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, 2020



☐	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 20, 2020, 112,183,192 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, 2020 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, 2020, 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.

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. 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 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, 2020 and December 31, 2019 (unaudited)	3
	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2020 and 2019 (unaudited)	4
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2020 and 2019 (unaudited)	5
	Consolidated Statements of Equity for the Three and Six Months Ended June 30, 2020 and 2019 (unaudited)	6
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019 (unaudited)	8
Consolidated Financial Statements of Corporate Office Properties, L.P.
	Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019 (unaudited)	10
	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2020 and 2019 (unaudited)	11
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2020 and 2019 (unaudited)	12
	Consolidated Statements of Equity for the Three and Six Months Ended June 30, 2020 and 2019 (unaudited)	13
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019 (unaudited)	15
Notes to Consolidated Financial Statements (unaudited)		17
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	58
Item 4:	Controls and Procedures	58

PART II: OTHER INFORMATION

Item 1:	Legal Proceedings	59
Item 1A:	Risk Factors	59
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	60
Item 3:	Defaults Upon Senior Securities	60
Item 4:	Mine Safety Disclosures	60
Item 5:	Other Information	60
Item 6:	Exhibits	61

SIGNATURES		62

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, 2020			December 31, 2019
Assets
Properties, net:
Operating properties, net	$	2,888,817		$	2,772,647
Projects in development or held for future development	624,282			568,239
Total properties, net	3,513,099			3,340,886
Property - operating right-of-use assets	31,009			27,864
Property - finance right-of-use assets	40,441			40,458
Cash and cash equivalents	21,596			14,733
Investment in unconsolidated real estate joint ventures	50,457			51,949
Accounts receivable, net	30,404			35,444
Deferred rent receivable	90,493			87,736
Intangible assets on real estate acquisitions, net	24,768			27,392
Deferred leasing costs (net of accumulated amortization of $34,878 and $33,782, respectively)	58,666			58,392
Investing receivables (net of allowance for credit losses of $3,976 at June 30, 2020)	72,333			73,523
Prepaid expenses and other assets, net	78,059			96,076
Total assets	$	4,011,325		$	3,854,453
Liabilities and equity
Liabilities:
Debt, net	$	2,012,019		$	1,831,139
Accounts payable and accrued expenses	149,836			148,746
Rents received in advance and security deposits	30,459			33,620
Dividends and distributions payable	31,302			31,263
Deferred revenue associated with operating leases	8,821			7,361
Property - operating lease liabilities	20,796			17,317
Interest rate derivatives	65,612			25,682
Other liabilities	12,408			10,649
Total liabilities	2,331,253			2,105,777
Commitments and contingencies (Note 17)
Redeemable noncontrolling interests	23,148			29,431
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 112,183,192 at June 30, 2020 and 112,068,705 at December 31, 2019)	1,122			1,121
Additional paid-in capital	2,477,977			2,481,558
Cumulative distributions in excess of net income	(797,959		)	(778,275		)
Accumulated other comprehensive loss	(64,513		)	(25,444		)
Total Corporate Office Properties Trust’s shareholders’ equity	1,616,627			1,678,960
Noncontrolling interests in subsidiaries:
Common units in COPLP	19,611			19,597
Preferred units in COPLP	8,800			8,800
Other consolidated entities	11,886			11,888
Noncontrolling interests in subsidiaries	40,297			40,285
Total equity	1,656,924			1,719,245
Total liabilities, redeemable noncontrolling interests and equity	$	4,011,325		$	3,854,453

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,
	2020			2019			2020			2019
Revenues
Lease revenue	$	132,147		$	131,415		$	263,159		$	262,318
Other property revenue	391			1,356			1,495			2,443
Construction contract and other service revenues	12,236			42,299			25,917			59,249
Total revenues	144,774			175,070			290,571			324,010
Operating expenses
Property operating expenses	50,204			47,886			100,203			97,331
Depreciation and amortization associated with real estate operations	33,612			34,802			66,208			69,598
Construction contract and other service expenses	11,711			41,002			24,832			57,328
General, administrative and leasing expenses	8,158			9,386			15,644			18,137
Business development expenses and land carry costs	1,262			870			2,380			1,983
Total operating expenses	104,947			133,946			209,267			244,377
Interest expense	(16,797		)	(18,475		)	(33,637		)	(37,149		)
Interest and other income	2,282			1,849			3,487			4,135
Credit loss expense	(615		)	—			(1,304		)	—
Gain on sales of real estate	—			84,469			5			84,469
Income before equity in income of unconsolidated entities and income taxes	24,697			108,967			49,855			131,088
Equity in income of unconsolidated entities	454			420			895			811
Income tax (expense) benefit	(30		)	176			(79		)	(18		)
Net income	25,121			109,563			50,671			131,881
Net income attributable to noncontrolling interests:
Common units in COPLP	(284		)	(1,339		)	(571		)	(1,596		)
Preferred units in COPLP	(77		)	(165		)	(154		)	(330		)
Other consolidated entities	(1,263		)	(1,268		)	(2,395		)	(2,305		)
Net income attributable to COPT common shareholders	$	23,497		$	106,791		$	47,551		$	127,650

Earnings per common share: (1)
Net income attributable to COPT common shareholders - basic	$	0.21		$	0.95		$	0.42		$	1.15
Net income attributable to COPT common shareholders - diluted	$	0.21		$	0.95		$	0.42		$	1.15

(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,
	2020			2019			2020			2019
Net income	$	25,121		$	109,563		$	50,671		$	131,881
Other comprehensive loss:
Unrealized loss on interest rate derivatives	(3,315		)	(13,545		)	(41,020		)	(22,390		)
Loss (gain) on interest rate derivatives recognized in interest expense	935			(557		)	1,066			(1,127		)
Total other comprehensive loss	(2,380		)	(14,102		)	(39,954		)	(23,517		)
Comprehensive income	22,741			95,461			10,717			108,364
Comprehensive income attributable to noncontrolling interests	(1,556		)	(2,597		)	(2,235		)	(3,941		)
Comprehensive income attributable to COPT	$	21,185		$	92,864		$	8,482		$	104,423

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 Loss			Noncontrolling Interests			Total
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

For the Three Months Ended June 30, 2020
Balance at March 31, 2020 (112,169,463 common shares outstanding)	$	1,122	$	2,476,677		$	(790,600	)	$	(62,201	)	$	40,188		$	1,665,186
Share-based compensation (13,729 shares issued, net of redemptions)	—		1,188			—			—			548			1,736
Redemption of vested equity awards	—		(80		)	—			—			—			(80		)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP	—		428			—			—			(428		)	—
Comprehensive income	—		—			23,497			(2,312		)	439			21,624
Dividends	—		—			(30,856		)	—			—			(30,856		)
Distributions to owners of common and preferred units in COPLP	—		—			—			—			(442		)	(442		)
Distributions to noncontrolling interests in other consolidated entities	—		—			—			—			(8		)	(8		)
Adjustment to arrive at fair value of redeemable noncontrolling interests	—		(236		)	—			—			—			(236		)
Balance at June 30, 2020 (112,183,192 common shares outstanding)	$	1,122	$	2,477,977		$	(797,959	)	$	(64,513	)	$	40,297		$	1,656,924

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 Loss			Noncontrolling Interests			Total
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

For the Six Months Ended June 30, 2020
Balance at December 31, 2019 (112,068,705 common shares outstanding)	$	1,121	$	2,481,558		$	(778,275	)	$	(25,444	)	$	40,285		$	1,719,245
Cumulative effect of accounting change for adoption of credit loss guidance	—		—			(5,541		)	—			—			(5,541		)
Balance at December 31, 2019, as adjusted	1,121		2,481,558			(783,816		)	(25,444		)	40,285			1,713,704
Conversion of common units to common shares (12,009 shares)	—		182			—			—			(182		)	—
Share-based compensation (102,478 shares issued, net of redemptions)	1		2,171			—			—			774			2,946
Redemption of vested equity awards	—		(1,572		)	—			—			—			(1,572		)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP	—		(25		)	—			—			25			—
Comprehensive income	—		—			47,551			(39,069		)	160			8,642
Dividends	—		—			(61,694		)	—			—			(61,694		)
Distributions to owners of common and preferred units in COPLP	—		—			—			—			(862		)	(862		)
Contributions from noncontrolling interests in other consolidated entities	—		—			—			—			112			112
Distributions to noncontrolling interests in other consolidated entities	—		—			—			—			(15		)	(15		)
Adjustment to arrive at fair value of redeemable noncontrolling interests	—		(4,337		)	—			—			—			(4,337		)
Balance at June 30, 2020 (112,183,192 common shares outstanding)	$	1,122	$	2,477,977		$	(797,959	)	$	(64,513	)	$	40,297		$	1,656,924

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)



	For the Six Months Ended June 30,
	2020			2019
Cash flows from operating activities
Revenues from real estate operations received	$	265,833		$	257,832
Construction contract and other service revenues received	42,149			21,449
Property operating expenses paid	(86,934		)	(83,305		)
Construction contract and other service expenses paid	(32,107		)	(31,157		)
General, administrative, leasing, business development and land carry costs paid	(16,969		)	(16,541		)
Interest expense paid	(31,581		)	(34,896		)
Lease incentives paid	(5,611		)	(3,228		)
Other	1,757			1,661
Net cash provided by operating activities	136,537			111,815
Cash flows from investing activities
Development and redevelopment of properties	(185,357		)	(219,633		)
Tenant improvements on operating properties	(16,489		)	(7,585		)
Other capital improvements on operating properties	(11,576		)	(8,920		)
Proceeds from property dispositions
Distribution from unconsolidated real estate joint venture following contribution of properties	—			129,783
Sale of properties	—			107,517
Investing receivables funded	—			(11,104		)
Leasing costs paid	(8,424		)	(7,632		)
Other	(5,442		)	3,944
Net cash used in investing activities	(227,288		)	(13,630		)
Cash flows from financing activities
Proceeds from debt
Revolving Credit Facility	251,000			258,000
Other debt proceeds	189,359			10,606
Repayments of debt
Revolving Credit Facility	(259,000		)	(308,000		)
Scheduled principal amortization	(2,044		)	(2,193		)
Deferred financing costs paid	(1,261		)	—
Net proceeds from issuance of common shares