Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)



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



For the quarterly period ended	June 30, 2019



☐	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	Trading Symbol(s)	Name of each exchange on which registered
Common Shares of beneficial interest, $0.01 par value	OFC	New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Corporate Office Properties Trust ☒ Yes ☐ No

Corporate Office Properties, L.P. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Corporate Office Properties Trust ☒ Yes ☐ No

Corporate Office Properties, L.P. ☒ Yes ☐ No

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

Corporate Office Properties Trust

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

Corporate Office Properties, L.P.

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Corporate Office Properties Trust ☐

Corporate Office Properties, L.P. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Corporate Office Properties Trust ☐ Yes ☒ No

Corporate Office Properties, L.P. ☐ Yes ☒ No

As of July 26, 2019, 111,949,887 of Corporate Office Properties Trust’s Common Shares of Beneficial Interest, $0.01 par value, were issued and outstanding.

EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the period ended June 30, 2019 of Corporate Office Properties Trust (“COPT”) and subsidiaries (collectively, the “Company”) and Corporate Office Properties, L.P. (“COPLP”) and subsidiaries (collectively, the “Operating Partnership”). Unless stated otherwise or the context otherwise requires, “we,” “our,” and “us” refer collectively to COPT, COPLP and their subsidiaries.

COPT is a real estate investment trust, or REIT, and the sole general partner of COPLP. As of June 30, 2019, COPT owned 98.6% of the outstanding common units in COPLP; the remaining common units and all of the outstanding COPLP preferred units were owned by third parties. As the sole general partner of COPLP, COPT controls COPLP and can cause it to enter into major transactions including acquisitions, dispositions and refinancings and cause changes in its line of business, capital structure and distribution policies.

There are a few differences between the Company and the Operating Partnership which are reflected in this Form 10-Q. 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 and limited liability companies (“LLCs”); 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 and LLCs. The only other

significant differences between the consolidated financial statements of COPT and those of COPLP are assets in connection with a non-qualified elective deferred compensation plan and the corresponding liability to the plan’s participants that are held directly by COPT.

We believe combining the quarterly reports on Form 10-Q 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:


•	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 8, Prepaid Expenses and Other Assets, Net of COPT and subsidiaries and COPLP and subsidiaries; and


•	Note 16, Earnings per Share of COPT and subsidiaries and Earnings per Unit of COPLP and subsidiaries;


•	“Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources of COPT”; and


•	“Item 2: 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 I, Item 4. Controls and Procedures and separate Exhibit 31 and Exhibit 32 certifications for each of COPT and COPLP to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the requisite certifications and that COPT and COPLP are compliant with Rule 13a-15 and Rule 15d-14 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and 18 U.S.C. §1350.

TABLE OF CONTENTS

FORM 10-Q



		PAGE
PART I: FINANCIAL INFORMATION

Item 1:	Financial Statements:
Consolidated Financial Statements of Corporate Office Properties Trust
	Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018 (unaudited)	3
	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2019 and 2018 (unaudited)	4
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2019 and 2018 (unaudited)	5
	Consolidated Statements of Equity for the Three and Six Months Ended June 30, 2019 and 2018 (unaudited)	6
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018 (unaudited)	8
Consolidated Financial Statements of Corporate Office Properties, L.P.
	Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018 (unaudited)	10
	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2019 and 2018 (unaudited)	11
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2019 and 2018 (unaudited)	12
	Consolidated Statements of Equity for the Three and Six Months Ended June 30, 2019 and 2018 (unaudited)	13
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018 (unaudited)	15
Notes to Consolidated Financial Statements (unaudited)		17
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	52
Item 4:	Controls and Procedures	52

PART II: OTHER INFORMATION

Item 1:	Legal Proceedings	53
Item 1A:	Risk Factors	53
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 3:	Defaults Upon Senior Securities	54
Item 4:	Mine Safety Disclosures	54
Item 5:	Other Information	54
Item 6:	Exhibits	55

SIGNATURES		56

PART I: FINANCIAL INFORMATION

ITEM 1. Financial Statements

Corporate Office Properties Trust and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share data)

(unaudited)



	June 30, 2019			December 31, 2018
Assets
Properties, net:
Operating properties, net	$	2,719,585		$	2,847,265
Projects in development or held for future development	474,787			403,361
Total properties, net	3,194,372			3,250,626
Property - operating right-of-use assets	27,434			—
Property - finance right-of-use assets	40,476			—
Assets held for sale, net	54,448			—
Cash and cash equivalents	46,282			8,066
Investment in unconsolidated real estate joint ventures	65,336			39,845
Accounts receivable	58,189			26,277
Deferred rent receivable	86,707			89,350
Intangible assets on real estate acquisitions, net	31,162			43,470
Deferred leasing costs (net of accumulated amortization of $33,866 and $31,994, respectively)	52,227			50,191
Investing receivables	70,656			56,982
Prepaid expenses and other assets, net	76,180			91,198
Total assets	$	3,803,469		$	3,656,005
Liabilities and equity
Liabilities:
Debt, net	$	1,784,362		$	1,823,909
Accounts payable and accrued expenses	152,196			92,855
Rents received in advance and security deposits	27,477			30,079
Dividends and distributions payable	31,346			30,856
Deferred revenue associated with operating leases	8,161			9,125
Property - operating lease liabilities	16,640			—
Interest rate derivatives	23,547			5,459
Other liabilities	10,826			10,414
Total liabilities	2,054,555			2,002,697
Commitments and contingencies (Note 17)
Redeemable noncontrolling interests	29,803			26,260
Equity:
Corporate Office Properties Trust’s shareholders’ equity:
Common Shares of beneficial interest ($0.01 par value; 150,000,000 shares authorized; shares issued and outstanding of 111,949,887 at June 30, 2019 and 110,241,868 at December 31, 2018)	1,119			1,102
Additional paid-in capital	2,475,293			2,431,355
Cumulative distributions in excess of net income	(780,667		)	(846,808		)
Accumulated other comprehensive loss	(23,465		)	(238		)
Total Corporate Office Properties Trust’s shareholders’ equity	1,672,280			1,585,411
Noncontrolling interests in subsidiaries:
Common units in COPLP	21,039			19,168
Preferred units in COPLP	8,800			8,800
Other consolidated entities	16,992			13,669
Noncontrolling interests in subsidiaries	46,831			41,637
Total equity	1,719,111			1,627,048
Total liabilities, redeemable noncontrolling interests and equity	$	3,803,469		$	3,656,005

See accompanying notes to consolidated financial statements.

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2019			2018			2019			2018
Revenues
Lease revenue	$	131,415		$	127,907		$	262,318		$	255,040
Other property revenue	1,356			1,255			2,443			2,400
Construction contract and other service revenues	42,299			17,581			59,249			44,779
Total revenues	175,070			146,743			324,010			302,219
Operating expenses
Property operating expenses	47,886			49,446			97,331			100,397
Depreciation and amortization associated with real estate operations	34,802			33,190			69,598			66,702
Construction contract and other service expenses	41,002			16,941			57,328			43,157
General, administrative and leasing expenses	9,386			7,628			18,137			14,920
Business development expenses and land carry costs	870			1,234			1,983			2,848
Total operating expenses	133,946			108,439			244,377			228,024
Interest expense	(18,475		)	(18,945		)	(37,149		)	(37,729		)
Interest and other income	1,849			1,439			4,135			2,798
Gain on sales of real estate	84,469			(23		)	84,469			(27		)
Income before equity in income of unconsolidated entities and income taxes	108,967			20,775			131,088			39,237
Equity in income of unconsolidated entities	420			373			811			746
Income tax benefit (expense)	176			(63		)	(18		)	(118		)
Net income	109,563			21,085			131,881			39,865
Net income attributable to noncontrolling interests:
Common units in COPLP	(1,339		)	(608		)	(1,596		)	(1,152		)
Preferred units in COPLP	(165		)	(165		)	(330		)	(330		)
Other consolidated entities	(1,268		)	(878		)	(2,305		)	(1,799		)
Net income attributable to COPT common shareholders	$	106,791		$	19,434		$	127,650		$	36,584

Earnings per common share: (1)
Net income attributable to COPT common shareholders - basic	$	0.95		$	0.19		$	1.15		$	0.36
Net income attributable to COPT common shareholders - diluted	$	0.95		$	0.19		$	1.15		$	0.36

(1) Basic and diluted earnings per common share are calculated based on amounts attributable to common shareholders of Corporate Office Properties Trust.

See accompanying notes to consolidated financial statements.

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Comprehensive Income

(in thousands)

(unaudited)



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2019			2018			2019			2018
Net income	$	109,563		$	21,085		$	131,881		$	39,865
Other comprehensive (loss) income
Unrealized (loss) gain on interest rate derivatives	(13,545		)	1,912			(22,390		)	6,588
(Gain) loss on interest rate derivatives recognized in interest expense	(557		)	(47		)	(1,127		)	198
Other comprehensive (loss) income	(14,102		)	1,865			(23,517		)	6,786
Comprehensive income	95,461			22,950			108,364			46,651
Comprehensive income attributable to noncontrolling interests	(2,597		)	(1,708		)	(3,941		)	(3,498		)
Comprehensive income attributable to COPT	$	92,864		$	21,242		$	104,423		$	43,153

See accompanying notes to consolidated financial statements.

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Equity

(Dollars in thousands)

(unaudited)



	Common Shares		Additional Paid-in Capital			Cumulative Distributions in Excess of Net Income			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interests			Total
For the Three Months Ended June 30, 2018
Balance at March 31, 2018 (102,150,358 common shares outstanding)	$	1,022	$	2,221,427		$	(813,302	)	$	7,204		$	65,673		$	1,482,024
Common shares issued under forward equity sale agreements (1,100,000 shares)	11		32,240			—			—			—			32,251
Share-based compensation (10,137 shares issued, net of redemptions)	—		1,720			—			—			—			1,720
Redemption of vested equity awards	—		(198		)	—			—			—			(198		)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP	—		(538		)	—			—			538			—
Comprehensive income	—		—			19,434			1,808			1,117			22,359
Dividends	—		—			(28,402		)	—			—			(28,402		)
Distributions to owners of common and preferred units in COPLP	—		—			—			—			(1,044		)	(1,044		)
Distributions to noncontrolling interests in other consolidated entities	—		—			—			—			(4		)	(4		)
Adjustment to arrive at fair value of redeemable noncontrolling interests	—		(221		)	—			—			—			(221		)
Balance at June 30, 2018 (103,260,495 common shares outstanding)	$	1,033	$	2,254,430		$	(822,270	)	$	9,012		$	66,280		$	1,508,485

For the Three Months Ended June 30, 2019
Balance at March 31, 2019 (111,939,790 common shares outstanding)	$	1,119	$	2,475,497		$	(856,703	)	$	(9,538	)	$	45,803		$	1,656,178
Redemption of common units	—		—			—			—			(1		)	(1		)
Share-based compensation (10,097 shares issued, net of redemptions)	—		1,487			—			—			346			1,833
Redemption of vested equity awards	—		(103		)	—			—			—			(103		)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP	—		488			—			—			(488		)	—
Comprehensive income	—		—			106,791			(13,927		)	1,728			94,592
Dividends	—		—			(30,755		)	—			—			(30,755		)
Distributions to owners of common and preferred units in COPLP	—		—			—			—			(553		)	(553		)
Distributions to noncontrolling interests in other consolidated entities	—		—			—			—			(4		)	(4		)
Adjustment to arrive at fair value of redeemable noncontrolling interests	—		(2,076		)	—			—			—			(2,076		)
Balance at June 30, 2019 (111,949,887 common shares outstanding)	$	1,119	$	2,475,293		$	(780,667	)	$	(23,465	)	$	46,831		$	1,719,111

See accompanying notes to consolidated financial statements.

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Equity (continued)

(Dollars in thousands)

(unaudited)



	Common Shares		Additional Paid-in Capital			Cumulative Distributions in Excess of Net Income			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interests			Total
For the Six Months Ended June 30, 2018
Balance at December 31, 2017 (101,292,299 common shares outstanding)	$	1,013	$	2,201,047		$	(802,085	)	$	2,167		$	66,165		$	1,468,307
Cumulative effect of accounting change for adoption of hedge accounting guidance	—		—			(276		)	276			—			—
Balance at December 31, 2017, as adjusted	1,013		2,201,047			(802,361		)	2,443			66,165			1,468,307
Conversion of common units to common shares (53,817 shares)	1		760			—			—			(761		)	—
Common shares issued under forward equity sale agreements (1,777,000 shares)	18		52,209			—			—			—			52,227
Share-based compensation (137,379 shares issued, net of redemptions)	1		3,399			—			—			—			3,400
Redemption of vested equity awards	—		(1,525		)	—			—			—			(1,525		)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP	—		(702		)	—			—			702			—
Comprehensive income	—		—			36,584			6,569			2,269			45,422
Dividends	—		—			(56,493		)	—			—			(56,493		)
Distributions to owners of common and preferred units in COPLP	—		—			—			—			(2,088		)	(2,088		)
Distributions to noncontrolling interests in other consolidated entities	—		—			—			—			(7		)	(7		)
Adjustment to arrive at fair value of redeemable noncontrolling interests	—		(758		)	—			—			—			(758		)
Balance at June 30, 2018 (103,260,495 common shares outstanding)	$	1,033	$	2,254,430		$	(822,270	)	$	9,012		$	66,280		$	1,508,485

For the Six Months Ended June 30, 2019
Balance at December 31, 2018 (110,241,868 common shares outstanding)	$	1,102	$	2,431,355		$	(846,808	)	$	(238	)	$	41,637		$	1,627,048
Conversion of common units to common shares (5,500 shares)	—		80			—			—			(80		)	—
Redemption of common units	—		—			—			—			(1		)	(1		)
Common shares issued under forward equity sale agreements (1,614,087 shares)	16		46,438			—			—			—			46,454
Share-based compensation (88,432 shares issued, net of redemptions)	1		3,049			—			—			585			3,635
Redemption of vested equity awards	—		(1,920		)	—			—			—			(1,920		)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP	—		(834		)	—			—			834			—
Comprehensive income	—		—			127,650			(23,227		)	2,397			106,820
Dividends	—		—			(61,509		)	—			—			(61,509		)
Distributions to owners of common and preferred units in COPLP	—		—			—			—			(1,103		)	(1,103		)
Contributions from noncontrolling interests in other consolidated entities	—		—			—			—			2,570			2,570
Distributions to noncontrolling interests in other consolidated entities	—		—			—			—			(8		)	(8		)
Adjustment to arrive at fair value of redeemable noncontrolling interests	—		(2,875		)	—			—			—			(2,875		)
Balance at June 30, 2019 (111,949,887 common shares outstanding)	$	1,119	$	2,475,293		$	(780,667	)	$	(23,465	)	$	46,831		$	1,719,111

See accompanying notes to consolidated financial statements.

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)



	For the Six Months Ended June 30,
	2019			2018
Cash flows from operating activities
Revenues from real estate operations received	$	257,832		$	262,602
Construction contract and other service revenues received	21,449			18,411
Property operating expenses paid	(83,305		)	(83,642		)
Construction contract and other service expenses paid	(31,157		)	(62,624		)
General, administrative, leasing, business development and land carry costs paid	(16,541		)	(15,148		)
Interest expense paid	(34,896		)	(36,155		)
Lease incentives paid	(3,228		)	(4,825		)
Other	1,661			2,093
Net cash provided by operating activities	111,815			80,712
Cash flows from investing activities
Construction, development and redevelopment	(219,633		)	(67,749		)
Tenant improvements on operating properties	(7,585		)	(18,352		)
Other capital improvements on operating properties	(8,920		)	(8,584		)
Proceeds from property dispositions
Distribution from unconsolidated real estate joint venture following contribution of properties	129,783			—
Sale of controlling interests in properties	107,517			—
Investing receivables funded	(11,104		)	—
Leasing costs paid	(7,632		)	(3,838		)
Other	3,944			1,715
Net cash used in investing activities	(13,630		)	(96,808		)
Cash flows from financing activities
Proceeds from debt
Revolving Credit Facility	258,000			153,000
Other debt proceeds	10,606			—
Repayments of debt
Revolving Credit Facility	(308,000		)	(109,000		)
Scheduled principal amortization	(2,193		)	(2,101		)
Payments on finance lease liabilities	(