ofc-20200930

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, 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 October 23, 2020, 112,175,248 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, 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 September 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 September 30, 2020 and December 31, 2019 (unaudited)	3
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)	4
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)	5
	Consolidated Statements of Equity for the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)	6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019 (unaudited)	8
Consolidated Financial Statements of Corporate Office Properties, L.P.
	Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019 (unaudited)	10
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)	11
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)	12
	Consolidated Statements of Equity for the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)	13
	Consolidated Statements of Cash Flows for the Nine Months Ended September 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	43
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	60
Item 4:	Controls and Procedures	60

PART II: OTHER INFORMATION

Item 1:	Legal Proceedings	61
Item 1A:	Risk Factors	61
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	62
Item 3:	Defaults Upon Senior Securities	62
Item 4:	Mine Safety Disclosures	62
Item 5:	Other Information	62
Item 6:	Exhibits	63

SIGNATURES		64

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, 2020		December 31, 2019
Assets
Properties, net:
Operating properties, net	$	2,999,892	$	2,772,647
Projects in development or held for future development	587,046		568,239
Total properties, net	3,586,938		3,340,886
Property - operating right-of-use assets	36,442		27,864
Property - finance right-of-use assets	40,432		40,458

Cash and cash equivalents	11,458		14,733
Investment in unconsolidated real estate joint ventures	49,662		51,949
Accounts receivable, net	36,151		35,444
Deferred rent receivable	92,853		87,736
Intangible assets on real estate acquisitions, net	22,433		27,392
Deferred leasing costs (net of accumulated amortization of $31,927 and $33,782 respectively)	59,392		58,392
Investing receivables (net of allowance for credit losses of $4,040 at September 30, 2020)	74,136		73,523


Prepaid expenses and other assets, net	110,292		96,076
Total assets	$	4,120,189	$	3,854,453
Liabilities and equity
Liabilities:
Debt, net	$	2,181,551	$	1,831,139
Accounts payable and accrued expenses	140,921		148,746
Rents received in advance and security deposits	30,276		33,620
Dividends and distributions payable	31,307		31,263
Deferred revenue associated with operating leases	8,579		7,361
Property - operating lease liabilities	26,382		17,317

Interest rate derivatives	10,977		25,682
Other liabilities	17,038		10,649
Total liabilities	2,447,031		2,105,777
Commitments and contingencies (Note 17)
Redeemable noncontrolling interests	23,522		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 112,175,688 at September 30, 2020 and 112,068,705 at December 31, 2019)	1,122		1,121
Additional paid-in capital	2,479,321		2,481,558
Cumulative distributions in excess of net income	(860,647)		(778,275)
Accumulated other comprehensive loss	(10,548)		(25,444)
Total Corporate Office Properties Trust’s shareholders’ equity	1,609,248		1,678,960
Noncontrolling interests in subsidiaries:
Common units in COPLP	19,522		19,597
Preferred units in COPLP	8,800		8,800
Other consolidated entities	12,066		11,888
Noncontrolling interests in subsidiaries	40,388		40,285
Total equity	1,649,636		1,719,245
Total liabilities, redeemable noncontrolling interests and equity	$	4,120,189	$	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 September 30,				For the Nine Months Ended September 30,
	2020		2019		2020		2019
Revenues
Lease revenue	$	133,875	$	129,461	$	397,034	$	391,779
Other property revenue	568		1,273		2,063		3,716
Construction contract and other service revenues	20,323		28,697		46,240		87,946
Total revenues	154,766		159,431		445,337		483,441
Operating expenses
Property operating expenses	51,552		49,714		151,755		147,045
Depreciation and amortization associated with real estate operations	35,332		34,692		101,540		104,290
Construction contract and other service expenses	19,220		27,802		44,052		85,130
Impairment losses	1,530		327		1,530		327
General, administrative and leasing expenses	7,467		7,929		23,111		26,066
Business development expenses and land carry costs	1,094		964		3,474		2,947
Total operating expenses	116,195		121,428		325,462		365,805
Interest expense	(17,152)		(17,126)		(50,789)		(54,275)
Interest and other income	1,746		1,842		5,233		5,977
Credit loss recoveries	1,465		—		161		—
Gain on sales of real estate	—		—		5		84,469
Loss on early extinguishment of debt	(3,237)		—		(3,237)		—
Loss on interest rate derivatives	(53,196)		—		(53,196)		—
(Loss) income before equity in income of unconsolidated entities and income taxes	(31,803)		22,719		18,052		153,807
Equity in income of unconsolidated entities	477		396		1,372		1,207
Income tax (expense) benefit	(16)		131		(95)		113
Net (loss) income	(31,342)		23,246		19,329		155,127
Net loss (income) attributable to noncontrolling interests:
Common units in COPLP	386		(267)		(185)		(1,863)
Preferred units in COPLP	(77)		(157)		(231)		(487)
Other consolidated entities	(812)		(1,565)		(3,207)		(3,870)



Net (loss) income attributable to COPT common shareholders	$	(31,845)	$	21,257	$	15,706	$	148,907

Earnings per common share: (1)
Net (loss) income attributable to COPT common shareholders - basic	$	(0.29)	$	0.19	$	0.14	$	1.34
Net (loss) income attributable to COPT common shareholders - diluted	$	(0.29)	$	0.19	$	0.14	$	1.33

(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,
	2020		2019		2020		2019
Net (loss) income	$	(31,342)	$	23,246	$	19,329	$	155,127
Other comprehensive income (loss):
Unrealized income (loss) on interest rate derivatives	1,428		(11,047)		(39,592)		(33,437)
Reclassification adjustments on interest rate derivatives recognized in interest expense	1,342		(307)		2,408		(1,434)
Reclassification adjustments on interest rate derivatives recognized in loss on interest rate derivatives	51,865		—		51,865		—

Total other comprehensive income (loss)	54,635		(11,354)		14,681		(34,871)
Comprehensive income	23,293		11,892		34,010		120,256
Comprehensive income attributable to noncontrolling interests	(1,173)		(1,750)		(3,408)		(5,691)
Comprehensive income attributable to COPT	$	22,120	$	10,142	$	30,602	$	114,565

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 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

For the Three Months Ended September 30, 2020
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





Share-based compensation (7,504 shares redeemed, net of issuances)	—		1,223		—		—		561		1,784
Redemption of vested equity awards	—		(57)		—		—		—		(57)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP	—		552		—		—		(552)		—
Comprehensive income	—		—		(31,845)		53,965		533		22,653
Dividends	—		—		(30,843)		—		—		(30,843)
Distributions to owners of common and preferred units in COPLP	—		—		—		—		(444)		(444)

Distributions to noncontrolling interests in other consolidated entities	—		—		—		—		(7)		(7)
Adjustment to arrive at fair value of redeemable noncontrolling interests	—		(374)		—		—		—		(374)

Balance at September 30, 2020 (112,175,688 common shares outstanding)	$	1,122	$	2,479,321	$	(860,647)	$	(10,548)	$	40,388	$	1,649,636

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 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

For the Nine Months Ended September 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 (94,974 shares issued, net of redemptions)	1		3,394		—		—		1,335		4,730
Redemption of vested equity awards	—		(1,629)		—		—		—		(1,629)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP	—		527		—		—		(527)		—
Comprehensive income	—		—		15,706		14,896		693		31,295
Dividends	—		—		(92,537)		—		—		(92,537)
Distributions to owners of common and preferred units in COPLP	—		—		—		—		(1,306)		(1,306)
Contributions from noncontrolling interests in other consolidated entities	—		—		—		—		112		112
Distributions to noncontrolling interests in other consolidated entities	—		—		—		—		(22)		(22)
Adjustment to arrive at fair value of redeemable noncontrolling interests	—		(4,711)		—		—		—		(4,711)

Balance at September 30, 2020 (112,175,688 common shares outstanding)	$	1,122	$	2,479,321	$	(860,647)	$	(10,548)	$	40,388	$	1,649,636

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	For the Nine Months Ended September 30,
	2020		2019
Cash flows from operating activities
Revenues from real estate operations received	$	394,094	$	391,758
Construction contract and other service revenues received	53,911		65,813
Property operating expenses paid	(159,007)		(151,478)
Construction contract and other service expenses paid	(45,686)		(68,599)
General, administrative, leasing, business development and land carry costs paid	(24,408)		(23,806)
Interest expense paid	(49,693)		(52,818)
Lease incentives paid	(12,634)		(6,366)




Other	2,464		2,533
Net cash provided by operating activities	159,041		157,037
Cash flows from investing activities
Development and redevelopment of properties	(284,416)		(308,997)

Tenant improvements on operating properties	(23,377)		(16,466)
Other capital improvements on operating properties	(24,797)		(14,497)
Proceeds from property dispositions
Distribution from unconsolidated real estate joint venture following contribution of properties	—		129,783
Sale of properties	—		107,440
Distributions from unconsolidated real estate joint ventures	2,287		16,937
Investing receivables funded	(258)		(11,169)
Leasing costs paid	(12,455)		(13,502)


Settlement of interest rate derivatives	(53,130)		—
Other	(63)		1,558
Net cash used in investing activities	(396,209)		(108,913)
Cash flows from financing activities
Proceeds from debt
Revolving Credit Facility	409,000		349,000
Unsecured senior notes	395,264		—
Other debt proceeds	199,088		32,002
Repayments of debt
Revolving Credit Facility	(529,000)		(342,000)
Unsecured senior notes	(122,948)		—
Scheduled principal amortization	(3,077)		(3,300)

Deferred financing costs paid	(2,161)		(405)

Net proceeds from issuance of common shares	—		46,415

Common share dividends paid	(92,512)		(91,835)

Distributions paid to noncontrolling interests in COPLP	(1,303)		(1,661)
Distributions paid to noncontrolling interests in other consolidated entities	(15)		(5,882)
Distributions paid to redeemable noncontrolling interests	(13,515)		(984)
Redemption of vested equity awards	(1,629)		(1,973)
Payments in connection with early extinguishment of debt	(3,037)		—
Other	(442)		(1,944)
Net cash provided by (used in) financing activities	233,713		(22,567)
Net (decrease) increase in cash and cash equivalents and restricted cash	(