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	September 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 October 25, 2019, 112,058,925 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 September 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 September 30, 2019, COPT owned 98.7% 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 September 30, 2019 and December 31, 2018 (unaudited)	3
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	4
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	5
	Consolidated Statements of Equity for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 (unaudited)	8
Consolidated Financial Statements of Corporate Office Properties, L.P.
	Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018 (unaudited)	10
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	11
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	12
	Consolidated Statements of Equity for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	13
	Consolidated Statements of Cash Flows for the Nine Months Ended September 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	53
Item 4:	Mine Safety Disclosures	53
Item 5:	Other Information	53
Item 6:	Exhibits	54

SIGNATURES		55

PART I: FINANCIAL INFORMATION

ITEM 1. Financial Statements

Corporate Office Properties Trust and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share data)

(unaudited)



	September 30, 2019			December 31, 2018
Assets
Properties, net:
Operating properties, net	$	2,713,900		$	2,847,265
Projects in development or held for future development	544,923			403,361
Total properties, net	3,258,823			3,250,626
Property - operating right-of-use assets	27,325			—
Property - finance right-of-use assets	40,467			—
Assets held for sale, net	61,728			—
Cash and cash equivalents	34,005			8,066
Investment in unconsolidated real estate joint ventures	49,408			39,845
Accounts receivable	37,623			26,277
Deferred rent receivable	88,001			89,350
Intangible assets on real estate acquisitions, net	29,454			43,470
Deferred leasing costs (net of accumulated amortization of $34,198 and $31,994, respectively)	55,839			50,191
Investing receivables	72,114			56,982
Prepaid expenses and other assets, net	100,582			91,198
Total assets	$	3,855,369		$	3,656,005
Liabilities and equity
Liabilities:
Debt, net	$	1,862,301		$	1,823,909
Accounts payable and accrued expenses	141,242			92,855
Rents received in advance and security deposits	27,975			30,079
Dividends and distributions payable	31,345			30,856
Deferred revenue associated with operating leases	7,665			9,125
Property - operating lease liabilities	16,686			—
Interest rate derivatives	34,825			5,459
Other liabilities	8,706			10,414
Total liabilities	2,130,745			2,002,697
Commitments and contingencies (Note 17)
Redeemable noncontrolling interests	28,677			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 112,059,175 at September 30, 2019 and 110,241,868 at December 31, 2018)	1,121			1,102
Additional paid-in capital	2,480,083			2,431,355
Cumulative distributions in excess of net income	(790,235		)	(846,808		)
Accumulated other comprehensive loss	(34,580		)	(238		)
Total Corporate Office Properties Trust’s shareholders’ equity	1,656,389			1,585,411
Noncontrolling interests in subsidiaries:
Common units in COPLP	19,365			19,168
Preferred units in COPLP	8,800			8,800
Other consolidated entities	11,393			13,669
Noncontrolling interests in subsidiaries	39,558			41,637
Total equity	1,695,947			1,627,048
Total liabilities, redeemable noncontrolling interests and equity	$	3,855,369		$	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 September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
Revenues
Lease revenue	$	129,461		$	127,691		$	391,779		$	382,731
Other property revenue	1,273			1,297			3,716			3,697
Construction contract and other service revenues	28,697			8,423			87,946			53,202
Total revenues	159,431			137,411			483,441			439,630
Operating expenses
Property operating expenses	49,714			49,340			147,045			149,737
Depreciation and amortization associated with real estate operations	34,692			34,195			104,290			100,897
Construction contract and other service expenses	27,802			8,058			85,130			51,215
Impairment losses	327			—			327			—
General, administrative and leasing expenses	7,929			6,899			26,066			21,819
Business development expenses and land carry costs	964			1,567			2,947			4,415
Total operating expenses	121,428			100,059			365,805			328,083
Interest expense	(17,126		)	(19,181		)	(54,275		)	(56,910		)
Interest and other income	1,842			1,486			5,977			4,284
Gain on sales of real estate	—			—			84,469			(27		)
Income before equity in income of unconsolidated entities and income taxes	22,719			19,657			153,807			58,894
Equity in income of unconsolidated entities	396			374			1,207			1,120
Income tax benefit	131			291			113			173
Net income	23,246			20,322			155,127			60,187
Net income attributable to noncontrolling interests:
Common units in COPLP	(267		)	(380		)	(1,863		)	(1,532		)
Preferred units in COPLP	(157		)	(165		)	(487		)	(495		)
Other consolidated entities	(1,565		)	(1,080		)	(3,870		)	(2,879		)
Net income attributable to COPT common shareholders	$	21,257		$	18,697		$	148,907		$	55,281

Earnings per common share: (1)
Net income attributable to COPT common shareholders - basic	$	0.19		$	0.18		$	1.34		$	0.54
Net income attributable to COPT common shareholders - diluted	$	0.19		$	0.18		$	1.33		$	0.54

(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 September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
Net income	$	23,246		$	20,322		$	155,127		$	60,187
Other comprehensive (loss) income
Unrealized (loss) gain on interest rate derivatives	(11,047		)	1,325			(33,437		)	7,913
Gain on interest rate derivatives recognized in interest expense	(307		)	(207		)	(1,434		)	(9		)
Other comprehensive (loss) income	(11,354		)	1,118			(34,871		)	7,904
Comprehensive income	11,892			21,440			120,256			68,091
Comprehensive income attributable to noncontrolling interests	(1,750		)	(1,647		)	(5,691		)	(5,145		)
Comprehensive income attributable to COPT	$	10,142		$	19,793		$	114,565		$	62,946

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 September 30, 2018
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
Conversion of common units to common shares (1,841,810 shares)	18		26,503			—			—			(26,521		)	—
Common shares issued under forward equity sale agreements (2,750,000 shares)	27		80,076			—			—			—			80,103
Common shares issued under at-the-market program (991,664 shares)	10		29,722			—			—			—			29,732
Share-based compensation (4,254 shares issued, net of redemptions)	—		1,779			—			—			—			1,779
Redemption of vested equity awards	—		(86		)	—			—			—			(86		)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP	—		(1,367		)	—			—			1,367			—
Comprehensive income	—		—			18,697			1,096			973			20,766
Dividends	—		—			(29,935		)	—			—			(29,935		)
Distributions to owners of common and preferred units in COPLP	—		—			—			—			(538		)	(538		)
Distributions to noncontrolling interests in other consolidated entities	—		—			—			—			(4		)	(4		)
Adjustment to arrive at fair value of redeemable noncontrolling interests	—		(573		)	—			—			—			(573		)
Balance at September 30, 2018 (108,848,223 common shares outstanding)	$	1,088	$	2,390,484		$	(833,508	)	$	10,108		$	41,557		$	1,609,729

For the Three Months Ended September 30, 2019
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
Conversion of common units to common shares (97,539 shares)	1		1,475			—			—			(1,476		)	—
Redemption of common units	—		—			—			—			(24		)	(24		)
Share-based compensation (11,749 shares issued, net of redemptions)	1		1,525			—			—			369			1,895
Redemption of vested equity awards	—		(53		)	—			—			—			(53		)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP	—		312			—			—			(312		)	—
Comprehensive income	—		—			21,257			(11,115		)	565			10,707
Dividends	—		—			(30,825		)	—			—			(30,825		)
Distributions to owners of common and preferred units in COPLP	—		—			—			—			(517		)	(517		)
Distributions to noncontrolling interests in other consolidated entities	—		—			—			—			(5,878		)	(5,878		)
Adjustment to arrive at fair value of redeemable noncontrolling interests	—		1,531			—			—			—			1,531
Balance at September 30, 2019 (112,059,175 common shares outstanding)	$	1,121	$	2,480,083		$	(790,235	)	$	(34,580	)	$	39,558		$	1,695,947

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 Nine Months Ended September 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 (1,895,627 shares)	19		27,263			—			—			(27,282		)	—
Common shares issued under forward equity sale agreements (4,527,000 shares)	45		132,285			—			—			—			132,330
Common shares issued under at-the-market program (991,664 shares)	10		29,722			—			—			—			29,732
Share-based compensation (141,633 shares issued, net of redemptions)	1		5,178			—			—			—			5,179
Redemption of vested equity awards	—		(1,611		)	—			—			—			(1,611		)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP	—		(2,069		)	—			—			2,069			—
Comprehensive income	—		—			55,281			7,665			3,242			66,188
Dividends	—		—			(86,428		)	—			—			(86,428		)
Distributions to owners of common and preferred units in COPLP	—		—			—			—			(2,626		)	(2,626		)
Distributions to noncontrolling interests in other consolidated entities	—		—			—			—			(11		)	(11		)
Adjustment to arrive at fair value of redeemable noncontrolling interests	—		(1,331		)	—			—			—			(1,331		)
Balance at September 30, 2018 (108,848,223 common shares outstanding)	$	1,088	$	2,390,484		$	(833,508	)	$	10,108		$	41,557		$	1,609,729

For the Nine Months Ended September 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 (103,039 shares)	1		1,555			—			—			(1,556		)	—
Redemption of common units	—		—			—			—			(25		)	(25		)
Common shares issued under forward equity sale agreements (1,614,087 shares)	16		46,438			—			—			—			46,454
Share-based compensation (100,181 shares issued, net of redemptions)	2		4,574			—			—			954			5,530
Redemption of vested equity awards	—		(1,973		)	—			—			—			(1,973		)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP	—		(522		)	—			—			522			—
Comprehensive income	—		—			148,907			(34,342		)	2,962			117,527
Dividends	—		—			(92,334		)	—			—			(92,334		)
Distributions to owners of common and preferred units in COPLP	—		—			—			—			(1,620		)	(1,620		)
Contributions from noncontrolling interests in other consolidated entities	—		—			—			—			2,570			2,570
Distributions to noncontrolling interests in other consolidated entities	—		—			—			—			(5,886		)	(5,886		)
Adjustment to arrive at fair value of redeemable noncontrolling interests	—		(1,344		)	—			—			—			(1,344		)
Balance at September 30, 2019 (112,059,175 common shares outstanding)	$	1,121	$	2,480,083		$	(790,235	)	$	(34,580	)	$	39,558		$	1,695,947

See accompanying notes to consolidated financial statements.

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)



	For the Nine Months Ended September 30,
	2019			2018
Cash flows from operating activities
Revenues from real estate operations received	$	391,758		$	395,172
Construction contract and other service revenues received	65,813			27,450
Property operating expenses paid	(151,478		)	(150,039		)
Construction contract and other service expenses paid	(68,599		)	(71,034		)
General, administrative, leasing, business development and land carry costs paid	(23,806		)	(20,858		)