northern Virginia (including 15 owned through unconsolidated real estate joint ventures).
As of December 31, 2019, Defense/IT Locations comprised 161 of our office and data center shell portfolio’s properties,
representing 88.8% of its square feet in operations, while Regional Office comprised seven of the portfolio’s properties, or
10.3% 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 16 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, 2019, we had 394 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 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, 2019, which are included in a separate section at the end of this report
beginning on page F-1.
Our performance and value are subject to risks associated with our properties and with the real estate industry.
Real estate investments are subject to various risks and fluctuations in value and demand, many of which are beyond our
control. Our performance and the value of our real estate assets may decline due to conditions in the general economy and the
real estate business which, in turn, could have an adverse effect on our financial position, results of operations, cash flows and
ability to make expected distributions to our shareholders. These conditions include, but are not limited to:
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downturns in national, regional and local economic environments, including increases in the unemployment rate and
inflation or deflation;
competition from other properties;
trends in office real estate that may adversely affect future demand, including telecommuting and flexible workplaces;
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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 development 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
could also decrease our likelihood of successfully renewing tenants at favorable terms or leasing vacant space in existing
properties or newly-developed properties. In addition, such conditions could increase the level of risk that we may not be able
to obtain new financing for development activities, refinancing of existing debt, acquisitions 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 expiration of existing leases, 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 USG 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, 2019, our 10 largest tenants accounted for 62.1% of our total
annualized rental revenue, the four largest of these tenants accounted for 50.6%, and the USG, our largest tenant, accounted for
34.6%. We calculate 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, 2019; with regard to properties owned
through unconsolidated real estate joint ventures, 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 USG provide for a series of one-year terms. The USG 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 USG elects to terminate some or all of its leases and the space cannot be re-leased on satisfactory terms.
Data center shells have been a significant growth driver for us in recent years, enabling us to develop and place into service
fully-occupied, single-tenant properties, with long-term leases and rent escalators for future growth. These properties have
garnered the interest of outside investors, enabling us to raise capital by selling ownership interests through joint venture
structures in recent years at favorable profit margins, and to apply the proceeds towards other development opportunities. Our
data center shell activity in recent years is concentrated with one customer. If that customer no longer chooses to allocate
development opportunities to us, we may have limited opportunities to continue to use data center shells as a growth driver and
possible source of future capital.
As of December 31, 2019, 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. There is also an increasing trend of
businesses utilizing shared office and co-working spaces. 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 significant 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
significantly 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.
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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 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, or may be willing to accept lower returns on their investments or incur
higher leverage.
Real estate investments are illiquid, and we may not be able to dispose of properties on a timely basis when we
determine it is appropriate to do so. Real estate investments can be difficult to sell and convert to cash quickly, especially if
market conditions, including real estate lending conditions, are not favorable. Such illiquidity could limit our ability to 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 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 investment
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 sales of interests in properties. 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. 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 additional properties. Although the majority of our investments are
in operating properties, we also develop and redevelop properties, including some that are not fully pre-leased. When we
develop 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 financing to fund property development 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 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 sufficiently 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,
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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
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. 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 COPT’s qualification as a REIT. We are also subject to the risks
that:
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we may not be able to refinance our existing indebtedness, or may refinance on terms that are less favorable to us than the
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, 2019, 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, extend the repayment date of, or
otherwise raise funds required to repay, our debt by its maturity date, we would default on such 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.
We may suffer adverse effects from changes in the method of determining LIBOR or the replacement of LIBOR
with an alternative interest rate. Our variable-rate debt and interest rate swaps use as a reference rate the London Interbank
Offered Rate (“LIBOR”), as calculated for the U.S. dollar (“USD-LIBOR”). The Chief Executive of the United Kingdom's
Financial Conduct Authority (“FCA”), which regulates LIBOR, announced the FCA’s intention to cease sustaining LIBOR after
2021. He has also indicated that market participants should expect LIBOR to be subsequently discontinued and should proceed
with preparations for transitioning to an alternative reference rate. The Federal Reserve Board convened the Alternative
Reference Rates Committee (“ARRC”) to identify a set of alternative reference rates for possible use as market benchmarks.
Based on the ARRC’s recommendation, the Federal Reserve Bank of New York began publishing the Secured Overnight
Financing Rate (“SOFR”) and two other alternative rates beginning in April 2018. Since then, certain derivative products and
debt securities tied to SOFR have been introduced, and various industry groups are developing plans to transition to SOFR as
the new market benchmark. While we have been closely monitoring developments in the LIBOR transition, we are not able to
predict whether LIBOR will actually cease to be available after 2021 or whether SOFR will become the market benchmark in
13
its place. Any changes announced or adopted by the FCA or other governing bodies in the method used for determining
LIBOR rates may result in a sudden or prolonged increase or decrease in reported LIBOR rates. If that were to occur, the level
of interest payments we incur may change. In addition, although our variable rate debt and interest rate swaps will likely
provide for alternative methods of calculating the interest rate if LIBOR is not reported, uncertainty as to the extent and manner
of future changes may result in interest rates and/or payments that are higher or lower than if the LIBOR rate were to remain
available in its current form.
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. In addition, since the variable interest rate spread and
facility fees on certain of our debt, including our Revolving Credit Facility and a term loan facility, is determined based on our
credit ratings, a downgrade in our credit ratings would increase the payments required on such debt.
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, due to the difference in time
between when we receive revenue or pay expenses and when we report such items for distribution purposes, it is possible that
we may need 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 unless we meet certain financial tests or such payments or distributions are required to
maintain COPT’s qualification as a REIT. Our ability to make distributions at expected levels is also dependent, in part, on
other matters, including, but not limited to:
•
•
•
•
•
•
•
•
•
•
continued property occupancy and timely receipt of rent from our tenants;
the amount of future capital expenditures and expenses relating to our properties;
our leasing activity and future rental rates;
the strength of the commercial real estate market;
our ability to compete;
governmental actions and initiatives, including risks associated with the impact of a prolonged government shutdown or
budgetary reductions or impasses;
our costs of compliance with environmental and other laws;
our corporate overhead levels;
our amount of uninsured losses; and
our decision to reinvest in operations rather than distribute available cash.
In addition, we can make distributions to the holders of our common shares/units only after we make preferential distributions
to holders of 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
14
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 USG 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. We have preventative, detective and responsive
measures in place to maintain the security and integrity of our networks and related systems that have to date enabled us to
avoid breaches and disruptions that were individually, or in the aggregate, material. We also have insurance coverage in place
in the event of significant future losses from breaches and disruptions. However, despite our activities to maintain the security
and integrity of our networks and related systems, there can be no absolute assurance that these activities will be effective in
mitigating these risks. A security breach involving our networks and related systems could disrupt our operations in numerous
ways, including compromising the confidential information of our tenants, customers, vendors and employees, which could
damage our relationships with such parties, and disrupting the proper functioning of our networks and systems on which much
of our operations depend.
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 and severe storms could adversely impact our properties. The potential consequences of climate change could also
adversely impact our properties, particularly our ones located in Baltimore City near the waterfront, and, over time, could
adversely affect demand for space and our ability to operate the properties effectively and result in additional operating costs.
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
15
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, development, 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. 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 USG. Agencies of the USG, 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 USG 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 USG. In addition, we could suffer serious reputational harm if allegations of impropriety were made against us.
COPT’s ownership limits are important factors. COPT’s Declaration of Trust limits ownership of its common shares
by any single shareholder to 9.8% of the number of the outstanding common shares or 9.8% of the value of the outstanding
common shares, whichever is more restrictive. COPT’s Declaration of Trust also limits ownership by any single shareholder of
our common and preferred shares in the aggregate to 9.8% of the aggregate value of the outstanding common and preferred
shares. We call these restrictions the “Ownership Limit.” COPT’s Declaration of Trust allows our Board of Trustees to exempt
shareholders from the Ownership Limit. The Ownership Limit and the restrictions on ownership of our common shares may
delay or prevent a transaction or a change of control that might involve a premium price for our common shares/units or
otherwise be in the best interest of our equityholders.
COPT’s Declaration of Trust includes other provisions that may prevent or delay a change of control. Subject to the
requirements of the New York Stock Exchange, our Board of Trustees has the authority, without shareholder approval, to issue
additional securities on terms that could delay or prevent a change in control. In addition, our Board of Trustees has the
authority to reclassify any of our unissued common shares into preferred shares. Our Board of Trustees may issue preferred
shares with such preferences, rights, powers and restrictions as our Board of Trustees may determine, which could also delay or
prevent a change in control.
The Maryland business statutes impose potential restrictions that may discourage a change of control of our
company. Various Maryland laws may have the effect of discouraging offers to acquire us, even if the acquisition would be
advantageous to equityholders. Resolutions adopted by our Board of Trustees and/or provisions of our bylaws exempt us from
such laws, but our Board of Trustees can alter its resolutions or change our bylaws at any time to make these provisions
applicable to us.
COPT’s failure to qualify as a REIT would have adverse tax consequences, which would substantially reduce funds
available to make distributions to our equityholders. We believe that COPT has qualified for taxation as a REIT for Federal
income tax purposes since 1992. We plan for COPT to continue to meet the requirements for taxation as a REIT. Many of
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
16
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. In addition, while REITs generally receive certain tax advantages
compared to entities taxed as C corporations, it is possible that future legislation could result in REITs having fewer tax
advantages, and therefore become a less attractive investment alternative. 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 our equity security issuances. These conditions include, but
are not limited to:
• market perception of REITs in general and office REITs in particular;
• market perception regarding our major tenants and sector concentrations;
•
•
•
•
•
• market perception of our financial condition, performance, dividends and growth potential; and
•
the level of institutional investor interest in COPT;
general economic and business conditions;
prevailing interest rates;
our financial performance;
our underlying asset value;
adverse changes in tax laws.
We may experience significant losses and harm to our financial condition if financial institutions holding our cash
and cash equivalents file for bankruptcy protection. We believe that we maintain our cash and cash equivalents with high
quality financial institutions. We have not experienced any losses to date on our deposited cash. However, we may incur
significant losses and harm to our financial condition in the future if we were holding large sums of cash in any of these
financial institutions at a time when they filed 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, 2019
(dollars and square feet in thousands, except per square foot amounts):
Segment
Office and Data Center Shell Portfolio
Defense/IT Locations:
Fort Meade/BW Corridor:
National Business Park (Annapolis Junction, MD)
Howard County, MD
Other
Fort Meade/BW Corridor Subtotal / Average
Northern Virginia Defense/IT
Lackland Air Force Base
Navy Support Locations
Redstone Arsenal
Data Center Shells:
Consolidated Properties
Unconsolidated Joint Venture Properties (4)
Defense/IT Locations Subtotal / Average
Regional Office
Other Properties
Total Office and Data Center Shell Portfolio
Wholesale Data Center
Total Operating Properties
Total Consolidated Operating Properties
Number of
Properties
Rentable
Square Feet
or Megawatts
(“MW”)
Occupancy (1)
Annualized
Rental
Revenue (2)
Annualized Rental
Revenue per
Occupied Square
Foot (2)(3)
31
35
22
88
13
7
21
10
7
15
161
7
2
170
3,823
2,849
1,624
8,296
1,993
953
1,242
806
1,309
2,435
17,034
1,982
157
19,173
1
19.25 MW
90.1 % $
94.1 %
95.0 %
92.4 %
82.4 %
100.0 %
92.5 %
99.3 %
100.0 %
100.0 %
93.7 %
88.1 %
73.0 %
92.9%
76.9%
$
$
$
$
137,267
76,710
44,152
258,129
54,671
52,960
32,610
17,404
19,290
7,718
442,782
57,997
2,807
503,586
21,752
525,338
517,620
39.86
28.61
28.45
33.63
33.31
53.15
28.37
21.59
14.73
12.27
31.10
33.23
24.46
31.28
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, 2019.
(2) Annualized rental revenue is the monthly contractual base rent as of December 31, 2019 (ignoring free rent then in effect) multiplied by
12, plus the estimated annualized expense reimbursements under existing leases. With regard to properties owned through
unconsolidated real estate joint ventures, 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, 2019. 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 $30.95 for our total office and data center shell portfolio,
$33.30 for the Fort Meade/BW Corridor (our largest Defense/IT Location sub-segment) and $32.50 for our Regional Office portfolio.
(4) Represents properties owned through unconsolidated real estate joint ventures. 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 development,
or had redevelopment underway, or otherwise approved, as of December 31, 2019 (dollars and square feet in thousands):
Property and Location
Under Development
Fort Meade/BW Corridor:
4600 River Road
College Park, Maryland
Redstone Arsenal:
7500 Advanced Gateway
Huntsville, Alabama
7600 Advanced Gateway
Huntsville, Alabama
100 Secured Gateway
Huntsville, Alabama
8600 Advanced Gateway
Huntsville, Alabama
8000 Rideout Road
Huntsville, Alabama
6000 Redstone Gateway
Huntsville, Alabama
Subtotal / Average
Data Center Shells:
P2 A
Northern Virginia
Oak Grove A
Northern Virginia
P2 B
Northern Virginia
P2 C
Northern Virginia
Subtotal / Average
NoVA Defense/IT:
NOVA Office C
Chantilly, Virginia
Regional Office:
2100 L Street
Washington, DC
Total Under Development
Under Redevelopment
Fort Meade/BW Corridor:
6950 Columbia Gateway
Columbia, Maryland (2)
Estimated
Rentable
Square Feet
Upon
Completion
Percentage
Leased
Calendar
Quarter
Anticipated to
be Operational
Costs
Incurred to
Date (1)
Estimated
Costs to
Complete (1)
102
25 %
3Q 21
$
8,928
$
21,581
135
126
250
105
100
40
756
230
216
274
230
950
100 %
2Q 20
7,195
11,923
100 %
2Q 20
2,543
11,696
16 %
2Q 21
25,763
32,837
100 %
4Q 20
4,931
22,749
0 %
4Q 21
2,564
22,636
66 %
57 %
4Q 21
788
43,784
8,738
110,579
100 %
1Q 20
46,610
7,660
100 %
2Q 20
29,420
18,875
100 %
3Q 20
32,115
32,521
100 %
100 %
1Q 21
18,727
126,872
32,393
91,449
348
100 %
2Q 22
20,870
85,349
190
2,346
53 %
79%
2Q 21
126,112
47,888
$
326,566
$
356,846
106
80%
2Q 20
$
23,276
$
2,279
(1) Includes land, development, leasing costs and allocated portion of structured parking and other shared infrastructure, if applicable.
(2) This property had occupied square feet in service as of December 31, 2019. Therefore, the property and its 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, 2019, including
properties under ground lease to us (square feet in thousands):
Segment
Defense/IT Locations:
Fort Meade/BW Corridor:
National Business Park (Annapolis Junction, MD)
Howard County, MD
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
126
341
52
49
44
366
53
905
10
915
43
958
2,106
290
1,338
3,734
1,618
785
109
3,227
934
10,407
900
11,307
638
11,945
(1) This land is owned by the USG and is controlled under a long-term master lease agreement 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, 2019 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
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
Wholesale Data Center
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
2030: Office and Data Center Shells
2031: Office and Data Center Shells
2033: Office and Data Center Shells
2034: Office and Data Center Shells
2035: Office and Data Center Shells
2037: Office and Data Center Shells (2)
2063: Office and Data Center Shells (2)
Total Operating Properties
Total Office and Data Center Shells
Annualized
Rental
Revenue of
Expiring
Leases (1)
Percentage of
Total
Annualized
Rental Revenue
Expiring (1)
Total Annualized
Rental Revenue
of Expiring
Leases Per
Occupied Square
Foot
Square Footage
of Leases
Expiring
$
1,525
N/A
1,897
N/A
1,642
N/A
1,878
N/A
2,624
N/A
2,612
1,281
823
987
N/A
1,116
164
432
255
366
214
—
53,898
18,539
58,238
413
53,423
2,104
63,704
453
70,666
10
88,442
28,615
16,199
20,169
233
22,865
4,942
6,444
7,728
4,326
3,664
136
—
17,816
17,816
$
$
127
525,338
503,586
10.3 %
3.5 %
11.1 %
0.1 %
10.2 %
0.4 %
12.1 %
0.1 %
13.5 %
— %
16.8 %
5.4 %
3.1 %
3.8 %
— %
4.4 %
1.0 %
1.2 %
1.5 %
0.8 %
0.7 %
— %
— %
100.0%
100.0%
$35.29
N/A
30.69
N/A
32.53
N/A
33.93
N/A
30.06
N/A
36.84
32.52
32.70
25.45
N/A
28.73
29.97
14.90
30.30
11.83
17.11
N/A
N/A
N/A
$31.28
(1) Refer to definition provided on first page of Item 2 of this Annual Report on Form 10-K.
(2)
Includes only ground leases.
With regard to office and data center shell property leases expiring in 2020, we believe that the weighted average annualized
rental revenue per occupied square foot for such leases as of December 31, 2019 was, on average, approximately 0% to 2%
higher than estimated current market rents for the related space, with specific results varying by market.
21
Item 3. Legal Proceedings
We are not currently involved in any material litigation nor, to our knowledge, is any material litigation currently
threatened against the Company or the Operating Partnership (other than routine litigation arising in the ordinary course of
business, substantially all of which is expected to be covered by liability insurance).
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrants’ Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
COPT’s common shares trade on the New York Stock Exchange (“NYSE”) under the symbol “OFC.” The number of
holders of record of COPT’s common shares was 476 as of January 28, 2020. 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 28, 2020, there were 28 holders of
record of COPLP’s common units.
Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended December 31, 2019, COPT issued:
•
•
2,000 common shares in exchange for 2,000 COPLP common units in accordance with COPLP’s Third Amended and
Restated Limited Partnership Agreement, as amended; and
1,000 common shares in aggregate to four individuals in satisfaction of their claims of being entitled to the shares pursuant
to a prior transaction to which COPT was a party. In return for these shares, COPT received a waiver from such
individuals of any rights, claims or cause of action at law or in equity with respect to such shares.
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, 2014 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”):
200
180
160
e
u
l
a
V
x
e
d
n
I
140
120
100
80
60
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
12/31/19
Corporate Office Properties Trust
S&P 500
NAREIT All Equity REIT Index
Index
Corporate Office Properties Trust
S&P 500
NAREIT All Equity REIT Index
12/31/14
$ 100.00
$ 100.00
$ 100.00
12/31/15
$
80.58
$ 101.38
$ 102.83
12/31/16
$ 119.75
$ 113.51
$ 111.70
12/31/17
$ 115.85
$ 138.29
$ 121.39
12/31/18
$
87.07
$ 132.23
$ 116.48
12/31/19
$ 126.44
$ 173.86
$ 149.86
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, 2015 through 2019. Our revenues relating to
real estate operations are derived from revenue 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. Our profitability from real estate
operations is highly dependent on our occupancy and rental rates, both of which are affected by a number of factors. You
should read the following summary historical financial data in conjunction with the consolidated 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
Net income
Net income attributable to noncontrolling interests
Net income attributable to COPT
Preferred share dividends
Issuance costs associated with redeemed preferred shares (2)
Net income attributable to COPT common shareholders
Basic earnings per common share (3)
Income from continuing operations
Net income
Diluted earnings per common share (3)
Income from continuing operations
Net income
2019
2018
2017
2016
2015
$ 527,463
113,763
641,226
$ 517,253
60,859
578,112
$ 509,980
102,840
612,820
$ 525,964
48,364
574,328
$ 519,064
106,402
625,466
198,143
201,035
190,964
197,530
194,494
137,069
109,962
329
35,402
4,239
485,144
(71,052)
7,894
105,230
—
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
198,154
1,633
217
200,004
—
200,004
(8,312)
191,692
—
—
$ 191,692
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
$
$
$
$
1.72
1.72
1.71
1.71
$
$
$
$
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
Weighted average common shares outstanding – basic
Weighted average common shares outstanding – diluted
111,196
111,623
103,946
104,125
98,969
99,155
94,502
94,594
93,914
97,667
24
2019
2018
2017
2016
2015
Balance Sheet Data (as of year end):
Total properties, net
Total assets
Debt, net
Total liabilities
Redeemable noncontrolling interests
Total equity
Other Financial Data (for the year ended December 31):
Cash flows provided by (used in):
$3,340,886
$3,854,453
$1,831,139
$2,105,777
$
29,431
$1,719,245
$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
Operating activities
Investing activities
Financing activities
Numerator for diluted EPS
Diluted funds from operations (“FFO”) (4)(5)
Diluted FFO, as adjusted for comparability (4)
Diluted FFO per share (4)(5)
Diluted FFO, as adjusted for comparability per share (4)
Cash dividends declared per common share
Operating Property Data (as of year end):
Number of office and data center shells owned (6)
Total rentable square feet owned (6)
$ 180,482
$ 230,121
$ 234,270
71,174
$ 228,558
$ (138,015) $ (232,918) $ (89,363) $
$ (84,363) $
49,555
71,839
$
$ 191,201
$ 214,303
$ 228,514
$ 215,800
$ 229,344
1.99
$
2.02
$
2.01
$
2.03
$
1.10
$
1.10
$
$ 205,733
$ (309,072)
$ (338,546) $ (155,088) $ 156,338
$ 169,787
55,230
$
$ 264,882
$ 199,239
$ 195,824
$ 207,356
2.71
$
1.94
$
2.01
$
2.02
$
1.10
$
1.10
$
14,157
$
$ 189,449
$ 197,157
1.93
$
2.01
$
1.10
$
170
19,173
163
18,094
159
17,345
164
17,190
177
18,053
(1) Reflects gain from sales of properties and interests in properties not associated with discontinued operations.
(2) 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.
(3) Basic and diluted earnings per common share are calculated based on amounts attributable to common shareholders of COPT.
(4) 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.”
(5) Prior period amounts include retrospective adjustments in connection with our adoption in 2019 of Nareit’s 2018 FFO Whitepaper
Restatement which changed the prior definition of FFO to also exclude gains on sales and impairment losses of properties other
than previously depreciated operating properties, net of associated income tax.
(6) Amounts reported reflect only operating office and data center shell properties. Includes properties owned through unconsolidated
real estate joint ventures (15 properties as of December 31, 2019 and 6 properties as of December 31, 2018, 2017 and 2016).
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
Net income
Net income attributable to noncontrolling interests
Net income attributable to COPLP
Preferred unit distributions
Issuance costs associated with redeemed preferred units (2)
Net income attributable to COPLP common unitholders
Basic earnings per common unit (3)
Income from continuing operations
Net income
Diluted earnings per common unit (3)
Income from continuing operations
Net income
2019
2018
2017
2016
2015
$ 527,463
113,763
641,226
$ 517,253
60,859
578,112
$ 509,980
102,840
612,820
$ 525,964
48,364
574,328
$ 519,064
106,402
625,466
198,143
201,035
190,964
197,530
194,494
137,069
109,962
329
35,402
4,239
485,144
(71,052)
7,894
105,230
—
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
198,154
1,633
217
200,004
—
200,004
(5,385)
194,619
(564)
—
$ 194,055
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
$
$
$
$
1.72
1.72
1.71
1.71
$
$
$
$
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
Weighted average common units outstanding – basic
Weighted average common units outstanding – diluted
112,495
112,922
106,414
106,593
102,331
102,517
98,135
98,227
97,606
97,667
26
2019
2018
2017
2016
2015
Balance Sheet Data (as of year end):
Total properties, net
Total assets
Debt, net
Total liabilities
Redeemable noncontrolling interests
Total equity
Other Financial Data (for the year ended December 31):
Cash flows provided by (used in):
$3,340,886
$3,851,393
$1,831,139
$2,102,717
$
29,431
$1,719,245
$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
Operating activities
Investing activities
Financing activities
Numerator for diluted EPU
Cash distributions declared per common unit
Operating Property Data (as of year end):
Number of office and data center shells owned (4)
Total rentable square feet owned (4)
$ 230,121
$ 180,482
$ 228,558
$ (138,015) $ (232,918) $ (89,363) $
49,555
$ (84,363) $
73,581
$
$ 193,435
1.10
$
1.10
$
$ 205,733
$ (309,072)
$ (338,546) $ (155,088) $ 156,338
$ 169,782
$
1.10
$
$
$ 234,270
71,174
57,120
1.10
14,660
1.10
$
$
170
19,173
163
18,094
159
17,345
164
17,190
177
18,053
(1) Reflects gain from sales of properties and interests in properties not associated with discontinued operations.
(2) Reflects a decrease to net income available to common unitholders 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.
(3) Basic and diluted earnings per common unit are calculated based on amounts attributable to common unitholders of COPLP.
(4) Amounts reported reflect only operating office and data center shell properties. Includes properties owned through unconsolidated
real estate joint ventures (15 properties as of December 31, 2019 and 6 properties as of December 31, 2018, 2017 and 2016).
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 publicly update or supplement forward-looking statements.
Overview
Our 2019 was highlighted by:
•
•
•
record-breaking leasing volume, which helped fuel;
accelerated development volume that we funded in large part using; and
capital raised by selling interests in data center shells through a newly-formed joint venture.
We leased 4.9 million square feet in 2019, exceeding our previous all-time high set in 2010 by 14%. This leasing volume
was highlighted by:
•
•
record-breaking development leasing of 2.2 million square feet, which exceeded our previous record set in 2012 by 81%,
and came on the heels of last year’s near-record volume. This year’s development leasing volume was highlighted by:
•
•
1.2 million square feet in our data center shell sub-segment;
548,000 square feet in our Redstone Arsenal sub-segment in Huntsville, Alabama, which exceeded the combined total
square footage previously placed in service by us in that sub-segment since our entry nearly 10 years ago; and
•
348,000 square feet in a property to be occupied by the USG in our Northern Virginia Defense/IT sub-segment.
vacant space leasing totaling 784,000 square feet, representing our highest annual volume since 2010, most of which was
in the Fort Meade/BW Corridor and Northern Virginia Defense/IT sub-segments and Regional Office segment; and
28
•
a portfolio-wide tenant retention rate of 76.7% (or 79.1% for our Defense/IT Locations) achieved by renewing leases on
1.9 million square feet (defined below in the section entitled “Occupancy and Leasing”). Strong tenant retention is key to
our asset management strategy in order to maximize revenue (by avoiding downtime) and minimize leasing capital.
We believe that these leasing results were attributable in large part to:
•
•
a healthy defense spending environment and continued bipartisan support towards funding our national defense.
Successive increases in defense spending since 2016, including a two-year budget deal signed into law in August 2019 that
removed the possibility of sequestration cuts by raising spending caps previously set forth under the Budget Control Act of
2011, increased USG and defense contractor tenants’ ability to invest in facility planning. This benefited our 2019 leasing
results, as demand for space worked its way through the Government’s appropriations process, fueling USG and defense
contractor demand for new space and expansion into previously vacant space; and
continued demand for data center shells. Our leasing included five new data center shells in Northern Virginia, the largest
data center market in the world, and represented further expansion of our relationship with an existing defense contractor
customer. As of year end, we held land that would accommodate an additional 934,000 square feet in future data center
shell development.
These leasing results contributed to our ending the year with our office and data center shell portfolio 94.4% leased (compared
to 93.9% as of December 31, 2018) while our Same Properties were 93.7% leased (compared to 93.5% as of December 31,
2018). Our year-end portfolio-wide office and data center shell occupancy was 92.9% (compared to 93.0% as of December 31,
2018) and Same Property occupancy was 91.9% (compared to 92.6% as of December 31, 2018). Our wholesale data center
was 76.9% leased at year end (compared to 87.6% as of December 31, 2018). Please refer to the section below entitled
“Occupancy and Leasing” for additional related disclosure.
Our record development leasing fueled an expansion of our overall development activity. We ended the year with 2.3
million square feet in properties under development, an increase of 114% from the end of last year. While our activity included
950,000 square feet in data center shells under development at year end (a 30.0% increase since the end of last year), most of
the increased activity was attributable to our Redstone Arsenal sub-segment, where we had six properties totaling 756,000
square feet under development. Our year-end development at Redstone Arsenal included two properties being built on a
speculative basis in order to keep pace with what we believe to be very strong demand, illustrated by that sub-segment’s 99.3%
year-end occupancy rate and its absorption of 100% of the space in two properties on which we commenced development on a
speculative basis last year. For further disclosure regarding our development underway as of year end, please refer to Item 2 of
this Annual Report on Form 10-K. In 2019, we placed into service 1.2 million square feet that were 100% leased in nine
newly-developed and one redeveloped Defense/IT Locations, comprised primarily of 946,000 square feet in data center shell
space.
We funded much of this development activity by selling, through a series of transactions, a 90% interest in nine data center
shells based on an aggregate property value of $345.1 million, retaining a 10% interest in the properties through BREIT COPT
DC JV LLC (“BREIT-COPT”), a newly-formed joint venture. The transactions for seven of these properties were completed
on June 20, 2019 and for the remaining two properties on December 5, 2019. Our partner in the joint venture acquired the 90%
interest from us for $310.6 million, resulting in our recognition of a $105.2 million gain on sale, and we received an additional
$20.1 million in net proceeds associated with the joint venture’s entry into non-recourse mortgage loans on the properties. This
transaction enabled us to monetize the value that we created through our development of these properties and then reinvest
towards funding our development activity for 2019 and much of 2020.
While we used borrowings under our Revolving Credit Facility to initially fund most of our development costs, we were
able to more than repay those borrowings using:
•
•
the $330.7 million in net proceeds from the BREIT-COPT transactions discussed above; and
$46.5 million in net proceeds from COPT’s issuance of 1.6 million common shares under forward equity sale agreements
originated in 2017 that COPT contributed into COPLP in exchange for an equal number of units in COPLP.
As a result, we were able to fund $394.4 million in development costs in 2019 while ending the year with a lower ratio of debt
to total assets and more capacity under our Revolving Credit Facility than when we began the year, leaving us with $632.0
million in capacity as of December 31, 2019.
Net income in 2019 was $121.4 million higher than in 2018 due primarily to the gain on sale that we recognized from the
BREIT-COPT transactions. Most of the remaining increase in net income was attributable to a $14.0 million increase in net
operating income (“NOI”) from real estate operations, our segment performance measure discussed further below, which
29
included: a $13.5 million increase from properties newly placed into service; a $7.6 million increase in Same Properties; and a
net decrease of $6.4 million from dispositions (due primarily to our decrease in ownership of the properties included in the
BREIT-COPT transactions discussed above). The increase in same property NOI was attributable to increased rental revenue
for our Defense/IT Locations due in large part to leasing of previously vacant space. Additional disclosure comparing our 2019
and 2018 results of operations is provided below.
We discuss significant factors contributing to changes in our net income between 2019 and 2018 in the section below
entitled “Results of Operations.” The results of operations discussion is combined for COPT and COPLP because there are no
material differences in the results of operations between the two reporting entities.
In addition, the section below entitled “Liquidity and Capital Resources” includes discussions of, among other things:
•
•
how we expect to generate cash for short and long-term capital needs; and
our commitments and contingencies.
We refer to the measure “annualized rental revenue” in various sections of the Management’s Discussion and Analysis of
Financial Condition and Results of Operations section of this Annual Report on Form 10-K. Annualized rental revenue is a
measure that we use to evaluate the source of our rental revenue as of a point in time. It is computed by multiplying by 12 the
sum of monthly contractual base rents and estimated monthly expense reimbursements under active leases as of a point in time
(ignoring free rent then in effect). Our computation of annualized rental revenue excludes the effect of lease incentives,
although the effect of this exclusion is not material. We consider annualized rental revenue to be a useful measure for
analyzing revenue sources because, since it is point-in-time based, it does not contain increases and decreases in revenue
associated with periods in which lease terms were not in effect; historical revenue under generally accepted accounting
principles in the United States of America (“GAAP”) does contain such fluctuations. We find the measure particularly useful
for leasing, tenant, segment and industry analysis.
With regard to our operating portfolio square footage, occupancy and leasing statistics included below and elsewhere in
this Annual Report on Form 10-K, amounts disclosed:
•
•
•
include total information pertaining to properties owned through unconsolidated real estate joint ventures 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, the unoccupied portion of two newly-developed
properties that were completed but reported as development projects since they were held for future lease to the USG.
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.
Assessment of Lease Term
As discussed above, a significant portion of our portfolio is leased to the USG, and the majority of those leases consist of a
series of one-year renewal options, and/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 term of each lease. The term of a lease includes the noncancellable periods of the lease along
with periods covered by: (1) a tenant option to extend the lease if the tenant is reasonably certain to exercise that option; (2) a
tenant option to terminate the lease if the tenant is reasonably certain not to exercise that option; and (3) an option to extend (or
30
not to terminate) the lease in which exercise of the option is controlled by us as the lessor. When assessing the expected lease
end date, we use judgment in contemplating the significance of: any penalties a tenant may incur should it choose not to
exercise any existing options to extend the lease or exercise any existing options to terminate the lease; and economic
incentives for the tenant based on any existing contract, asset, entity or market-based factors in the lease. Factors we consider
in making this assessment 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 tenant leasehold improvements or other assets whose value would be impaired by the lessee vacating or
discontinuing use of the leased property. For most of our leases with the USG, we have determined, based on the factors above,
that exercise of existing renewal options, or continuation of such leases without exercising early termination rights, is
reasonably certain as it relates to the expected lease end date. Changes in these lease term 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.
Impairment of Long-Lived Assets
We assess the asset groups associated with each of our properties, including operating properties, properties in
development, land held for future development, related intangible assets, right-of-use assets, deferred rents receivable and lease
liabilities, for indicators of impairment quarterly or when circumstances indicate that an asset group may be impaired. If our
analyses indicate that the carrying values of certain properties’ asset groups may be impaired, we perform a recovery analysis
for such asset groups. For properties 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 properties over, in most cases, a ten-
year holding period. If we believe it is more likely than not that we will dispose of the properties 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 properties over the various possible holding periods. If the analysis
indicates that the carrying value of a tested property’s asset group is not recoverable from its estimated future cash flows, the
property’s asset group is written down to the property’s estimated fair value and an impairment loss is recognized. If and when
our plans change, we revise our recoverability analyses of such property’s asset group to use the cash flows expected from the
operations and eventual disposition of such property 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 our impairment 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 market rental and occupancy rates,
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 discount 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.
Asset groups associated with 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 properties will result in impairment losses if the carrying values of the specific properties’
asset groups classified as held for sale exceed such properties’ estimated fair values less costs to sell. The estimates of fair
value consider matters such as recent sales data for comparable properties and, where applicable, contracts or the results of
negotiations with prospective purchasers. These estimates are subject to revision as market conditions, and our assessment of
such conditions, change.
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.
31
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.
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
USG
Fortune 500 Company
General Dynamics Corporation (1)
The Boeing Company (1)
CACI International Inc.
Northrop Grumman Corporation (1)
CareFirst Inc.
Booz Allen Hamilton, Inc.
Wells Fargo & Company (1)
AT&T Corporation (1)
University of Maryland
Miles and Stockbridge, PC
Kratos Defense and Security Solutions (1)
Science Applications International Corp. (1)
The Raytheon Company (1)
Jacobs Engineering Group Inc
Transamerica Life Insurance Company
Peraton Inc.
The MITRE Corporation
Mantech International Corp.
International Business Machines Corp.
KEYW Corporation
Accenture Federal Services, LLC
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,
2019
2018
2017
34.6%
7.9%
4.9%
3.2%
2.5%
2.2%
2.1%
2.1%
1.3%
1.3%
1.2%
1.1%
1.0%
1.0%
1.0%
1.0%
0.9%
0.9%
0.7%
0.7%
N/A
N/A
N/A
N/A
71.6%
28.4%
100.0%
32.7%
8.9%
4.7%
3.8%
2.4%
2.3%
2.2%
2.0%
1.3%
0.7%
1.4%
1.1%
1.0%
1.3%
1.1%
N/A
0.9%
N/A
0.8%
N/A
0.7%
1.0%
0.7%
N/A
71.0%
29.0%
100.0%
31.7%
7.6%
3.5%
4.2%
1.5%
2.2%
2.1%
2.0%
1.7%
1.2%
1.0%
1.1%
1.0%
0.9%
1.1%
N/A
0.9%
N/A
0.9%
N/A
N/A
1.2%
0.7%
2.3%
68.8%
31.2%
100.0%
$ 525,338
$ 522,898
$ 501,212
The increase in the USG’s concentration from 2018 to 2019 was due primarily to its leasing of previously vacant space.
32
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,
2019
2018
2017
2019
2018
2017
51.3%
10.9%
10.5%
6.5%
3.5%
5.3%
87.9%
11.5%
0.6%
100.0%
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%
88
13
7
21
10
22
161
7
2
170
87
13
7
21
8
18
154
7
2
163
87
12
7
21
7
15
149
7
3
159
For the changes in revenue concentration reflected above between year end 2018 and 2019: the decrease in our data center
shells was attributable to our sale in 2019 of a 90% interest in nine properties; the increase in Fort Meade/BW Corridor was due
primarily to the effect of the decrease in the data center shells’ concentration coupled with increased occupancy primarily from
leasing of previously vacant space; and the decrease in Northern Virginia Defense/IT was due to lower occupancy.
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,
2018
2017
2019
92.9%
93.0%
93.6%
92.4%
82.4%
100.0%
92.5%
99.3%
100.0%
93.7%
88.1%
73.0%
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%
Average contractual annualized rental rate per square foot at year end (1)
$ 31.28
$ 30.41
$ 30.41
(1) Includes estimated expense reimbursements.
33
December 31, 2018
Vacated upon lease expiration (1)
Occupancy for new leases
Developed or redeveloped
Removed from operations (2)
Other changes
December 31, 2019
Rentable
Square Feet
Occupied
Square Feet
(in thousands)
18,094
—
—
1,179
(155)
55
19,173
16,821
(997)
852
1,179
—
(39)
17,816
(1)
(2)
Includes lease terminations and space reductions occurring in connection with lease renewals.
Includes the removal from service of our oldest data center shell property, which we intend to repurpose.
With regard to changes in occupancy from December 31, 2018 to December 31, 2019:
•
•
•
•
Fort Meade/BW Corridor and Navy Support Locations: Occupancy increased due primarily to progress made in leasing
previously vacant space in these sub-segments;
Northern Virginia Defense/IT: Occupancy decreased due primarily to two large tenant vacancies during the year. As of
December 31, 2019, eight of the 13 properties in this sub-segment had combined occupancy of 98.0%, while the other five
properties had combined occupancy of 55.3%, and we had scheduled lease expirations in the sub-segment in 2020 for
121,000 square feet, or 7% of its occupied square feet. This sub-segment was 87.7% leased as of year end (inclusive of
106,000 square feet under leases yet to commence);
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 2018 to 2019, occupancy decreases in our Baltimore City properties
(which were 89.4% occupied as of December 31, 2019) more than offset the effect of occupancy increases in the Northern
Virginia properties (which were 85.0% occupied as of December 31, 2019). As of December 31, 2019, we had scheduled
lease expirations in 2020 for 77,000 square feet, or 4% of this segment’s occupied square feet; and
Other: As of December 31, 2019, our Other segment included two properties totaling 157,000 square feet in Aberdeen,
Maryland.
In 2019, we leased 4.9 million square feet, including 2.2 million square feet of development and redevelopment space
discussed in further detail above.
In 2019, we renewed leases on 1.9 million square feet, representing 76.7% of the square footage of our lease expirations
(including the effect of early renewals). The annualized rents of these renewals (totaling $30.88 per square foot) decreased on
average by approximately 5.8% and the GAAP rents (totaling $31.15 per square foot) decreased on average by approximately
0.3% relative to the leases previously in place for the space. The renewed leases had a weighted average lease term of
approximately 4.1 years, with average rent escalations per year of 2.4%, and the per annum average estimated tenant
improvements and lease costs associated with completing the leasing was approximately $2.53 per square foot. The decrease in
average rents on renewals was attributable primarily to per annum rent escalation terms of the previous leases that increased
rents over the lease terms by amounts exceeding the increases in the applicable market rental rates.
In 2019, we also completed leasing on 784,000 square feet of vacant space. The annualized rents of this leasing totaled
$29.46 per square foot and the GAAP rents totaled $29.81 per square foot; these leases had a weighted average lease term of
approximately 6.4 years, with average rent escalations per year of 2.4%, and the per annum average estimated tenant
improvements and lease costs associated with completing this leasing was approximately $6.77 per square foot.
34
Wholesale Data Center
Our 19.25 megawatt wholesale data center was 76.9% leased as of December 31, 2019 and 87.6% leased as of
December 31, 2018. Based on known tenant downsizings, we expect that the leased percentage of this property will decline to
approximately 70% (or 13.6 megawatts) by July 2020. We are negotiating the renewal of a lease for 11.25 megawatts that is
scheduled to expire in August 2020.
Lease Expirations
The table below sets forth as of December 31, 2019 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
2020
2021
2022
2023
2024
Thereafter
Total
5.9%
0.7%
2.3%
0.8%
0.0%
0.0%
0.5%
0.1%
3.5%
13.8%
7.0%
0.6%
0.0%
1.4%
1.7%
0.0%
0.2%
0.2%
0.1%
11.2%
5.0%
0.9%
0.0%
0.9%
0.2%
0.0%
3.2%
0.0%
0.4%
10.6%
9.4%
0.9%
0.0%
1.0%
0.0%
0.0%
0.8%
0.0%
0.1%
12.2%
8.0%
2.9%
0.0%
0.8%
0.3%
0.6%
0.8%
0.0%
0.0%
13.4%
49.2%
13.9%
10.5%
4.5%
10.1%
7.8%
6.2%
1.3%
3.3%
1.1%
5.1%
4.5%
11.0%
5.5%
0.5%
0.2%
0.0%
4.1%
38.8% 100.0%
For our office and data center shell properties, our weighted average lease term as of December 31, 2019 was
approximately five years. We believe that the weighted average annualized rental revenue per occupied square foot for our
office and data center shell leases expiring in 2020 was, on average, approximately 0% to 2% 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 85% of its annualized rental revenue.
Results of Operations
For a discussion of our results of operations comparison for 2018 and 2017, refer to our Annual Report on Form 10-K
for the fiscal year ended December 31, 2018 filed on February 21, 2019.
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:
•
stably owned and 100% operational throughout the two years being compared. 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”;
developed or redeveloped and placed into service that were not 100% operational throughout the two years being
compared; and
disposed; 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
35
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 16 to our consolidated financial statements.
Comparison of Statements of Operations for the Years Ended December 31, 2019 and 2018
2019
For the Years Ended December 31,
2018
(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
Net income
$
527,463
113,763
641,226
$
517,253
60,859
578,112
$
10,210
52,904
63,114
198,143
137,069
109,962
329
35,402
4,239
485,144
(71,052)
7,894
105,230
—
1,633
217
200,004
$
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
$
(2,892)
(47)
51,636
(2,038)
6,502
(1,601)
51,560
4,333
3,536
102,890
258
(1,064)
(146)
121,361
$
36
NOI from Real Estate Operations
For the Years Ended December 31,
2018
(Dollars in thousands, except per square foot data)
Variance
2019
Revenues
Same Properties revenues
Lease revenue, excluding lease termination revenue
Lease termination revenue
Other property revenue
Same Properties total revenues
Developed and redeveloped properties placed in service
Wholesale data center
Dispositions
Other
Property operating expenses
Same Properties
Developed and redeveloped properties placed in service
Wholesale data center
Dispositions
Other
UJV NOI allocable to COPT
Same Properties
Retained interests in newly-formed UJV
NOI from real estate operations
Same Properties
Developed and redeveloped properties placed in service
Wholesale data center
Dispositions, net of retained interests in newly formed UJV
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)
$
$
$
$
$
454,144
2,046
4,764
460,954
23,655
29,405
11,191
2,258
527,463
(180,242)
(3,635)
(13,213)
(977)
(76)
(198,143)
4,852
853
5,705
285,564
20,020
16,192
11,067
2,182
335,025
254,135
29,928
1,501
285,564
91.8%
26.55
$
$
$
$
$
445,237
3,231
4,698
453,166
7,958
31,892
20,297
3,940
517,253
(179,988)
(1,429)
(16,342)
(2,862)
(414)
(201,035)
4,818
—
4,818
277,996
6,529
15,550
17,435
3,526
321,036
245,402
30,784
1,810
277,996
91.1%
26.44
$
$
$
$
$
8,907
(1,185)
66
7,788
15,697
(2,487)
(9,106)
(1,682)
10,210
(254)
(2,206)
3,129
1,885
338
2,892
34
853
887
7,568
13,491
642
(6,368)
(1,344)
13,989
8,733
(856)
(309)
7,568
0.7%
0.11
(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 82.9% of our office and data center shell portfolio’s
square footage as of December 31, 2019. This pool of properties changed from the pool used for purposes of comparing 2018
and 2017 in our 2018 Annual Report on Form 10-K due to: the addition of nine properties placed in service and 100%
operational on or before January 1, 2018; and the removal of eight properties in which we sold a 90% interest (six in June 2019
and two in December 2019) and one property that was removed from service in October 2019.
37
As reflected above, our increase in Same Properties NOI from real estate operations was due primarily to increased lease
revenue for our Defense/IT Locations due in large part to higher occupancy.
Our NOI from developed and redeveloped properties placed in service included 14 properties and land under a long-term
contract placed in service in 2018 and 2019, while our dispositions included our decrease in ownership in the nine data center
shells included in the BREIT-COPT transactions.
Our provision for credit losses of $686,000 in 2019 and $339,000 in 2018 was included in revenue from real estate
operations and property operating expenses, respectively, representing 0.13% and 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
$ 113,763
109,962
3,801
$
2019
2018
(in thousands)
60,859
$
58,326
2,533
$
Variance
$
$
52,904
51,636
1,268
For the Years Ended December 31,
Construction contract and other service revenue and expenses increased due primarily to a higher 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.
General, Administrative and Leasing Expenses
General, administrative and leasing expenses increased in large part due to: higher compensation and related expenses and
legal and professional expenses; and lower capitalized compensation resulting from our adoption of lease accounting guidance
in 2019 under which we no longer defer recognition of non-incremental leasing costs.
We capitalize compensation and indirect costs associated with properties, or portions thereof, undergoing development or
redevelopment activities. We also, prior to our adoption of lease accounting guidance in 2019, capitalized compensation costs
associated with obtaining new tenant leases or extending existing tenants. Our capitalized compensation and indirect costs
totaled $10.1 million in 2019 and $11.1 million in 2018.
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,
2018
2019
(in thousands)
53,254
$
6,933
11,216
1,954
(407)
5,873
2,491
(5,929)
75,385
53,321
7,908
8,908
2,136
(1,415)
8,613
2,367
(10,786)
71,052
67
975
(2,308)
182
(1,008)
2,740
(124)
(4,857)
(4,333)
$
$
The increase in capitalized interest reflected above was attributable to the expansion of our development activity.
Our average outstanding debt was $1.9 billion in 2019 and 2018, and our weighted average effective interest rate on debt
was approximately 4.1% in 2019 and 2018.
38
Gain on sales of real estate
The gain on sales of real estate in 2019 was due to our sale of a 90% interest in nine data center shell properties through
the BREIT-COPT transactions.
Funds from Operations
Funds from operations (“FFO”) is defined as net income computed using GAAP, excluding gains on sales and impairment
losses of real estate (net of associated income tax) and real estate-related depreciation and amortization. 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 on sales and impairment losses of real estate (net of associated income tax), and 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 share-based compensation awards. With these adjustments, Basic FFO represents FFO available to common
shareholders and common unitholders. Common units in the Operating Partnership are substantially similar to our common
shares and are exchangeable into common shares, subject to certain conditions. We believe that Basic FFO is useful to
investors due to the close correlation of common units to common shares. We believe that net income is the most directly
comparable GAAP measure to Basic FFO. Basic FFO has essentially the same limitations as FFO; management compensates
for these limitations in essentially the same manner as described above for FFO.
Diluted FFO available to common share and common unit holders (“Diluted FFO”) is Basic FFO adjusted to add back any
changes in Basic FFO that would result from the assumed conversion of securities that are convertible or exchangeable into
common shares. We believe that Diluted FFO is useful to investors because it is the numerator used to compute Diluted FFO
per share, discussed below. We believe that net income is the most directly comparable GAAP measure to Diluted FFO. Since
Diluted FFO excludes certain items includable in the numerator to diluted EPS, reliance on the measure has limitations;
management compensates for these limitations by using the measure simply as a supplemental measure that is weighed in the
balance with other GAAP and non-GAAP measures. Diluted FFO is not necessarily an indication of our cash flow available to
fund cash needs. Additionally, it should not be used as an alternative to net income when evaluating our financial performance
or to cash flow from operating, investing and financing activities when evaluating our liquidity or ability to make cash
distributions or pay debt service.
Diluted FFO available to common share and common unit holders, as adjusted for comparability is defined as Diluted FFO
adjusted to exclude operating property acquisition costs; 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; issuance costs associated with redeemed preferred shares; and certain other expenses that we believe are not
closely correlated with our operating performance. 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
39
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.
We believe that net income is the most directly comparable GAAP measure to this non-GAAP measure. This measure has
essentially the same limitations as Diluted FFO, as well as the further limitation of not reflecting the effects of the excluded
items; we compensate for these limitations in essentially the same manner as described above for Diluted FFO.
Diluted FFO per share is (1) Diluted FFO divided by (2) the sum of the (a) weighted average common shares outstanding
during a period, (b) weighted average common units outstanding during a period and (c) weighted average number of potential
additional common shares that would have been outstanding during a period if other securities that are convertible or
exchangeable into common shares were converted or exchanged. We believe that Diluted FFO per share is useful to investors
because it provides investors with a further context for evaluating our FFO results in the same manner that investors use
earnings per share (“EPS”) in evaluating net income available to common shareholders. In addition, since most equity REITs
provide Diluted FFO per share information to the investment community, we believe that Diluted FFO per share is a useful
supplemental measure for comparing us to other equity REITs. We believe that diluted EPS is the most directly comparable
GAAP measure to Diluted FFO per share. Diluted FFO per share has most of the same limitations as Diluted FFO (described
above); management compensates for these limitations in essentially the same manner as described above for Diluted FFO.
Diluted FFO per share, as adjusted for comparability is (1) Diluted FFO, as adjusted for comparability divided by (2) the
sum of the (a) weighted average common shares outstanding during a period, (b) weighted average common units outstanding
during a period and (c) weighted average number of potential additional common shares that would have been outstanding
during a period if other securities that are convertible or exchangeable into common shares were converted or exchanged. We
believe that this measure is useful to investors because it provides investors with a further context for evaluating our FFO
results. We believe this to be a useful supplemental measure alongside Diluted FFO per share as it excludes gains and losses
from certain investing and financing activities and certain other items that we believe are not closely correlated to (or
associated with) our operating performance. We believe that diluted EPS is the most directly comparable GAAP measure to
this per share measure. This measure has most of the same limitations as Diluted FFO (described above) as well as the further
limitation of not reflecting the effects of the excluded items; we compensate for these limitations in essentially the same
manner as described above for Diluted FFO.
The computations for all of the above measures on a diluted basis assume the conversion of common units in COPLP but
do not assume the conversion of other securities that are convertible into common shares if the conversion of those securities
would increase per share measures in a given period.
We use measures called payout ratios as supplemental measures of our ability to make distributions to investors based on
each of the following: FFO; Diluted FFO; and Diluted FFO, adjusted for comparability. These measures are defined as (1) the
sum of (a) dividends on unrestricted common shares and (b) distributions to holders of interests in COPLP (excluding unvested
share-based compensation awards) 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.
We adopted, retrospectively effective January 1, 2019, Nareit’s 2018 Whitepaper Restatement, which changed the
prior definition of FFO to also exclude gains on sales and impairment losses of properties other than previously depreciated
operating properties, net of associated income tax. This adoption affected our reporting for FFO, Basic FFO, Diluted FFO and
Diluted FFO per share.
The table below sets forth the computation of the above stated measures for the years ended December 31, 2015 through
2019 and provides reconciliations to the GAAP measures of COPT and subsidiaries associated with such measures:
40
Net income
Add: Real estate-related depreciation and amortization
Add: Depreciation and amortization on UJV allocable to COPT
Add: Impairment losses on real estate
Less: Gain on sales of real estate
Add: Income tax expense associated with FFO adjustments
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) 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
Non-comparable professional and legal expenses
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
2019
2015
For the Years Ended December 31,
2016
2017
2018
(Dollars and shares in thousands, except per share data)
$ 74,941
134,228
2,252
15,123
(9,890)
800
217,454
$ 33,768
132,719
938
101,391
(59,679)
—
209,137
$ 78,643
137,116
2,256
2,367
(2,340)
—
218,042
$ 188,878
140,025
—
23,523
(68,047)
—
284,379
$ 200,004
137,069
2,703
329
(105,230)
—
234,875
(564)
(5,024)
—
—
(905)
228,382
132
228,514
—
—
—
—
148
681
4
—
(3)
(660)
(3,768)
—
—
(851)
212,763
1,540
214,303
—
—
258
—
462
—
793
—
(16)
(660)
(3,675)
(6,219)
(6,847)
(814)
199,239
—
199,239
—
(234)
513
6,847
294
—
732
—
(35)
(660)
(4,020)
(14,297)
(17)
(694)
189,449
—
189,449
—
(378)
1,110
17
578
—
6,454
(660)
(3,586)
(14,210)
—
(1,041)
264,882
—
264,882
4,134
386
(85,655)
—
1,396
—
—
—
10,456
(73)
225
$ 229,344
$ 215,800
$ 207,356
$ 197,157
$ 195,824
111,196
1,299
112,495
308
—
119
112,922
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
Diluted FFO per share
Diluted FFO per share, as adjusted for comparability
$
$
2.02
2.03
$
$
1.99
2.01
$
$
1.94
2.02
$
$
1.93
2.01
$
$
2.71
2.01
Denominator for diluted EPS
Weighted average common units
Redeemable noncontrolling interests
Denominator for diluted FFO per share measures
111,623
1,299
—
112,922
104,125
2,468
936
107,529
99,155
3,362
—
102,517
94,594
3,633
—
98,227
97,667
—
—
97,667
Common share dividends - unrestricted shares and deferred shares
Common unit distributions - unrestricted units
Dividends and distributions for payout ratios
$ 122,823
1,405
$ 124,228
$ 116,285
2,498
$ 118,783
$ 109,489
3,661
$ 113,150
$ 104,811
3,990
$ 108,801
$ 103,552
4,046
$ 107,598
FFO payout ratio
Diluted FFO payout ratio
Diluted FFO payout ratio, as adjusted for comparability
52.9%
54.4%
54.2%
54.5%
55.4%
55.0%
52.0%
56.8%
54.6%
52.0%
57.4%
55.2%
37.8%
40.6%
54.9%
41
Property Additions
The table below sets forth the major components of our additions to properties for 2019 and 2018:
Development and redevelopment
Tenant improvements on operating properties (1)
Capital improvements on operating properties
Variance
For the Years Ended December 31,
2018
2019
(in thousands)
$ 169,671
31,876
22,977
$ 224,524
$ 427,526
26,294
26,598
$ 480,418
$ 257,855
(5,582)
3,621
$ 255,894
(1) Tenant improvement costs incurred on newly-developed properties are classified in this table as development and redevelopment.
Cash Flows
Net cash flow from operating activities increased $48.1 million from 2018 to 2019 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 decreased $94.9 million from 2018 to 2019 due primarily to $309.6 million in
property disposition proceeds mostly from our sale in 2019 of a 90% interest in properties that was offset in part by a $234.5
million increase in cash outlays for development and redevelopment in 2019.
Net cash flow used in financing activities in 2019 was $84.4 million and included primarily the following:
•
•
•
•
•
dividends and/or distributions to equity holders of $124.8 million; offset in part by
net proceeds from the issuance of common shares (or units) of $46.4 million.
Net cash flow provided by financing activities in 2018 was $49.6 million and included primarily 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; and
payments on a capital lease obligation of $15.4 million.
Liquidity and Capital Resources of COPT
COPLP is the entity through which COPT, the sole general partner of COPLP, conducts almost all of its operations and
owns almost all of its assets. COPT occasionally issues public equity but does not otherwise generate any capital itself or
conduct any business itself, other than incurring certain expenses in operating as a public company which are fully reimbursed
by COPLP. COPT itself does not hold any indebtedness, and its only material asset is its ownership of partnership interests of
COPLP. COPT’s principal funding requirement is the payment of dividends on its common and preferred shares. COPT’s
principal source of funding for its dividend payments is distributions it receives from COPLP.
As of December 31, 2019, COPT owned 98.7% 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.
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.
42
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 and
improvements to existing properties. 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, 2019, COPLP had $14.7 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, 2019, the maximum borrowing capacity under this facility
totaled $800.0 million, of which $623.0 million was available.
COPT has a program in place 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. Under this 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.
43
The following table summarizes our contractual obligations as of December 31, 2019 (in thousands):
2020
2021
2022
2023
2024
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 building improvements
(3)(6)
Finance leases (principal and interest) (3)
Operating leases (3)
Other obligations (3)
Total contractual cash obligations
12,132
4,024
72,754
$ 300,000
3,955
65,754
$ 297,069
4,272
60,004
$ 590,578
3,252
37,281
$ 277,649
2,034
18,406
$ 345,623
2,219
9,997
$1,823,051
19,756
264,196
184,700
15,449
16,546
—
501
—
—
—
—
—
—
—
200,650
16,546
32,393
862
1,140
178
$ 324,729
19,871
202
1,146
178
$ 406,555
6,500
64
1,164
178
$ 369,752
—
—
1,169
178
$ 632,458
—
—
1,173
177
$ 299,439
—
—
100,609
622
$ 459,070
58,764
1,128
106,401
1,511
$2,492,003
(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 $11.7 million. As of December 31, 2019, maturities included $177.0 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, 2019 for the terms of such debt. For variable rate debt, the
amounts reflected above used December 31, 2019 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 development and construction 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.
We expect to spend $325 million to $375 million on development costs and approximately $80 million on improvements
and leasing costs for operating properties (including the commitments set forth in the table above) in 2020. We expect to fund
the development costs initially using primarily borrowings under our Revolving Credit Facility. 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,
2019, we were compliant with these covenants.
Off-Balance Sheet Arrangements
We had no material off-balance sheet arrangements during 2019.
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.
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements for information regarding recent accounting pronouncements.
44
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, 2019 our debt obligations and weighted average interest rates on debt
maturing each year (dollars in thousands):
Debt:
Fixed rate debt (1)
Weighted average interest rate
Variable rate debt (2)
$
$
Weighted average interest rate (3)
3.56%
2020
2021
2022
2023
2024
Thereafter
Total
For the Years Ending December 31,
3,718
$ 303,875
$
4,033
$ 416,590
$ 279,443
$ 337,442
$ 1,345,101
3.96%
12,438
$
3.70%
80
3.14%
3.98%
3.70%
$ 297,308
$ 177,240
$
3.12%
2.70%
5.16%
240
3.14%
4.87%
4.30%
$
10,400
$ 497,706
3.14%
2.99%
(1) Represents principal maturities only and therefore excludes net discounts and deferred financing costs of $11.7 million.
(2) As of December 31, 2019, maturities included $177.0 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, 2019 for variable rate debt.
The fair value of our debt was $1.9 billion as of December 31, 2019 and 2018. If interest rates had been 1% lower, the fair
value of our fixed-rate debt would have increased by approximately $45 million as of December 31, 2019 and $56 million as of
December 31, 2018.
See Note 11 to our consolidated financial statements for information pertaining to interest rate swap contracts in place as of
December 31, 2019 and 2018 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 $2.0 million in 2019 and $1.7 million in 2018 if the applicable LIBOR rate was 1% higher. Interest expense
in 2019 was more sensitive to a change in interest rates than 2018 due primarily to our having a higher average variable-rate
debt balance in 2019.
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, 2019. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that COPT’s
disclosure controls and procedures as of December 31, 2019 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.
45
(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, 2019. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that
COPLP’s disclosure controls and procedures as of December 31, 2019 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 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.
46
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 2020 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
3.5
4
10.1
10.1.1
10.2.1*
10.2.2*
10.3.1*
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).
Indenture, dated as of April 8, 2019, 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
Registration Statement on Form S-3 (Commission File No. 333-230764) and incorporated herein by reference).
Description of Common Shares (filed herewith).
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).
First Amendment to Third Amended and Restated Limited Partnership Agreement of Corporate Office
Properties, L.P. dated July 31, 2019 (filed with the Company’s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2019 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).
47
EXHIBIT
NO.
10.3.2*
10.3.3*
10.4.1*
10.4.2*
10.5.1*
10.5.2*
10.5.3*
10.6*
10.7*
10.8*
10.9*
DESCRIPTION
Corporate Office Properties Trust Amended and Restated 2008 Omnibus Equity and Incentive Plan (included in
Annex A to the Company’s Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange
Commission on March 30, 2010 and incorporated herein by reference).
Corporate Office Properties Trust First Amendment to the Amended and Restated 2008 Omnibus Equity and
Incentive Plan (filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016
and incorporated herein by reference).
Corporate Office Properties Trust 2017 Omnibus Equity and Incentive Plan (included in Annex B to the
Company’s Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission
on March 27, 2017 and incorporated herein by reference).
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 Annual Report on Form 10-K for the year ended
December 31, 2017 and incorporated herein by reference).
Form of Corporate Office Properties Trust Performance-Based Profit Interest Unit Award Certificate (2017
Omnibus Equity and Incentive Plan) (filed with the Company’s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2019 and incorporated herein by reference).
Form of Corporate Office Properties Trust Time-Based Profit Interest Unit Award Certificate (2017 Omnibus
Equity and Incentive Plan) (filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2019 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).
48
EXHIBIT
NO.
10.18.1
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
DESCRIPTION
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).
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 with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 and
incorporated herein by reference).
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).
49
EXHIBIT
NO.
32.4
DESCRIPTION
Certification of the Chief Financial Officer of Corporate Office Properties, L.P. required by Rule 15d-14
(b) under the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed “filed” for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability
of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the
Securities Exchange Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended). (Furnished
herewith).
101.INS
XBRL Instance Document - The instance document does not appear in the interactive data file because its
XBRL tags are embedded within the Inline XBRL document (filed herewith).
101.SCH XBRL Taxonomy Extension Schema Document (filed herewith).
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith).
101.LAB XBRL Extension Labels Linkbase (filed herewith).
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith).
101.DEF XBRL Taxonomy Extension Definition Linkbase Document (filed herewith).
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
* - 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.
50
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 19, 2020
Date: February 19, 2020
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
51
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/ Stephen E. Budorick
(Stephen E. Budorick)
/s/ Anthony Mifsud
(Anthony Mifsud)
/s/ Gregory J. Thor
(Gregory J. Thor)
/s/ Thomas F. Brady
(Thomas F. Brady)
/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)
President and Chief Executive Officer and Trustee February 19, 2020
Executive Vice President and Chief Financial
Officer (Principal Financial Officer)
February 19, 2020
Senior Vice President, Controller and Chief
Accounting Officer (Principal Accounting Officer)
February 19, 2020
Chairman of the Board and Trustee
February 19, 2020
February 19, 2020
February 19, 2020
February 19, 2020
February 19, 2020
February 19, 2020
February 19, 2020
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
52
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 19, 2020
Date: February 19, 2020
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:
53
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/ Stephen E. Budorick
(Stephen E. Budorick)
/s/ Anthony Mifsud
(Anthony Mifsud)
/s/ Gregory J. Thor
(Gregory J. Thor)
/s/ Thomas F. Brady
(Thomas F. Brady)
/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)
President and Chief Executive Officer and Trustee February 19, 2020
Executive Vice President and Chief Financial
Officer (Principal Financial Officer)
February 19, 2020
Senior Vice President, Controller and Chief
Accounting Officer (Principal Accounting Officer)
February 19, 2020
Chairman of the Board and Trustee
February 19, 2020
February 19, 2020
February 19, 2020
February 19, 2020
February 19, 2020
February 19, 2020
February 19, 2020
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
54
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, 2019 and 2018
Consolidated Statements of Operations for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2019, 2018
and 2017
Consolidated Statements of Equity for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Financial Statements of Corporate Office Properties, L.P.
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Operations for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2019, 2018
and 2017
Consolidated Statements of Equity for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
Financial Statements Schedule
Schedule III - Real Estate and Accumulated Depreciation as of December 31, 2019
F-2
F-3
F-4
F-6
F-8
F-9
F-10
F-11
F-12
F-14
F-15
F-16
F-17
F-18
F-20
F-62
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, 2019. 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, 2019 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, 2019 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, 2019 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, 2019. 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, 2019 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, 2019 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, 2019 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, 2019 and 2018, 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, 2019, including the related
notes and financial statement schedule 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2019 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, 2019, 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 trustees 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.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial
statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or
disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or
complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate
opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Determination of Expected Lease End Date for United States Government Leases with One-year Renewal Options and/or Early
Termination Rights
As described in Notes 2 and 5 to the consolidated financial statements, total lease revenue for the year ended December 31,
2019 was $522.5 million and a significant portion of the Company’s leases are with the United States Government, which
represented 25% of the fixed lease revenues for the year ended December 31, 2019. The majority of United States Government
leases contain one-year renewal options and/or provide for early termination rights. The Company recognizes minimum rental
payments on a straight-line basis over the terms of each lease. The lease term of a lease includes the noncancellable periods of
the lease along with periods covered by: (1) a tenant option to extend the lease if the tenant is reasonably certain to exercise that
option; (2) a tenant option to terminate the lease if the tenant is reasonably certain not to exercise that option; and (3) an option
to extend (or not to terminate) the lease in which exercise of the option is controlled by the Company as the lessor. When
assessing the expected lease end date, management uses judgment in contemplating the significance of any penalties a tenant
may incur should it choose not to exercise any existing options to extend the lease or exercise any existing options to terminate
the lease; and economic incentives for the tenant based on any existing contract, asset, entity or market-based factors in the
lease.
The principal considerations for our determination that performing procedures relating to the determination of the expected
lease end date for United Stated Government leases with one-year renewal options and/or early termination rights is a critical
audit matter are the significant judgments by management when determining the expected lease end date for the United States
Government leases with one-year renewal options and/or early termination rights, which in turn led to a high degree of auditor
judgment, subjectivity and audit effort in performing procedures and evaluating audit evidence relating to the determination of
such expected lease end dates.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall
opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the
revenue recognition for leases, including controls over the determination of the expected lease end dates for United States
Government leases with one-year renewal options and/or early termination rights. These procedures also included, among
others, testing management’s process for determining the expected lease end date for a sample of United States Government
leases with one-year renewal options and/or early termination rights, including evaluating the reasonableness of significant
assumptions utilized by management, such as the significance of any penalties a tenant may incur should it choose not to
exercise any existing options to extend the lease or exercise any existing options to terminate the lease; and economic
incentives for the tenant based on any existing contract, asset, entity or market-based factors in the lease. Evaluating the
assumptions included evaluating whether the assumptions used were reasonable considering past experience with the tenant
and the rental property and whether the assumptions were consistent with evidence obtained in other areas of the audit.
/s/ PricewaterhouseCoopers LLP
Baltimore, Maryland
February 19, 2020
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
“Operating Partnership”) as of December 31, 2019 and 2018, 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, 2019,
including the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the
“consolidated financial statements”). We also have audited the Operating Partnership’s internal control over financial reporting
as of December 31, 2019, 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 Operating Partnership as of December 31, 2019 and 2018, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2019 in conformity with accounting principles generally accepted in
the United States of America. Also in our opinion, the Operating Partnership maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the COSO.
Basis for Opinions
The Operating Partnership’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 Operating Partnership’s consolidated financial statements and on the Operating Partnership’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 Operating
Partnership 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 trustees 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.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial
statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or
disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or
complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate
opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Determination of Expected Lease End Date for United States Government Leases with One-year Renewal Options and/or Early
Termination Rights
As described in Notes 2 and 5 to the consolidated financial statements, total lease revenue for the year ended December 31,
2019 was $522.5 million and a significant portion of the Operating Partnership’s leases are with the United States Government,
which represented 25% of the fixed lease revenues for the year ended December 31, 2019. The majority of United States
Government leases contain one-year renewal options and/or provide for early termination rights. The Operating Partnership
recognizes minimum rental payments on a straight-line basis over the terms of each lease. The lease term of a lease includes the
noncancellable periods of the lease along with periods covered by: (1) a tenant option to extend the lease if the tenant is
reasonably certain to exercise that option; (2) a tenant option to terminate the lease if the tenant is reasonably certain not to
exercise that option; and (3) an option to extend (or not to terminate) the lease in which exercise of the option is controlled by
the Operating Partnership as the lessor. When assessing the expected lease end date, management uses judgment in
contemplating the significance of any penalties a tenant may incur should it choose not to exercise any existing options to
extend the lease or exercise any existing options to terminate the lease; and economic incentives for the tenant based on any
existing contract, asset, entity or market-based factors in the lease.
The principal considerations for our determination that performing procedures relating to the determination of the expected
lease end date for United Stated Government leases with one-year renewal options and/or early termination rights is a critical
audit matter are the significant judgments by management when determining the expected lease end date for the United States
Government leases with one-year renewal options and/or early termination rights, which in turn led to a high degree of auditor
judgment, subjectivity and audit effort in performing procedures and evaluating audit evidence relating to the determination of
such expected lease end dates.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall
opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the
revenue recognition for leases, including controls over the determination of the expected lease end dates for United States
Government leases with one-year renewal options and/or early termination rights. These procedures also included, among
others, testing management’s process for determining the expected lease end date for a sample of United States Government
leases with one-year renewal options and/or early termination rights, including evaluating the reasonableness of significant
assumptions utilized by management, such as the significance of any penalties a tenant may incur should it choose not to
exercise any existing options to extend the lease or exercise any existing options to terminate the lease; and economic
incentives for the tenant based on any existing contract, asset, entity or market-based factors in the lease. Evaluating the
assumptions included evaluating whether the assumptions used were reasonable considering past experience with the tenant
and the rental property and whether the assumptions were consistent with evidence obtained in other areas of the audit.
/s/ PricewaterhouseCoopers LLP
Baltimore, Maryland
February 19, 2020
We have served as the Operating Partnership’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
Property - operating right-of-use assets
Property - finance right-of-use assets
Cash and cash equivalents
Investment in unconsolidated real estate joint ventures
Accounts receivable
Deferred rent receivable
Intangible assets on real estate acquisitions, net
Deferred leasing costs, net (accumulated amortization of $33,782 and $31,994, respectively)
Investing receivables
Prepaid expenses and other assets, net
Total assets
Liabilities and equity
Liabilities:
Debt, net
Accounts payable and accrued expenses
Rents received in advance and security deposits
Dividends and distributions payable
Deferred revenue associated with operating leases
Property - operating lease liabilities
Interest rate derivatives
Other liabilities
Total liabilities
Commitments and contingencies (Note 19)
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 112,068,705 at December 31, 2019 and 110,241,868 at December 31,
2018)
Additional paid-in capital
Cumulative distributions in excess of net income
Accumulated other comprehensive loss
Total Corporate Office Properties Trust’s shareholders’ equity
Noncontrolling interests in subsidiaries:
Common units in COPLP
Preferred units in COPLP
Other consolidated entities
Noncontrolling interests in subsidiaries
Total equity
Total liabilities, redeemable noncontrolling interests and equity
See accompanying notes to consolidated financial statements.
F-8
December 31,
2019
2018
$ 2,772,647
568,239
3,340,886
27,864
40,458
14,733
51,949
35,444
87,736
27,392
58,392
73,523
96,076
$ 3,854,453
$ 2,847,265
403,361
3,250,626
—
—
8,066
39,845
26,277
89,350
43,470
50,191
56,982
91,198
$ 3,656,005
$ 1,831,139
148,746
33,620
31,263
7,361
17,317
25,682
10,649
2,105,777
$ 1,823,909
92,855
30,079
30,856
9,125
—
5,459
10,414
2,002,697
29,431
26,260
1,121
2,481,558
(778,275)
(25,444)
1,678,960
1,102
2,431,355
(846,808)
(238)
1,585,411
19,597
8,800
11,888
40,285
1,719,245
$ 3,854,453
19,168
8,800
13,669
41,637
1,627,048
$ 3,656,005
Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
Revenues
Lease revenue
Other property 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,
2019
2018
2017
$ 522,472
4,991
113,763
641,226
$ 512,327
4,926
60,859
578,112
$ 504,889
5,091
102,840
612,820
198,143
137,069
109,962
329
35,402
4,239
485,144
(71,052)
7,894
105,230
—
198,154
1,633
217
200,004
(2,363)
(564)
(5,385)
191,692
—
—
$ 191,692
$
$
1.72
1.71
$
$
$
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
$
$
$
(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 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,
2019
$ 200,004
2018
78,643
$
2017
74,941
$
(24,321)
(1,415)
199
(25,537)
174,467
(7,981)
$ 166,486
$
(2,373)
(407)
210
(2,570)
76,073
(6,453)
69,620
$
684
3,304
39
4,027
78,968
(6,325)
72,643
See accompanying notes to consolidated financial statements.
F-10
Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Equity
(Dollars in thousands)
F
-
1
1
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 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, 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)
Conversion of common units to common shares (105,039 shares)
Redemption of common units
Common shares issued to the public (1,000 shares)
Common shares issued under forward equity sale agreements (1,614,087 shares)
Share-based compensation (106,711 shares issued, net of redemptions)
Redemption of vested equity awards
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP
Comprehensive income
Dividends
Distributions to owners of common and preferred units in COPLP
Contributions from noncontrolling interests in other consolidated entities
Distributions to noncontrolling interests in other consolidated entities
Adjustment to arrive at fair value of redeemable noncontrolling interests
Balance at December 31, 2019 (112,068,705 common shares outstanding)
Preferred
Shares
Common
Shares
$
$ 172,500
(172,500)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
$
985
—
3
17
6
—
2
—
—
—
—
—
—
—
—
1,013
—
1,013
19
—
59
10
1
—
—
—
—
—
—
—
1,102
1
—
—
16
2
—
—
—
—
—
—
—
—
1,121
Additional
Paid-in
Capital
$ 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
1,585
—
29
46,438
6,131
(2,064)
(167)
—
—
—
—
—
(1,749)
$ 2,481,558
Cumulative
Distributions in
Excess of Net
Income
Accumulated
Other
Comprehensive
Income (Loss)
Noncontrolling
Interests
Total
$
$
(747,825) $
(6,847)
—
—
—
—
—
—
—
68,745
(116,158)
—
—
—
—
(802,085)
(276)
(802,361)
—
—
—
—
—
—
—
72,301
(116,748)
—
—
—
(846,808)
—
—
—
—
—
—
—
191,692
(123,159)
—
—
—
—
(778,275) $
(1,731) $
—
—
—
—
—
—
—
—
3,898
—
—
—
—
—
2,167
276
2,443
—
—
—
—
—
—
—
(2,681)
—
—
—
—
(238)
—
—
—
—
—
—
—
(25,206)
—
—
—
—
—
(25,444) $
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
(1,586)
(25)
—
—
1,323
—
167
4,146
—
(2,057)
2,570
(5,890)
—
40,285
$ 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
—
(25)
29
46,454
7,456
(2,064)
—
170,632
(123,159)
(2,057)
2,570
(5,890)
(1,749)
$ 1,719,245
See accompanying notes to consolidated financial statements.
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
Development and redevelopment of properties
Tenant improvements on operating properties
Other capital improvements on operating properties
Proceeds from property dispositions
Distribution from unconsolidated real estate joint venture following
contribution of properties
Sale of properties
Distributions from unconsolidated real estate joint ventures
Investing receivables funded
Leasing costs paid
Other
Net cash used in 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 finance lease liabilities
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
Distributions paid to noncontrolling interests in other consolidated entities
Redemption of vested equity awards
Other
Net cash (used in) provided by financing activities
Net increase (decrease) 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,
2019
2018
2017
$ 530,280
94,677
(196,611)
(96,789)
(29,347)
(67,475)
(9,482)
—
3,305
228,558
$ 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
(394,444)
(23,809)
(24,659)
(159,994)
(35,098)
(24,223)
(200,504)
(33,409)
(22,882)
201,499
108,128
22,426
(11,180)
(16,825)
849
(138,015)
—
—
1,942
(97)
(10,926)
(4,522)
(232,918)
—
180,839
1,874
(588)
(14,581)
(112)
(89,363)
409,000
43,615
381,000
13,406
352,000
—
(445,000)
(4,310)
(77)
(448)
(223)
46,415
—
(122,657)
—
(2,166)
(1,659)
(5,890)
(2,064)
1,101
(84,363)
6,180
(294,000)
(4,240)
(100,000)
(8,292)
(15,379)
202,065
—
(114,286)
—
(3,699)
(1,382)
(16)
(1,702)
(3,920)
49,555
(2,881)
(226,000)
(4,062)
(200,000)
(500)
—
69,534
(199,083)
(109,174)
(9,305)
(4,426)
(8,215)
(2,617)
(1,973)
5,275
(338,546)
(197,788)
11,950
18,130
$
14,831
11,950
212,619
14,831
$
$
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:
(Increase) decrease in accounts receivable
(Increase) decrease in prepaid expenses and other assets, net
Increase (decrease) 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
Finance right-of-use asset contributed by noncontrolling interest in joint venture
Operating right-of-use assets obtained in exchange for operating lease liabilities
Finance right-of-use asset obtained in exchange for finance lease liability
Non-cash changes from property dispositions:
Contribution of properties to unconsolidated real estate joint venture
Investment in unconsolidated real estate joint venture retained in disposition
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
(Decrease) increase in fair value of derivatives applied to accumulated other
comprehensive income and noncontrolling interests
Equity in other comprehensive income of an equity method investee
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,
2019
2018
2017
$ 200,004
$
78,643
$
74,941
138,903
329
3,639
(4,091)
(105,230)
6,714
(6,022)
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)
(7,141)
(22,457)
20,369
3,541
$ 228,558
5,673
(987)
(49,179)
4,827
$ 180,482
2,783
7,219
4,309
(3,913)
$ 230,121
$
$
$
$
$
$
$
$
8,066
3,884
11,950
14,733
3,397
18,130
$
$
$
$
35,913
$
$
2,570
840
$
— $
$ 209,863
2,756
$ 212,619
$
$
12,261
2,570
14,831
12,261
2,570
14,831
8,066
3,884
11,950
6,570
$ (10,654)
—
—
16,127
— $
— $
— $
$ 158,542
34,506
$
$
$
— $
— $
$
$
— $ (42,226) $
$
— $
43,377
—
—
—
—
$ (25,817) $
$
$
$
$
199
31,263
$
$
$
1,586
167
1,749
$
$
$
2,915
210
30,856
27,413
2,466
1,837
$
$
$
$
$
$
3,845
39
28,921
4,636
1,486
(626)
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
Property - operating right-of-use assets
Property - finance right-of-use assets
Cash and cash equivalents
Investment in unconsolidated real estate joint ventures
Accounts receivable
Deferred rent receivable
Intangible assets on real estate acquisitions, net
Deferred leasing costs, net (accumulated amortization of $33,782 and $31,994, respectively)
Investing receivables
Prepaid expenses and other assets, net
Total assets
Liabilities and equity
Liabilities:
Debt, net
Accounts payable and accrued expenses
Rents received in advance and security deposits
Distributions payable
Deferred revenue associated with operating leases
Property - operating lease liabilities
Interest rate derivatives
Other liabilities
Total liabilities
Commitments and contingencies (Note 19)
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,
2019 and 2018
Common units, 112,068,705 and 110,241,868 held by the general partner and 1,482,425 and
1,332,886 held by limited partners at December 31, 2019 and 2018, respectively
Accumulated other comprehensive loss
Total Corporate Office Properties, L.P.’s equity
Noncontrolling interests in subsidiaries
Total equity
Total liabilities, redeemable noncontrolling interests and equity
See accompanying notes to consolidated financial statements.
December 31,
2019
2018
$ 2,772,647
568,239
3,340,886
27,864
40,458
14,733
51,949
35,444
87,736
27,392
58,392
73,523
93,016
$ 3,851,393
$ 2,847,265
403,361
3,250,626
—
—
8,066
39,845
26,277
89,350
43,470
50,191
56,982
87,330
$ 3,652,137
$ 1,831,139
148,746
33,620
31,263
7,361
17,317
25,682
7,589
2,102,717
$ 1,823,909
92,855
30,079
30,856
9,125
—
5,459
6,546
1,998,829
29,431
26,260
8,800
8,800
1,724,159
(25,648)
1,707,311
11,934
1,719,245
$ 3,851,393
1,604,655
(121)
1,613,334
13,714
1,627,048
$ 3,652,137
F-14
Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per unit data)
Revenues
Lease revenue
Other property 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,
2019
2018
2017
$ 522,472
4,991
113,763
641,226
$ 512,327
4,926
60,859
578,112
$ 504,889
5,091
102,840
612,820
198,143
137,069
109,962
329
35,402
4,239
485,144
(71,052)
7,894
105,230
—
198,154
1,633
217
200,004
(5,385)
194,619
(564)
—
$ 194,055
$
$
1.72
1.71
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
$
$
$
$
$
$
(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 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,
2019
$ 200,004
2018
78,643
$
2017
74,941
$
(24,321)
(1,415)
199
(25,537)
174,467
(5,375)
$ 169,092
$
(2,373)
(407)
210
(2,570)
76,073
(3,940)
72,133
$
684
3,304
39
4,027
78,968
(3,646)
75,322
See accompanying notes to consolidated financial statements.
F-16
Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Equity
(Dollars in thousands)
Limited Partner
Preferred Units
General Partner
Preferred Units
Common Units
Amount
$ 8,800
Units
6,900,000
— (6,900,000)
—
—
Amount
$172,500
(172,500)
—
Units
102,089,042
—
1,678,913
Amount
$1,419,710
—
49,944
Noncontrolling
Interests in
Subsidiaries
Accumulated
Other
Comprehensive
Income (Loss)
$
(1,854) $
—
—
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
F
-
1
7
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
Redemption of common units
Issuance of common units resulting from public issuance of common shares
Issuance of common units resulting from common shares issued under COPT
forward equity sale agreements
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
Balance at December 31, 2019
Units
352,000
—
—
—
—
—
—
—
—
—
—
—
352,000
—
352,000
—
—
—
—
—
660
(660)
—
—
—
8,800
—
8,800
—
—
—
—
—
—
—
—
—
—
352,000
—
—
—
—
—
—
—
—
—
—
352,000
—
—
—
660
(660)
—
—
8,800
—
—
—
—
—
564
(564)
—
—
—
$ 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
29,732
991,664
—
6,963
146,290
—
(1,702)
—
—
—
74,043
—
— (119,245)
—
—
—
—
(1,837)
—
—
1,604,655
— 111,574,754
(25)
—
(924)
29
1,000
—
—
—
—
—
4,027
—
—
—
—
2,173
276
2,449
—
—
—
—
—
(2,570)
—
—
—
(121)
—
—
—
—
—
—
—
—
—
—
— $
46,454
1,614,087
—
7,456
362,213
—
(2,064)
—
—
—
194,055
—
— (124,652)
—
—
—
—
—
—
—
(1,749)
—
—
$1,724,159
— 113,551,130
$
—
—
—
(25,527)
—
—
—
—
(25,648) $
Total
Equity
$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)
13,621
—
—
—
—
—
—
1,308
—
(2,617)
—
—
12,312
—
12,312
—
—
172,294
—
—
—
1,417
—
(15)
—
13,714
—
—
—
—
—
1,540
—
2,570
(5,890)
—
11,934
29,732
6,963
(1,702)
73,550
(119,905)
(15)
(1,837)
1,627,048
(25)
29
46,454
7,456
(2,064)
170,632
(125,216)
2,570
(5,890)
(1,749)
$1,719,245
See accompanying notes to consolidated financial statements.
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
Development and redevelopment of properties
Tenant improvements on operating properties
Other capital improvements on operating properties
Proceeds from property dispositions
Distribution from unconsolidated real estate joint venture following
contribution of properties
Sale of properties
Distributions from unconsolidated real estate joint ventures
Investing receivables funded
Leasing costs paid
Other
Net cash used in 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 finance lease liabilities
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
Distributions paid to noncontrolling interests in other consolidated entities
Redemption of vested equity awards
Other
Net cash (used in) provided by financing activities
Net increase (decrease) 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,
2019
2018
2017
$ 530,280
94,677
(196,611)
(96,789)
(29,347)
(67,475)
(9,482)
—
3,305
228,558
$ 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
(394,444)
(23,809)
(24,659)
(159,994)
(35,098)
(24,223)
(200,504)
(33,409)
(22,882)
201,499
108,128
22,426
(11,180)
(16,825)
849
(138,015)
—
—
1,942
(97)
(10,926)
(4,522)
(232,918)
—
180,839
1,874
(588)
(14,581)
(112)
(89,363)
409,000
43,615
381,000
13,406
352,000
—
(445,000)
(4,310)
(77)
(448)
(223)
46,415
—
(124,171)
(652)
(1,659)
(5,890)
(2,064)
1,101
(84,363)
6,180
(294,000)
(4,240)
(100,000)
(8,292)
(15,379)
202,065
—
(117,325)
(660)
(1,382)
(16)
(1,702)
(3,920)
49,555
(2,881)
(226,000)
(4,062)
(200,000)
(500)
—
69,534
(199,083)
(112,940)
(9,965)
(8,215)
(2,617)
(1,973)
5,275
(338,546)
(197,788)
11,950
18,130
$
14,831
11,950
212,619
14,831
$
$
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:
(Increase) decrease in accounts receivable
(Increase) decrease in prepaid expenses and other assets, net
Increase (decrease) 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
Finance right-of-use asset contributed by noncontrolling interest in joint venture
Operating right-of-use assets obtained in exchange for operating lease liabilities
Finance right-of-use asset obtained in exchange for finance lease liability
Non-cash changes from property dispositions:
For the Years Ended December 31,
2019
2018
2017
$ 200,004
$
78,643
$
74,941
138,903
329
3,639
(4,091)
(105,230)
6,714
(6,022)
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)
(7,141)
(23,255)
21,167
3,541
$ 228,558
5,673
(1,735)
(48,431)
4,827
$ 180,482
2,783
6,398
5,130
(3,913)
$ 230,121
$
$
$
$
$
$
$
$
8,066
3,884
11,950
14,733
3,397
18,130
$
$
$
$
35,913
2,570
840
$
$
$
— $
12,261
2,570
14,831
$ 209,863
2,756
$ 212,619
8,066
3,884
11,950
$
$
12,261
2,570
14,831
6,570
$ (10,654)
—
—
16,127
— $
— $
— $
Contribution of properties to unconsolidated real estate joint venture
Investment in unconsolidated real estate joint venture retained in disposition
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
$ 158,542
34,506
$
$
$
— $
— $
$
$
— $ (42,226) $
$
— $
43,377
—
—
—
—
(Decrease) increase in fair value of derivatives applied to accumulated other
comprehensive income and noncontrolling interests
Equity in other comprehensive income of an equity method investee
Distributions payable
Increase (decrease) in redeemable noncontrolling interests and decrease (increase)
in equity to carry redeemable noncontrolling interests at fair value
$ (25,817) $
$
$
$
$
199
31,263
2,915
210
30,856
$
1,749
$
1,837
$
$
$
$
3,845
39
28,921
(626)
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 (“USG”) 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, 2019, our
properties included the following (all references to number of properties, square footage, acres and megawatts are unaudited):
•
•
•
•
170 properties totaling 19.2 million square feet comprised of 15.4 million square feet in 148 office properties and 3.7
million square feet in 22 single-tenant data center shell properties (“data center shells”). We owned 15 of these data center
shells through unconsolidated real estate joint ventures;
a wholesale data center with a critical load of 19.25 megawatts;
14 properties under development or redevelopment (ten office properties and four data center shells) that we estimate will
total approximately 2.5 million square feet upon completion, including one partially-operational property; and
approximately 900 acres of land controlled for future development that we believe could be developed into approximately
11.3 million square feet and 43 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, development
and construction 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, 2019, COPT owned 98.7%
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 common units to quarterly distributions and payments in
liquidation is substantially the same as that of COPT common shareholders. 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.
2.
Summary of Significant Accounting Policies
Basis of Presentation
The COPT consolidated financial statements include the accounts of COPT, the Operating Partnership, their subsidiaries
and other entities in which COPT has a majority voting interest and control. The COPLP consolidated financial statements
include the accounts of COPLP, its subsidiaries and other entities in which COPLP has a majority voting interest and control.
We also consolidate certain entities when control of such entities can be achieved through means other than voting rights
(“variable interest entities” or “VIEs”) if we are deemed to be the primary beneficiary of such entities. We eliminate all
intercompany balances and transactions in consolidation.
F-20
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
We use the equity method of accounting when we own an interest in an entity and can exert significant influence over but
cannot control the entity’s operations. We discontinue equity method accounting if our investment in an entity (and net
advances) is reduced to zero unless we have guaranteed obligations of the entity or are otherwise committed to provide further
financial support for the entity.
When we own an equity investment in an entity and cannot exert significant influence over its operations, 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 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 allocation of property acquisition costs, 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.
Properties
We report properties to be developed or held and used in operations at our depreciated cost, reduced for impairment losses.
The predevelopment 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 that 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 development and redevelopment activities. In
capitalizing interest expense, if there is a specific borrowing for a property undergoing 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 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-
developed 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 development. We start depreciating newly-
developed 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
F-21
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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
Estimated Useful Lives
10-40 years
10-20 years
Shorter of remaining useful lives
of assets or related lease term
Equipment and personal property
3-10 years
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 Properties
We recognize gains from sales of interests in properties 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.
Impairment of Properties
We assess the asset groups associated with each of our properties, including operating properties, properties in
development, land held for future development, related intangible assets, right-of-use assets, deferred rents receivable and lease
liabilities for indicators of impairment quarterly or when circumstances indicate that an asset group may be impaired. If our
analyses indicate that the carrying values of certain properties’ asset groups may be impaired, we perform a recovery analysis
for such asset groups. For properties 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 properties over, in most cases, a ten-
year holding period. If we believe it is more likely than not that we will dispose of the properties 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 properties over the various possible holding periods. If the analysis
indicates that the carrying value of a tested property’s asset group is not recoverable from its estimated future cash flows, the
property’s asset group is written down to the property’s 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 such property 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
comparable sales analyses. Estimated cash flows used in our impairment 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 market rental and
occupancy rates, 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.
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’s asset group, we recognize an impairment loss equal to the difference and reduce the net book value of the property’s
asset group. For periods in which a property is classified as held for sale, we classify the assets of the property’s asset group as
held for sale on our consolidated balance sheet for such periods.
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Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Acquisition 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,
development 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.
Property Right-of-Use Assets
We lease land underlying certain properties that we are operating or developing from third parties. In determining
operating right-of-use assets and lease liabilities for our existing operating leases upon our adoption of the new lease guidance
discussed below, as well as for new operating leases in the current period, we were required to estimate an appropriate
incremental borrowing rate on a fully-collateralized basis for the terms of the leases. Since the terms under our ground leases
are significantly longer than the terms of borrowings available to us on a fully-collateralized basis, our estimate of this rate
requires significant judgment, and considers factors such as interest rates available to us on a fully-collateralized basis for
shorter-termed debt and U.S. Treasury rates.
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.
F-23
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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.
Accounts and Deferred Rents Receivable and Investing Receivables
We evaluate our receivables from customers and borrowers for collectability and recognize estimated credit losses on these
receivables. We use judgment in estimating these losses based primarily upon the payment history and credit status of the
entities associated with the individual receivables. We write off 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 previously recognized credit losses, we recognize reductions in our credit losses.
For lease revenue, if collectability is not probable, revenue recognized is limited to the lesser of revenue that would have
been recognized if collectability was probable or lease payments collected. Losses on lease revenue receivables are presented
on our consolidated statements of operation with property operating expenses for years prior to January 1, 2019, when we
adopted new lease accounting guidance, and as reductions in lease revenue thereafter.
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.
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- 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.
F-24
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Deferred Leasing Costs
We defer costs incurred to obtain new tenant leases or extend existing tenant leases; our deferral of costs included related
non-incremental compensation costs until January 1, 2019, when we adopted new lease accounting guidance. 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”.
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 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. We use interest rate swaps to hedge the cash flows associated with interest rates on variable-rate debt borrowings. We
also use forward-starting interest rate swaps to hedge the cash flows associated with interest rates on forecasted fixed-rate
borrowings. 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 Financial Accounting Standards Board (“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.
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.
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Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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. We classify noncontrolling interests that are
currently redeemable for cash at the option of the holders or are probable of becoming redeemable 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. Our other noncontrolling interests are reported in the equity section of our consolidated
balance sheets.
Revenue Recognition
Lease and Other Property Revenue
We lease real estate properties, comprised primarily of office properties and data center shells, to third parties. These
leases usually include options under which the tenant may renew its lease based on market rates at the time of renewal, which
are then typically subject to further negotiation. These leases occasionally provide the tenant with an option to terminate its
lease early usually for a defined termination fee.
Most of our lease revenue is from fixed contractual payments defined under the lease that, in most cases, escalate annually
over the term of the lease. Our lease revenue also includes variable lease payments predominantly for tenant reimbursements of
property operating expenses and lease termination fees. Property operating expense reimbursement structures vary, with some
tenants responsible for all of a property’s expenses, while others are responsible for their share of a property’s expense only to
the extent such expenses exceed amounts defined in the lease (which are derived from the property’s historical expense levels).
Lease termination fees in most cases result from a tenant’s exercise of an existing right under a lease.
Our leases of properties as lessor reflected herein are classified as operating leases. We recognize minimum rents on
operating leases, net of abatements, on a straight-line basis over the 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 term of a lease includes the noncancellable periods of the lease along with
periods covered by: (1) a tenant option to extend the lease if the tenant is reasonably certain to exercise that option; (2) a tenant
option to terminate the lease if the tenant is reasonably certain not to exercise that option; and (3) an option to extend (or not to
terminate) the lease in which exercise of the option is controlled by us as the lessor. When assessing the expected lease end
date, we use judgment in contemplating the significance of: any penalties a tenant may incur should it choose not to exercise
any existing options to extend the lease or exercise any existing options to terminate the lease; and economic incentives for the
tenant based on any existing contract, asset, entity or market-based factors in the lease. While a significant portion of our
portfolio is leased to the USG, and the majority of those leases consist of a series of one-year renewal options, or provide for
early termination rights, we have concluded that exercise of existing renewal options, or continuation of such leases without
exercising early termination rights, is reasonably certain for most of these leases.
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
F-26
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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.
If collectability under a lease is not probable, revenue recognized is limited to the lesser of revenue that would have been
recognized if collectability was probable or lease payments collected.
We recognize lease revenue associated with tenant expense recoveries in the same periods in which we incur the related
expenses, including tenant reimbursements of 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 USG 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 a 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.
•
•
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.
F-27
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
•
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.
Expense Classification
We classify as property operating expense costs incurred for property taxes, ground rents, utilities, property management,
insurance, repairs and exterior and interior maintenance, 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 four forms of share-based compensation: restricted COPT common shares (“restricted shares”), deferred share
awards (also known as restricted share units), performance share units (also known as performance share awards) (“PSUs”) and
profit interest units (“PIUs”) (time-based and performance-based). 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 development and redevelopment activities.
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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 compute the fair value of restricted shares, time-based PIUs and deferred share awards based on the fair value of COPT
common shares on the grant date. We compute the fair value of PSUs and performance-based PIUs using a Monte Carlo
model. Significant assumptions used for that model include the following: the baseline common share value is the market value
on the grant date; the risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant; and expected
volatility is based on historical volatility of COPT’s common shares.
Income Taxes
COPT elected to be treated as a REIT under Sections 856 through 860 of the Internal Revenue Code. To qualify as a REIT,
COPT must meet a number of organizational and operational requirements, including a requirement that it distribute at least
90% of the Company’s adjusted taxable income to its shareholders. As a REIT, COPT generally will not be subject to Federal
income tax on taxable income that it distributes to its shareholders. If COPT fails to qualify as a REIT in any tax year, it will be
subject to Federal income tax on its taxable income at regular corporate rates and may not be able to qualify as a REIT for four
subsequent tax years.
COPLP is a limited partnership and is not subject to federal income tax. Its partners are required to report their respective
share of the Operating Partnership’s taxable income on their respective tax returns. COPT’s share of the Operating
Partnership’s taxable income is reported on COPT’s income tax return.
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,
2018
83.1%
16.9%
2019
54.4%
45.6%
2017
86.5%
13.5%
Preferred Shares
For the Years Ended December 31,
2018
2019
N/A
N/A
N/A
N/A
2017
100.0%
0.0%
While the dividends allocated to each of the above years for Federal income tax purposes included dividends paid on COPT’s
common shares during each of those years, the dividends allocated to 2019 for Federal income tax purposes also included
dividends paid on January 15, 2020 (with a record date of December 31, 2019).
We distributed all of COPT’s REIT taxable income in 2019, 2018 and 2017 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 $52 million higher
than the amount reported on our consolidated balance sheet as of December 31, 2019 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 reclassifications of our revenue from
real estate operations in connection with our adoption of new lease guidance described below.
Recent Accounting Pronouncements
In February 2016, the FASB issued guidance setting 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
F-29
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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. This guidance requires lessors of real estate to account for
leases using an approach substantially equivalent to guidance previously in place for operating leases, direct financing leases
and sales-type leases. We adopted this guidance on January 1, 2019 using a modified retrospective transition approach under
which we elected to apply the guidance effective January 1, 2019 and not adjust prior comparative reporting periods (except for
our presentation of lease revenue discussed below). We elected to apply a package of practical expedients that enabled us to
carry forward upon adoption our historical assessments of: expired or existing leases regarding their lease classification and
deferred recognition of non-incremental direct leasing costs; and whether any expired or existing contracts are, or contain,
leases. We also elected a practical expedient that enabled us to avoid the need to assess whether expired or existing land
easements not previously accounted for as leases are, or contain, a lease. In addition, we elected a practical expedient for our
rental properties (as lessor) to avoid separating non-lease components that otherwise would need to be accounted for under the
recently-adopted revenue accounting guidance (such as tenant reimbursements of property operating expenses) from the
associated lease component since (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; this enables
us to account for the combination of the lease component and non-lease components as an operating lease since the lease
component is the predominant component of the combined components. Below is a summary of the primary changes in our
accounting and reporting that resulted from our adoption of this guidance:
•
•
Property leases in which we are the lessor:
◦
Deferral of non-incremental leasing costs: For new or extended tenant leases, we no longer defer recognition of non-
incremental leasing costs that we would have deferred under prior accounting guidance; these deferrals totaled $1.2
million in 2018 and $1.1 million in 2017.
Change in presentation of revenue: Due to our adoption of the practical expedient discussed above to not separate non-
lease component revenue from the associated lease component, we are aggregating revenue from our lease
components and non-lease components (comprised predominantly of tenant operating expense reimbursements) into
the line entitled “lease revenue.” We are reporting other revenue from our properties in the line entitled “other
property revenue.” We recast prior periods for these changes in presentation.
Changes in assessment of lease revenue collectability: Changes in our assessment of lease revenue collectability that
previously would have resulted in charges to bad debt expense under prior guidance are being recognized as an
adjustment to rental revenue under the new guidance. Such amounts recognized by us in prior periods were not
significant.
Operating expenses paid directly by tenants to third parties: Operating expenses paid directly by tenants to third parties
(primarily for real estate taxes) and revenue associated with such tenant payments that would have been recognized
under prior guidance will no longer be reported on our Statement of Operations. Such amounts recognized by us in
prior periods were not significant.
Leases in which we are the lessee (the most significant of which are ground leases):
◦
Balance sheet presentation of property operating lease right-of-use assets: Upon adoption on January 1, 2019, we
recognized property right-of-use assets and offsetting lease liabilities for existing operating leases totaling $16 million
for the present value of minimum lease payments under these leases, and also reclassified an additional $11 million in
amounts previously presented elsewhere on our balance sheet in connection with these leases to the right-of-use assets.
We will recognize additional right-of-use assets and lease liabilities as we enter into new operating leases.
Balance sheet presentation of property finance lease right-of-use assets: Property right-of-use assets of finance leases
that previously were presented as properties under prior guidance are being presented as property finance right-of-use
assets under the new guidance. As a result, we reclassified $38 million in assets from properties to property finance
right-of-use assets upon adoption on January 1, 2019.
Segment assets: We changed our definition of segment assets used for our reportable segments to include property
right-of-use assets associated with operating properties, net of related lease liabilities.
◦
◦
◦
◦
◦
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 applies to most
financial assets measured at amortized cost and certain other instruments, including trade and other receivables (excluding ones
arising from operating leases), loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit
exposures (e.g. loan commitments and guarantees). Under the new guidance, we will recognize an estimate of our expected
credit losses on these asset types as an allowance, as the guidance requires that financial assets be measured on an amortized
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Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
cost basis and be presented at the net amount expected to be collected. Upon adoption, our most significant assets within the
scope of this guidance were our investing receivables and receivables and contract assets associated with our non-USG
construction contracts. We adopted this guidance effective January 1, 2020 using a modified retrospective transition approach
under which we apply the guidance effective January 1, 2020, with a cumulative-effect adjustment as of such date, and do not
adjust prior comparative reporting periods. Upon adoption, we recognized an allowance for expected credit losses on these
assets with an offset to retained earnings that did not have a material impact on our consolidated financial statements.
Following adoption, our consolidated statements of operations will reflect adjustments for any changes in our expected credit
losses.
In August 2018, the FASB issued guidance that modifies disclosure requirements for fair value measurements. We adopted
this guidance effective January 1, 2020. The resulting changes in disclosure will not 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. We
adopted this guidance effective January 1, 2020. Our adoption of this guidance did not 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.
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 $3.1
million as of December 31, 2019 and $3.9 million as of December 31, 2018, 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,
2019 and 2018, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our
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Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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.
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, 2019 and 2018 and the hierarchy level of inputs used in measuring their respective fair
values under applicable accounting standards (in thousands):
Description
December 31, 2019:
Assets:
Marketable securities in deferred compensation plan (1)
Mutual funds
Other
Interest rate derivatives (1)
Total assets
Liabilities:
Deferred compensation plan liability (2)
Interest rate derivatives
Total liabilities
December 31, 2018:
Assets:
Marketable securities in deferred compensation plan (1)
Mutual funds
Other
Interest rate derivatives (1)
Total assets
Liabilities:
Deferred compensation plan liability (2)
Interest rate derivatives
Total liabilities
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$
$
$
$
$
$
$
$
3,035
25
—
3,060
$
$
— $
—
— $
3,819
49
—
3,868
$
$
— $
—
— $
— $
—
23
23
$
3,060
25,682
28,742
$
$
— $
—
5,617
5,617
$
3,868
5,459
9,327
$
$
— $
—
—
— $
— $
—
— $
— $
—
—
— $
— $
—
— $
3,035
25
23
3,083
3,060
25,682
28,742
3,819
49
5,617
9,485
3,868
5,459
9,327
(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.
F-32
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
COPLP and Subsidiaries
The tables below set forth financial assets and liabilities of COPLP and subsidiaries that are accounted for at fair value on a
recurring basis as of December 31, 2019 and 2018 and the hierarchy level of inputs used in measuring their respective fair
values under applicable accounting standards (in thousands):
Description
December 31, 2019:
Assets:
Interest rate derivatives (1)
Liabilities:
Interest rate derivatives
December 31, 2018:
Assets:
Interest rate derivatives (1)
Liabilities:
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
$
$
$
$
— $
23
— $
25,682
— $
— $
5,617
5,459
$
$
$
$
— $
23
— $
25,682
— $
— $
5,617
5,459
(1) Included in the line entitled “prepaid expenses and other assets, net” on COPLP’s consolidated balance sheet.
2019 Nonrecurring Fair Value Measurements
In the third quarter of 2019, we determined that the carrying amount of land held in Frederick, Maryland would not be
recovered from its eventual disposition. As a result, we recognized an impairment loss of $327,000 in order to adjust the land
to its estimated fair value. This land was sold in the fourth quarter of 2019.
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 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 2016. 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.
F-33
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
4.
Properties, Net
Operating properties, net consisted of the following (in thousands):
Land
Buildings and improvements
Less: Accumulated depreciation
Operating properties, net
2019 Dispositions
December 31,
$
2019
472,976
3,306,791
(1,007,120)
$ 2,772,647
$
2018
503,274
3,241,894
(897,903)
$ 2,847,265
In 2019, we sold, through a series of transactions, a 90% interest in nine recently-developed data center shells in Northern
Virginia based on an aggregate property value of property value of $345.1 million, retaining a 10% interest in the properties
through BREIT COPT DC JV LLC (“BREIT-COPT”), a newly-formed joint venture. The transactions for seven of these
properties were completed on June 20, 2019 and the remaining two properties on December 5, 2019. Our partner in the joint
venture acquired the 90% interest from us for $310.6 million. We account for our interest in the joint venture using the equity
method of accounting as described further in Note 6. We recognized a gain on sale of $105.2 million.
2019 Development Activities
In 2019, we placed into service 1.1 million square feet in nine newly-developed properties and 85,000 square feet in one
partially-operational property under redevelopment. As of December 31, 2019, we had 13 properties under development, or
which we were contractually committed to develop, that we estimate will total 2.3 million square feet upon completion and one
partially-operational property under redevelopment that we estimate will total 106,000 square feet upon completion.
2018 Dispositions
In 2018, we sold 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. In
the fourth quarter of 2018, we recognized a gain on this sale of $1.5 million.
2018 Development Activities
In 2018, we placed into service 666,000 square feet in six newly-developed properties (including two partially-
operational properties), 22,000 square feet in one redeveloped property and land under a long-term contract.
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.
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Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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
White Marsh Properties (1) White Marsh,
201 Technology Drive
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
6/9/2017
7/28/2017
10/27/2017
12/15/2017
Number of
Properties
1
Total
Rentable
Square Feet
190,000
Transaction
Value
$ 39,000
Gain on
Sale
$
—
1
8
1
1
37,000
2,300
—
412,000
47,500
1,180
103,000
29,500
3,625
57,000
7,529
831
12
799,000
$ 125,829
$ 5,636
(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 Development Activities
In 2017, we placed into service 1.1 million square feet in eight newly-developed properties (including a partially-
operational property) and 94,000 square feet in three redeveloped properties.
5.
Leases
Lessor Arrangements
We lease real estate properties, comprised primarily of office properties and data center shells, to third parties. As of
December 31, 2019, these leases, which may encompass all, or a portion of, a property, had remaining terms spanning from one
month to 15 years and averaging approximately five years.
Our lease revenue is comprised of: fixed lease revenue, including contractual rent billings under leases recognized on a
straight-line basis over lease terms and amortization of lease incentives and above- and below- market lease intangibles; and
variable lease revenue, including tenant expense recoveries, lease termination revenue and other revenue from tenants that is
not fixed under the lease. The table below sets forth our allocation of lease revenue recognized between fixed and variable
lease revenue (in thousands):
Lease revenue
Fixed
Variable
For the Year Ended
December 31, 2019
412,342
$
110,130
522,472
$
A significant concentration of our lease revenue in 2019 was earned from our largest tenant, the USG, including 34% of our
total lease revenue and 25% of our fixed lease revenue. Our lease revenue from the USG 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
16).
F-35
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fixed contractual payments due under our property leases were as follows (in thousands):
Year Ending December 31,
2020
2021
2022
2023
2024
Thereafter
Lessee Arrangements
December 31, 2019
388,310
$
336,482
299,356
245,661
195,246
474,741
1,939,796
$
We lease land underlying certain properties that we are operating or developing from third parties. These ground leases
have long durations with remaining terms ranging from 29 years (excluding extension options) to 96 years. As of
December 31, 2019, our balance sheet included $68.3 million in right-of-use assets associated with ground leases that included:
•
•
•
•
•
•
$37.8 million for land on which we are developing an office property in Washington, DC through our Stevens Investors,
LLC joint venture, virtually all of the rent on which was previously paid. This lease has a 96-year remaining term, and we
possess a bargain purchase option that we expect to exercise in 2020;
$10.3 million for land underlying operating office properties in Washington, DC under two leases with remaining terms of
approximately 80 years;
$6.5 million for land underlying a parking garage in Baltimore, Maryland under a lease with a remaining term of 29 years
and an option to renew for an additional 49 years that was included in the term used in determining the asset balance;
$6.6 million for land in a research park in College Park, Maryland under four leases through our M Square Associates,
LLC joint venture all of the rent on which was previously paid. These leases had remaining terms ranging from 63 to 74
years;
$4.8 million for land in a business park in Huntsville, Alabama under 10 leases through our LW Redstone Company, LLC
joint venture, with remaining terms ranging from 43 to 51 years and options to renew for an additional 25 years that were
not included in the term used in determining the asset balance; and
$2.3 million for other land underlying operating properties in our Fort Meade/BW Corridor sub-segment under two leases
with remaining terms of approximately 48 years all of the rent on which was previously paid.
As of December 31, 2019, our balance sheet also included right-of-use lease assets totaling $1.2 million in connection with
vehicles and office equipment that we lease from third parties.
Our right-of-use assets consisted of the following (in thousands):
Leases
Right-of-use assets
Operating leases - Property
Finance leases
Property
Vehicles and office equipment
Total finance lease right-of-use assets
Total right-of-use assets
Balance Sheet Location
December 31, 2019
Property - operating right-of-use assets
Property - finance right-of-use assets
Prepaid expenses and other assets, net
$
$
27,864
40,458
1,196
41,654
69,518
Lease liabilities consisted of the following (in thousands):
Leases
Lease liabilities
Operating leases - Property
Finance leases
Total lease liabilities
Balance Sheet Location
December 31, 2019
Property - operating lease liabilities
Other liabilities
$
$
17,317
1,116
18,433
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Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The table below sets forth the weighted average terms and discount rates of our leases as of December 31, 2019:
Weighted average remaining lease term
Operating leases
Finance leases
Weighted average discount rate
Operating leases
Finance leases
68 years
1 year
7.33%
3.11%
The table below presents our total lease cost (in thousands):
Lease cost
Operating lease cost
Property leases
Vehicles and office equipment
Finance lease cost
Statement of Operations Location
For the Year Ended
December 31, 2019
Property operating expenses
General, administrative and leasing expenses
$
Amortization of vehicles and office equipment
right-of-use assets
Amortization of property right-of-use assets
Interest on lease liabilities
General, administrative and leasing expenses
Property operating expenses
Interest expense
$
1,699
69
457
30
13
2,268
The table below presents the effect of lease payments on our consolidated statement of cash flows (in thousands):
Supplemental cash flow information
Cash paid for amounts included in the
measurement of lease liabilities:
Operating cash flows for operating leases
Operating cash flows for financing leases
Financing cash flows for financing leases
For the Year Ended
December 31, 2019
$
$
$
1,004
13
223
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Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Payments on leases as of December 31, 2019 were due as follows (in thousands):
Year Ending December 31,
2020
2021
2022
2023
2024
Thereafter
Total lease payments
Less: Amount representing interest
Lease liability
Operating leases
1,140
$
1,146
1,164
1,169
1,173
100,609
106,401
(89,084)
17,317
$
$
$
Finance leases
Total
862
202
64
—
—
—
1,128
(12)
1,116
$
$
2,002
1,348
1,228
1,169
1,173
100,609
107,529
(89,096)
18,433
Future minimum rental payments on leases as of December 31, 2018 were due as follows (in thousands):
Year Ending December 31,
2019
2020
2021
2022
2023
Thereafter
Total lease payments
Less: Amount representing interest
Total
$
Operating leases
1,101
$
1,110
1,094
1,115
1,119
83,373
88,912
N/A
N/A $
$
Finance leases
Total
219
844
184
49
—
—
1,296
(24)
1,272
$
$
1,320
1,954
1,278
1,164
1,119
83,373
90,208
(24)
90,184
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 developed 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, 2019 (dollars in thousands):
Entity
Date
Acquired
LW Redstone Company, LLC 3/23/2010
6/26/2007
M Square Associates, LLC
8/11/2015
Stevens Investors, LLC
Nominal
Ownership %
85%
50%
95%
Location
Huntsville, Alabama
College Park, Maryland
Washington, DC
(1) Excludes amounts eliminated in consolidation.
December 31, 2019 (1)
Total Assets
$ 249,875
87,915
126,603
$ 464,393
Encumbered
Assets
$
$
73,911
63,895
126,112
263,918
Total
Liabilities
$ 73,083
56,028
56,268
$ 185,379
Each of these joint ventures are engaged in the development and operation of real estate. With regard to these joint ventures:
•
for LW Redstone Company, 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 $49.0 million to the City through December 31, 2019 to fund such costs. We also expect to fund additional
development 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 equity contributions. While net
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Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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 approximately 1.5 million square feet of construction commencement through December 31,
2019. 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 are 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
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 property’s development completion (expected to occur in 2021) 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. We and our partners each
have the right to acquire each other’s interests at fair value upon the second anniversary of the property’s stabilization date
(as defined in the operating agreement). 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.
Unconsolidated Real Estate Joint Ventures
The table below sets forth information pertaining to our investments in unconsolidated real estate joint ventures accounted
for using the equity method of accounting (dollars in thousands):
Entity
GI-COPT DC Partnership LLC
BREIT COPT DC JV LLC
Date Acquired
7/21/2016
6/20/2019
Nominal
Ownership %
50%
10%
Number of
Properties
6
9
15
Carrying Value of Investment (1)
December 31, 2019
37,816
$
14,133
51,949
$
December 31, 2018
39,845
$
—
39,845
$
(1) Included in the line entitled “investment in unconsolidated real estate joint ventures” on our consolidated balance sheets.
These joint ventures operate triple-net leased, single-tenant data center shell properties in Northern Virginia. With regard to
these joint ventures:
•
•
for GI-COPT DC Partnership LLC, under the terms of the joint venture agreement, we and our partner receive returns in
proportion to our investments in the joint venture; and
for BREIT-COPT, as described further in Note 4, in 2019, we sold a 90% interest in nine triple-net leased, single-tenant
data center shell properties in Northern Virginia and retained a 10% interest in the properties through the joint venture. We
concluded that the joint venture is a variable interest entity. Under the terms of the joint venture agreement, we and our
partner receive returns in proportion to our investments, and our maximum exposure to losses is limited to our investment,
subject to certain indemnification obligations with respect to nonrecourse debt secured by the properties. The nature of our
F-39
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
involvement in the activities of the joint venture does not give us power over decisions that significantly affect its
economic performance.
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
Above-market leases
Below-market cost arrangements (1)
Other
December 31, 2019
December 31, 2018
Gross
Carrying
Amount
131,975
59,131
13,718
—
1,333
206,157
$
$
Accumulated
Amortization
120,894
$
43,544
13,318
—
1,009
178,765
$
Net
Carrying
Amount
Gross
Carrying
Amount
$
$
11,081
15,587
400
—
324
27,392
$
$
132,276
60,028
13,841
8,880
1,333
216,358
Accumulated
Amortization
117,520
$
39,703
13,164
1,507
994
172,888
$
Net
Carrying
Amount
$
$
14,756
20,325
677
7,373
339
43,470
(1) These assets pertain to ground leases. Upon our adoption of lease accounting guidance effective January 1, 2019, the net
carrying amount was reclassified to property operating lease right-of-use assets associated with these leases.
Amortization of the intangible asset categories set forth above totaled $8.7 million in 2019, $15.6 million in 2018 and $19.3
million in 2017. The approximate weighted average amortization periods of the categories set forth above follow: in-place
lease value: seven years; tenant relationship value: eight years; above-market leases: eight years; and other: 23 years. The
approximate weighted average amortization period for all of the categories combined is eight 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: $5.2 million for 2020; $5.0 million for 2021; $3.5 million
for 2022; $3.1 million for 2023; and $2.5 million for 2024.
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,
2019
59,427
14,096
73,523
2018
53,961
3,021
56,982
$
$
$
$
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
developed by the joint venture. When these tax revenues are sufficient to cover the debt service on a certain increment of
municipal bonds, the City of Huntsville will be required to issue bonds to repay the notes 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 developed properties in 2045.
Our other investing loans receivable carry an interest rate of 8.0% and mature in 2020.
We did not have an allowance for credit losses in connection with our investing receivables as of December 31, 2019 or
December 31, 2018. The fair value of these receivables was approximately $74 million as of December 31, 2019 and $58
million as of December 31, 2018.
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Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
9.
Prepaid Expenses and Other Assets, Net
Prepaid expenses and other assets, net consisted of the following (in thousands):
Lease incentives, net
Prepaid expenses
Construction contract costs in excess of billings
Furniture, fixtures and equipment, net (1)
Non-real estate equity investments
Deferred financing costs, net (2)
Restricted cash
Deferred tax asset, net
Interest rate derivatives
Other assets
Total for COPLP and subsidiaries
Marketable securities in deferred compensation plan
Total for COPT and subsidiaries
December 31,
2019
28,433
18,835
17,223
7,823
6,705
3,633
3,397
2,328
23
4,616
93,016
3,060
96,076
$
$
2018
21,258
25,658
3,189
8,630
5,940
4,733
3,884
2,084
5,617
6,337
87,330
3,868
91,198
$
$
(1) Includes $1.2 million in finance right-of-use assets as of December 31, 2019.
(2) 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
Property
Share-based compensation
Accrued payroll
Valuation allowance
Deferred tax asset, net
December 31,
2019
2018
$
$
2,885
(77)
—
—
(480)
2,328
$
$
4,354
427
28
2
(2,727)
2,084
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 decrease in deferred tax asset valuation
allowance reflected above was due to higher projected taxable income in our TRS resulting from certain construction projects.
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, 2019 net deferred tax asset.
F-41
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,
2019
December 31,
2018
December 31, 2019
Stated Interest Rates
Scheduled Maturity
Mortgage and Other Secured Debt:
Fixed rate mortgage debt (2)
$
143,430
$
147,141
3.82% - 4.62% (3)
Variable rate secured debt (4)
Total mortgage and other secured debt
Revolving Credit Facility
Term Loan Facility (8)
Unsecured Senior Notes (10)
3.60%, $350,000 aggregate principal
5.25%, $250,000 aggregate principal
3.70%, $300,000 aggregate principal
5.00%, $300,000 aggregate principal
Unsecured note payable
Total debt, net
68,055
211,485
177,000
248,706
348,431
247,652
299,324
297,503
1,038
2023-2026
2020-2026
23,282
LIBOR + 1.45% to 2.35% (5)
170,423
213,000
LIBOR + 0.775% to 1.45% (6)
March 2023 (7)
248,273
LIBOR + 0.85% to 1.65% (9)
2022
347,986
247,136
298,815
297,109
1,167
3.60% (11)
5.25% (12)
3.70% (13)
5.00% (14)
0% (15)
May 2023
February 2024
June 2021
July 2025
May 2026
$
1,831,139
$
1,823,909
(1) The carrying values of our debt other than the Revolving Credit Facility reflect net deferred financing costs of $5.8 million as of
December 31, 2019 and $7.2 million as of December 31, 2018.
(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 $217,000 as of December 31, 2019 and $281,000 as of December 31, 2018.
Includes a construction loan with $64.9 million in remaining borrowing capacity as of December 31, 2019.
(3) The weighted average interest rate on our fixed rate mortgage debt was 4.16% as of December 31, 2019.
(4)
(5) The weighted average interest rate on our variable rate secured debt was 3.85% as of December 31, 2019.
(6) The weighted average interest rate on the Revolving Credit Facility was 2.70% as of December 31, 2019.
(7) The facility matures in March 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.
(8) As discussed below, we have the ability to borrow an additional $150.0 million in the aggregate under this facility, provided that there is
no default under the facility and subject to the approval of the lenders. In addition, in connection with our Revolving Credit Facility, 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.
(9) The interest rate on this loan was 2.94% as of December 31, 2019.
(10) Refer to the paragraphs below for further disclosure.
(11) The carrying value of these notes reflects an unamortized discount totaling $1.1 million as of December 31, 2019 and $1.4 million as of
December 31, 2018. 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 $2.1 million as of December 31, 2019 and $2.6 million as of
December 31, 2018. 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 $534,000 as of December 31, 2019 and $943,000 as of
December 31, 2018. 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 $2.1 million as of December 31, 2019 and $2.4 million as of
December 31, 2018. 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 $223,000 as of December 31,
2019 and $294,000 as of December 31, 2018.
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
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Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
debt may limit its ability to make certain types of payments and other distributions to COPT in the event of default or when
such payments or distributions may prompt failure of debt covenants. As of December 31, 2019, we were compliant with these
financial covenants.
Our debt matures on the following schedule (in thousands):
Year Ending December 31,
2020
2021
2022
2023
2024
Thereafter
Total
December 31, 2019
16,156
$
303,955
301,341
593,830
279,683
347,842
$
1,842,807 (1)
(1) Represents scheduled principal amortization and maturities only and therefore excludes net discounts and deferred financing costs of
$11.7 million.
We capitalized interest costs of $10.8 million in 2019, $5.9 million in 2018 and $5.2 million in 2017.
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, 2019
December 31, 2018
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
$
$
1,192,910
144,468
493,761
1,831,139
$
$
1,227,441
149,907
495,962
1,873,310
$
$
1,191,046
148,308
484,555
1,823,909
$
$
1,219,603
147,106
486,497
1,853,206
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,
2019, the maximum borrowing capacity under this facility totaled $800.0 million, of which $623.0 million was available.
Weighted average borrowings under our Revolving Credit Facility totaled $255.6 million in 2019 and $188.1 million in
2018. The weighted average interest rate on our Revolving Credit Facility was 3.32% in 2019 and 3.08% in 2018.
Term Loan Facilities
Our unsecured term loan facility originated in 2015 and was subsequently amended. We have the ability to borrow an
additional $150.0 million under this facility provided that there is no default under the loan and subject to the approval of the
lenders. The 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-43
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 a term loan originating in 2012 on which we repaid $200.0
million in May 2017 and the remaining balance of $100.0 million in November 2018.
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 3.60% Senior Notes, 40 basis points for the 5.25% Senior Notes, 25 basis
points for the 3.70% Senior Notes and 45 basis points for the 5.00% 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
12,438 (1)
100,000
100,000
50,000
11,200 (2)
75,000
75,000
75,000
100,000
Fixed Rate
Floating Rate Index
1.390% One-Month LIBOR
1.901% One-Month LIBOR
1.905% One-Month LIBOR
1.908% One-Month LIBOR
1.678% One-Month LIBOR
3.176% Three-Month LIBOR
3.192% Three-Month LIBOR
2.744% Three-Month LIBOR
1.730% One-Month LIBOR
Effective
Date
10/13/2015
9/1/2016
9/1/2016
9/1/2016
8/1/2019
6/30/2020
6/30/2020
6/30/2020
9/1/2015
Expiration
Date
10/1/2020
12/1/2022
12/1/2022
12/1/2022
8/1/2026
6/30/2030
6/30/2030
6/30/2030
8/1/2019
Fair Value at December 31,
2019
2018
$
$
23
(1,028)
(1,037)
(524)
(20)
(8,640)
(8,749)
(5,684)
—
$ (25,659) $
239
1,968
1,967
971
—
(2,676)
(2,783)
—
472
158
(1) The notional amount of this instrument is scheduled to amortize to $12.1 million.
(2) The notional amount of this instrument is scheduled to amortize to $10.0 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
Prepaid expenses and other assets, net
Interest rate derivatives (liabilities)
Fair Value at December 31,
2019
2018
$
$
$
23
(25,682) $
5,617
(5,459)
F-44
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):
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,
Derivatives in Hedging Relationships
Interest rate derivatives
2019
(24,321) $
$
2018
2017
2019
2018
2017
(2,373) $
684
$
1,415
$
407
$
(3,304)
Over the next 12 months, we estimate that approximately $2.6 million of losses will be reclassified from accumulated other
comprehensive loss (“AOCL”) as an increase to interest expense.
We have agreements with each of our interest rate derivative counterparties that contain provisions under which, if we
default or are capable of being declared in default on defined levels of our indebtedness, we could also be declared in default on
our derivative obligations. Failure to comply with the loan covenant provisions could result in our being declared in default on
any derivative instrument obligations covered by the agreements. As of December 31, 2019, we were not in default with any of
these provisions. As of December 31, 2019, the fair value of interest rate derivatives in a liability position related to these
agreements was $25.7 million, excluding the effects of accrued interest and credit valuation adjustments. As of December 31,
2019, we had not posted any collateral related to these agreements. If we breach any of these provisions, we could be required
to settle our obligations under the agreements at their termination value, which was $25.8 million as of December 31, 2019.
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,
2018
2017
2019
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
$
$
26,260
—
(2,413)
3,835
1,749
29,431
$
$
23,125
186
(1,411)
2,523
1,837
26,260
$
$
22,979
—
(1,566)
2,338
(626)
23,125
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, 2019, 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; and
F-45
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
•
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 in 2018 and 2017:
•
•
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; and
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.
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, 2019, 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 received upon physical settlement of the agreements was 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 was 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:
•
•
•
1.6 million shares in 2019 for net proceeds of $46.5 million;
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
used its remaining capacity under these agreements in 2019.
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 105,039 in 2019, 1.9 million in 2018 and 339,513 in 2017.
COPT declared dividends per common share of $1.10 in 2019, 2018 and 2017.
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.
See Note 15 for disclosure of common share activity pertaining to our share-based compensation plans.
F-46
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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 Units effective on January 21, 2017; 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. The owner of these units is entitled
to a priority annual cumulative return equal to 3.5% of their liquidation preference. 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. These units may be
redeemed for cash by COPLP at COPLP’s option on or after January 1, 2020, provided that COPLP provides notice to the unit
holder six months prior to the effective date of the redemption. The units’ terms also require COPLP to provide notice to the
unit holder for defined periods of time in advance of the sale of certain property or repayment or refinancing of certain debt,
after which, in certain instances, the unit holder would have the ability to require COPLP to redeem the units at their liquidation
preference. The terms of these units were amended on July 31, 2019 to:
•
•
•
reduce, effective September 23, 2019, the priority annual cumulative return on these units from 7.5% of the units’
liquidation preference to 3.5%, and eliminate provisions for future increases previously in place;
extend the earliest date that COPLP could redeem the units to January 1, 2020; and
establish the notice provisions in advance of property sales and debt repayments or refinancing and related redemption
requirements described above.
Common Units
COPT owned 98.7% of COPLP’s common units as of December 31, 2019 and 98.8% as of December 31, 2018.
In 2018 and 2017, 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; and
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.
From 2017 through 2019, COPT also acquired additional common units through the following common share issuances
under its forward equity sale agreements:
•
•
•
1.6 million shares in 2019 for net proceeds of $46.5 million;
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-47
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 105,039 in 2019, 1.9 million in 2018 and 339,513 in
2017. In addition, we redeemed 924 common units in 2019 for $25,000 and 13,377 in 2018 for $339,000.
COPLP declared distributions per common unit of $1.10 in 2019, 2018 and 2017.
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 PIUs; PIUs are a special class of common unit structured to qualify as “profit interests” for tax purposes which
are 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,
2019
2018
2017
General, administrative and leasing expenses
Property operating expenses
Capitalized to development activities
Share-based compensation cost
$
$
5,748
966
742
7,456
$
$
5,415
961
587
6,963
$
$
4,649
966
480
6,095
The amounts included in our consolidated statements of operations for share-based compensation reflected an estimate of
pre-vesting forfeitures of 0% for PSUs, PIUs and deferred share awards and 0% to 7% for restricted shares.
As of December 31, 2019, unrecognized compensation costs related to unvested awards included:
•
•
•
•
•
$6.5 million on restricted shares expected to be recognized over a weighted average period of approximately two years;
$1.6 million on performance-based PIUs (“PB-PIUs”) expected to be recognized over a weighted average performance
period of approximately two years;
$1.1 million on time-based PIUs (“TB-PIUs”) expected to be recognized over a weighted average performance period of
approximately two years;
$630,000 on PSUs expected to be recognized over a weighted average performance period of approximately one year; and
$33,000 on deferred share awards expected to be recognized through May 2020.
F-48
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Our TRS is subject to Federal and state income taxes. We realized a windfall tax loss of $13,000 in 2017 on options
exercised and vesting restricted shares in connection with employees of that subsidiary.
Restricted Shares
The following table summarizes restricted shares under the share-based compensation plans for 2017, 2018 and 2019:
Unvested as of December 31, 2016
Granted
Forfeited
Vested
Unvested as of December 31, 2017
Granted
Forfeited
Vested
Unvested as of December 31, 2018
Granted
Forfeited
Vested
Unvested as of December 31, 2019
Unvested shares as of December 31,
2019 that are expected to vest
Weighted
Average
Grant Date
Fair Value
26.20
33.84
27.80
26.27
30.37
25.62
30.02
29.49
28.38
26.56
29.44
28.01
27.49
27.50
Shares
371,247
239,479
(27,056)
(158,044)
425,626
219,716
(25,419)
(181,238)
438,685
195,520
(56,341)
(185,001)
392,863
363,773
$
$
$
The aggregate intrinsic value of restricted shares that vested was $4.9 million in 2019, $4.6 million in 2018 and $5.3
million in 2017.
PIUs
Commencing in 2019, we offered our executives and Trustees the opportunity to select PIUs as a form of long-term
compensation in lieu of, or in combination with, other forms of share-based compensation awards (restricted shares, deferred
share awards and PSUs). Our executives and certain of our Trustees selected PIUs as their form of share-based compensation
for their 2019 grants. We granted two forms of PIUs: TB-PIUs; and PB-PIUs. TB-PIUs are subject to forfeiture restrictions
until the end of the requisite service period, at which time the TB-PIUs automatically convert into vested PIUs. PB-PIUs are
subject to a market condition in that the number of earned awards are determined at the end of the performance period (as
described further below) and then settled in vested PIUs. Vested PIUs carry substantially the same rights to redemption and
distributions as non-PIU common units.
TB-PIUs
In 2019, our executives and certain non-employee Trustees were granted a total of 61,820 TB-PIUs with an aggregate grant
date fair value of $1.6 million (weighted average of $26.01 per TB-PIU). TB-PIUs granted to executives vest in equal one-third
increments over a three-year period beginning on the date of grant. TB-PIUs granted to non-employee Trustees vest on the first
anniversary of the grant date, provided that the Trustee remains in his or her position. Prior to vesting, TB-PIUs carry
substantially the same rights to distributions as non-PIU common units but carry no redemption rights.
F-49
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
PB-PIUs
On January 1, 2019, we granted our executives 193,682 PB-PIUs with a three-year performance period concluding on the
earlier of December 31, 2021 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 earned awards
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 (target)
25th
Below 25th
Earned Awards Payout %
100% of PB-PIUs granted
50% of PB-PIUs granted
25% of PB-PIUs granted
0% of PB-PIUs granted
If the percentile rank exceeds the 25th percentile and is between two of the percentile ranks set forth in the table above, then the
percentage of the earned awards will be interpolated between the ranges set forth in the table above to reflect any performance
between the listed percentiles. During the performance period, PB-PIUs carry rights to distributions equal to 10% of the
distribution rights of non-PIU common units but carry no redemption rights.
At the end of the performance period, we will settle the award by issuing vested PIUs equal to the number of earned
awards in settlement of the award plan and paying cash equal to the excess, if any, of: the aggregate distributions that would
have been paid with respect to vested PIUs issued in settlement of the earned awards through the date of settlement had such
vested PIUs been issued on the grant date; over the aggregate distributions made on the PB-PIUs during the performance
period. If a performance period ends due to a sale event or qualified termination, the number of earned awards 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 PB-PIUs are forfeited.
These PB-PIUs had an aggregate grant date fair value of $2.4 million ($12.47 per PB-PIU) which is being recognized over
the performance period. The grant date fair value was computed using a Monte Carlo model that included the following
assumptions: baseline common share value of $21.03; expected volatility for common shares of 21.0%; and a risk-free interest
rate of 2.51%.
PSUs
We made the following grants of PSUs to executives from 2015 through 2018 (dollars in thousands):
Grant Date
3/5/2015
3/1/2016
1/1/2017
1/1/2018
Number of
PSUs
Granted
45,656
26,299
39,351
59,110
Performance
Period
Commencement
Date
1/1/2015
1/1/2016
1/1/2017
1/1/2018
Performance
Period End Date
12/31/2017
12/31/2018
12/31/2019
12/31/2020
Grant Date
Fair Value
$
$
$
$
1,678
1,005
1,415
1,890
Number of PSUs
Outstanding as of
December 31, 2019
—
—
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.
F-50
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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 (target)
25th
Below 25th
Earned PSUs Payout %
200% of PSUs granted
100% of PSUs granted
50% of PSUs granted
0% of PSUs granted
If the percentile rank exceeds the 25th percentile and is between two of the percentile ranks set forth in the table above, then the
percentage of the earned PSUs will be interpolated between the ranges set forth in the table above to reflect any performance
between the listed percentiles. At the end of the performance period, we 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 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; and
for the 2016 PSUs issued to executives that vested on December 31, 2018, we issued 44,757 common shares in settlement
of the PSUs on January 18, 2019.
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 2017 and 2018 are set forth below:
Grant Date
1/1/2017 $
1/1/2018 $
Grant Date
Fair Value
Per Share
38.43
31.97
Baseline
Common
Share Value
31.22
$
29.20
$
Expected
Volatility of
Common Shares
19.0%
17.0%
Risk-free
Interest Rate
1.47%
2.04%
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
We made the following grants of deferred share awards to nonemployee members of our Board of Trustees in 2017, 2018
and 2019 (dollars in thousands, except per share data):
Year of Grant
2017
2018
2019
Number of
Deferred Share
Awards Granted
10,032
13,832
3,432
Aggregate
Grant Date
Fair Value
$
$
$
326
388
95
Grant Date Fair
Value Per Share
32.47
$
28.08
$
27.60
$
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 2017, 2018 and 2019 (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,
2019
2018
3,097
26.77
86
$
$
5,515
29.32
154
$
$
$
$
2017
15,590
26.89
508
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
201,100
60,000
30,000
—
Weighted
Average
Exercise Price
Per Share
$
$
$
43.35
35.17
32.52
N/A
Weighted Average
Remaining
Contractual Term
(in Years)
1
1
0.4
N/A
Aggregate
Intrinsic
Value
$
31
$ —
$ —
N/A
December 31, 2016
December 31, 2017
December 31, 2018
December 31, 2019
The aggregate intrinsic value of options exercised was $18,000 in 2017. No options were exercised in 2019 or 2018.
16.
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, 2019, 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, 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
F-52
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
assets associated with consolidated operating properties (including the carrying value of properties, right-of-use assets, net of related
lease liabilities, 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):
Year Ended December 31, 2019
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, 2019
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
F
-
5
4
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
Fort
Meade/BW
Corridor
Northern
Virginia
Defense/IT
$ 252,781
(82,815)
—
$ 169,966
34,618
$
$
18,606
$ 1,280,656
$
55,742
(19,779)
—
35,963
$
9,326
$
$
4,548
$ 396,914
$ 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
$ 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
Operating Property Segments
Defense/Information Technology Locations
Navy
Support
Locations
Lackland
Air Force
Base
Redstone
Arsenal
Data Center
Shells
Total
Defense/IT
Locations
Regional
Office
Operating
Wholesale
Data Center
Other
Total
$
$
51,140
(29,042)
—
22,098
32,659
(13,579)
—
19,080
8,912
$
$
$
10,781
$ 146,592
$
— $
$
$ 184,257
$
$
— $
$
16,593
(6,626)
—
9,967
1,548
33,606
$ 138,501
26,571
(1,962)
5,705
30,314
— $
$
$
$ 159,472
$ 279,099
$ 435,486
(153,803)
5,705
$ 287,388
54,404
$ 227,013
$ 2,426,019
$
$
59,611
(29,682)
—
29,929
20,925
$
$
— $
$
$
$
$ 392,319
$
29,405
(13,213)
—
$
16,192
893
$
(1,012) $
$
$ 202,935
2,961
(1,445)
—
1,516
128
$ 527,463
(198,143)
5,705
$ 335,025
76,350
$
— $ 226,001
$ 3,024,958
3,685
$
$
46,286
(26,888)
—
19,398
$
$
$
14,718
$ 139,731
$
— $
$
$ 188,911
$
31,927
(13,536)
—
$
18,391
6,535
$
(116) $
14,745
(6,050)
—
8,695
573
4,167
$ 108,010
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
$
$
47,209
(27,812)
—
$
19,397
71
$
— $
$
$
$
$ 128,755
29,540
(12,619)
—
16,921
8,451
474
$ 194,476
$
14,322
(5,783)
—
8,539
$
1,056
$
$
2,159
$ 108,119
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
$
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
$
$
$
$
$
$
$
$
$
$
3,127
(1,436)
—
1,691
480
$ 517,253
(201,035)
4,818
$ 321,036
74,742
$
— $ 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
$
$
$
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,
2019
$ 527,463
113,763
$ 641,226
2018
$ 517,253
60,859
$ 578,112
2017
$ 509,980
102,840
$ 612,820
The following table reconciles UJV NOI allocable to COPT to equity in income of unconsolidated entities as reported on
our consolidated statements of operations (in thousands):
UJV NOI allocable to COPT
Less: Income from UJV allocable to COPT attributable to depreciation and
amortization expense and interest expense
Add: Equity in (loss) income of unconsolidated non-real estate entities
Equity in income of unconsolidated entities
For the Years Ended December 31,
2017
2018
2019
$
5,705
$
4,818
$
4,805
(4,065)
(7)
1,633
$
(3,314)
1,193
2,697
$
(3,310)
(5)
1,490
$
As previously discussed, we provide real estate services such as property management, development and construction
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,
2017
2018
2019
$ 102,840
$ 60,859
$ 113,763
(99,618)
(58,326)
(109,962)
3,222
2,533
3,801
$
$
$
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,
2017
2018
2019
$ 323,821
$ 321,036
$ 335,025
3,222
2,533
3,801
6,318
4,358
7,894
9,890
2,340
105,230
1,490
2,697
1,633
(1,098)
363
217
(134,228)
(137,116)
(137,069)
(15,123)
(2,367)
(329)
(30,837)
(28,900)
(35,402)
(6,213)
(5,840)
(4,239)
(76,983)
(75,385)
(71,052)
(5,705)
—
$ 200,004
$
(4,818)
(258)
78,643
$
(4,805)
(513)
74,941
The following table reconciles our segment assets to the consolidated total assets of COPT and subsidiaries (in thousands):
Segment assets
Operating properties lease liabilities included in segment assets
Non-operating property assets
Other assets
Total COPT consolidated assets
As of December 31,
2019
$ 3,024,958
17,317
621,630
190,548
$ 3,854,453
2018
$ 3,084,862
—
410,671
160,472
$ 3,656,005
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.
17.
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 revenue:
GMP
FFP
Cost-plus fee
Other
For the Years Ended December 31,
2019
2018
2017
$
$
67,708
10,688
34,386
981
113,763
$
$
34,050
20,327
5,540
942
60,859
$
$
78,401
22,607
801
1,031
102,840
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 revenue:
Construction
Design
Other
For the Years Ended December 31,
2019
2018
2017
$
$
112,170
612
981
113,763
$
$
57,986
1,931
942
60,859
$
$
94,471
7,338
1,031
102,840
We derived 74% of our construction contract revenue from the USG in 2019, 95% in 2018 and 98% in 2017.
We recognized revenue of $53,000, $349,000 and $586,000 in 2019, 2018 and 2017, 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,
2019
2018
$
$
6,701
12,378
$
$
4,577
6,701
Contract assets, which we refer to herein as construction contract 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,
2019
2018
$
$
3,189
17,223
$
$
4,884
3,189
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
$
$
$
568
1,184
446
$
$
$
27,402
568
27,296
For the Years Ended December 31,
2019
2018
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, 2019 that will be
recognized as revenue in future periods was $79.0 million, approximately $29 million of which we expect to recognize in 2020.
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 2019, 2018 and 2017.
F-57
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
18.
Earnings Per Share (“EPS”) and Earnings Per Unit (“EPU”)
COPT and Subsidiaries EPS
We present both basic and diluted EPS. We compute basic EPS by dividing net income available to common shareholders
allocable to unrestricted common shares under the two-class method by the weighted average number of unrestricted common
shares outstanding during the period. Our computation of diluted EPS is similar except that:
•
•
the denominator is increased to include: (1) the weighted average number of potential additional common shares that
would have been outstanding if securities that are convertible into 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,
redeemable noncontrolling interests 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 add 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 EPS on net income attributable to COPT common
shareholders
Redeemable noncontrolling interests
Income attributable to share-based compensation awards
Numerator for diluted EPS on net income attributable to COPT common
shareholders
Denominator (all weighted averages):
Denominator for basic EPS (common shares)
Dilutive effect of redeemable noncontrolling interests
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,
2017
2018
2019
$
$
$ 191,692
—
—
(656)
$ 191,036
132
33
$
$
72,301
—
—
(462)
71,839
—
—
68,745
(6,219)
(6,847)
(449)
55,230
—
—
$ 191,201
$
71,839
$
55,230
111,196
119
308
—
111,623
1.72
1.71
$
$
103,946
—
134
45
104,125
0.69
0.69
$
$
98,969
—
132
54
99,155
0.56
0.56
$
$
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
Weighted Average Shares Excluded from
Denominator for the Years Ended
December 31,
2019
2018
2017
1,299
896
176
2,468
936
176
3,362
689
176
F-58
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The following securities were also excluded from the computation of diluted EPS because their effect was antidilutive:
•
•
•
•
weighted average shares related to COPT’s forward equity sale agreements of 376,000 for 2019;
weighted average restricted shares and deferred share awards of 441,000 for 2019, 452,000 for 2018 and 433,000 for 2017;
weighted average options of 12,000 for 2019, 42,000 for 2018 and 70,000 for 2017; and
weighted average unvested PIUs of 51,000 for 2019.
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, redeemable
noncontrolling interests 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 add 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 EPU on net income attributable to COPLP common
unitholders
Redeemable noncontrolling interests
Income attributable to share-based compensation awards
Numerator for diluted EPU on net income attributable to COPLP common
unitholders
Denominator (all weighted averages):
Denominator for basic EPU (common units)
Dilutive effect of redeemable noncontrolling interests
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,
2019
2018
2017
$
$ 194,619
(564)
—
(785)
193,270
132
33
$
74,703
(660)
—
(462)
73,581
—
—
71,295
(6,879)
(6,847)
(449)
57,120
—
—
$ 193,435
$
73,581
$
57,120
112,495
119
308
—
112,922
1.72
1.71
$
$
106,414
—
134
45
106,593
0.69
0.69
$
$
102,331
—
132
54
102,517
0.56
0.56
$
$
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
F-59
Weighted Average Units Excluded from
Denominator for the Years Ended
December 31,
2019
2018
2017
896
176
936
176
689
176
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The following securities were also excluded from the computation of diluted EPU because their effect was antidilutive:
•
•
•
•
weighted average shares related to COPT’s forward equity sale agreements of 376,000 for 2019;
weighted average restricted units and deferred share awards of 441,000 for 2019, 452,000 for 2018 and 433,000 for 2017;
weighted average options of 12,000 for 2019, 42,000 for 2018 and 70,000 for 2017; and
weighted average unvested PIUs of 51,000 for 2019.
19.
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. As of
December 31, 2019, management believes that it is reasonably possible that we could recognize a loss of up to $3 million for
certain municipal tax claims. While we do not believe this loss would materially affect our financial position or liquidity, it
could be material to our results of operations. Management believes that it is also reasonably possible that we could incur
losses pursuant to other 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
Anne Arundel County, Maryland issued tax incremental financing bonds to third-party investors in order to finance public
improvements needed in connection with our project known as the National Business Park. These bonds had a remaining
principal balance of approximately $34 million as of December 31, 2019. The real estate taxes on increases in assessed values
post-bond issuance of properties in development districts encompassing the National Business Park are 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, 2019, we do not
expect any such future fundings will be required.
Contractual Obligations
We had amounts remaining to be incurred under various contractual obligations as of December 31, 2019 that included the
following (excluding amounts incurred and therefore reflected as liabilities reported on our consolidated balance sheets):
•
•
•
•
development and redevelopment obligations of $200.7 million;
tenant and other building improvements of $58.8 million;
third party construction obligations of $16.5 million; and
other obligations of $1.5 million.
F-60
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
20.
Quarterly Data (Unaudited)
The tables below set forth selected quarterly information for the years ended December 31, 2019 and 2018 (in thousands, except per share/unit data).
COPT and Subsidiaries
Revenues
Net income
Net income attributable to noncontrolling interests
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
Net income attributable to COPLP common unitholders
F
-
6
1
Basic EPU
Diluted EPU
For the Year Ended December 31, 2019
For the Year Ended December 31, 2018
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$ 148,940
$ 22,318
(1,459)
$ 20,859
$ 175,070
$ 109,563
(2,772)
$ 106,791
$ 159,431
$ 23,246
(1,989)
$ 21,257
$ 157,785
$ 44,877
(2,092)
$ 42,785
$ 155,476
$ 18,780
(1,630)
$ 17,150
$ 146,743
$ 21,085
(1,651)
$ 19,434
$ 137,411
$ 20,322
(1,625)
$ 18,697
$ 138,482
$ 18,456
(1,436)
$ 17,020
$
$
0.19
0.19
$
$
0.95
0.95
$
$
0.19
0.19
$
$
0.38
0.38
$
$
0.17
0.17
$
$
0.19
0.19
$
$
0.18
0.18
$
$
0.16
0.16
$ 148,940
$ 22,318
(1,037)
21,281
(165)
$ 21,116
$ 175,070
$ 109,563
(1,268)
108,295
(165)
$ 108,130
$ 159,431
$ 23,246
(1,565)
21,681
(157)
$ 21,524
$ 157,785
$ 44,877
(1,515)
43,362
(77)
$ 43,285
$ 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
$
$
0.19
0.19
$
$
0.95
0.95
$
$
0.19
0.19
$
$
0.38
0.38
$
$
0.17
0.17
$
$
0.19
0.19
$
$
0.18
0.18
$
$
0.16
0.16
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Schedule III— Real Estate and Accumulated Depreciation
December 31, 2019
(Dollars in thousands)
Property (Type) (1)
Location
100 Light Street (O)
100 Secured Gateway (O)
1000 Redstone Gateway (O)
1100 Redstone Gateway (O)
Baltimore, MD
Huntsville, AL
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
F
-
6
2
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)
Hanover, MD
13450 Sunrise Valley Road (O)
Herndon, VA
13454 Sunrise Valley Road (O)
135 National Business Parkway (O) Annapolis Junction, MD
1362 Mellon Road (O)
Hanover, MD
Herndon, VA
Herndon, VA
13857 McLearen Road (O)
140 National Business Parkway (O) Annapolis Junction, MD
141 National Business Parkway (O) Annapolis Junction, MD
Chantilly, VA
14280 Park Meadow Drive (O)
Hanover, MD
1460 Dorsey Road (L)
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)
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)
Linthicum, MD
Linthicum, MD
Linthicum, MD
Baltimore, 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)
Accumulated
Depreciation
(4)
Year Built or
Renovated
Date
Acquired
(5)
Land
$
47,529 $ 26,715 $
59,177 $
12,989 $ 26,715 $
72,166 $
98,881 $
(16,790)
1973/2011
—
10,035
10,598
—
12,242
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
364
—
—
2,130
—
630
1,906
2,917
2,517
3,684
905
1,386
2,847
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
25,763
20,533
19,593
3,109
22,389
49,785
17,007
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
75
8,175
8,358
14,402
51,990
20,365
13,615
16,930
113
246
—
5
6
223
—
8,879
669
8,093
—
4,120
4,669
5,607
4,952
1,821
4,591
8,670
6,196
271
4,142
1,734
4,828
4,809
—
5,060
—
—
—
364
—
—
2,130
—
630
1,906
2,917
2,517
3,684
905
1,386
2,847
2,484
950
3,507
3,407
2,398
3,731
1,577
1,572
3,781
7,880
18,470
16,525
4,190
1,615
3,436
27,964
4,415
5,753
— 14,071
1,441
—
259
—
25,763
20,538
19,599
3,332
22,389
58,664
17,676
50,557
—
11,743
16,928
15,675
12,469
5,441
10,167
20,656
15,946
4,135
34,319
25,901
14,366
20,762
75
13,235
12,139
22,282
70,460
36,890
17,805
16,930
113
246
25,763
20,538
19,599
3,696
22,389
58,664
19,806
50,557
630
13,649
19,845
18,192
16,153
6,346
11,553
23,503
18,430
5,085
37,826
29,308
16,764
24,493
1,652
14,807
13,754
25,718
98,424
41,305
23,558
31,001
1,554
505
—
(3,492)
(2,926)
(1,491)
(3,384)
(16,924)
(7)
2013
2014
2002
2013
2001
(5,073)
1985/2017
(15,746)
—
(7,074)
(9,958)
(10,005)
(6,727)
(3,100)
(5,741)
(11,121)
(9,584)
(578)
(11,745)
(10,247)
(8,605)
(8,630)
—
(6,626)
(6,788)
(12,059)
(25,079)
(15,930)
(9,374)
(5,942)
(16)
(17)
2003
(6)
1990
2000
1997
1999
1989
1998
1998
1998
2006
2007
2003
1990
1999
(6)
2000
2000
1999
2006
1997
2000
2009
2014
2016
8/7/2015
3/23/2010
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
Property (Type) (1)
Location
1616 West Nursery Road (O)
1622 West Nursery Road (O)
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)
Linthicum, MD
Linthicum, MD
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
F
-
6
3
22289 Exploration Drive (O)
Lexington Park, MD
22299 Exploration Drive (O)
Lexington Park, MD
22300 Exploration Drive (O)
Lexington Park, MD
22309 Exploration Drive (O)
Lexington Park, MD
23535 Cottonwood Parkway (O)
California, MD
250 W Pratt St (O)
Baltimore, MD
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)
310 The Bridge Street (O)
312 Sentinel Way (O)
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
Huntsville, AL
Annapolis Junction, 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)
Accumulated
Depreciation
(4)
Year Built or
Renovated
Land
—
—
—
—
—
—
—
—
—
—
—
—
—
393
393
613
1,856
522
688
773
436
10,486
8,275
—
134
113
47,068
19,024
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,998
—
—
—
—
—
—
—
—
—
1,422
1,362
1,094
2,243
692
8,057
2,791
20,293
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
3,323
2,542
2,582
7,425
2,090
2,860
3,094
1,742
42,339
34,353
—
1,711
1,402
60,822
6,951
5,719
5,791
5,038
10,419
3,051
34,588
12,146
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
41,160
26,531
27,797
—
—
960
1,894
1,033
2,188
2,367
802
393
393
613
1,856
522
688
773
436
33,115
22,407
10,486
8,275
—
276
204
—
134
113
3,323
2,542
3,542
9,319
3,123
5,048
5,461
2,544
75,454
56,760
—
1,987
1,606
3,716
2,935
4,155
11,175
3,645
5,736
6,234
2,980
85,940
65,035
—
2,121
1,719
— 19,024
60,822
79,846
2,881
1,924
2,911
2,729
7,986
648
14,833
1
1,859
5,565
5,530
2,847
2,167
3,205
8,709
867
1,756
901
1,966
2,487
2,354
—
4,916
—
—
1,422
1,362
1,094
2,243
692
8,057
2,791
20,293
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
9,832
7,643
8,702
7,767
18,405
3,699
49,421
12,147
36,302
22,899
20,796
24,458
31,439
17,802
40,321
12,968
60,921
30,588
26,883
25,079
28,562
41,160
31,447
27,797
9,832
9,065
10,064
8,861
20,648
4,391
57,478
14,938
56,595
24,997
22,533
26,709
35,302
22,413
49,058
12,968
62,438
33,236
30,294
28,339
29,984
43,532
31,708
30,935
(183)
(180)
(1,735)
(3,928)
(1,255)
(2,692)
(2,408)
(1,131)
2017
2016
2002
2000
2002
1990
1996
2002
(35,552)
1989/1995
(22,899)
1976/2004
—
(487)
(400)
—
(1,304)
(3,869)
(4,357)
(3,115)
2012
2010
2010
(7)
2016
2000
1998
1997
(7,511)
1984/1997
(1,861)
(12,629)
(12,146)
(5,932)
(11,271)
(11,505)
(12,920)
(12,354)
(9,741)
(21,502)
(1,503)
(14,803)
(9,224)
(9,807)
(8,174)
(6,123)
(3,968)
(9,962)
(3,694)
1984
1985
2000
1999
2005
2001
2002
2004
2000
1990
2009
2009
2007
2005
2006
2010
2016
2009
2014
Date
Acquired
(5)
4/30/1998
4/30/1998
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
Property (Type) (1)
Location
314 Sentinel Way (O)
316 Sentinel Way (O)
318 Sentinel Way (O)
320 Sentinel Way (O)
322 Sentinel Way (O)
324 Sentinel Way (O)
Annapolis Junction, MD
Annapolis Junction, MD
Annapolis Junction, MD
Annapolis Junction, MD
Annapolis Junction, MD
Annapolis Junction, MD
4000 Market Street (O)
Huntsville, AL
410 National Business Parkway (O) Annapolis Junction, MD
4100 Market Street (O)
Huntsville, AL
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)
4600 River Road (O)
46579 Expedition Drive (O)
46591 Expedition Drive (O)
F
-
6
4
California, MD
California, MD
California, MD
California, MD
California, MD
California, MD
College Park, 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)
5801 University Research Court (O) College Park, MD
5825 University Research Court (O) College Park, MD
5850 University Research Court (O) College Park, MD
Catonsville, MD
Catonsville, MD
6000 Redstone Gateway (O)
6700 Alexander Bell Drive (O)
6708 Alexander Bell Drive (O)
6711 Columbia Gateway Drive (O)
6716 Alexander Bell Drive (O)
6721 Columbia Gateway Drive (O)
6724 Alexander Bell Drive (O)
6731 Columbia Gateway Drive (O)
6740 Alexander Bell Drive (O)
6741 Columbia Gateway Drive (O)
6750 Alexander Bell Drive (O)
Huntsville, AL
Columbia, MD
Columbia, MD
Columbia, MD
Columbia, MD
Columbia, MD
Columbia, MD
Columbia, MD
Columbia, MD
Columbia, MD
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)
Accumulated
Depreciation
(4)
Year Built or
Renovated
Land
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
11,200
20,450
21,636
—
—
—
—
—
—
—
—
—
—
—
1,254
2,748
2,185
2,067
2,605
1,656
—
1,831
—
2,370
1,852
817
405
434
344
1,309
2,272
30
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
7,741
38,156
28,426
21,623
22,827
23,018
9,187
23,257
7,998
27,751
21,563
1,583
1,619
3,822
890
3,506
13,808
8,345
5,796
7,199
11,558
31,249
20,072
4,550
17,429
22,771
31,906
508
7,019
12,644
23,239
4,969
34,090
5,039
19,098
5,696
1,711
12,461
—
157
560
65
1,900
—
—
1,254
2,748
2,185
2,067
2,605
1,656
—
1,705
1,831
—
132
396
1,706
1,071
180
291
2,217
533
—
2,145
2,112
38
—
1,530
836
—
1,329
405
—
8,186
1,618
1,557
4,544
131
2,165
5,340
3,441
169
4,976
—
2,370
1,852
817
405
434
344
1,309
2,272
30
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
7,741
38,313
28,986
21,688
24,727
23,018
9,187
24,962
7,998
27,883
21,959
3,289
2,690
4,002
1,181
5,723
8,995
41,061
31,171
23,755
27,332
24,674
9,187
26,793
7,998
30,253
23,811
4,106
3,095
4,436
1,525
7,032
14,341
16,613
8,345
7,941
9,311
11,596
31,249
21,602
5,386
17,429
24,100
32,311
508
15,205
14,262
24,796
9,513
34,221
7,204
24,438
9,137
1,880
17,437
8,375
9,347
10,511
13,474
33,284
21,602
5,386
17,429
24,100
32,311
508
16,960
15,159
27,479
10,755
35,974
7,653
27,245
10,561
2,555
18,700
(1,014)
(7,446)
(9,949)
(6,482)
(7,808)
(5,380)
(162)
(4,101)
(102)
(4,046)
(4,265)
(1,374)
(1,328)
2008
2011
2005
2007
2006
2010
2018
2012
2019
2013
2011
1986
1986
(1,815)
1989/2015
(486)
(3,068)
(2,848)
—
(3,931)
(3,443)
(4,407)
(1,723)
(5,549)
(1,456)
(706)
(6,399)
(8,025)
—
(8,193)
(4,393)
(8,399)
(5,829)
(9,234)
(3,200)
(12,123)
(6,055)
(580)
(10,076)
1989
1997
2011
(7)
2002
2005
2004
2017
2009
2007
2018
2008
2008
(7)
1988
1988/2016
2006-2007
1990
2009
2001
2002
1992
2008
2001
Date
Acquired
(5)
11/14/2003
11/14/2003
11/14/2003
11/14/2003
11/14/2003
6/29/2006
3/23/2010
6/29/2006
3/23/2010
6/29/2006
6/29/2006
3/24/2004
3/24/2004
3/24/2004
11/9/2004
5/5/2004
8/30/2010
1/29/2008
3/24/2004
3/24/2004
8/14/2002
6/29/2006
4/4/2006
3/8/2006
1/29/2008
1/29/2008
1/29/2008
3/23/2010
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
F
-
6
5
Property (Type) (1)
Location
6760 Alexander Bell Drive (O)
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
7015 Albert Einstein Drive (O)
Columbia, MD
7061 Columbia Gateway Drive (O)
Columbia, MD
7063 Columbia Gateway Drive (O)
Columbia, MD
7065 Columbia Gateway Drive (O)
Columbia, MD
7067 Columbia Gateway Drive (O)
Columbia, MD
7125 Columbia Gateway Drive (O)
Columbia, MD
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 Drive (O)
7205 Riverwood Drive (O)
7272 Park Circle Drive (O)
7318 Parkway Drive (O)
7400 Redstone Gateway (O)
7467 Ridge Road (O)
7500 Advanced Gateway (O)
7600 Advanced Gateway (O)
7740 Milestone Parkway (O)
7770 Backlick Road (O)
7880 Milestone Parkway (O)
8000 Rideout Road (O)
8600 Advanced Gateway (O)
8621 Robert Fulton Drive (O)
8661 Robert Fulton Drive (O)
8671 Robert Fulton Drive (O)
870 Elkridge Landing Road (O)
Columbia, MD
Columbia, MD
Columbia, MD
Columbia, MD
Huntsville, AL
Columbia, MD
Columbia, MD
Hanover, MD
Hanover, MD
Huntsville, AL
Hanover, MD
Huntsville, AL
Huntsville, AL
Hanover, MD
Springfield, VA
Hanover, MD
Huntsville, AL
Huntsville, AL
Columbia, MD
Columbia, MD
Columbia, 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)
Accumulated
Depreciation
(4)
Year Built or
Renovated
Land
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5,932
—
—
—
—
6,506
—
—
—
17,352
—
—
—
—
—
—
—
—
890
3,545
3,596
3,131
3,036
2,058
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
3,561
9,916
26,846
12,103
747
6,093
3,094
3,684
3,763
11,823
46,994
4,359
4,700
3,518
7,148
3,429
4,388
7,006
3,096
7,269
8,348
22,630
21,419
6,300
3,888
9,223
3,116
7,195
2,543
34,176
76,663
25,913
2,564
4,931
12,642
3,764
4,280
9,442
3,901
7,974
3,220
7,443
—
3,319
2,379
3,416
3,095
5,116
890
3,545
3,596
3,131
3,036
2,058
729
902
919
1,829
21,053
20,487
2,859
436
2,843
2,608
813
1,854
3,124
2,243
—
88
4,538
—
4,578
1,319
82
4,954
—
—
1,009
283
247
—
—
6,428
2,956
4,306
9,333
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
7,462
17,890
30,066
19,546
747
9,412
5,473
7,100
6,858
16,939
68,047
7,218
5,136
6,361
9,756
4,242
6,242
10,130
5,339
7,269
8,436
27,168
21,419
10,878
5,207
9,305
8,070
7,195
2,543
35,185
76,946
26,160
2,564
4,931
19,070
6,720
8,586
18,775
8,352
21,435
33,662
22,677
3,783
11,470
6,202
8,002
7,777
18,768
88,534
8,568
5,840
7,465
11,098
5,274
8,063
12,862
6,622
9,057
8,436
31,257
22,786
12,357
6,179
9,305
9,635
7,195
2,543
39,010
83,333
31,017
2,564
4,931
21,387
8,230
10,304
20,778
Date
Acquired
(5)
12/31/1998
11/13/1998
(4,585)
(9,882)
1991
1999
(11,307) 1998/2019 (7)
10/22/1998
(8,231)
—
(4,165)
(3,215)
(4,004)
(4,428)
(8,069)
1999
(6)
1999
2000
2000
2000
2001
(25,351)
1973/1999
(3,621)
1989
(1,666)
1990/2016
(3,864)
1990
(3,516)
1994/2018
(1,673)
(2,799)
(4,336)
(2,295)
1991
2000
2000
2000
(1,116)
1996/2013
(1,175)
(11,823)
(3,452)
(4,955)
(2,740)
(1,044)
(3,456)
—
—
(8,311)
(12,966)
(2,695)
—
—
(5,755)
(3,240)
(4,366)
(10,533)
2013
1986
2013
1991/1996
1984
2015
1990
(7)
(7)
2009
2012
2015
(7)
(7)
2005-2006
2002
2002
1981
5/31/2002
6/26/2014
12/1/2005
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
3/23/2010
3/23/2010
7/2/2007
3/10/2010
9/17/2013
3/23/2010
3/23/2010
6/10/2005
12/30/2003
12/30/2003
8/3/2001
Property (Type) (1)
Location
8800 Redstone Gateway (O)
Huntsville, AL
891 Elkridge Landing Road (O)
Linthicum, MD
901 Elkridge Landing Road (O)
Linthicum, MD
911 Elkridge Landing Road (O)
Linthicum, MD
938 Elkridge Landing Road (O)
Linthicum, MD
939 Elkridge Landing Road (O)
Linthicum, MD
9651 Hornbaker Road (D)
Arundel Preserve (L)
BLC 1 (O)
BLC 2 (O)
Canton Crossing Land (L)
Manassas, VA
Hanover, MD
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
F
-
6
6
Expedition VII (L)
IN 1 (O)
IN 2 (O)
Lexington Park, MD
Northern Virginia
Northern Virginia
M Square Research Park (L)
College Park, MD
MP 1 (O)
MP 2 (O)
MR Land (L)
National Business Park North (L)
North Gate Business Park (L)
Northwest Crossroads (L)
NOVA Office A (O) (8)
NOVA Office B (O) (8)
NOVA Office C (O) (8)
Northern Virginia
Northern Virginia
Northern Virginia
Annapolis Junction, MD
Aberdeen, MD
San Antonio, TX
Chantilly, VA
Chantilly, VA
Chantilly, VA
NOVA Office D (O) (8)
Oak Grove A (O)
Oak Grove B (O)
Oak Grove Phase II (L)
Old Annapolis Road (O)
P2 A (O)
P2 B (O)
P2 C (O)
Paragon Park (L)
Patriot Ridge (L)
Project EX (O) (9)
Chantilly, VA
Northern Virginia
Northern Virginia
Northern Virginia
Columbia, MD
Northern Virginia
Northern Virginia
Northern Virginia
Northern Virginia
Springfield, VA
Confidential-USA
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)
Accumulated
Depreciation
(4)
Year Built or
Renovated
Land
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,165
1,156
1,215
922
939
6,050
13,352
12,026
12,026
17,285
6,100
6,387
978
705
1,815
2,627
—
9,426
9,426
9,038
28,843
1,755
7,430
2,096
739
5,604
6,587
12,866
12,866
23,483
1,637
19,514
25,621
17,137
—
18,517
8,959
17,730
4,772
4,437
4,861
4,748
3,756
250,355
9,683
18,175
17,929
8,322
10,450
3,722
178
730
15,955
28,527
1,632
29,508
28,843
407
46,879
5
847
46,849
38,376
9,191
40,518
16,554
26,518
8,942
5,500
27,096
6,494
1,591
78
14,530
16,525
—
3,483
3,864
2,970
1,516
4,438
5,582
—
1,165
1,156
1,215
922
939
6,050
— 13,352
— 12,026
— 12,026
— 17,285
1,727
—
—
—
—
—
—
—
—
—
6,100
6,387
978
705
1,815
2,627
—
9,426
9,426
9,038
— 28,843
1,755
—
7,430
—
2,096
—
739
—
5,604
—
6,587
—
— 12,866
— 12,866
— 23,483
1,637
— 19,514
— 25,621
— 17,137
6,710
—
—
— 18,517
8,959
—
17,730
17,730
8,255
8,301
7,831
6,264
8,194
9,420
9,457
9,046
7,186
9,133
(58)
(4,921)
(4,321)
(4,481)
(3,022)
(5,028)
255,937
261,987
(61,123)
9,683
18,175
17,929
8,322
12,177
3,722
178
730
15,955
28,527
1,632
29,508
28,843
407
46,879
5
847
46,849
38,376
9,191
40,518
16,554
26,518
8,942
12,210
27,096
6,494
1,591
78
14,530
16,525
23,035
30,201
29,955
25,607
18,277
10,109
1,156
1,435
17,770
31,154
1,632
38,934
38,269
9,445
75,722
1,760
8,277
48,945
39,115
14,795
47,105
29,420
39,384
32,425
13,847
46,610
32,115
18,728
78
33,047
25,484
—
(696)
(655)
—
(5,651)
—
—
—
(336)
(364)
—
(490)
(685)
—
—
—
—
(5,751)
(2,754)
—
(2,433)
—
—
—
(4,380)
—
—
—
—
—
(279)
2019
1984
1984
1985
1984
1983
2010
(6)
2018
2018
(6)
2006
(6)
(6)
(6)
2019
2019
(6)
2019
2018
(6)
(6)
(6)
(6)
2015
2016
(7)
2017
(7)
2019
(6)
1974/1985
(7)
(7)
(7)
(6)
(6)
2018
Date
Acquired
(5)
3/23/2010
7/2/2001
7/2/2001
4/30/1998
7/2/2001
4/30/1998
9/14/2010
7/2/2007
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
7/18/2002
7/18/2002
7/18/2002
7/2/2013
11/1/2018
11/1/2018
11/1/2018
12/14/2000
5/2/2019
5/2/2019
5/2/2019
5/8/2017
3/10/2010
7/16/2008
Initial Cost
Gross Amounts Carried
At Close of Period
Building
and Land
Improvements
Costs
Capitalized
Subsequent
to
Acquisition
Property (Type) (1)
Location
Encumbrances
(2)
Redstone Gateway (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)
SP Manassas (L)
Westfields - Park Center (L)
Huntsville, AL
San Antonio, TX
San Antonio, TX
San Antonio, TX
San Antonio, TX
San Antonio, TX
San Antonio, TX
San Antonio, TX
Manassas, VA
Chantilly, VA
Westfields Corporate Center (L)
Chantilly, VA
Other Developments, including
intercompany eliminations (V)
Various
—
—
—
—
—
—
—
—
—
—
—
—
Land
—
4,052
14,020
—
—
1,964
1,964
1,964
8,156
10,815
7,141
21,472
1,833
38,804
1,066
1,884
21,178
21,298
30,573
94
6,019
1,576
Land
—
4,052
14,020
—
—
1,964
1,964
1,964
8,156
—
—
13
—
71
—
—
—
—
— 10,815
—
7,141
Building
and Land
Improvements
Total
(3)
Accumulated
Depreciation
(4)
Year Built or
Renovated
Date
Acquired
(5)
21,472
1,833
38,817
1,066
1,955
21,178
21,298
30,573
94
6,019
1,576
21,472
5,885
52,837
1,066
1,955
23,142
23,262
32,537
8,250
16,834
8,717
—
—
(6)
(6)
(12,502)
1982/2008
(295)
(496)
(4,846)
(4,875)
(3,673)
—
—
—
2007
2009
2010
2010
2015
(6)
(6)
(6)
3/23/2010
3/30/2005
3/30/2005
3/30/2005
3/30/2005
1/20/2006
1/20/2006
6/14/2005
2/6/2015
7/2/2013
1/27/2005
—
530
258
—
788
788
(79)
Various
Various
F
-
6
7
(1) A legend for the Property Type follows: (O) = Office or Data Center Shell Property; (L) = Land held or pre-development; (D) = Wholesale Data Center; and (V) = Various.
(2) Excludes our Revolving Credit Facility of $177.0 million, term loan facilities of $248.7 million, unsecured senior notes of $1.2 billion, unsecured notes payable of $1.0 million, and deferred financing costs, net of
premiums, on the remaining loans of $3.1 million.
(3) The aggregate cost of these assets for Federal income tax purposes was approximately $3.4 billion as of December 31, 2019.
(4) The estimated lives over which depreciation is recognized follow: Building and land improvements: 10-40 years; and tenant improvements: related lease terms.
(5) The acquisition date of multi-parcel properties reflects the date of the earliest parcel acquisition. The acquisition date of properties owned through real estate joint ventures reflects the date of the formation of the joint
$
214,546 $ 735,948 $
3,124,706 $
487,352 $ 735,948 $
3,612,058 $ 4,348,006 $
(1,007,120)
venture.
(6) Held as of December 31, 2019.
(7) Under development or redevelopment as of December 31, 2019.
(8) The carrying amounts of these properties exclude allocated costs of the garage being constructed to support the properties.
(9) 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, 2019, 2018 and 2017 (in thousands):
Beginning balance
Improvements and other additions
Sales (1)
Impairments
Other dispositions
Reclassification to right-of use asset
Ending balance
2019
2018
2017
$ 4,148,529
$ 3,980,813
$ 3,874,715
480,418
(242,497)
(329)
(340)
(37,775)
224,524
(53,547)
(2,493)
(768)
—
259,548
(138,216)
(15,116)
(118)
—
$ 4,348,006
$ 4,148,529
$ 3,980,813
The following table summarizes our changes in accumulated depreciation for the same time periods (in thousands):
Beginning balance
Depreciation expense
Sales (1)
Impairments
Other dispositions
Ending balance
2019
2018
2017
$
897,903
$
801,038
$
715,951
117,973
(8,416)
—
(340)
112,610
(14,845)
(132)
(768)
107,772
(22,567)
—
(118)
$ 1,007,120
$
897,903
$
801,038
(1) Includes our sale, through a series of transactions, of ownership interests in data center shells through a newly-formed unconsolidated real estate joint venture in 2019, as described in Note 4 to our consolidated
financial statements.
F
-
6
8
2019
Annual
Report
CORPORATE
OFFICE
PROPERTIES
TRUST
CORPORATE
INFORMATION
ANNUAL
MEETING
The 2020 Annual Meeting
of Shareholders will be held
at 9:30 a.m. Eastern Time on
May 21, 2020, 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
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
copt.com // NYSE: OFC
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