UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K 

(Mark one)

ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended	December 31, 2017

or

o	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		Maryland		23-2947217
		(State or other jurisdiction of		(IRS Employer
		incorporation or organization)		Identification No.)
Corporate Office Properties, L.P.		Delaware		23-2930022
		(State or other jurisdiction of		(IRS Employer
		incorporation or organization)		Identification No.)

6711 Columbia Gateway Drive, Suite 300, Columbia, MD		21046
(Address of principal executive offices)		(Zip Code)

 Registrant’s telephone number, including area code:  (443) 285-5400

________________________________________

Securities registered pursuant to Section 12(b) of the Act:

(Title of Each Class)		(Name of Exchange on Which Registered)
Common Shares of beneficial interest, $0.01 par value		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 ý Yes   o No

Corporate Office Properties, L.P. ý Yes   o 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 o Yes   ý No

Corporate Office Properties, L.P. o Yes   ý 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 ý Yes   o No

Corporate Office Properties, L.P. ý Yes   o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

Corporate Office Properties Trust ý Yes   o No

Corporate Office Properties, L.P. ý Yes   o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

Corporate Office Properties Trust

Large accelerated filer x		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Corporate Office Properties, L.P.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer x		Smaller reporting company o
				(Do not check if a smaller reporting company)

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 o Yes   ý No

Corporate Office Properties, L.P. o Yes   ý 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 $3.5 billion, as calculated using the closing price of such shares on the New York Stock Exchange and the number of outstanding shares as of June 30, 2017. For purposes of calculating this amount only, affiliates are defined as Trustees, executive owners and beneficial owners of more than 10% of Corporate Office Properties Trust’s outstanding common shares, $0.01 par value. At January 31, 2018, 101,283,508 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 $108.9 million, as calculated using the closing price of the common shares of Corporate Office Properties Trust (into which common units not held by Corporate Office Properties Trust are exchangeable) on the New York Stock Exchange and the number of outstanding units as of June 30, 2017.

Portions of the proxy statement of Corporate Office Properties Trust for its 2018 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, 2017 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, 2017, COPT owned approximately 96.9% of the outstanding common units; the remaining common units and all of the outstanding COPLP preferred units were owned by third parties. As the sole general partner of COPLP, COPT controls COPLP and can cause it to enter into major transactions including acquisitions, dispositions and refinancings and cause changes in its line of business, capital structure and distribution policies.

There are a few differences between the Company and the Operating Partnership which are reflected in this Form 10-K. We believe it is important to understand the differences between the Company and the Operating Partnership in the context of how the two operate as an interrelated, consolidated company. COPT is a REIT whose only material asset is its ownership of partnership interests of COPLP. As a result, COPT does not conduct business itself, other than acting as the sole general partner of COPLP, issuing public equity and guaranteeing certain debt of COPLP. COPT itself is not directly obligated under any indebtedness but guarantees some of the debt of COPLP. COPLP owns substantially all of the assets of COPT either directly or through its subsidiaries, conducts almost all of the operations of the business and is structured as a limited partnership with no publicly traded equity. Except for net proceeds from public equity issuances by COPT, which are contributed to COPLP in exchange for partnership units, COPLP generates the capital required by COPT’s business through COPLP’s operations, by COPLP’s direct or indirect incurrence of indebtedness or through the issuance of partnership units.

Noncontrolling interests, shareholders’ equity and partners’ capital are the main areas of difference between the consolidated financial statements of COPT and those of COPLP. The common limited partnership interests in COPLP not owned by COPT are accounted for as partners’ capital in COPLP’s consolidated financial statements and as noncontrolling interests in COPT’s consolidated financial statements. COPLP’s consolidated financial statements also reflect COPT’s noncontrolling interests in certain real estate partnerships, limited liability companies (“LLCs”), business trusts and corporations; the differences between shareholders’ equity, partners’ capital and noncontrolling interests result from the differences in the equity issued at the COPT and COPLP levels and in COPT’s noncontrolling interests in these real estate partnerships, LLCs, business trusts and corporations. 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 (comprised primarily of mutual funds and equity securities) and the corresponding liability to the plan’s participants that are held directly by COPT.

We believe combining the annual reports on Form 10-K of the Company and the Operating Partnership into this single report results in the following benefits:

•	combined reports better reflect how management, investors and the analyst community view the business as a single operating unit;

•	combined reports enhance investors’ understanding of the Company and the Operating Partnership by enabling them to view the business as a whole and in the same manner as management;

•	combined reports are more efficient for the Company and the Operating Partnership and result in savings in time, effort and expense; and

•	combined reports are more efficient for investors by reducing duplicative disclosure and providing a single document for their review.

To help investors understand the significant differences between the Company and the Operating Partnership, this report presents the following separate sections for each of the Company and the Operating Partnership:

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•	consolidated financial statements;

•	the following notes to the consolidated financial statements:

•	Note 3, Fair Value Measurements of COPT and subsidiaries and COPLP and subsidiaries;

•	Note 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.

•	“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.

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Table of Contents

 

Form 10-K

 

		PAGE
PART I
ITEM 1.	BUSINESS	6
ITEM 1A	RISK FACTORS	10
ITEM 1B.	UNRESOLVED STAFF COMMENTS	17
ITEM 2.	PROPERTIES	18
ITEM 3.	LEGAL PROCEEDINGS	22
ITEM 4.	MINE SAFETY DISCLOSURES	22
PART II
ITEM 5.	MARKET FOR REGISTRANTS’ COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	22
ITEM 6.	SELECTED FINANCIAL DATA	23
ITEM 7.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	28
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	52
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	52
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	52
ITEM 9A.	CONTROLS AND PROCEDURES	52
ITEM 9B	OTHER INFORMATION	53
PART III
ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	54
ITEM 11.	EXECUTIVE COMPENSATION	54
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	54
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	54
ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	54
PART IV
ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	54
ITEM 16.	FORM 10-K SUMMARY	59
	SIGNATURES	60

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FORWARD-LOOKING STATEMENTS

This Form 10-K contains “forward-looking” statements, as defined in the Private Securities Litigation Act of 1995, that are based on our current expectations, estimates and projections about future events and financial trends affecting the financial condition and operations of our business. Additionally, documents we subsequently file with the SEC and incorporated by reference will contain forward-looking statements.

Forward-looking statements can be identified by the use of words such as “may,” “will,” “should,” “could,” “believe,” “anticipate,” “expect,” “estimate,” “plan” or other comparable terminology. Forward-looking statements are inherently subject to risks and uncertainties, many of which we cannot predict with accuracy and some of which we might not even anticipate. Although we believe that the expectations, estimates and projections reflected in such forward-looking statements are based on reasonable assumptions at the time made, we can give no assurance that these expectations, estimates and projections will be achieved. Future events and actual results may differ materially from those discussed in the forward-looking statements. We caution readers that forward-looking statements reflect our opinion only as of the date on which they were made. You should not place undue reliance on forward-looking statements. The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:

•	general economic and business conditions, which will, among other things, affect office property and data center demand and rents, tenant creditworthiness, interest rates, financing availability and property values;

•	adverse changes in the real estate markets, including, among other things, increased competition with other companies;

•	governmental actions and initiatives, including risks associated with the impact of a prolonged government shutdown or budgetary reductions or impasses, such as a reduction in rental revenues, non-renewal of leases and/or a curtailment of demand for additional space by our strategic customers;

•	our ability to borrow on favorable terms;

•	risks of real estate acquisition and development activities, including, among other things, risks that development projects may not be completed on schedule, that tenants may not take occupancy or pay rent or that development or operating costs may be greater than anticipated;

•	risks of investing through joint venture structures, including risks that our joint venture partners may not fulfill their financial obligations as investors or may take actions that are inconsistent with our objectives;

•	changes in our plans for properties or views of market economic conditions or failure to obtain development rights, either of which could result in recognition of significant impairment losses;

•	our ability to satisfy and operate effectively under Federal income tax rules relating to real estate investment trusts and partnerships;

•	possible adverse changes in tax laws;

•	the dilutive effects of issuing additional common shares;

•	our ability to achieve projected results; 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.”

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PART I

Item 1. Business

OUR COMPANY

General. Corporate Office Properties Trust (“COPT”) and subsidiaries (collectively, the “Company”) is a fully-integrated and self-managed real estate investment trust (“REIT”). Corporate Office Properties, L.P. (“COPLP”) and subsidiaries (collectively, the “Operating Partnership”) is the entity through which COPT, the sole general partner of COPLP, conducts almost all of its operations and owns almost all of its assets. Unless otherwise expressly stated or the context otherwise requires, “we”, “us” and “our” as used herein refer to each of the Company and the Operating Partnership. We own, manage, lease, develop and selectively acquire office and data center properties. The majority of our portfolio is in locations that support the United States Government and its contractors, most of whom are engaged in national security, defense and information technology (“IT”) related activities servicing what we believe are growing, durable priority missions (“Defense/IT Locations”). We also own a portfolio of office properties located in select urban/urban-like submarkets in the Greater Washington, DC/Baltimore region with durable Class-A office fundamentals and characteristics (“Regional Office”). As of December 31, 2017, our properties included the following:

•	159 properties totaling 17.3 million square feet comprised of 144 office properties and 15 single-tenant data center shell properties (“data center shells”). We owned six of these data center shells through an unconsolidated real estate joint venture;

•	a wholesale data center with a critical load of 19.25 megawatts;

•	ten properties under construction or redevelopment (seven office properties and three data center shells) that we estimate will total approximately 1.1 million square feet upon completion, including two partially operational properties and two properties completed and held for future lease to the United States Government; and

•	approximately 1,000 acres of land controlled for future development that we believe could be developed into approximately 13.0 million square feet and 150 acres of other land.

COPLP owns real estate directly and through subsidiary partnerships and limited liability companies (“LLCs”).  In addition to owning real estate, COPLP also owns subsidiaries that provide real estate services such as property management and construction and development services primarily for our properties but also for third parties. Some of these services are performed by a taxable REIT subsidiary (“TRS”).

Equity interests in COPLP are in the form of common units and preferred units. As of December 31, 2017, COPT owned 96.9% of the outstanding COPLP common units (“common units”); the remaining common units and all of the outstanding COPLP preferred units (“preferred units”) were owned by third parties. Common units not owned by COPT carry certain redemption rights. The number of common units owned by COPT is equivalent to the number of outstanding common shares of beneficial interest (“common shares”) of COPT, and the entitlement of all common units to quarterly distributions and payments in liquidation is substantially the same as those of COPT common shareholders. Similarly, in the case of any series of preferred units held by COPT, there would be a series of preferred shares of beneficial interest (“preferred shares”) in COPT that is equivalent in number and carries substantially the same terms as such series of COPLP preferred units. COPT’s common shares are publicly traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “OFC”.

Because COPLP is managed by COPT, and COPT conducts substantially all of its operations through COPLP, we refer to COPT’s executive officers as COPLP’s executive officers; similarly, although COPLP, as a partnership, does not have a board of trustees, we refer to COPT’s Board of Trustees as COPLP’s Board of Trustees.

We believe that COPT is organized and has operated in a manner that satisfies the requirements for taxation as a REIT under the Internal Revenue Code of 1986, as amended, and we intend to continue to operate COPT in such a manner. If COPT continues to qualify for taxation as a REIT, it generally will not be subject to Federal income tax on its taxable income (other than that of its TRS entities) that is distributed to its shareholders. A REIT is subject to a number of organizational and operational requirements, including a requirement that it distribute to its shareholders at least 90% of its annual taxable income.

Our executive offices are located at 6711 Columbia Gateway Drive, Suite 300, Columbia, Maryland 21046 and our telephone number is (443) 285-5400.

Our Internet address is www.copt.com. We make available on our Internet website free of charge our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably possible after we file such material with the Securities and Exchange Commission (the “SEC”). In addition, we have made available on our Internet website under the heading “Corporate Governance” the charters for our Board of Trustees’

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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. The public may also read and copy paper filings that we have made with the SEC at the SEC’s Public Reference Room, located at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling (800) SEC-0330.

Significant Developments

In 2017:

•	we finished the year with our office and data center shell portfolio 93.6% occupied;

•	we placed into service an aggregate of 1.2 million square feet in eight newly constructed properties and three redeveloped properties that were 97.8% leased as of December 31, 2017;

•

we sold 13 operating properties totaling 992,000 square feet that were 91.8% occupied and other land for $184.2 million. We provided a financial guaranty to the buyer of one of these properties under which we would indemnify it for up to $20 million in losses it could incur related to a potential defined capital event occurring on the property by June 30, 2019. Accordingly, we did not recognize the sale of this property for accounting purposes, and we reported the sales proceeds as a liability on our consolidated balance sheet. We do not expect to incur any losses under this financial guaranty;

•	we repaid $200.0 million on a term loan scheduled to mature in 2020;

•	COPT redeemed all of the outstanding shares of its:

•	Series K Preferred Shares effective January 21, 2017 at a price of $50 per share, or $26.6 million in the aggregate, plus accrued and unpaid dividends thereon through the date of redemption; and

•	Series L Preferred Shares effective June 27, 2017 at a price of $25 per share, or $172.5 million in the aggregate, plus accrued and unpaid dividends thereon through the date of redemption;

•

COPT entered into forward equity sale agreements effective November 2, 2017 to issue 9.2 million common shares at an initial gross offering price of $285.2 million, or $31.00 per share, before underwriting discounts, commissions and offering expenses. The forward sale price that we expect to receive upon physical settlement of the agreements will be subject to adjustment on a daily basis based on a floating interest rate factor equal to the overnight bank funding rate less a spread, and will be decreased on each of certain dates specified in the agreements during the term of the agreements. On December 27, 2017, COPT issued 1.7 million common shares under the agreements for net proceeds of $50.0 million; and

•	COPT issued 591,000 COPT common shares at a weighted average price of $33.84 per share under our at-the-market (“ATM”) stock offering program established in September 2016. Net proceeds from the shares issued totaled $19.7 million.

Business and Growth Strategies

Our primary goal is to deliver attractive and competitive total returns to our shareholders. This section sets forth key components of our business and growth strategies that we have in place to support this goal.

Defense/IT Locations Strategy: We specialize in serving the unique requirements of tenants of our Defense/IT Locations properties. These properties are primarily occupied by United States Government and contractor tenants engaged in what we believe are high priority security, defense and IT missions. These tenants’ missions pertain more to knowledge-based activities (i.e., cyber security, research and development and other highly technical defense and security areas) than to force structure (i.e., troops) and weapon system production. Our office and data center shell portfolio is significantly concentrated in Defense/IT Locations, which as of December 31, 2017 accounted for 149 of the portfolio’s 159 properties, or 87.4% of its annualized rental revenue, plus developable land controlled to accommodate future growth. These properties generally have higher tenant renewal rates than is typical in commercial office space due in large part to the importance of their proximity to defense installations or other key demand drivers, the ability of many of these properties to meet Anti-Terrorism Force Protection (“ATFP”) requirements and significant investments often made by tenants in their space for unique needs such as Secure Compartmented Information Facility (“SCIF”).

Our data center shell platform has fueled significant growth in our Defense/IT Locations strategy. Data center shells are properties leased to tenants to be operated as data centers in which the tenants fund the costs for the power, fiber connectivity

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and data center infrastructure. Since 2013, we placed into service 14 data center shells totaling 2.3 million square feet, and we estimate that an additional 11 totaling 2.0 million square feet will be completed over the next several years.  We enter into long-term leases prior to commencing construction of these properties, with triple-net structures and multiple extension options and rent escalators to provide future growth. Additionally, our tenants fund the costs to fully power and equip these properties, significantly enhancing these properties’ values and creating high barriers to exit for such tenants.

We believe that our properties and team collectively complement our Defense/IT Locations strategy due to our:

•	properties’ proximity to defense installations and other knowledge-based government demand drivers. Such proximity is generally preferred and often required for our tenants to execute their missions. Specifically, our:

•

office properties are proximate to such mission-critical facilities as Fort George G. Meade (which houses 119 organizations, including U.S. Cyber Command, Defense Information Systems Agency and other Department of Defense organizations and agencies engaged in signals intelligence) and Redstone Arsenal (which houses priority missions such as Army procurement, missile defense, space exploration and research, development, testing and evaluation of advanced weapons systems); and

•	data center shells are primarily in the Northern Virginia area, proximate to the MAE-East Corridor, which is a major Network Access Point in the United States for interconnecting traffic between Internet service providers;

•	well-established relationships with the United States Government and its contractors;

•	extensive experience in developing:

•	secured, specialized space, with the ability to satisfy the United States Government’s unique needs (including SCIF and ATFP requirements); and

•	data center shells to customer specifications within very condensed timeframes to accommodate time-sensitive tenant demand; and

•	depth of knowledge, specialized skills and credentialed personnel in operating highly specialized properties with high security-oriented requirements.

Regional Office Strategy: While our primary focus pertains to Defense/IT Locations, due to our depth of market knowledge in the Greater Washington, DC/Baltimore region, we focus secondarily on owning office properties located in select urban/urban-like submarkets that feature the following characteristics: (1) mixed-use, lifestyle oriented locations with a robust high-end residential and retail base; (2) proximity to public transportation and major transportation routes; (3) an educated workforce; (4) a diverse and growing employment base; and (5) constraints in supply. We believe that these types of submarkets provide better overall quality and opportunity for long-term, sustained growth than other commercial office submarkets. As of December 31, 2017, we owned seven Regional Office properties, representing 12.1% of our annualized rental revenue from operating properties, which were comprised of: three high-rise Baltimore City properties proximate to the city’s waterfront; and four Northern Virginia properties proximate to existing or future Washington Metropolitan Area Metrorail stations and major interstates. In prior reporting periods, this segment also included suburban properties that did not meet these characteristics (that were since disposed).

Asset Management Strategy: We aggressively manage our portfolio to maximize the value and operating performance of each property through: (1) proactive property management and leasing; (2) renewal of tenant leases and re-tenanting at increasing rents where market conditions permit; (3) achievement of operating efficiencies by increasing economies of scale and, where possible, aggregating vendor contracts to achieve volume pricing discounts; and (4) redevelopment when we believe property conditions and market demand warrant. In 2017, we completed seven years of programmatic property sales to improve the strategic focus of our portfolio and improve our balance sheet and overall capital position. In the future, we plan to continuously evaluate our portfolio and consider dispositions when properties no longer meet our strategic objectives, or when capital markets and the circumstances pertaining to such holdings otherwise warrant, in order to maximize our return on invested capital or support our capital strategy.

To the extent possible, we also operate and develop our properties in a manner that minimizes adverse impact on the environment by: (1) constructing new buildings designed to use resources with a high level of efficiency and low impact on human health and the environment during their life cycles through our participation in the U.S. Green Building Council’s Leadership in Energy and Environmental Design (“LEED”) program; (2) investing in energy systems and other equipment that reduce energy consumption and property 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 annually in the 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. In each of the last three years, we earned an overall score of “Green Star” on the GRESB survey, which represents the highest quadrant of achievement on the survey.

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Property Development and Acquisition Strategy: We grow our operating portfolio primarily through property development opportunities in support of our Defense/IT Locations strategy, and we have significant land holdings that we believe can support that growth and also act as a barrier against competitive supply. We pursue development activities as market conditions and leasing opportunities support favorable risk-adjusted returns on investment, and therefore typically prefer properties to be significantly leased prior to commencing construction. To a lesser extent, we may also pursue growth through acquisitions, seeking to execute such transactions at attractive yields and below replacement cost.

Capital Strategy: Our capital strategy is aimed at maintaining access to capital in the face of differing market conditions in the most cost-effective manner by:

•	maintaining an investment grade rating to enable us to use debt comprised of unsecured, primarily fixed-rate debt (including the effect of interest rate swaps) from public markets and banks;

•	using secured nonrecourse debt from institutional lenders and banks;

•

managing our debt by monitoring, among other things: (1) the relationship of certain measures of earnings to our debt level and to certain capital costs; (2) the timing of debt maturities to ensure that maturities in any one year do not exceed levels that we believe we can refinance; (3) the relationship of our variable-rate debt to our total debt; and (4) our total and secured debt levels relative to our overall capital structure;

•	using equity raised through issuances of common shares in COPT and common units in COPLP and, to a lesser extent, issuances of preferred shares in COPT and preferred units in COPLP and joint venture structures for certain investments;

•	monitoring capacity available under revolving credit facilities and ATM stock offering programs to provide liquidity to fund investment activities;

•	paying dividends at a level that is at least sufficient for us to maintain our REIT status;

•	recycling proceeds from property sales under our asset management strategy (discussed above) to fund our investment activities and/or reduce overall debt; and

•	continuously evaluating the ability of our capital resources to accommodate our plans for future growth.

Industry Segments

As of December 31, 2017, our operations included the following reportable segments: Defense/IT Locations; Regional Office; Wholesale Data Center; and Other. Our Defense/IT Locations segment included the following sub-segments:

•	Fort George G. Meade and the Baltimore/Washington Corridor (referred to herein as “Fort Meade/BW Corridor”);

•	Northern Virginia Defense/IT Locations;

•	Lackland Air Force Base in San Antonio, Texas;

•	locations serving the U.S. Navy (referred to herein as “Navy Support Locations”). Properties in this segment as of December 31, 2017 were proximate to the Washington Navy Yard, the Naval Air Station Patuxent River in Maryland and the Naval Surface Warfare Center Dahlgren Division in Virginia;

•	Redstone Arsenal in Huntsville, Alabama; and

•	data center shells, primarily in Northern Virginia (including six owned through an unconsolidated real estate joint venture).

As of December 31, 2017, Defense/IT Locations comprised 149 of our office and data center shell portfolio’s properties, or 86.7% of its square feet in operations, while Regional Office comprised seven of the portfolio’s properties, or 11.7% 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, you should refer to Note 17 to our consolidated financial statements, which is included in a separate section at the end of this Annual Report on Form 10-K beginning on page F-1.

Employees

As of December 31, 2017, we had 375 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 than we are. 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

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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 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, 2017, 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:

•	downturns in national, regional and local economic environments, including increases in the unemployment rate and inflation or deflation;

•	competition from other properties;

•	trends in office real estate that may adversely affect future demand, including telecommuting and flexible workplaces that increase the population density per square foot;

•	deteriorating local real estate market conditions, such as oversupply, reduction in demand and decreasing rental rates;

•	declining real estate valuations;

•	adverse developments concerning our tenants, which could affect our ability to collect rents and execute lease renewals;

•	government actions and initiatives, including risks associated with the impact of prolonged government shutdowns and budgetary reductions or impasses, such as a reduction of rental revenues, non-renewal of leases and/or a curtailment of demand for additional space by our strategic customers;

•	increasing operating costs, including insurance, utilities, real estate taxes and other expenses, some of which we may not be able to pass through to tenants;

•	increasing construction costs for materials and labor;

•	increasing vacancies and the need to periodically repair, renovate and re-lease space;

•	increasing interest rates and unavailability of financing on acceptable terms or at all;

•	unavailability of financing for potential purchasers of our properties;

•	adverse changes in taxation or zoning laws;

•	potential inability to secure adequate insurance;

•	adverse consequences resulting from civil disturbances, natural disasters, terrorist acts or acts of war; and

•	potential liability under environmental or other laws or regulations.

We may suffer adverse consequences as a result of adverse economic conditions. Our business may be affected by adverse economic conditions in the United States economy or real estate industry as a whole or by the local economic conditions in the markets in which our properties are located, including the impact of high unemployment and constrained credit. Adverse economic conditions could increase the likelihood of tenants encountering financial difficulties, including bankruptcy, insolvency or general downturn of business, and as a result could increase the likelihood of tenants defaulting on their lease obligations to us. Such conditions also could increase our likelihood of being unsuccessful in renewing tenants, renewing tenants on terms less favorable to us or being unable to lease newly constructed properties. In addition, such

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conditions could increase the level of risk that we may not be able to obtain new financing for development activities, acquisitions, refinancing of existing debt or other capital requirements at reasonable terms, if at all.

We may suffer adverse consequences as a result of our reliance on rental revenues for our income. We earn revenue from renting our properties. Our operating costs do not necessarily fluctuate in relation to changes in our rental revenue. This means that certain of our costs will not necessarily decline and may increase even if our revenues decline.

For new tenants or upon lease expiration for existing tenants, we generally must make improvements and pay other leasing costs for which we may not receive increased rents. We also make building-related capital improvements for which tenants may not reimburse us.

If our properties do not generate revenue sufficient to meet our operating expenses and capital costs, we may have 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, government shutdown or general downturn of business.

We may be adversely affected by developments concerning our major tenants or the United States Government and its contractors, including prolonged shutdowns of the government and actual, or potential, reductions in government spending targeting knowledge-based activities. As of December 31, 2017, our 10 largest tenants accounted for 58.8% of our total annualized rental revenue, the four largest of these tenants accounted for 47.0%, and the United States Government, our largest tenant, accounted for 31.7%. We calculated annualized rental revenue by multiplying by 12 the sum of monthly contractual base rents and estimated monthly expense reimbursements under active leases in our portfolio as of December 31, 2017; with regard to properties owned through an unconsolidated real estate joint venture, we include the portion of annualized rental revenue allocable to our ownership interest. For additional information regarding our tenant concentrations, please refer to the section entitled “Concentration of Operations” within the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Most of our leases with the United States Government provide for a series of one-year terms. The United States Government may terminate its leases if, among other reasons, the United States Congress fails to provide funding. We would be harmed if any of our four largest tenants fail to make rental payments to us over an extended period of time, including as a result of a prolonged government shutdown, or if the United States Government elects to terminate some or all of its leases and the space cannot be re-leased on satisfactory terms.

As of December 31, 2017, 87.4% 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.

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We would suffer economic harm if we were unable to renew our leases on favorable terms. When leases expire, our tenants may not renew or may renew on terms less favorable to us than the terms of their original leases. If a tenant vacates a property, we can expect to experience a vacancy for some period of time, as well as incur higher leasing costs than we would likely incur if a tenant renews. As a result, we may be harmed if we experience a high volume of tenant departures at the end of their lease terms.

We may be adversely affected by trends in the office real estate industry. Some businesses increasingly permit employee telecommuting, flexible work schedules, open workplaces and teleconferencing. These practices enable businesses to reduce their space requirements. These trends could over time erode the overall demand for office space and, in turn, place downward pressure on occupancy, rental rates and property valuations.

We may encounter a decline in the value of our real estate. The value of our real estate could be adversely affected by general economic and market conditions connected to a specific property, a market or submarket, a broader economic region or the office real estate industry. Examples of such conditions include a broader economic recession, declining demand and decreases in market rental rates and/or market values of real estate assets. If our real estate assets decline in value, it could result in our recognition of impairment losses. Moreover, a decline in the value of our real estate could adversely affect the amount of borrowings available to us under future credit facilities and other loans.

We may not be able to compete successfully with other entities that operate in our industry. The commercial real estate market is highly competitive. Numerous commercial properties compete with our properties for tenants. Some of the properties competing with ours may be newer or in more desirable locations, or the competing properties’ owners may be willing to accept lower rates than are acceptable to us. In addition, we compete for the purchase of commercial property with many entities, including other publicly traded commercial REITs.

Real estate investments are illiquid, and we may not be able to dispose of properties on a timely basis when we determine it is appropriate to do so. Real estate investments can be difficult to sell and convert to cash quickly, especially if market conditions, including real estate lending conditions, are not favorable. Such illiquidity could limit our ability to quickly change our portfolio of properties in response to changes in economic or other conditions. Our failure to successfully execute dispositions could adversely affect our ability to effectively execute our business strategy. Moreover, under certain circumstances, the Internal Revenue Code imposes certain penalties on a REIT that sells property held for less than two years and limits the number of properties it can sell in a given year.

We are dependent on external sources of capital for growth. Because COPT is a REIT, it must distribute at least 90% of its annual taxable income to its shareholders. Due to this requirement, we are not able to significantly fund our development and acquisition activities using retained cash flow from operations. Therefore, our ability to fund these activities may be dependent on our ability to access debt or equity capital. Such capital could be in the form of new debt, common shares, preferred shares, common and preferred units in COPLP, joint venture funding or asset sales. These capital sources may not be available on favorable terms or at all. Moreover, additional debt financing may substantially increase our leverage and subject us to covenants that restrict management’s flexibility in directing our operations, and additional equity offerings may result in substantial dilution of our equityholders’ interests. Our inability to obtain capital when needed could have a material adverse effect on our ability to expand our business and fund other cash requirements.

We often use our Revolving Credit Facility to initially finance much of our investing activities and certain financing activities. Our lenders under this and other facilities could, for financial hardship or other reasons, fail to honor their commitments to fund our requests for borrowings under these facilities. If lenders default under these facilities by not being able or willing to fund a borrowing request, it would adversely affect our ability to access borrowing capacity under these facilities.

We may be unable to execute our plans to develop and construct additional properties. Although the majority of our investments are in currently leased properties, we also develop, construct and redevelop properties, including some that are not fully pre-leased. When we develop, construct and redevelop properties, we assume the risk that actual costs will exceed our budgets, that we will experience conditions which delay or preclude project completion and that projected leasing will not occur. In addition, we may find that we are unable to successfully execute plans to obtain construction loans to fund property construction activities.

We may suffer adverse effects from acquisitions of commercial real estate properties. We may acquire existing commercial real estate properties to the extent that suitable acquisitions can be made on advantageous terms. Acquisitions of commercial properties entail risks, such as the risk that we may not be in a position, or have the opportunity in the future, to make suitable property acquisitions on advantageous terms and/or that such acquisitions will fail to perform as expected.

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We may pursue selective acquisitions of properties in regions where we have not previously owned properties. These acquisitions may entail risks in addition to those we face in other acquisitions where we are familiar with the regions, such as the risk that we do not correctly anticipate conditions or trends in a new market and therefore are not able to operate the acquired property profitably.

In addition, we may acquire properties that are subject to liabilities in situations where we have no recourse, or only limited recourse, against the prior owners or other third parties with respect to unknown liabilities. As a result, if a liability were asserted against us based upon ownership of those properties, we might have to pay substantial sums to settle or contest it, which could adversely affect our results of operations and cash flow. Examples of unknown liabilities with respect to acquired properties include, but are not limited to:

•	liabilities for remediation of disclosed or undisclosed environmental contamination;

•	claims by tenants, vendors or other persons dealing with the former owners of the properties;

•	liabilities incurred in the ordinary course of business; and

•	claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the properties.

Our wholesale data center may become obsolete. Wholesale data centers are much more expensive investments on a per square foot basis than office properties due to the level of infrastructure required to operate the centers. At the same time, technology, industry standards and service requirements for wholesale data centers are rapidly evolving and, as a result, the risk of investments we make in our wholesale data center becoming obsolete is higher than other commercial real estate properties. Our wholesale data center may become obsolete due to the development of new systems to deliver power to, or eliminate heat from, the servers housed in the properties, or due to other technological advances. In addition, we may not be able to efficiently upgrade or change power and cooling systems to meet new demands or industry standards without incurring significant costs that we may not be able to pass on to our tenants.

Certain of our properties containing data centers contain space not suitable for lease other than as data centers, which could make it difficult to reposition them for alternative use. 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. Several of our properties are pledged by us to support repayment of indebtedness. Any foreclosure on our properties could result in loss of income and asset value. In addition, we rely on borrowings to fund some or all of the costs of construction and development activities, new property acquisitions and other items.

Payments of principal and interest on our debt may leave us with insufficient cash to operate our properties or pay distributions to COPT’s shareholders required to maintain its qualification as a REIT. We are also subject to the risks that:

•	we may not be able to refinance our existing indebtedness, or may refinance on terms that are less favorable to us than the 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.

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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, 2017, we had $1.8 billion in debt, the future maturities of which are set forth in Note 10 to our consolidated financial statements. Our operations likely will not generate enough cash flow to repay all of this debt without additional borrowings, equity issuances and/or property sales. If we cannot refinance our debt, extend the repayment dates, or raise additional equity prior to the dates when our debt matures, we would default on our existing debt.

Our organizational documents do not limit the amount of indebtedness that we may incur. Therefore, we may incur additional indebtedness and become more highly leveraged, which could harm our financial position.

A downgrade in our credit ratings would materially adversely affect our business and financial condition. COPLP’s Senior Notes are currently rated investment grade by the three major rating agencies. These credit ratings are subject to ongoing evaluation by the credit rating agencies and can change. Any downgrades of our ratings or outlook by the credit rating agencies would have a material adverse impact on our cost and availability of capital and also could have a materially adverse effect on the market price of COPT’s common shares.

We have certain distribution requirements that reduce cash available for other business purposes. Since COPT is a REIT, it must distribute at least 90% of its annual taxable income, which limits the amount of cash that can be retained for other business purposes, including amounts to fund acquisitions and development activity. Also, it is possible that because of the differences between the time we actually receive revenue or pay expenses and the period during which we report those items for distribution purposes, we may have to borrow funds for COPT to meet the 90% distribution requirement.

We may be unable to continue to make distributions to our equityholders at expected levels. We expect to make regular quarterly cash distributions to our equityholders. However, our ability to make such distributions depends on a number of factors, some of which are beyond our control. Some of our loan agreements contain provisions that could, in the event of default, restrict future distributions. Our ability to make distributions at expected levels will also be dependent, in part, on other matters, including, but not limited to:

•	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 our 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.

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Our ability to pay distributions is further limited by the requirements of Maryland law. As a Maryland REIT, COPT may not under applicable Maryland law make a distribution if either of the following conditions exists after giving effect to the distribution: (1) the REIT would not be able to pay its debts as the debts become due in the usual course of business; or (2) the REIT’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the REIT were dissolved at the time of the distribution, to satisfy upon dissolution the rights of equityholders whose preferential rights are superior to those receiving the distribution. Therefore, we may not be able to make expected distributions to our equityholders if either of the above described conditions exists for COPT after giving effect to the distribution.

We may issue additional common or preferred shares/units that dilute our equityholders’ interests. We may issue additional common and preferred shares/units without shareholder approval. Similarly, COPT may cause COPLP to issue its common or preferred units for contributions of cash or property without approval by the limited partners of COPLP or COPT’s shareholders. Our existing equityholders’ interests could be diluted if such additional issuances were to occur.

We may suffer economic harm as a result of the actions of our partners in real estate joint ventures and other investments. We may invest in certain entities in which we are not the exclusive investor or principal decision maker. Investments in such entities may, under certain circumstances, involve risks not present when a third party is not involved, including the possibility that the other parties to these investments might become bankrupt or fail to fund their share of required capital contributions. Our partners in these entities may have economic, tax or other business interests or goals that are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Such investments may also lead to impasses on major decisions, such as whether or not to sell a property, because neither we nor the other parties to these investments may have full control over the entity. In addition, we may in certain circumstances be liable for the actions of the other parties to these investments.

 

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. These laws often impose liability on an entity even if the facility was not owned or operated by the entity.

Although most of our properties have been subject to varying degrees of environmental assessment, many of these assessments are limited in scope and may not include or identify all potential environmental liabilities or risks associated with the property.  Identification of new compliance concerns or undiscovered areas of contamination, changes in the extent or known scope of contamination, discovery of additional sites, human exposure to the contamination or changes in cleanup or compliance requirements could result in significant costs to us.

We may be adversely affected by natural disasters and the effects of climate change. Natural disasters, including earthquakes, storms and hurricanes, as well as the potential consequences of climate change could adversely impact our properties.  Over time, climate change could adversely affect demand for space in our properties or our ability to operate our properties; it could also have indirect effects on our business, including increasing the cost of (or making unavailable) property insurance, increasing the cost of energy and requiring us to expend funds as we seek to repair and protect our properties against such risks.

Terrorist attacks may adversely affect the value of our properties, our financial position and cash flows. We have significant investments in properties located in large metropolitan areas and near military installations. Future terrorist attacks could directly or indirectly damage our properties or cause losses that materially exceed our insurance coverage. After such an attack, tenants in these areas may choose to relocate their businesses to areas of the United States that may be perceived to be less likely targets of future terrorist activity, and fewer customers may choose to patronize businesses in these areas. This in turn would trigger a decrease in the demand for space in these areas, which could increase vacancies in our properties and force us to lease space on less favorable terms.

We may be subject to other possible liabilities that would adversely affect our financial position and cash flows. Our properties may be subject to other risks related to current or future laws, including laws relating to zoning, construction, fire and life safety requirements and other matters. These laws may require significant property modifications in the future and could result in the levy of fines against us. In addition, although we believe that we adequately insure our properties, we are

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subject to the risk that our insurance may not cover all of the costs to restore a property that is damaged by a fire or other catastrophic events, including acts of war or, as mentioned above, terrorism.

We may be subject to increased costs of insurance and limitations on coverage, particularly regarding acts of terrorism. Our portfolio of properties is insured for losses under our property, casualty and umbrella insurance policies. These policies include coverage for acts of terrorism. Future changes in the insurance industry’s risk assessment approach and pricing structure may increase the cost of insuring our properties and decrease the scope of insurance coverage. Most of our loan agreements contain customary covenants requiring us to maintain insurance. Although we believe that we have adequate insurance coverage for purposes of these agreements, we may not be able to obtain an equivalent amount of coverage at reasonable costs, or at all, in the future. In addition, if lenders insist on greater coverage than we are able to obtain, it could adversely affect our ability to finance and/or refinance our properties and execute our growth strategies.

Our business could be adversely affected by a negative audit by the United States Government. Agencies of the United States Government, including the Defense Contract Audit Agency and various agency Inspectors General, routinely audit and investigate government contractors. These agencies review a contractor’s performance under its contracts, cost structure and compliance with applicable laws, regulations, and standards. The United States Government also reviews the adequacy of, and a contractor’s compliance with, its internal control systems and policies. Any costs found to be misclassified may be subject to repayment. If an audit or investigation uncovers improper or illegal activities, we may be subject to civil or criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines, and suspension or prohibition from doing business with the United States Government. In addition, we could suffer serious reputational harm if allegations of impropriety were made against us.

Our business could be adversely affected by security breaches through cyber attacks, cyber intrusions or otherwise. We face risks associated with security breaches and other significant disruptions of our information technology networks and related systems, which are essential to our business operations. Such breaches and disruptions may occur through cyber attacks or cyber intrusions over the Internet, malware, computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization. Because of our concentration on serving the United States Government and its contractors with a general focus on national security and information technology, we may be more likely to be targeted by cyber attacks, including by governments, organizations or persons hostile to our government.  Despite our activities to maintain the security and integrity of our networks and related systems, as well as purchasing available insurance coverage, there can be no absolute assurance that these activities will be effective in mitigating these risks. A security breach involving our networks and related systems could disrupt our operations in numerous ways, including by creating difficulties for our tenants that may reflect poorly on us.

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

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these requirements, however, are highly technical and complex. The determination that we are a REIT requires an analysis of various factual matters and circumstances that may not be totally within our control. For example, to qualify as a REIT, at least 95% of COPT’s gross income must come from certain sources that are specified in the REIT tax laws. COPT is also required to distribute to shareholders at least 90% of its REIT taxable income (excluding capital gains). 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. In December 2017, the legislation commonly referred to as the Tax Cuts and Jobs Act, which made widespread changes to the Internal Revenue Code, was signed into law; while we believe that this law generally will have a favorable effect on REITs and their shareholders, uncertainty remains regarding the full effect that this law will have on us and our tenants, equityholders and other stakeholders. We also cannot predict whether, when or to what extent other new U.S. federal tax laws, regulations, interpretations or rulings will be issued. As a result, changes in U.S. federal tax laws could negatively impact our operating results, financial condition and business operations, and adversely impact our equityholders.

Occasionally, changes in state and local tax laws or regulations are enacted that may result in an increase in our tax liability. Shortfalls in tax revenues for states and municipalities in recent years 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 or income.

A number of factors could cause our security prices to decline. As is the case with any publicly-traded securities, certain factors outside of our control could influence the value of COPT’s common and preferred shares. These conditions include, but are not limited to:

•	market perception of REITs in general and office REITs in particular;

•	market perception regarding our major tenants and sector concentrations;

•	the level of institutional investor interest in COPT;

•	general economic and business conditions;

•	prevailing interest rates;

•	our financial performance;

•	our underlying asset value;

•	market perception of our financial condition, performance, dividends and growth potential; and

•	adverse changes in tax laws.

We may experience significant losses and harm to our financial condition if financial institutions holding our cash and cash equivalents file for bankruptcy protection. We believe that we maintain our cash and cash equivalents with high quality financial institutions. We have not experienced any losses to date on our deposited cash. However, we may incur significant losses and harm to our financial condition in the future if any of these financial institutions files for bankruptcy protection.

Item 1B. Unresolved Staff Comments

None

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Item 2. Properties

The following table provides certain information about our operating property segments as of December 31, 2017 (dollars and square feet in thousands, except per square foot amounts):

Segment		Number of Properties			Rentable Square Feet or Megawatts (“MW”)			Occupancy (1)			Annualized Rental Revenue (2)				Annualized Rental Revenue per Occupied Square Foot (2)(3)
Office and Data Center Shell Portfolio
Defense/IT Locations:
Fort Meade/BW Corridor:
National Business Park (Annapolis Junction, MD)		31			3,577			95.2	%		$	132,114			$38.82
Howard County, MD		35			2,759			96.5	%		73,619				27.65
Other		21			1,563			94.8	%		41,177				27.79
Fort Meade/BW Corridor Subtotal / Average		87			7,899			95.6	%		246,910				32.71
Northern Virginia Defense/IT		12			1,840			89.1	%		51,694				31.53
Lackland Air Force Base		7			953			100.0	%		47,451				49.79
Navy Support Locations		21			1,253			87.7	%		30,973				28.18
Redstone Arsenal		7			651			98.2	%		14,663				22.94
Data Center Shells
Consolidated Properties		9			1,478			100.0	%		21,528				14.57
Unconsolidated Joint Venture Properties (4)		6			962			100.0	%		5,333				11.09
Defense/IT Locations Subtotal / Average		149			15,036			95.2	%		418,552				29.60
Regional Office		7			2,023			89.5	%		57,722				31.88
Other Properties		3			286			34.4	%		2,558				26.03
Total Office and Data Center Shell Portfolio		159			17,345			93.6	%		478,832				$29.84
Wholesale Data Center		1			19.25 MW			87.6	%		22,380				N/A
Total Operating Properties											$	501,212
Total Consolidated Operating Properties											$	495,879

(1)    This percentage is based upon all rentable square feet or megawatts under lease terms that were in effect as of December 31, 2017.

(2)

Annualized rental revenue is the monthly contractual base rent as of December 31, 2017 (ignoring free rent then in effect) multiplied by 12, plus the estimated annualized expense reimbursements under existing leases. With regard to properties owned through an unconsolidated real estate joint venture, we include the portion of annualized rental revenue allocable to our ownership interest. We consider annualized rental revenue to be a useful measure for analyzing revenue sources because, since it is point-in-time based, it does not contain increases and decreases in revenue associated with periods in which lease terms were not in effect; historical revenue under generally accepted accounting principles does contain such fluctuations. We find the measure particularly useful for leasing, tenant and segment analysis.

(3)

Annualized rental revenue per occupied square foot is a property’s annualized rental revenue divided by that property’s occupied square feet as of December 31, 2017. Our computation of annualized rental revenue excludes the effect of lease incentives. The annualized rent per occupied square foot, including the effect of lease incentives, was $29.58 for our total office and data center shell portfolio, $32.58 for Fort Meade/BW Corridor (our largest Defense/IT Location sub-segment) and $31.31 for our Regional Office portfolio.

(4)	Represents properties owned through an unconsolidated real estate joint venture. The amounts reported above reflect 100% of the properties’ square footage but only reflect the portion of Annualized Rental Revenue that was allocable to our ownership interest.

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The following table provides certain information about office and data center shell properties that were under construction, or had redevelopment underway, or otherwise approved, as of December 31, 2017 (dollars and square feet in thousands):

Property and Location		Estimated Rentable Square Feet Upon Completion			Percentage Leased			Calendar Quarter Anticipated to be Operational		Costs Incurred to Date (1)				Estimated Costs to Complete (1)
Under Construction
Fort Meade/BW Corridor:
310 Sentinel Way (2)		191			12	%		(3)		$	41,237			$	13,115
Annapolis Junction, MD
540 National Business Parkway (2)		145			49	%		1Q 2018		32,630				11,082
Annapolis Junction, MD
5801 University Research Court		71			0	%		1Q 2019		9,938				8,606
College Park, MD
Subtotal / Average		407			23	%				83,805				32,803
Data Center Shells:
DC 23		149			100	%		3Q 2018		498				20,849
Northern VA
BLC 1		149			100	%		3Q 2018		12,277				20,723
Northern VA
BLC 2		149			100	%		4Q 2018		12,201				20,909
Northern VA
Subtotal / Average		447			100	%				24,976				62,481
Northern Virginia Defense/IT:
NOVA Office B		161			0	%		(3)		31,187				10,313
Northern VA
Redstone Arsenal:
4100 Market Street		36			59	%		2Q 2019		1,014				6,452
Huntsville, AL
4000 Market Street		43			0	%		3Q 2019		466				7,649
Huntsville, AL
Subtotal / Average		79			27	%				1,480				14,101
Total Under Construction		1,094			51	%				$	141,448			$	119,698
Under Redevelopment
Fort Meade/BW Corridor:
7142 Columbia Gateway Drive (2)		22			73	%		1Q 2019		$	1,387			$	2,531
Columbia, MD

(1) Includes land, construction, leasing costs and allocated portion of structured parking and other shared infrastructure, if applicable.

(2) These properties had occupied square feet in service as of December 31, 2017. Therefore, the properties and their occupied square feet are included in our operating property statistics, including the information set forth on the previous page.

(3) The building shells of these properties were completed and held for future lease to the United States Government.

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The following table provides certain information about land that we owned or controlled as of December 31, 2017, including properties under ground lease to us (square feet in thousands):

Segment		Acres			Estimated Developable Square Feet
Defense/IT Locations:
Fort Meade/BW Corridor:
National Business Park		196			2,106
Howard County		27			590
Other		133			1,494
Total Fort Meade/BW Corridor		356			4,190
Northern Virginia Defense/IT Locations		59			1,965
Lackland Air Force Base		68			1,033
Navy Support Locations		44			109
Redstone Arsenal (1)		422			4,005
Data Center Shells		41			636
Total Defense/IT Locations		990			11,938
Regional Office (2)		11			1,090
Total land owned/controlled for future development		1,001			13,028
Other land owned/controlled		150			1,638
Total Land Owned/Controlled		1,151			14,666

(1) This land is owned by the United States Government and is controlled under a long-term, enhanced-use lease to a consolidated joint venture. As this land is developed in the future, the joint venture will execute site-specific leases under the master lease agreement. Rental payments will commence under the site-specific leases as cash rents under tenant leases commence at the respective properties.

(2) Includes a pre-leased, pre-construction project totaling 190,000 square feet.

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Lease Expirations

The following table provides a summary schedule of lease expirations for leases in place at our operating properties as of December 31, 2017 based on the non-cancelable term of tenant leases determined in accordance with generally accepted accounting principles (dollars and square feet in thousands, except per square foot amounts):

Year of Lease Expiration		Square Footage of Leases Expiring			Annualized Rental Revenue of Expiring Leases (1)				Percentage of Total Annualized Rental Revenue Expiring (1)			Total Annualized Rental Revenue of Expiring Leases Per Occupied Square Foot
					(in thousands)
2018: Office and Data Center Shells		2,135			$	68,997			13.8	%			$32.32
Wholesale Data Center		N/A			218				—	%		N/A
2019: Office and Data Center Shells		2,680			84,722				16.9	%		31.62
Wholesale Data Center		N/A			4,097				0.8	%		N/A
2020: Office and Data Center Shells		1,692			57,981				11.6	%		35.14
Wholesale Data Center		N/A			13,722				2.7	%		N/A
2021: Office and Data Center Shells		1,318			40,647				8.1	%		30.83
Wholesale Data Center		N/A			570				0.1	%		N/A
2022: Office and Data Center Shells		1,221			35,002				7.0	%		29.69
Wholesale Data Center		N/A			1,842				0.4	%		N/A
2023: Office and Data Center Shells		957			30,169				6.0	%		31.54
Wholesale Data Center		N/A			1,931				0.4	%		N/A
2024: Office and Data Center Shells		1,424			31,198				6.2	%		22.65
2025: Office and Data Center Shells		1,858			60,931				12.2	%		34.07
2026: Office and Data Center Shells		1,062			27,639				5.5	%		26.01
2027: Office and Data Center Shells		652			13,384				2.7	%		20.53
2028: Office and Data Center Shells		499			11,986				2.4	%		24.03
2029: Office and Data Center Shells		489			11,736				2.3	%		23.99
2033: Office and Data Center Shells		240			4,440				0.9	%		18.50
Total Operating Properties		16,227			$	501,212			100.0	%		N/A
Total Office and Data Center Shells		16,227			$	478,832			100.0	%			$29.84

(1)	Please refer to definition provided on first page of Item 2 of this Annual Report on Form 10-K.

With regard to office and data center shell property leases expiring in 2018, we believe that the weighted average annualized rental revenue per occupied square foot for such leases as of December 31, 2017 was, on average, approximately 0% to 2% higher than estimated current market rents for the related space, with specific results varying by market.

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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 table below shows the range of the high and low sale prices for COPT’s common shares as reported on the NYSE, as well as the quarterly common share dividends per share declared:

		Price Range				Dividends
2016		Low		High		Per Share
First Quarter		$19.52		$26.45		$0.2750
Second Quarter		$25.17		$29.58		$0.2750
Third Quarter		$26.91		$30.55		$0.2750
Fourth Quarter		$24.92		$31.51		$0.2750
		Price Range				Dividends
2017		Low		High		Per Share
First Quarter		$30.22		$34.25		$0.2750
Second Quarter		$32.22		$36.03		$0.2750
Third Quarter		$32.03		$35.66		$0.2750
Fourth Quarter		$28.88		$33.81		$0.2750

The number of holders of record of COPT’s common shares was 463 as of December 31, 2017. This number does not include shareholders whose shares are held of record by a brokerage house or clearing agency, but does include any such brokerage house or clearing agency as one record holder.

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 above 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.

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 December 31, 2017, there were 35 holders of record of COPLP’s common units.

Unregistered Sales of Equity Securities and Use of Proceeds

During the three months ended December 31, 2017, 2,513 of COPLP’s common units were exchanged for 2,513 COPT common shares in accordance with COPLP’s Second Amended and Restated Limited Partnership Agreement, as amended.  The issuance of these common shares was effected in reliance upon the exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended.

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COPT’s Common Shares Performance Graph

The graph and the table set forth below assume $100 was invested on December 31, 2012 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”):

		Period Ended
Index		12/31/12				12/31/13				12/31/14				12/31/15				12/31/16				12/31/17
Corporate Office Properties Trust		$	100.00			$	99.11			$	123.58			$	99.58			$	147.98			$	143.16
S&P 500		$	100.00			$	132.39			$	150.51			$	152.59			$	170.84			$	208.14
NAREIT All Equity REIT Index		$	100.00			$	102.86			$	131.68			$	135.40			$	147.09			$	159.85

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, 2013 through 2017. Our revenues relating to real estate operations are derived from rents and property operating expense reimbursements earned from tenant leases on our properties. Most of our expenses relating to our real estate operations take the form of property operating costs (such as real estate taxes, utilities and repairs and maintenance) and depreciation and amortization associated with our operating properties. Most of our profitability from real estate operations depends on our ability to maintain high levels of occupancy and increase rents, which is affected by a number of factors, including, among other things, our tenants’ ability to fulfill their lease obligations and their continuing space needs based on variables such as employment levels, business confidence, competition, general economic conditions of the markets in which we operate and governmental actions and initiatives. You should read the following summary historical financial data in conjunction with the consolidated historical financial statements and notes thereto of COPT and its subsidiaries and COPLP and its subsidiaries and the section of this report entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information.

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Corporate Office Properties Trust and Subsidiaries
(in thousands, except per share data and number of properties)
	2017				2016				2015				2014				2013
Revenues
Revenues from real estate operations	$	509,980			$	525,964			$	519,064			$	479,725			$	460,997
Construction contract and other service revenues	102,840				48,364				106,402				106,748				62,363
Total revenues	612,820				574,328				625,466				586,473				523,360
Expenses
Property operating expenses	190,964				197,530				194,494				179,934				167,199
Depreciation and amortization associated with real estate operations	134,228				132,719				140,025				136,086				113,214
Construction contract and other service expenses	99,618				45,481				102,696				100,058				58,875
Impairment losses	15,123				101,391				23,289				1,416				5,857
General, administrative and leasing expenses	30,837				36,553				31,361				31,794				30,869
Business development expenses and land carry costs	6,213				8,244				13,507				5,573				5,436
Total operating expenses	476,983				521,918				505,372				454,861				381,450
Operating income	135,837				52,410				120,094				131,612				141,910
Interest expense	(76,983		)		(83,163		)		(89,074		)		(92,393		)		(82,010		)
Interest and other income	6,318				5,444				4,517				4,923				3,834
(Loss) gain on early extinguishment of debt	(513		)		(1,110		)		85,275				(9,552		)		(27,030		)
Income (loss) from continuing operations before equity in income of unconsolidated entities and income taxes	64,659				(26,419		)		120,812				34,590				36,704
Equity in income of unconsolidated entities	2,882				1,332				62				229				2,110
Income tax expense	(1,098		)		(244		)		(199		)		(310		)		(1,978		)
Income (loss) from continuing operations	66,443				(25,331		)		120,675				34,509				36,836
Discontinued operations (1)	—				—				156				26				55,692
Income (loss) before gain on sales of real estate	66,443				(25,331		)		120,831				34,535				92,528
Gain on sales of real estate (2)	9,890				40,986				68,047				10,671				9,016
Net income	76,333				15,655				188,878				45,206				101,544
Net income attributable to noncontrolling interests	(6,242		)		(4,216		)		(10,578		)		(4,951		)		(7,837		)
Net income attributable to COPT	70,091				11,439				178,300				40,255				93,707
Preferred share dividends	(6,219		)		(14,297		)		(14,210		)		(15,939		)		(19,971		)
Issuance costs associated with redeemed preferred shares (3)	(6,847		)		(17		)		—				(1,769		)		(2,904		)
Net income (loss) attributable to COPT common shareholders	$	57,025			$	(2,875	)		$	164,090			$	22,547			$	70,832
Basic earnings per common share (4)
Income (loss) from continuing operations	$	0.57			$	(0.03	)		$	1.74			$	0.25			$	0.21
Net income (loss)	$	0.57			$	(0.03	)		$	1.74			$	0.25			$	0.83
Diluted earnings per common share (4)
Income (loss) from continuing operations	$	0.57			$	(0.03	)		$	1.74			$	0.25			$	0.21
Net income (loss)	$	0.57			$	(0.03	)		$	1.74			$	0.25			$	0.83
Weighted average common shares outstanding – basic	98,969				94,502				93,914				88,092				85,167
Weighted average common shares outstanding – diluted	99,155				94,502				97,667				88,263				85,224

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	2017				2016				2015				2014				2013
Balance Sheet Data (as of year end):
Total properties, net	$	3,141,105			$	3,073,362			$	3,349,748			$	3,296,914			$	3,214,301
Total assets	$	3,578,484			$	3,780,885			$	3,909,312			$	3,664,236			$	3,621,251
Debt	$	1,828,333			$	1,904,001			$	2,077,752			$	1,914,036			$	1,919,002
Total liabilities	$	2,103,773			$	2,163,242			$	2,273,530			$	2,124,935			$	2,106,244
Redeemable noncontrolling interests	$	23,125			$	22,979			$	19,218			$	18,417			$	17,758
Total equity	$	1,451,586			$	1,594,664			$	1,616,564			$	1,520,884			$	1,497,249
Other Financial Data (for the year ended):
Cash flows provided by (used in):
Operating activities	$	230,654			$	232,538			$	204,008			$	193,885			$	158,979
Investing activities	$	(89,710	)		$	71,449			$	(307,532	)		$	(209,689	)		$	(119,790	)
Financing activities	$	(338,546	)		$	(154,434	)		$	157,757			$	(32,492	)		$	4,590
Numerator for diluted EPS	$	56,576			$	(3,294	)		$	169,787			$	22,115			$	70,418
Diluted funds from operations (“FFO”) (5)	$	199,553			$	178,761			$	249,454			$	155,296			$	214,149
Diluted FFO, as adjusted for comparability (5)	$	207,739			$	197,317			$	195,824			$	173,110			$	175,613
Diluted FFO per share (5)	$	1.95			$	1.82			$	2.55			$	1.69			$	2.40
Diluted FFO, as adjusted for comparability per share (5)	$	2.03			$	2.01			$	2.01			$	1.88			$	1.97
Cash dividends declared per common share	$	1.10			$	1.10			$	1.10			$	1.10			$	1.10
Property Data (as of year end):
Number of office and data center shells owned (6)	159				164				177				173				183
Total rentable square feet owned (6)	17,345				17,190				18,053				16,790				17,370

(1)	Includes income derived from 31 operating properties disposed in 2013.

(2)	Reflects gain from sales of properties and unconsolidated real estate joint ventures not associated with discontinued operations.

(3)	Reflects a decrease to net income available to common shareholders pertaining to the original issuance costs recognized in connection with the redemption of the Series K Preferred Shares (following shareholder notification of such redemption in December 2016) and Series L Preferred Shares in 2017, the Series H Preferred Shares in 2014 and the Series J Preferred Shares in 2013.

(4)	Basic and diluted earnings per common share are calculated based on amounts attributable to common shareholders of COPT.

(5)	For definitions and reconciliations of these measures to their comparable measures under generally accepted accounting principles, you should refer to the section entitled “Funds from Operations” within the section entitled “Management's Discussion and Analysis of Financial Condition and Results of Operations.”

(6)	Amounts reported reflect only operating office and data center shell properties, including six owned through an unconsolidated real estate joint venture.

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Corporate Office Properties, L.P. and Subsidiaries
(in thousands, except per share data and number of properties)
	2017				2016				2015				2014				2013
Revenues
Revenues from real estate operations	$	509,980			$	525,964			$	519,064			$	479,725			$	460,997
Construction contract and other service revenues	102,840				48,364				106,402				106,748				62,363
Total revenues	612,820				574,328				625,466				586,473				523,360
Expenses
Property operating expenses	190,964				197,530				194,494				179,934				167,199
Depreciation and amortization associated with real estate operations	134,228				132,719				140,025				136,086				113,214
Construction contract and other service expenses	99,618				45,481				102,696				100,058				58,875
Impairment losses	15,123				101,391				23,289				1,416				5,857
General, administrative and leasing expenses	30,837				36,553				31,361				31,794				30,869
Business development expenses and land carry costs	6,213				8,244				13,507				5,573				5,436
Total operating expenses	476,983				521,918				505,372				454,861				381,450
Operating income	135,837				52,410				120,094				131,612				141,910
Interest expense	(76,983		)		(83,163		)		(89,074		)		(92,393		)		(82,010		)
Interest and other income	6,318				5,444				4,517				4,923				3,834
(Loss) gain on early extinguishment of debt	(513		)		(1,110		)		85,275				(9,552		)		(27,030		)
Income (loss) from continuing operations before equity in income of unconsolidated entities and income taxes	64,659				(26,419		)		120,812				34,590				36,704
Equity in income of unconsolidated entities	2,882				1,332				62				229				2,110
Income tax expense	(1,098		)		(244		)		(199		)		(310		)		(1,978		)
Income (loss) from continuing operations	66,443				(25,331		)		120,675				34,509				36,836
Discontinued operations (1)	—				—				156				26				55,692
Income (loss) before gain on sales of real estate	66,443				(25,331		)		120,831				34,535				92,528
Gain on sales of real estate (2)	9,890				40,986				68,047				10,671				9,016
Net income	76,333				15,655				188,878				45,206				101,544
Net income attributable to noncontrolling interests	(3,646		)		(3,715		)		(3,520		)		(3,276		)		(3,907		)
Net income attributable to COPLP	72,687				11,940				185,358				41,930				97,637
Preferred unit distributions	(6,879		)		(14,957		)		(14,870		)		(16,599		)		(20,631		)
Issuance costs associated with redeemed preferred units (3)	(6,847		)		(17		)		—				(1,769		)		(2,904		)
Net income (loss) attributable to COPLP common unitholders	$	58,961			$	(3,034	)		$	170,488			$	23,562			$	74,102
Basic earnings per common unit (4)
Income (loss) from continuing operations	$	0.57			$	(0.04	)		$	1.74			$	0.25			$	0.21
Net income (loss)	$	0.57			$	(0.04	)		$	1.74			$	0.25			$	0.83
Diluted earnings per common unit (4)
Income (loss) from continuing operations	$	0.57			$	(0.04	)		$	1.74			$	0.25			$	0.21
Net income (loss)	$	0.57			$	(0.04	)		$	1.74			$	0.25			$	0.83
Weighted average common units outstanding – basic	102,331				98,135				97,606				91,989				89,036
Weighted average common units outstanding – diluted	102,517				98,135				97,667				92,160				89,093

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	2017				2016				2015				2014				2013
Balance Sheet Data (as of year end):
Total properties, net	$	3,141,105			$	3,073,362			$	3,349,748			$	3,296,914			$	3,214,301
Total assets	$	3,573,868			$	3,775,448			$	3,903,549			$	3,658,354			$	3,613,784
Debt	$	1,828,333			$	1,904,001			$	2,077,752			$	1,914,036			$	1,919,002
Total liabilities	$	2,099,157			$	2,157,805			$	2,267,767			$	2,119,053			$	2,098,777
Redeemable noncontrolling interests	$	23,125			$	22,979			$	19,218			$	18,417			$	17,758
Total equity	$	1,451,586			$	1,594,664			$	1,616,564			$	1,520,884			$	1,497,249
Other Financial Data (for the year ended):
Cash flows provided by (used in):
Operating activities	$	230,654			$	232,538			$	204,008			$	193,885			$	158,979
Investing activities	$	(89,710	)		$	71,449			$	(307,532	)		$	(209,689	)		$	(119,790	)
Financing activities	$	(338,546	)		$	(154,434	)		$	157,757			$	(32,492	)		$	4,590
Numerator for diluted EPU	$	58,512			$	(3,453	)		$	169,782			$	23,130			$	73,688
Cash distributions declared per common unit	$	1.10			$	1.10			$	1.10			$	1.10			$	1.10
Property Data (as of year end):
Number of office and data center shells owned (5)	159				164				177				173				183
Total rentable square feet owned (5)	17,345				17,190				18,053				16,790				17,370

(1)	Includes income derived from 31 operating properties disposed in 2013.

(2)	Reflects gain from sales of properties and unconsolidated real estate joint ventures not associated with discontinued operations.

(3)	Reflects a decrease to net income available to common shareholders pertaining to the original issuance costs recognized in connection with the redemption of the Series K Preferred Units (following notification of such redemption in December 2016) and Series L Preferred Units in 2017, the Series H Preferred Units in 2014 and the Series J Preferred Units in 2013.

(4)	Basic and diluted earnings per common unit are calculated based on amounts attributable to common unitholders of COPLP.

(5)	Amounts reported reflect only operating office and data center shell properties, including six owned through an unconsolidated real estate joint venture.

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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 a curtailment of demand for additional space by our strategic customers;

•	our ability to borrow on favorable terms;

•	risks of real estate acquisition and development activities, including, among other things, risks that development projects may not be completed on schedule, that tenants may not take occupancy or pay rent or that development or operating costs may be greater than anticipated;

•	risks of investing through joint venture structures, including risks that our joint venture partners may not fulfill their financial obligations as investors or may take actions that are inconsistent with our objectives;

•	changes in our plans for properties or views of market economic conditions or failure to obtain development rights, either of which could result in recognition of significant impairment losses;

•	our ability to satisfy and operate effectively under Federal income tax rules relating to real estate investment trusts and partnerships;

•	the dilutive effects of issuing additional common shares;

•	our ability to achieve projected results; and

•	environmental requirements.

We undertake no obligation to update or supplement forward-looking statements.

 

Overview

We ended 2017 with our office and data center shell portfolio 93.6% occupied, an increase from 92.1% as of December 31, 2016 and representing our highest year-end occupancy since 2005. Most of this increase was attributable to high occupancy rates in newly-developed properties placed into service and re-tenanted space in existing properties (re-tenant is the term we use to refer to new occupancy of space previously occupied but subsequently vacated). Our Same Properties (defined below) were 92.8% occupied as of December 31, 2017, increased from 91.8% as of December 31, 2016, and had higher average occupancy in 2017 than in 2016.

Occupancy for our Defense/IT Locations segment increased to 95.2% as of December 31, 2017 from 92.6% at December 31, 2016, which included increases in each of that segment’s sub-segments. From 2012 through 2015, our ability to lease Defense/IT Locations properties was adversely affected by diminished defense spending, a shift in contract award criteria and uncertainty regarding the potential for future reductions in government spending targeting defense. This served to disrupt the government’s process for awarding contracts to prospective tenants and pressured defense contractor margins, causing significant contraction in the defense contractor sector. The government’s passage of appropriations legislation for fiscal years 2015, 2016 and 2017 brought clarity regarding funding for defense spending and elevated spending levels through September 30, 2017; this served to normalize the leasing environment for our Defense/IT Locations, resulting in increased segment occupancy over that timeframe.  Funding for the Department of Defense’s discretionary base budget authority, as set forth in the National Defense Authorization Act for Fiscal Year 2018, represents a 14% increase over the prior year. While, as of mid-February 2018, Congress had not yet appropriated funding for this Act and the United States Government was operating under a continuing resolution, we believe that the defense industry has, to a certain extent, adapted to operating under new contract

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award criteria and to uncertainty pertaining to timing of defense appropriations. We also believe that the knowledge-based activities of most of our tenants will continue to be a priority in defense budgets as such activities are considered critical to our national security.

In 2017, we further increased our portfolio’s concentration in Defense/IT Location properties by:

•	placing into service an aggregate of 1.2 million square feet in eight newly-constructed and three redeveloped Defense/IT Location properties. These square feet were 97.8% leased as of December 31, 2017; and

•

selling 13 operating properties totaling 992,000 square feet that were 91.8% occupied and other land for $184.2 million. These operating property sales included: eight properties representing the last of our White Marsh, Maryland portfolio, including the last of our Regional Office properties not located in urban/urban-like submarkets; and five Defense/IT Location properties that included three in the Greater Washington, DC/Baltimore region and two located outside of our strategic investment area.

Due in large part to these development and sale activities, the percentage of our office and data center shell portfolio’s annualized rent from Defense/IT Locations increased to 87.4% as of December 31, 2017 from 84.5% as of December 31, 2016; we expect this trend to continue in 2018 as we place into service additional newly-constructed properties.

We entered 2017 with $210 million in cash on hand and $800 million in borrowing capacity under our Revolving Credit Facility, with goals of redeeming COPT’s remaining $199 million in preferred equity and funding development activities, while maintaining our debt and liquidity levels. As a result, in 2017:

•	we funded $201 million in construction, development and redevelopment costs;

•	COPT redeemed of all of its remaining preferred shares, including its:

•	Series K Preferred Shares effective January 21, 2017 at a price of $50 per share, or $26.6 million in the aggregate, plus accrued and unpaid dividends thereon through the date of redemption using available cash. These shares accrued dividends equal to 5.6% of their liquidation preference; and

•	Series L Preferred Shares effective June 27, 2017 at a price of $25 per share, or $172.5 million in the aggregate, plus accrued and unpaid dividends thereon through the date of redemption using borrowings from our Revolving Credit Facility. These shares accrued dividends equal to 7.375% of their liquidation preference;

•	we repaid $200.0 million of the loan balance on a term loan scheduled to mature in 2020 using available cash;

•	we used most of the proceeds from the property sales discussed above to repay borrowings under our Revolving Credit Facility and fund cash reserves;

•

COPT entered into forward equity sale agreements effective November 2, 2017 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 to fund low-risk, high-probability development activities. The forward sale price that we expect to receive upon physical settlement of the agreements will be subject to adjustment on a daily basis based on a floating interest rate factor equal to the overnight bank funding rate less a spread, and will be decreased on each of certain dates specified in the agreements during the term of the agreements. On December 27, 2017, COPT issued 1.7 million common shares under the agreements for net proceeds of $50.0 million, which was used to fund development land acquisitions; and

•	COPT issued 591,000 COPT common shares at a weighted average price of $33.84 per share under our at-the-market (“ATM”) stock offering program established in September 2016. Net proceeds from the shares issued totaled $19.7 million, which were used primarily to fund cash reserves.

We ended 2017:

•	with $1.83 billion in debt, which was decreased from $1.90 billion as of December 31, 2016; and

•	from a liquidity perspective with: $12 million in cash on hand; $674 million in borrowing capacity under our Revolving Credit Facility; and 7.5 million shares available for issuance under COPT’s forward equity sale agreements with a settlement value of $221.9 million.

Net operating income (“NOI”) from real estate operations, our segment performance measure discussed further below, increased $5.9 million from 2016 to 2017 for our Same Properties due in large part to a higher average occupancy rate and average straight-line rent per occupied square foot. Our total NOI from real estate operations decreased from 2016 to 2017 due to our sale of properties in each of the years. Our net income increased $60.7 million from 2016 to 2017 due primarily to: an $86.3 million decrease in impairment losses attributable primarily to decisions by us in 2016 to either sell, or abandon plans to develop, properties; offset in part by a $31.1 million decrease in gain on sales of real estate.

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We discuss significant factors contributing to changes in our net income over the last three years in the section below entitled “Results of Operations.” The results of operations discussion is combined for COPT and COPLP because there are no material differences in the results of operations between the two reporting entities.

In addition, the section below entitled “Liquidity and Capital Resources” includes discussions of, among other things:

•	how we expect to generate cash for short and long-term capital needs; and