COPT Reports Second Quarter 2019 Results

July 29, 2019 5:39 PM

EPS of $0.95 & FFO per Share of $0.52 Exceed Guidance

$0.75 per Share Gain on JV Contribution Drove EPS Outperformance

Strong Same-Property Cash NOI Growth of 4.5% Drove FFO Outperformance

Core Portfolio 92.9% Occupied & 94.1% Leased

606,000 SF of Development Placed into Service 100% Leased

Record Leasing Volumes

1.6 Million SF Total Leasing Completed in 2Q19

2Q19 and 1H19 Vacancy Leasing Volumes Are Double 2018 Levels

Solid Tenant Retention in 2Q19 of 81.1%; Increasing Annual Guidance to 75%─80%

Adjusting Full Year 2019 Cash Rent Spreads on Renewals to Incorporate Incremental Early Renewals

Development Leasing of 652,000 SF in 2Q19; 1.7 Million SF To-Date

Raising 2019 Development Leasing Goal Further; Now Expect 2 Million SF

Affirming Full-Year FFO per Share Guidance

Increasing Development Spend Guidance by another $75 Million, to $400─$450 Million

Contributing Two Additional Data Center Shells in 4Q19 to Recent Joint Venture

Highly-Leased Development Pipeline Expected to Drive Outsized FFO Growth in 2021

COLUMBIA, Md.--(BUSINESS WIRE)-- Corporate Office Properties Trust (“COPT” or the “Company”) (NYSE: OFC) announced financial and operating results for the second quarter ended June 30, 2019.

Management Comments

Stephen E. Budorick, COPT’s President & Chief Executive Officer, commented, “Second quarter FFO per share exceeded the high-end of our guidance, driven in part by stronger-than-anticipated growth in same-property cash NOI of 4.5%. The strength of demand recovery throughout our Defense/IT locations continues to support record-levels of lease achievement, and we have already exceeded our previously elevated full-year goal of leasing 1.4 million square feet in development projects, setting a new corporate record for annual development leasing volume. Based on the pipeline of opportunities before us, we are increasing our development leasing target to 2.0 million square feet.” He continued, “As important, in June we created a strategic joint venture with a world class investment group. Proceeds from this venture fund our 2019 development investment needs, as well as most of our expected 2020 development investment.”

Financial Highlights

2nd Quarter Financial Results:

Operating Performance Highlights

Operating Portfolio Summary:

Same-Property Performance:

Leasing:

Investment Activity Highlights

Development & Redevelopment Projects:

Balance Sheet and Capital Transaction Highlights

2019 Guidance

Management is increasing its previously issued guidance range of $1.34―$1.38 for full year EPS to include the gain on sale from contributing two more data center shell properties in the fourth quarter. The new range for full year EPS is $1.52─$1.56. The Company is reiterating its previously issued guidance range for full year FFOPS, as adjusted for comparability, of $2.01―$2.05.

Management also is establishing EPS and FFOPS, as adjusted for comparability, guidance for the third quarter ending September 30, 2019 at ranges of $0.14―$0.16 and $0.49―$0.51, respectively. Reconciliations of projected diluted EPS to projected FFOPS are as follows:

Reconciliation of EPS to FFOPS, per Nareit and

Quarter ending

Year ending

As Adjusted for Comparability

September 30, 2019

December 31, 2019

Low

High

Low

High

EPS

$

0.14

$

0.16

$

1.52

$

1.56

Real estate depreciation and amortization

0.35

0.35

1.40

1.40

Gain on sales of real estate

-

-

(0.91

)

(0.91

)

FFOPS, Nareit definition and as adjusted for comparability

$

0.49

$

0.51

$

2.01

$

2.05

Updated Full-Year Guidance AssumptionsManagement is updating the following assumptions for its full-year guidance:

Associated Supplemental Presentation

Prior to the call, the Company will post a slide presentation to accompany management’s prepared remarks for its second quarter 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 second quarter 2019 results on its conference call tomorrow at 12:00 p.m. Eastern Time, details of which are listed below:

Conference Call Date:

Tuesday, July 30, 2019

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:

9254219

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 available immediately via webcast on COPT’s Investors website. Additionally, a telephonic replay of this call will be available beginning at 3:00 p.m. Eastern Time on Tuesday, July 30 through 3:00 p.m. Eastern Time on Tuesday, August 13. 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 9254219.

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.

Company Information

COPT is a REIT that owns, manages, leases, develops and selectively acquires office and data center properties 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 June 30, 2019, the Company derived 88% of its core portfolio annualized revenue from Defense/IT Locations and 12% from its Regional Office Properties. As of the same date and including 13 buildings owned through unconsolidated joint ventures, COPT’s core portfolio of 167 office and data center shell properties encompassed 18.8 million square feet and was 94.1% leased; the Company also owned one wholesale data center with a critical load of 19.25 megawatts.

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.

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, 2018.

Corporate Office Properties Trust
Summary Financial Data
(unaudited)
(in thousands, except per share data)

For the Three Months
Ended June 30,

For the Six Months
Ended June 30,

2019

2018

2019

2018

Revenues

Revenues from real estate operations

$

132,771

$

129,162

$

264,761

$

257,440

Construction contract and other service revenues

42,299

17,581

59,249

44,779

Total revenues

175,070

146,743

324,010

302,219

Operating expenses

Property operating expenses

47,886

49,446

97,331

100,397

Depreciation and amortization associated with real estate operations

34,802

33,190

69,598

66,702

Construction contract and other service expenses

41,002

16,941

57,328

43,157

General and administrative expenses

7,650

6,067

14,369

11,928

Leasing expenses

1,736

1,561

3,768

2,992

Business development expenses and land carry costs

870

1,234

1,983

2,848

Total operating expenses

133,946

108,439

244,377

228,024

Interest expense

(18,475

)

(18,945

)

(37,149

)

(37,729

)

Interest and other income

1,849

1,439

4,135

2,798

Gain on sales of real estate

84,469

(23

)

84,469

(27

)

Income before equity in income of unconsolidated entities and income taxes

108,967

20,775

131,088

39,237

Equity in income of unconsolidated entities

420

373

811

746

Income tax benefit (expense)

176

(63

)

(18

)

(118

)

Net income

109,563

21,085

131,881

39,865

Net income attributable to noncontrolling interests:

Common units in the Operating Partnership (“OP”)

(1,339

)

(608

)

(1,596

)

(1,152

)

Preferred units in the OP

(165

)

(165

)

(330

)

(330

)

Other consolidated entities

(1,268

)

(878

)

(2,305

)

(1,799

)

Net income attributable to COPT common shareholders

$

106,791

$

19,434

$

127,650

$

36,584

Earnings per share (“EPS”) computation:

Numerator for diluted EPS:

Net income attributable to COPT common shareholders

$

106,791

$

19,434

$

127,650

$

36,584

Distributions on dilutive convertible preferred units

165

Redeemable noncontrolling interests

902

66

Common units in the OP

1,515

Amount allocable to share-based compensation awards

(346

)

(117

)

(391

)

(234

)

Numerator for diluted EPS

$

107,512

$

19,317

$

128,840

$

36,350

Denominator:

Weighted average common shares - basic

111,557

101,789

110,759

101,397

Dilutive effect of share-based compensation awards

310

119

289

131

Dilutive effect of redeemable noncontrolling interests

1,062

130

Dilutive convertible preferred units

176

Common units in the OP

1,329

Weighted average common shares - diluted

113,105

101,908

112,507

101,528

Diluted EPS

$

0.95

$

0.19

$

1.15

$

0.36

Corporate Office Properties Trust
Summary Financial Data
(unaudited)
(in thousands, except per share data)

For the Three Months
Ended June 30,

For the Six Months
Ended June 30,

2019

2018

2019

2018

Net income

$

109,563

$

21,085

$

131,881

$

39,865

Real estate-related depreciation and amortization

34,802

33,190

69,598

66,702

Gain on sales of real estate

(84,469

)

23

(84,469

)

27

Depreciation and amortization on unconsolidated real estate JVs

566

564

1,132

1,127

Funds from operations (“FFO”)

60,462

54,862

118,142

107,721

Noncontrolling interests - preferred units in the OP

(165

)

(165

)

(330

)

(330

)

FFO allocable to other noncontrolling interests

(1,188

)

(753

)

(2,159

)

(1,697

)

Basic and diluted FFO allocable to share-based compensation awards

(229

)

(224

)

(414

)

(437

)

Basic FFO available to common share and common unit holders (“Basic FFO”)

58,880

53,720

115,239

105,257

Redeemable noncontrolling interests

33

942

Diluted FFO available to common share and common unit holders (“Diluted FFO”)

58,913

53,720

116,181

105,257

Demolition costs on redevelopment and nonrecurring improvements

9

44

48

Executive transition costs

213

4

376

Non-comparable professional and legal expenses

311

311

Diluted FFO comparability adjustments allocable to share-based compensation awards

(2

)

(1

)

(2

)

(2

)

Diluted FFO available to common share and common unit holders, as adjusted for comparability

59,222

53,941

116,538

105,679

Straight line rent adjustments and lease incentive amortization

1,051

(1,195

)

(616

)

(2,023

)

Amortization of intangibles included in net operating income

(50

)

231

12

587

Share-based compensation, net of amounts capitalized

1,623

1,550

3,296

3,035

Amortization of deferred financing costs

529

468

1,057

936

Amortization of net debt discounts, net of amounts capitalized

374

358

744

712

Accum. other comprehensive loss on derivatives amortized to expense

33

34

67

68

Replacement capital expenditures

(16,002

)

(15,613

)

(27,175

)

(31,133

)

Other diluted AFFO adjustments associated with real estate JVs

181

(32

)

214

99

Diluted adjusted funds from operations available to common share and common unit holders (“Diluted AFFO”)

$

46,961

$

39,742

$

94,137

$

77,960

Diluted FFO per share

$

0.52

$

0.51

$

1.02

$

1.00

Diluted FFO per share, as adjusted for comparability

$

0.52

$

0.51

$

1.03

$

1.01

Dividends/distributions per common share/unit

$

0.275

$

0.275

$

0.550

$

0.550

Corporate Office Properties Trust
Summary Financial Data
(unaudited)
(Dollars and shares in thousands, except per share data)

June 30,
2019

December 31,
2018

Balance Sheet Data

Properties, net of accumulated depreciation

$

3,194,372

$

3,250,626

Total assets

3,803,469

3,656,005

Debt, per balance sheet

1,784,362

1,823,909

Total liabilities

2,054,555

2,002,697

Redeemable noncontrolling interest

29,803

26,260

Equity

1,719,111

1,627,048

Net debt to adjusted book

36.1

%

38.9

%

Core Portfolio Data (as of period end) (1)

Number of operating properties

167

161

Total net rentable square feet owned (in thousands)

18,788

17,937

Occupancy %

92.9

%

93.1

%

Leased %

94.1

%

94.0

%

For the Three Months
Ended June 30,

For the Six Months
Ended June 30,

2019

2018

2019

2018

Payout ratios

Diluted FFO

52.7

%

54.3

%

53.5

%

55.1

%

Diluted FFO, as adjusted for comparability

52.4

%

54.1

%

53.3

%

54.9

%

Diluted AFFO

66.1

%

73.4

%

66.0

%

74.4

%

Adjusted EBITDA fixed charge coverage ratio

3.7x

3.6x

3.7x

3.6x

Net debt to in-place adjusted EBITDA ratio (2)

5.7x

6.3x

N/A

N/A

Net debt plus preferred equity to in-place adjusted EBITDA ratio (3)

5.7x

6.3x

N/A

N/A

Reconciliation of denominators for per share measures

Denominator for diluted EPS

113,105

101,908

112,507

101,528

Weighted average common units

1,327

3,197

3,208

Redeemable noncontrolling interests

(926

)

907

Dilutive convertible preferred units

(176

)

Denominator for diluted FFO per share and as adjusted for comparability

113,330

105,105

113,414

104,736

(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 June 30,

For the Six Months
Ended June 30,

2019

2018

2019

2018

Reconciliation of common share dividends to dividends and distributions for payout ratios

Common share dividends - unrestricted shares and deferred shares

$

30,693

$

28,284

$

61,378

$

56,258

Common unit distributions - unrestricted units

365

879

730

1,758

Dividends and distributions for payout ratios

$

31,058

$

29,163

$

62,108

$

58,016

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

$

109,563

$

21,085

$

131,881

$

39,865

Interest expense

18,475

18,945

37,149

37,729

Income tax (benefit) expense

(176

)

63

18

118

Depreciation of furniture, fixtures and equipment

496

459

929

982

Real estate-related depreciation and amortization

34,802

33,190

69,598

66,702

Gain on sales of real estate

(84,469

)

23

(84,469

)

27

Adjustments from unconsolidated real estate JVs

830

828

1,657

1,652

EBITDAre

79,521

74,593

156,763

147,075

Net gain on other investments

(12

)

(400

)

Business development expenses

460

757

1,008

1,780

Non-comparable professional and legal expenses

311

311

Demolition costs on redevelopment and nonrecurring improvements

9

44

48

Executive transition costs

213

4

376

Adjusted EBITDA

80,280

75,572

$

157,730

$

149,279

Proforma net operating income adjustment for property changes within period

(1,981

)

418

In-place adjusted EBITDA

$

78,299

$

75,990

Reconciliation of interest expense to the denominators for fixed charge coverage-Adjusted EBITDA

Interest expense

$

18,475

$

18,945

$

37,149

$

37,729

Less: Amortization of deferred financing costs

(529

)

(468

)

(1,057

)

(936

)

Less: Amortization of net debt discounts, net of amounts capitalized

(374

)

(358

)

(744

)

(712

)

Less: Accum. other comprehensive loss on derivatives amortized to expense

(33

)

(34

)

(67

)

(68

)

COPT’s share of interest expense of unconsolidated real estate JVs, excluding deferred financing costs

258

258

513

513

Scheduled principal amortization

1,095

1,049

2,193

2,101

Capitalized interest

2,388

1,397

4,392

2,771

Preferred unit distributions

165

165

330

330

Denominator for fixed charge coverage-Adjusted EBITDA

$

21,445

$

20,954

$

42,709

$

41,728

Corporate Office Properties Trust
Summary Financial Data
(unaudited)
(Dollars in thousands)

For the Three Months
Ended June 30,

For the Six Months
Ended June 30,

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

$

8,568

$

8,117

$

15,720

$

16,732

Building improvements

4,333

5,775

8,864

7,696

Leasing costs

2,761

1,822

5,943

3,102

Net additions to tenant improvements and incentives

1,759

1,315

290

4,604

Excluded building improvements

(1,419

)

(1,370

)

(3,642

)

(955

)

Excluded leasing costs

(46

)

(46

)

Replacement capital expenditures

$

16,002

$

15,613

$

27,175

$

31,133

Same Properties cash NOI

$

73,436

$

70,304

$

144,322

$

138,062

Straight line rent adjustments and lease incentive amortization

(1,071

)

447

(1,136

)

16

Amortization of acquired above- and below-market rents

73

(176

)

33

(476

)

Amortization of below-market cost arrangements

(23

)

(55

)

(46

)

(110

)

Lease termination fees, gross

285

558

806

1,566

Tenant funded landlord assets and lease incentives

522

831

910

2,694

Cash NOI adjustments in unconsolidated real estate JV

46

68

105

135

Same Properties NOI

$

73,268

$

71,977

$

144,994

$

141,887

June 30,
2019

December 31,
2018

Reconciliation of total assets to adjusted book

Total assets

$

3,803,469

$

3,656,005

Accumulated depreciation

949,111

897,903

Accumulated depreciation included in assets held for sale

1,397

Accumulated amortization of real estate intangibles and deferred leasing costs

210,183

204,882

Accumulated amortization of real estate intangibles and deferred leasing costs included in assets held for sale

4

COPT’s share of liabilities of unconsolidated real estate JVs

30,588

29,917

COPT’s share of accumulated depreciation and amortization of unconsolidated real estate JVs

6,578

5,446

Less: Property - operating lease liabilities

(16,640

)

Less: Property - finance lease liabilities

(712

)

(660

)

Less: Cash and cash equivalents

(46,282

)

(8,066

)

Less: COPT’s share of cash of unconsolidated real estate JVs

(406

)

(293

)

Adjusted book

$

4,937,290

$

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)

$

1,827,304

$

1,868,504

Less: Cash and cash equivalents

(46,282

)

(8,066

)

Less: COPT’s share of cash of unconsolidated real estate JVs

(406

)

(293

)

Net debt

$

1,780,616

$

1,860,145

Preferred equity

8,800

8,800

Net debt plus preferred equity

$

1,789,416

$

1,868,945

IR Contacts:

Stephanie Krewson-Kelly

443-285-5453

stephanie.kelly@copt.com

Michelle Layne

443-285-5452

michelle.layne@copt.com

Source: Corporate Office Properties Trust

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