COPT Reports Third Quarter 2016 Results

October 27, 2016 5:01 PM

COLUMBIA, Md.--(BUSINESS WIRE)-- Corporate Office Properties Trust (“COPT” or the “Company”) (NYSE: OFC) announced financial and operating results for the third quarter ended September 30, 2016.

Management Comments

“As the third quarter demonstrated, we are executing well on all aspects of our 2016 plan, and key performance metrics were in-line with our guidance and expectations,” stated Stephen E. Budorick, COPT’s President & Chief Executive Officer. “Same office cash NOI grew 1.1% in the quarter and 4.1% for the first nine months of the year, and we have completed over $300 million of asset sales to date.” He added, “Demand throughout our portfolio is steady and provides solid momentum for 2017.”

Financial Highlights

3rd Quarter Financial Results:

Adjustments for comparability encompass items such as impairment losses and gains on non-operating properties, gains (losses) on early extinguishment of debt, derivative gains (losses), executive transition costs and write-offs of original issuance costs for redeemed preferred shares.

Operating Performance Highlights

Portfolio Summary:

Same Office Performance:

Leasing:

Investment Activity Highlights

Development & Redevelopment Projects:

Dispositions: During the quarter, the Company closed on $285 million of sales detailed as follows:

Subsequent to the quarter, the Company sold another 151,000 square foot operating property in Northern Virginia and a parcel of non-strategic land for an aggregate of $14.1 million, bringing total assets to-date to $304 million, or 69% of the full year goal.

Balance Sheet and Capital Transaction Highlights

2016 FFO Guidance Update

Management is narrowing its guidance range for full year FFOPS, as adjusted for comparability, of $2.00―$2.02. The Company also is maintaining its previously established guidance for the fourth quarter ending December 31, 2016, for FFOPS, as adjusted for comparability, of $0.50―$0.52. Reconciliations of projected diluted EPS to projected FFOPS are as follows:

Three Months Ending Year Ending
December 31, 2016 December 31, 2016
Low High Low High
EPS $ 0.24 $ 0.26 $ (0.02 ) $ -
Real estate depreciation and amortization 0.34 0.34 1.37 1.37
Impairment losses on operating properties - - 0.83 0.83
Gains on sales of operating properties (0.01 ) (0.01 ) (0.36 ) (0.36 )
FFOPS, NAREIT definition 0.57 0.59 1.82 1.84
Executive transition costs - - 0.06 0.06
Impairment losses on non-operating properties - - 0.18 0.18
Gains on sales of non-operating properties (0.08 ) (0.08 ) (0.08 ) (0.08 )
Loss on interest rate derivatives and other 0.01 0.01 0.02 0.02
FFOPS, as adjusted for comparability $ 0.50 $ 0.52 $ 2.00 $ 2.02

Associated Supplemental Presentation

Prior to the call, the Company will post a slide presentation to accompany management’s prepared remarks for its third quarter 2016 conference call, the details of which are provided below. You may access the slide presentation on the ‘Investors’ section of the website (www.copt.com). Please have the slides available to review during management’s comments.

Conference Call Information

Management will discuss third quarter 2016 earnings results on its conference call tomorrow at 12:00 p.m. Eastern Time, details of which are listed below:

Earnings Release Date: Thursday, October 27, 2016 after market closes
Conference Call Date: Friday, October 28, 2016
Time: 12:00 p.m. Eastern Time
Telephone Number: (within the U.S.) 888-713-4218
Telephone Number: (outside the U.S.) 617-213-4870
Passcode: 86051712#

Please use the following link to pre-register and view important information about this conference call. Pre-registering is not mandatory but is recommended as it will provide you immediate entry into the call and will facilitate the timely start of the conference. To pre-register, please click on the below link: https://www.theconferencingservice.com/prereg/key.process?key=PAX84XXNT.

You may also pre-register in the Investors section of the Company’s website at www.copt.com. Alternatively, you may be placed into the call by an operator by calling the number provided above at least 5 to 10 minutes before the start of the call.

Replay Information

A replay of this call will be available beginning at 3:00 p.m. Eastern Time on Friday, October 28, through midnight Eastern Time on Friday, November 11. To access the replay within the United States, please call 888-286-8010 and use passcode 93348081. To access the replay outside the United States, please call 617-801-6888 and use passcode 93348081.

The conference call will also be available via live webcast in the Investor Relations section of the Company’s website at www.copt.com. A replay of the conference calls will be immediately available via webcast in the Investor Relations section of the Company’s website.

Definitions

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

Company Information

COPT is an office REIT that owns, manages, develops and selectively acquires office and data center properties in locations that support United States Government agencies and their contractors, most of whom are engaged in national security, defense and information technology (“IT”) related activities servicing priority missions (“Defense/IT Locations”). We also own a complementary portfolio of traditional Class-A office properties located in select urban/urban-like submarkets within our regional footprint (“Regional Office Properties”). As of September 30, 2016, we derived 86% of core portfolio annualized revenue from Defense/IT Locations and 14% from our Regional Office Properties. As of September 30, 2016, our core portfolio of 146 office properties encompassed 15.9 million square feet and was 94.4% 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. Accordingly, 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.

Important factors that may affect these expectations, estimates, and projections include, but are not limited to:

The Company undertakes no obligation to update or supplement any forward-looking statements. For further information, please refer to the Company’s filings with the Securities and Exchange Commission, particularly the section entitled “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

Corporate Office Properties Trust
Summary Financial Data
(unaudited)
(in thousands, except per share data)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2016 2015 2016 2015
Revenues
Real estate revenues $ 130,954 $ 133,686 $ 397,965 $ 384,587
Construction contract and other service revenues 11,149 17,058 34,372 97,554
Total revenues 142,103 150,744 432,337 482,141
Expenses
Property operating expenses 49,952 48,897 149,968 145,996
Depreciation and amortization associated with real estate operations 32,015 38,403 99,790 103,788
Construction contract and other service expenses 10,341 16,132 32,513 94,923
Impairment losses 27,699 2,307 99,837 3,545
General and administrative expenses 7,242 5,783 23,884 17,917
Leasing expenses 1,613 1,656 4,880 4,947
Business development expenses and land carry costs 1,716 5,573 6,497 10,986
Total operating expenses 130,578 118,751 417,369 382,102
Operating income 11,525 31,993 14,968 100,039
Interest expense (18,301 ) (24,121 ) (64,499 ) (66,727 )
Interest and other income 1,391 692 3,877 3,217
(Loss) gain on early extinguishment of debt (59 ) 85,745 (37 ) 85,677
(Loss) income from continuing operations before equity in income of unconsolidated entities and income taxes (5,444 ) 94,309 (45,691 ) 122,206
Equity in income of unconsolidated entities 594 18 614 52
Income tax benefit (expense) 21 (48 ) 28 (153 )
(Loss) income from continuing operations (4,829 ) 94,279 (45,049 ) 122,105
Discontinued operations 156
(Loss) income before gain on sales of real estate (4,829 ) 94,279 (45,049 ) 122,261
Gain on sales of real estate 34,101 15 34,101 4,000
Net income (loss) 29,272 94,294 (10,948 ) 126,261
Net (income) loss attributable to noncontrolling interests
Common units in the Operating Partnership (“OP”) (901 ) (3,357 ) 948 (4,231 )
Preferred units in the OP (165 ) (165 ) (495 ) (495 )
Other consolidated entities (907 ) (972 ) (2,799 ) (2,599 )
Net income (loss) attributable to COPT 27,299 89,800 (13,294 ) 118,936
Preferred share dividends (3,552 ) (3,552 ) (10,657 ) (10,657 )
Net income (loss) attributable to COPT common shareholders $ 23,747 $ 86,248 $ (23,951 ) $ 108,279
Earnings per share (“EPS”) computation:
Numerator for diluted EPS:
Net income (loss) attributable to common shareholders $ 23,747 $ 86,248 $ (23,951 ) $ 108,279
Dividends on dilutive convertible preferred shares 372
Common units in the OP 4,231
Amount allocable to share-based compensation awards (105 ) (369 ) (319 ) (475 )
Numerator for diluted EPS $ 23,642 $ 86,251 $ (24,270 ) $ 112,035
Denominator:
Weighted average common shares - basic 94,433 94,153 94,312 93,830
Dilutive convertible preferred shares 434
Common units in the OP 3,697
Dilutive effect of share-based compensation awards 81 21 82
Weighted average common shares - diluted 94,514 94,608 94,312 97,609
Diluted EPS $ 0.25 $ 0.91 $ (0.26 ) $ 1.15
Corporate Office Properties Trust
Summary Financial Data
(unaudited)
(in thousands, except per share data)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2016 2015 2016 2015
Net income (loss) $ 29,272 $ 94,294 $ (10,948 ) $ 126,261
Real estate-related depreciation and amortization 32,015 38,403 99,790 103,788
Impairment losses on previously depreciated operating properties 25,857 2,307 81,828 3,779
Gain on sales of previously depreciated operating properties (34,101 ) (15 ) (34,101 ) (15 )
Depreciation and amortization on unconsolidated real estate entities 207 207
Funds from operations (“FFO”) 53,250 134,989 136,776 233,813
Noncontrolling interests - preferred units in the OP (165 ) (165 ) (495 ) (495 )
FFO allocable to other noncontrolling interests (894 ) (1,027 ) (2,935 ) (2,769 )
Preferred share dividends (3,552 ) (3,552 ) (10,657 ) (10,657 )
Basic and diluted FFO allocable to share-based compensation awards (190 ) (541 ) (486 ) (926 )
Basic FFO available to common share and common unit holders (“Basic FFO”) 48,449 129,704 122,203 218,966
Dividends on dilutive convertible preferred shares 372
Distributions on dilutive preferred units in the OP 165
Diluted FFO available to common share and common unit holders (“Diluted FFO”) 48,449 130,241 122,203 218,966
Operating property acquisition costs 2,695 4,102
Gain on sales of non-operating properties (3,985 )
Impairment losses on other properties 1,842 18,009
(Gain) loss on interest rate derivatives (1,523 ) 347
Loss (gain) on early extinguishment of debt 59 (85,745 ) 37 (86,057 )
Add: Negative FFO of properties conveyed to extinguish debt in default (1) 2,766 10,456
Demolition costs on redevelopment properties 930 578 1,171
Executive transition costs 1,639 6,023
Diluted FFO comparability adjustments allocable to share-based compensation awards (5 ) 334 (99 ) 313
Dividends and distributions on antidilutive preferred securities (2) (537 )
Diluted FFO available to common share and common unit holders, as adjusted for comparability 50,461 50,684 147,098 144,966
Straight line rent adjustments 691 (5,625 ) 206 (10,820 )
Straight line rent adjustments - properties in default conveyed (19 ) (115 )
Amortization of intangibles included in net operating income 349 474 1,025 1,063
Share-based compensation, net of amounts capitalized 1,258 1,739 4,375 4,949
Amortization of deferred financing costs 1,126 1,203 3,480 3,339
Amortization of net debt discounts, net of amounts capitalized 332 321 976 849
Replacement capital expenditures (16,120 ) (12,126 ) (39,386 ) (29,180 )
Diluted AFFO adjustments allocable to other noncontrolling interests 42 (81 ) 137 55
Diluted AFFO adjustments on unconsolidated real estate JV (141 ) (141 )
Diluted adjusted funds from operations available to common share and common unit holders (“Diluted AFFO”) $ 37,998 $ 36,570 $ 117,770 $ 115,106
Diluted FFO per share $ 0.49 $ 1.32 $ 1.25 $ 2.24
Diluted FFO per share, as adjusted for comparability $ 0.51 $ 0.52 $ 1.50 $ 1.49
Dividends/distributions per common share/unit $ 0.275 $ 0.275 $ 0.825 $ 0.825
(1) Interest expense exceeded net operating income from these properties by the amounts in the statement.
Corporate Office Properties Trust
Summary Financial Data
(unaudited)
(Dollars and shares in thousands, except per share data)
September 30, 2016 December 31, 2015
Balance Sheet Data
Properties, net of accumulated depreciation $ 3,028,338 $ 3,349,748
Total assets 3,634,194 3,909,312
Debt, per balance sheet 1,873,836 2,077,752
Total liabilities 2,110,559 2,273,530
Redeemable noncontrolling interest 22,848 19,218
Equity 1,500,787 1,616,564
Net debt to adjusted book 41.2 % 42.6 %
Core Portfolio Data (as of period end) (1)
Number of operating properties 146 157
Total net rentable square feet owned (in thousands) 15,938 17,038
Occupancy % 93.0 % 92.7 %
Leased % 94.4 % 93.9 %
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2016 2015 2016 2015
Payout ratios
Diluted FFO 55.8 % 21.2 % 66.4 % 37.0 %
Diluted FFO, as adjusted for comparability 53.6 % 53.3 % 55.2 % 55.9 %
Diluted AFFO 71.2 % 73.9 % 68.9 % 70.4 %
Adjusted EBITDA fixed charge coverage ratio 3.1 x 2.9 x 2.9 x 3.0 x
Net debt to in-place adjusted EBITDA ratio (2) 6.3 x 6.6 x N/A N/A
Reconciliation of denominators for per share measures
Denominator for diluted EPS 94,514 94,608 94,312 97,609
Weighted average common units 3,591 3,679 3,648
Dilutive noncontrolling interests - preferred units in the OP 176
Anti-dilutive EPS effect of share-based compensation awards 98
Denominator for diluted FFO per share 98,105 98,463 98,058 97,609
Antidilutive preferred securities for dilutive FFO, as adj. for comparability (610 )
Denominator for diluted FFO per share, as adj. for comparability 98,105 97,853 98,058 97,609
(1) Represents Defense/IT Locations and Regional Office properties excluding properties held for sale, and includes six properties owned through an unconsolidated joint venture totaling 962,000 square feet that were 100% occupied and leased.
(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).
Corporate Office Properties Trust
Summary Financial Data
(unaudited)
(Dollars in thousands)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2016 2015 2016 2015
Reconciliation of common share dividends to dividends and distributions for payout ratios
Common share dividends $ 26,068 $ 26,000 $ 78,139 $ 78,000
Common unit distributions 988 1,011 3,003 3,035
Dividends and distributions on dilutive preferred securities 537
Dividends and distributions for diluted FFO payout ratio 27,056 27,548 81,142 81,035
Dividends and distributions on antidilutive preferred securities (1) (537 )
Dividends and distributions for other payout ratios $ 27,056 $ 27,011 $ 81,142 $ 81,035
Reconciliation of GAAP net income to adjusted earnings before interest, income taxes, depreciation and amortization (“Adjusted EBITDA”) and in-place adjusted EBITDA
Net income (loss) $ 29,272 $ 94,294 $ (10,948 ) $ 126,261
Interest expense on continuing operations 18,301 24,121 64,499 66,727
Income tax (benefit) expense (21 ) 48 (28 ) 153
Real estate-related depreciation and amortization 32,015 38,403 99,790 103,788
Depreciation of furniture, fixtures and equipment 513 590 1,639 1,609
Impairment losses 27,699 2,307 99,837 3,779
Loss (gain) on early extinguishment of debt on continuing and discontinued operations 59 (85,745 ) 37 (86,057 )
Gain on sales of operating properties (34,101 ) (15 ) (34,101 ) (15 )
Gain on sales of non-operational properties (3,985 )
Net loss (gain) on investments in unconsolidated entities included in interest and other income 27 98 (32 ) 121
Business development expenses 1,016 1,221 3,656 3,263
Operating property acquisition costs 2,695 4,102
EBITDA from properties conveyed to extinguish debt in default (15 ) (768 )
Demolition costs on redevelopment properties 930 578 1,171
Adjustments from unconsolidated real estate JV 415 415
Executive transition costs 1,639 6,023
Adjusted EBITDA $ 76,834 $ 78,932 $ 231,365 $ 220,149
Proforma net operating income adjustment for property changes within period (2,469 ) 1,309
In-place adjusted EBITDA $ 74,365 $ 80,241
Reconciliation of interest expense to the denominators for fixed charge coverage-Adjusted EBITDA
Interest expense $ 18,301 $ 24,121 $ 64,499 $ 66,727
Less: Amortization of deferred financing costs (1,126 ) (1,203 ) (3,480 ) (3,339 )
Less: Amortization of net debt discount, net of amounts capitalized (332 ) (321 ) (976 ) (849 )
Less: Gain (loss) on interest rate derivatives 1,523 (347 )
Less: Interest expense on debt in default extinguished via conveyance of properties (2,781 ) (11,224 )
COPT’s share of interest expense of unconsolidated real estate JV, excluding deferred financing costs 204 204
Scheduled principal amortization 922 1,692 4,454 5,011
Capitalized interest 1,242 1,559 4,304 5,641
Preferred share dividends 3,552 3,552 10,657 10,657
Preferred unit distributions 165 165 495 495
Denominator for fixed charge coverage-Adjusted EBITDA $ 24,451 $ 26,784 $ 79,810 $ 73,119
Corporate Office Properties Trust
Summary Financial Data
(unaudited)
(Dollars in thousands)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,

2016

2015

2016

2015

Reconciliations of tenant improvements and incentives, capital improvements and leasing costs for operating properties to replacement capital expenditures
Tenant improvements and incentives $ 21,470 $ 6,374 $ 37,020 $ 17,408
Building improvements 5,707 4,223 14,962 11,969
Leasing costs 5,182 2,547 7,978 4,986
Less: Excluded tenant improvements and incentives (12,706 ) 205 (14,944 ) (1,045 )
Less: Excluded building improvements (3,533 ) (1,155 ) (5,211 ) (3,328 )
Less: Excluded leasing costs (68 ) (419 ) (810 )
Replacement capital expenditures $ 16,120 $ 12,126 $ 39,386 $ 29,180
Same office property cash NOI $ 60,952 $ 60,297 $ 182,098 $ 174,942
Straight line rent adjustments (2,230 ) 965 (7,163 ) 3,175
Add: Amortization of deferred market rental revenue 22 16 90 71
Less: Amortization of below-market cost arrangements (218 ) (264 ) (655 ) (775 )
Add: Lease termination fee, gross 390 185 1,679 1,950
Add: Cash NOI on tenant-funded landlord assets 2,379 390 5,790 390
Same office property NOI $ 61,295 $ 61,589 $ 181,839 $ 179,753

September 30, 2016

December 31, 2015
Reconciliation of total assets to adjusted book
Total assets $ 3,634,194 $ 3,909,312
Accumulated depreciation 681,476 700,363
Accumulated depreciation included in assets held for sale 22,938 18,317
Accumulated amortization of real estate intangibles and deferred leasing costs 201,414 195,506
Accumulated amortization of real estate intangibles and deferred leasing costs included in assets held for sale 21,469 17,456
COPT’s share of liabilities of unconsolidated real estate JV 30,013
COPT’s share of accumulated depreciation and amortization of unconsolidated real estate JV 375
Less: Cash and cash equivalents (47,574 ) (60,310 )
COPT’s share of cash of unconsolidated real estate JV (444 )
Adjusted book $ 4,543,861 $ 4,780,644
Reconciliation of debt outstanding to net debt
Debt outstanding (excluding net debt discounts and deferred financing costs) $ 1,921,219 $ 2,097,230
Less: Cash and cash equivalents (47,574 ) (60,310 )
COPT’s share of cash of unconsolidated real estate JV (444 )
Net debt $ 1,873,201 $ 2,036,920

Corporate Office Properties Trust

IR Contacts:

Stephanie Krewson-Kelly, 443-285-5453

stephanie.kelly@copt.com

or

Michelle Layne, 443-285-5452

michelle.layne@copt.com

Source: Corporate Office Properties Trust

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