COPT Reports Fourth Quarter and Full Year 2019 Results
Corporate Office Properties Trust (“COPT” or the “Company”) (NYSE: OFC) announced financial and operating results for the fourth quarter and full year ended December 31, 2019.
Management Comments
Stephen E. Budorick, COPT’s President & Chief Executive Officer, commented, “Fourth quarter and full year FFO per share met the mid-points of our updated guidance ranges, and strong demand throughout our Defense/IT Locations translated into record leasing for new developments, strong vacancy leasing, and near-record leasing with the U.S. Government. Our 2.2 million square feet of development leasing exceeded our prior annual record set in 2012 by 1 million square feet, and we executed 586,000 square feet of development and vacancy leasing with the U.S. Government, our second-best year ever.” He continued, “We believe that this strong leasing achievement, combined with the $357 million of equity raised and the 1.2 million square feet of 100% leased developments placed into service during 2019, position our Company to deliver 1.5%-3.5% FFO per share growth in 2020, and robust FFO growth in 2021.”
Financial Highlights
4th Quarter Financial Results:
Diluted earnings per share (“EPS”) was $0.38 for the quarter ended December 31, 2019 as compared to $0.16 for the fourth quarter of 2018. Diluted funds from operations per share (“FFOPS”), as calculated in accordance with Nareit’s definition, of $0.49 for the fourth quarter of 2019 equaled fourth quarter 2018 results. FFOPS, as adjusted for comparability, was $0.50 for the fourth quarter of 2019, equal to fourth quarter 2018 results.Full Year 2019 Financial Results:
EPS for the year ended December 31, 2019 was $1.71, which included $105.2 million of gains on the sale of a 90% interest in nine data center shell properties during the year as compared to 2018 EPS of $0.69. Per Nareit’s definition, FFOPS for 2019 was $2.02 as compared to $1.99 for 2018. FFOPS, as adjusted for comparability, for 2019 was $2.03 as compared to $2.01 for 2018.Adjustments for comparability encompass items such as demolition costs of redevelopment, executive transition costs, and non-comparable professional and legal expenses.
Operating Performance Highlights
Operating Portfolio Summary:
At December 31, 2019, the Company’s core portfolio of 168 operating office and data center shell properties was 93.1% occupied and 94.6% leased. During the quarter and the year, the Company placed into service 375,000 and 1.2 million respective square feet that were 100% leased.Same-Property Performance:
At December 31, 2019, COPT’s same-property portfolio of 147 buildings was 91.9% occupied and 93.7% leased. For the quarter and year ended December 31, 2019, the Company’s same-property cash NOI increased 6.2% and 3.9%, respectively, over the prior year’s comparable periods.Leasing:
Total Square Feet Leased: For the quarter ended December 31, 2019, the Company leased 659,000 total square feet, including 339,000 square feet of renewals, 162,000 square feet of new leases on vacant space, and 158,000 square feet in development projects.For the year ended December 31, 2019, the Company leased 4.9 million total square feet, including 1.9 million square feet of renewals, 784,000 square feet of new leases on vacant space, and 2.2 million square feet in development projects. Renewal Rates: During the quarter and year ended December 31, 2019, the Company respectively renewed 84% and 77% of total expiring square feet. Cash Rent Spreads & Average Escalations on Renewing Leases: For the quarter and year ended December 31, 2019, cash rents on renewed space decreased 8.4% and 5.8%, respectively. For the same time periods, average annual escalations on renewing leases were 2.3% and 2.4%, respectively. Lease Terms: In the fourth quarter, lease terms averaged 6.1 years on renewing leases, 6.6 years on new leasing of vacant space, and 12.1 years on development leasing. For the year, lease terms averaged 4.1 years on renewing leases, 6.4 years on new leasing of vacant space, and 12.6 years on development leasing.
Investment Activity Highlights
Development & Redevelopment Projects:
Development Pipeline: At January 31, 2020, the Company’s development pipeline consisted of 13 properties totaling 2.3 million square feet that were 79% leased. These projects have a total estimated cost of $683.4 million, of which $326.6 million has been incurred. Redevelopment: At December 31, 2019, one project was under redevelopment totaling 106,000 square feet that was 80% leased. The Company has invested $23.3 million of the $25.6 million anticipated total cost.Balance Sheet and Capital Transaction Highlights
As of December 31, 2019, the Company’s net debt plus preferred equity to adjusted book ratio was 37.0% and its net debt plus preferred equity to in-place adjusted EBITDA ratio was 6.1x. For the quarter and year ended December 31, 2019, the Company’s adjusted EBITDA fixed charge coverage ratio was 3.7x. As of December 31, 2019, and including the effect of interest rate swaps, the Company’s weighted average effective interest rate was 4.07%; additionally, 87.8% of the Company’s debt was subject to fixed interest rates and the consolidated debt portfolio had a weighted average maturity of 3.5 years. During the quarter ended March 31, 2019, the Company issued the remaining 1.6 million common shares under its 2017 forward equity sale agreements for net proceeds of $46.5 million. During the year, the Company sold a 90% interest in nine single-tenant data center shell properties through the Blackstone Real Estate Income Trust, Inc. (“BREIT”)-COPT joint venture formed in June 2019. The Company received a total of $310.6 million of proceeds in 2019, plus an additional $20.1 million in net proceeds associated with the joint venture entering into non-recourse mortgage loans on the properties.Associated Supplemental Presentation
Prior to the call, the Company will post a slide presentation to accompany management’s prepared remarks for its fourth quarter and year end 2019 conference call, the details of which are provided below. The accompanying slide presentation can be viewed on and downloaded from the ‘Latest Updates’ section of COPT’s Investors website: https://investors.copt.com/.
Conference Call Information
Management will discuss fourth quarter and year end 2019 results on its conference call tomorrow at 12:00 p.m. Eastern Time, details of which are listed below:
Conference Call Date:
Friday, February 7, 2020
Time:
12:00 p.m. Eastern Time
Telephone Number: (within the U.S.)
855-463-9057
Telephone Number: (outside the U.S.)
661-378-9894
Passcode:
8794749
The conference call will also be available via live webcast in the ‘Latest Updates’ section of COPT’s Investors website: https://investors.copt.com/.
Replay Information
A replay of the conference call will be immediately available via webcast on the Investors website. Additionally, a telephonic replay of this call will be available beginning at 3:00 p.m. Eastern Time on Friday, February 7, through 3:00 p.m. Eastern Time on Friday, February 21. To access the replay within the United States, please call 855-859-2056; to access it from outside the United States, please call 404-537-3406. In either case, use passcode 8794749.
Definitions
For definitions of certain terms used in this press release, please refer to the information furnished in the Company’s Supplemental Information Package furnished on a Form 8-K which can be found on its website (www.copt.com). Reconciliations of non-GAAP measures to the most directly comparable GAAP measures are included in the attached tables.
About COPT
COPT is a REIT that owns, manages, leases, develops and selectively acquires office and data center properties. The majority of its portfolio is in locations that support the United States Government and its contractors, most of whom are engaged in national security, defense and information technology (“IT”) related activities servicing what it believes are growing, durable, priority missions (“Defense/IT Locations”). The Company also owns a portfolio of office properties located in select urban/urban-like submarkets in the Greater Washington, DC/Baltimore region with durable Class-A office fundamentals and characteristics (“Regional Office Properties”). As of December 31, 2019, the Company derived 88% of its core portfolio annualized rental revenue from Defense/IT Locations and 12% from its Regional Office Properties. As of the same date and including 15 buildings owned through unconsolidated joint ventures, COPT’s core portfolio of 168 office and data center shell properties encompassed 19.0 million square feet and was 94.6% leased; the Company also owned one wholesale data center with a critical load of 19.25 megawatts that was 76.9% leased.
Forward-Looking Information
This press release may contain “forward-looking” statements, as defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that are based on the Company’s current expectations, estimates and projections about future events and financial trends affecting the Company. Forward-looking statements can be identified by the use of words such as “may,” “will,” “should,” “could,” “believe,” “anticipate,” “expect,” “estimate,” “plan” or other comparable terminology. Forward-looking statements are inherently subject to risks and uncertainties, many of which the Company cannot predict with accuracy and some of which the Company might not even anticipate. Although the Company believes that the expectations, estimates and projections reflected in such forward-looking statements are based on reasonable assumptions at the time made, the Company can give no assurance that these expectations, estimates and projections will be achieved. Future events and actual results may differ materially from those discussed in the forward-looking statements and the Company undertakes no obligation to update or supplement any forward-looking statements.
The areas of risk that may affect these expectations, estimates and projections include, but are not limited to, those risks described in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 and Quarterly Report on Form 10-Q for the quarter ended June 30, 2019.
Corporate Office Properties Trust
Summary Financial Data
(unaudited)
(in thousands, except per share data)
For the Three Months
Ended December 31,
For the Years Ended
December 31,
2019
2018
2019
2018
Revenues
Revenues from real estate operations
$
131,968
$
130,825
$
527,463
$
517,253
Construction contract and other service revenues
25,817
7,657
113,763
60,859
Total revenues
157,785
138,482
641,226
578,112
Operating expenses
Property operating expenses
51,098
51,298
198,143
201,035
Depreciation and amortization associated with real estate operations
32,779
36,219
137,069
137,116
Construction contract and other service expenses
24,832
7,111
109,962
58,326
Impairment losses
2
2,367
329
2,367
General and administrative expenses
7,043
5,105
27,517
22,829
Leasing expenses
2,293
1,976
7,885
6,071
Business development expenses and land carry costs
1,292
1,425
4,239
5,840
Total operating expenses
119,339
105,501
485,144
433,584
Interest expense
(16,777
)
(18,475
)
(71,052
)
(75,385
)
Interest and other income
1,917
74
7,894
4,358
Gain on sales of real estate
20,761
2,367
105,230
2,340
Loss on early extinguishment of debt
—
(258
)
—
(258
)
Income before equity in income of unconsolidated entities and income taxes
44,347
16,689
198,154
75,583
Equity in income of unconsolidated entities
426
1,577
1,633
2,697
Income tax benefit
104
190
217
363
Net income
44,877
18,456
200,004
78,643
Net income attributable to noncontrolling interests:
Common units in the Operating Partnership (“OP”)
(500
)
(210
)
(2,363
)
(1,742
)
Preferred units in the OP
(77
)
(165
)
(564
)
(660
)
Other consolidated entities
(1,515
)
(1,061
)
(5,385
)
(3,940
)
Net income attributable to COPT common shareholders
$
42,785
$
17,020
$
191,692
$
72,301
Earnings per share (“EPS”) computation:
Numerator for diluted EPS:
Net income attributable to COPT common shareholders
$
42,785
$
17,020
$
191,692
$
72,301
Redeemable noncontrolling interests
33
—
132
—
Amount allocable to share-based compensation awards
(154
)
(114
)
(623
)
(462
)
Numerator for diluted EPS
$
42,664
$
16,906
$
191,201
$
71,839
Denominator:
Weighted average common shares - basic
111,670
108,528
111,196
103,946
Dilutive effect of share-based compensation awards
293
45
308
134
Dilutive effect of redeemable noncontrolling interests
108
—
119
—
Dilutive effect of forward equity sale agreements
—
—
—
45
Weighted average common shares - diluted
112,071
108,573
111,623
104,125
Diluted EPS
$
0.38
$
0.16
$
1.71
$
0.69
Corporate Office Properties Trust
Summary Financial Data
(unaudited)
(in thousands, except per share data)
For the Three Months
Ended December 31,
For the Years Ended
December 31,
2019
2018
2019
2018
Net income
$
44,877
$
18,456
$
200,004
$
78,643
Real estate-related depreciation and amortization
32,779
36,219
137,069
137,116
Impairment losses on real estate
2
2,367
329
2,367
Gain on sales of real estate
(20,761
)
(2,367
)
(105,230
)
(2,340
)
Depreciation and amortization on unconsolidated real estate JVs
781
565
2,703
2,256
Funds from operations (“FFO”)
57,678
55,240
234,875
218,042
Noncontrolling interests - preferred units in the OP
(77
)
(165
)
(564
)
(660
)
FFO allocable to other noncontrolling interests
(1,436
)
(1,011
)
(5,024
)
(3,768
)
Basic and diluted FFO allocable to share-based compensation awards
(243
)
(200
)
(905
)
(851
)
Basic FFO available to common share and common unit holders (“Basic FFO”)
55,922
53,864
228,382
212,763
Distributions on dilutive preferred units in the OP
77
—
—
—
Redeemable noncontrolling interests
33
331
132
1,540
Diluted FFO available to common share and common unit holders (“Diluted FFO”)
56,032
54,195
228,514
214,303
Loss on early extinguishment of debt
—
258
—
258
Demolition costs on redevelopment and nonrecurring improvements
104
163
148
462
Executive transition costs
—
371
4
793
Non-comparable professional and legal expenses
195
—
681
—
Diluted FFO comparability adjustments allocable to share-based compensation awards
(1
)
(13
)
(3
)
(16
)
Diluted FFO available to common share and common unit holders, as adjusted for comparability
56,330
54,974
229,344
215,800
Straight line rent adjustments and lease incentive amortization
1,386
(46
)
255
(1,487
)
Amortization of intangibles included in net operating income
(174
)
153
(221
)
893
Share-based compensation, net of amounts capitalized
1,735
1,601
6,728
6,193
Amortization of deferred financing costs
541
550
2,136
1,954
Amortization of net debt discounts, net of amounts capitalized
382
365
1,503
1,439
Accum. other comprehensive loss on derivatives amortized to expense
—
34
79
135
Replacement capital expenditures
(19,862
)
(14,848
)
(63,789
)
(64,784
)
Other diluted AFFO adjustments associated with real estate JVs
(68
)
(28
)
212
121
Diluted adjusted funds from operations available to common share and common unit holders (“Diluted AFFO”)
$
40,270
$
42,755
$
176,247
$
160,264
Diluted FFO per share
$
0.49
$
0.49
$
2.02
$
1.99
Diluted FFO per share, as adjusted for comparability
$
0.50
$
0.50
$
2.03
$
2.01
Dividends/distributions per common share/unit
$
0.275
$
0.275
$
1.100
$
1.100
Corporate Office Properties Trust
Summary Financial Data
(unaudited)
(Dollars and shares in thousands, except per share data)
December 31,
2019
December 31,
2018
Balance Sheet Data
Properties, net of accumulated depreciation
$3,340,886
$3,250,626
Total assets
3,854,453
3,656,005
Debt, per balance sheet
1,831,139
1,823,909
Total liabilities
2,105,777
2,002,697
Redeemable noncontrolling interest
29,431
26,260
Equity
1,719,245
1,627,048
Net debt to adjusted book
36.8
%
38.9
%
Core Portfolio Data (as of period end) (1)
Number of operating properties
168
161
Total net rentable square feet owned (in thousands)
19,016
17,937
% Occupied
93.1
%
93.1
%
% Leased
94.6
%
94.0
%
For the Three Months Ended
December 31,
For the Years Ended
December 31,
2019
2018
2019
2018
Payout ratios
Diluted FFO
55.6
%
56.4
%
54.4
%
55.4
%
Diluted FFO, as adjusted for comparability
55.3
%
55.6
%
54.2
%
55.0
%
Diluted AFFO
77.3
%
71.5
%
70.5
%
74.1
%
Adjusted EBITDA fixed charge coverage ratio
3.7x
3.6x
3.7x
3.6x
Net debt to in-place adjusted EBITDA ratio (2)
6.1x
6.0x
N/A
N/A
Net debt plus preferred equity to in-place adjusted EBITDA ratio (3)
6.1x
6.0x
N/A
N/A
Reconciliation of denominators for per share measures
Denominator for diluted EPS
112,071
108,573
111,623
104,125
Weighted average common units
1,228
1,345
1,299
2,468
Redeemable noncontrolling interests
—
1,126
—
936
Dilutive convertible preferred units
176
—
—
—
Denominator for diluted FFO per share and as adjusted for comparability
113,475
111,044
112,922
107,529
(1)
Represents Defense/IT Locations and Regional Office properties.
(2)
Represents net debt as of period end divided by in-place adjusted EBITDA for the period, as annualized (i.e. three month periods are multiplied by four).
(3)
Represents net debt plus the total liquidation preference of preferred equity as of period end divided by in-place adjusted EBITDA for the period, as annualized (i.e. three month periods are multiplied by four).
Corporate Office Properties Trust
Summary Financial Data
(unaudited)
(Dollars in thousands)
For the Three Months
Ended December 31,
For the Years Ended
December 31,
2019
2018
2019
2018
Reconciliation of common share dividends to dividends and distributions for payout ratios
Common share dividends - unrestricted shares and deferred shares
$
30,724
$
30,206
$
122,823
$
116,285
Common unit distributions - unrestricted units
337
367
1,405
2,498
Distributions on dilutive preferred units
$
77
$
—
$
—
$
—
Dividends and distributions for payout ratios
$
31,138
$
30,573
$
124,228
$
118,783
Reconciliation of GAAP net income to earnings before interest, income taxes, depreciation and amortization for real estate (“EBITDAre”), adjusted EBITDA and in-place adjusted EBITDA
Net income
$
44,877
$
18,456
$
200,004
$
78,643
Interest expense
16,777
18,475
71,052
75,385
Income tax benefit
(104
)
(190
)
(217
)
(363
)
Depreciation of furniture, fixtures and equipment
438
404
1,834
1,947
Real estate-related depreciation and amortization
32,779
36,219
137,069
137,116
Impairment losses on real estate
2
2,367
329
2,367
Gain on sales of real estate
(20,761
)
(2,367
)
(105,230
)
(2,340
)
Adjustments from unconsolidated real estate JVs
1,206
832
4,065
3,314
EBITDAre
75,214
74,196
308,906
296,069
Loss on early extinguishment of debt
—
258
—
258
Net gain on other investments
(1
)
(449
)
(401
)
(449
)
Business development expenses
512
661
1,939
3,114
Non-comparable professional and legal expenses
195
—
681
—
Demolition costs on redevelopment and nonrecurring improvements
104
163
148
462
Executive transition costs
—
371
4
793
Adjusted EBITDA
76,024
75,200
$
311,277
$
300,247
Proforma net operating income adjustment for property changes within period
463
2,052
Change in collectability of deferred rental revenue
928
—
In-place adjusted EBITDA
$
77,415
$
77,252
Reconciliation of interest expense to the denominators for fixed charge coverage-Adjusted EBITDA
Interest expense
$
16,777
$
18,475
$
71,052
$
75,385
Less: Amortization of deferred financing costs
(541
)
(550
)
(2,136
)
(1,954
)
Less: Amortization of net debt discounts, net of amounts capitalized
(382
)
(365
)
(1,503
)
(1,439
)
Less: Accum. other comprehensive loss on derivatives amortized to expense
—
(34
)
(79
)
(135
)
COPT’s share of interest expense of unconsolidated real estate JVs, excluding deferred financing costs
416
260
1,332
1,034
Scheduled principal amortization
1,010
1,079
4,310
4,240
Capitalized interest
3,467
1,748
10,786
5,929
Preferred unit distributions
77
165
564
660
Denominator for fixed charge coverage-Adjusted EBITDA
$
20,824
$
20,778
$
84,326
$
83,720
Corporate Office Properties Trust
Summary Financial Data
(unaudited)
(Dollars in thousands)
For the Three Months
Ended December 31,
For the Years Ended
December 31,
2019
2018
2019
2018
Reconciliations of tenant improvements and incentives, building improvements and leasing costs for operating properties to replacement capital expenditures
Tenant improvements and incentives
$
11,447
$
7,876
$
38,047
$
37,502
Building improvements
8,826
9,306
26,598
22,977
Leasing costs
2,998
3,800
11,663
9,847
Net (exclusions from) additions to tenant improvements and incentives
(426
)
(2,131
)
(2,292
)
1,577
Excluded building improvements
(2,983
)
(3,984
)
(10,227
)
(7,073
)
Excluded leasing costs
—
(19
)
—
(46
)
Replacement capital expenditures
$
19,862
$
14,848
$
63,789
$
64,784
Same Properties cash NOI
$
73,708
$
69,377
$
285,944
$
275,094
Straight line rent adjustments and lease incentive amortization
(2,838
)
(907
)
(5,004
)
(3,111
)
Amortization of acquired above- and below-market rents
197
(97
)
312
(671
)
Amortization of below-market cost arrangements
(23
)
(56
)
(92
)
(222
)
Lease termination fees, gross
417
906
2,046
3,231
Tenant funded landlord assets and lease incentives
748
409
2,177
3,421
Cash NOI adjustments in unconsolidated real estate JV
34
57
181
254
Same Properties NOI
$
72,243
$
69,689
$
285,564
$
277,996
December 31,
2019
December 31,
2018
Reconciliation of total assets to adjusted book
Total assets
$
3,854,453
$
3,656,005
Accumulated depreciation
1,007,120
897,903
Accumulated amortization of real estate intangibles and deferred leasing costs
212,547
204,882
COPT’s share of liabilities of unconsolidated real estate JVs
50,734
29,917
COPT’s share of accumulated depreciation and amortization of unconsolidated real estate JVs
8,164
5,446
Less: Property - operating lease liabilities
(17,317
)
—
Less: Property - finance lease liabilities
(702
)
(660
)
Less: Cash and cash equivalents
(14,733
)
(8,066
)
Less: COPT’s share of cash of unconsolidated real estate JVs
(498
)
(293
)
Adjusted book
$
5,099,768
$
4,785,134
Reconciliation of debt outstanding to net debt and net debt plus preferred equity
Debt outstanding (excluding net debt discounts and deferred financing costs)
$
1,893,057
$
1,868,504
Less: Cash and cash equivalents
(14,733
)
(8,066
)
Less: COPT’s share of cash of unconsolidated real estate JVs
(498
)
(293
)
Net debt
$
1,877,826
$
1,860,145
Preferred equity
8,800
8,800
Net debt plus preferred equity
$
1,886,626
$
1,868,945
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