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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 | March 31, 2021 |
or
| | | | | |
☐ | 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
(Exact name of registrant as specified in its charter)
| | | | | | | | |
Maryland | | 23-2947217 |
(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. ☒ 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). ☒ 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
As of April 22, 2021, 112,326,054 of Corporate Office Properties Trust’s Common Shares of Beneficial Interest, $0.01 par value, were issued and outstanding.
TABLE OF CONTENTS
FORM 10-Q
PART I: FINANCIAL INFORMATION
ITEM 1. Financial Statements
Corporate Office Properties Trust and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
(unaudited)
| | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
Assets | | | |
Properties, net: | | | |
Operating properties, net | $ | 3,106,698 | | | $ | 3,115,280 | |
Projects in development or held for future development | 472,556 | | | 447,269 | |
Total properties, net | 3,579,254 | | | 3,562,549 | |
Property - operating right-of-use assets | 39,810 | | | 40,570 | |
Property - finance right-of-use assets | 40,091 | | | 40,425 | |
| | | |
Cash and cash equivalents | 36,139 | | | 18,369 | |
Investment in unconsolidated real estate joint ventures | 28,934 | | | 29,303 | |
Accounts receivable, net | 44,916 | | | 41,637 | |
Deferred rent receivable | 98,048 | | | 92,876 | |
Intangible assets on real estate acquisitions, net | 18,137 | | | 19,344 | |
Deferred leasing costs (net of accumulated amortization of $29,854 and $30,375, respectively) | 56,508 | | | 58,613 | |
Investing receivables (net of allowance for credit losses of $2,080 and $2,851, respectively) | 71,831 | | | 68,754 | |
| | | |
| | | |
Prepaid expenses and other assets, net | 99,280 | | | 104,583 | |
Total assets | $ | 4,112,948 | | | $ | 4,077,023 | |
Liabilities and equity | | | |
Liabilities: | | | |
Debt, net | $ | 2,207,903 | | | $ | 2,086,918 | |
Accounts payable and accrued expenses | 96,465 | | | 142,717 | |
Rents received in advance and security deposits | 30,922 | | | 33,425 | |
Dividends and distributions payable | 31,305 | | | 31,231 | |
Deferred revenue associated with operating leases | 10,221 | | | 10,832 | |
Property - operating lease liabilities | 30,176 | | | 30,746 | |
| | | |
Interest rate derivatives | 7,640 | | | 9,522 | |
Other liabilities | 15,599 | | | 12,490 | |
Total liabilities | 2,430,231 | | | 2,357,881 | |
Commitments and contingencies (Note 18) | | | |
Redeemable noncontrolling interests | 25,925 | | | 25,430 | |
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 112,327,234 at March 31, 2021 and 112,181,759 at December 31, 2020) | 1,123 | | | 1,122 | |
Additional paid-in capital | 2,476,807 | | | 2,478,906 | |
Cumulative distributions in excess of net income | (847,407) | | | (809,836) | |
Accumulated other comprehensive loss | (7,391) | | | (9,157) | |
Total Corporate Office Properties Trust’s shareholders’ equity | 1,623,132 | | | 1,661,035 | |
Noncontrolling interests in subsidiaries: | | | |
Common units in COPLP | 21,345 | | | 20,465 | |
| | | |
Other consolidated entities | 12,315 | | | 12,212 | |
Noncontrolling interests in subsidiaries | 33,660 | | | 32,677 | |
Total equity | 1,656,792 | | | 1,693,712 | |
Total liabilities, redeemable noncontrolling interests and equity | $ | 4,112,948 | | | $ | 4,077,023 | |
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 March 31, | | |
| 2021 | | 2020 | | | | |
Revenues | | | | | | | |
Lease revenue | $ | 144,624 | | | $ | 131,012 | | | | | |
Other property revenue | 540 | | | 1,104 | | | | | |
Construction contract and other service revenues | 16,558 | | | 13,681 | | | | | |
Total revenues | 161,722 | | | 145,797 | | | | | |
Operating expenses | | | | | | | |
Property operating expenses | 56,974 | | | 49,999 | | | | | |
Depreciation and amortization associated with real estate operations | 37,321 | | | 32,596 | | | | | |
Construction contract and other service expenses | 15,793 | | | 13,121 | | | | | |
| | | | | | | |
General, administrative and leasing expenses | 8,406 | | | 7,486 | | | | | |
Business development expenses and land carry costs | 1,094 | | | 1,118 | | | | | |
Total operating expenses | 119,588 | | | 104,320 | | | | | |
Interest expense | (17,519) | | | (16,840) | | | | | |
Interest and other income | 1,865 | | | 1,205 | | | | | |
Credit loss recoveries (expense) | 907 | | | (689) | | | | | |
Gain on sales of real estate | (490) | | | 5 | | | | | |
Loss on early extinguishment of debt | (33,166) | | | — | | | | | |
| | | | | | | |
(Loss) income before equity in income of unconsolidated entities and income taxes | (6,269) | | | 25,158 | | | | | |
Equity in income of unconsolidated entities | 222 | | | 441 | | | | | |
Income tax expense | (32) | | | (49) | | | | | |
Net (loss) income | (6,079) | | | 25,550 | | | | | |
Net loss (income) attributable to noncontrolling interests: | | | | | | | |
Common units in COPLP | 85 | | | (287) | | | | | |
Preferred units in COPLP | — | | | (77) | | | | | |
Other consolidated entities | (675) | | | (1,132) | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Net (loss) income attributable to COPT common shareholders | $ | (6,669) | | | $ | 24,054 | | | | | |
| | | | | | | |
Earnings per common share: (1) | | | | | | | |
Net (loss) income attributable to COPT common shareholders - basic | $ | (0.06) | | | $ | 0.21 | | | | | |
Net (loss) income attributable to COPT common shareholders - diluted | $ | (0.06) | | | $ | 0.21 | | | | | |
(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 March 31, | | |
| 2021 | | 2020 | | | | |
Net (loss) income | $ | (6,079) | | | $ | 25,550 | | | | | |
Other comprehensive income (loss): | | | | | | | |
Unrealized income (loss) on interest rate derivatives | 784 | | | (37,705) | | | | | |
Reclassification adjustments on interest rate derivatives recognized in interest expense | 1,175 | | | 131 | | | | | |
| | | | | | | |
| | | | | | | |
Total other comprehensive income (loss) | 1,959 | | | (37,574) | | | | | |
Comprehensive loss | (4,120) | | | (12,024) | | | | | |
Comprehensive loss attributable to noncontrolling interests | (783) | | | (679) | | | | | |
Comprehensive loss attributable to COPT | $ | (4,903) | | | $ | (12,703) | | | | | |
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 March 31, 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 (88,749 shares issued, net of redemptions) | | | 1 | | | 983 | | | — | | | — | | | 226 | | | 1,210 | |
Redemption of vested equity awards | | | — | | | (1,492) | | | — | | | — | | | — | | | (1,492) | |
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP | | | — | | | (453) | | | — | | | — | | | 453 | | | — | |
Comprehensive loss | | | — | | | — | | | 24,054 | | | (36,757) | | | (279) | | | (12,982) | |
Dividends | | | — | | | — | | | (30,838) | | | — | | | — | | | (30,838) | |
Distributions to owners of common and preferred units in COPLP | | | — | | | — | | | — | | | — | | | (420) | | | (420) | |
Contributions from noncontrolling interests in other consolidated entities | | | — | | | — | | | — | | | — | | | 112 | | | 112 | |
Distributions to noncontrolling interests in other consolidated entities | | | — | | | — | | | — | | | — | | | (7) | | | (7) | |
Adjustment to arrive at fair value of redeemable noncontrolling interests | | | — | | | (4,101) | | | — | | | — | | | — | | | (4,101) | |
| | | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | |
For the Three Months Ended March 31, 2021 | | | | | | | | | | | | | |
Balance at December 31, 2020 (112,181,759 common shares outstanding) | | | $ | 1,122 | | | $ | 2,478,906 | | | $ | (809,836) | | | $ | (9,157) | | | $ | 32,677 | | | $ | 1,693,712 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Conversion of common units to common shares (8,054 shares) | | | — | | | 121 | | | — | | | — | | | (121) | | | — | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Share-based compensation (137,421 shares issued, net of redemptions) | | | 1 | | | 1,097 | | | — | | | — | | | 917 | | | 2,015 | |
Redemption of vested equity awards | | | — | | | (2,290) | | | — | | | — | | | — | | | (2,290) | |
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP | | | — | | | (545) | | | — | | | — | | | 545 | | | — | |
Comprehensive loss | | | — | | | — | | | (6,669) | | | 1,766 | | | 371 | | | (4,532) | |
Dividends | | | — | | | — | | | (30,902) | | | — | | | — | | | (30,902) | |
Distributions to owners of common units in COPLP | | | — | | | — | | | — | | | — | | | (398) | | | (398) | |
| | | | | | | | | | | | | |
Distributions to noncontrolling interests in other consolidated entities | | | — | | | — | | | — | | | — | | | (7) | | | (7) | |
Adjustment to arrive at fair value of redeemable noncontrolling interests | | | — | | | (482) | | | — | | | — | | | — | | | (482) | |
Other | | | — | | | — | | | — | | | — | | | (324) | | | (324) | |
| | | | | | | | | | | | | |
Balance at March 31, 2021 (112,327,234 common shares outstanding) | | | $ | 1,123 | | | $ | 2,476,807 | | | $ | (847,407) | | | $ | (7,391) | | | $ | 33,660 | | | $ | 1,656,792 | |
Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| | | | | | | | | | | |
| For the Three Months Ended March 31, |
| 2021 | | 2020 |
Cash flows from operating activities | | | |
Revenues from real estate operations received | $ | 133,234 | | | $ | 133,092 | |
Construction contract and other service revenues received | 22,046 | | | 24,925 | |
Property operating expenses paid | (51,718) | | | (46,330) | |
Construction contract and other service expenses paid | (19,897) | | | (17,631) | |
General, administrative, leasing, business development and land carry costs paid | (10,806) | | | (12,371) | |
Interest expense paid | (24,510) | | | (16,767) | |
Lease incentives paid | (5,963) | | | (3,628) | |
Sales-type lease costs paid | (2,028) | | | — | |
| | | |
| | | |
| | | |
| | | |
Other | 314 | | | 928 | |
Net cash provided by operating activities | 40,672 | | | 62,218 | |
Cash flows from investing activities | | | |
Development and redevelopment of properties | (57,427) | | | (92,802) | |
| | | |
Tenant improvements on operating properties | (4,173) | | | (10,446) | |
Other capital improvements on operating properties | (5,955) | | | (5,457) | |
| | | |
| | | |
| | | |
| | | |
| | | |
Leasing costs paid | (4,628) | | | (5,950) | |
| | | |
| | | |
| | | |
Other | (631) | | | 192 | |
Net cash used in investing activities | (72,814) | | | (114,463) | |
Cash flows from financing activities | | | |
Proceeds from debt | | | |
Revolving Credit Facility | 73,000 | | | 251,000 | |
Unsecured senior notes | 589,818 | | | — | |
Other debt proceeds | 3,620 | | | 181,595 | |
Repayments of debt | | | |
Revolving Credit Facility | (216,000) | | | (186,000) | |
Unsecured senior notes | (330,039) | | | — | |
Scheduled principal amortization | (962) | | | (1,021) | |
| | | |
Deferred financing costs paid | (1,440) | | | (1,261) | |
| | | |
| | | |
| | | |
Payments in connection with early extinguishment of debt | (31,565) | | | — | |
Common share dividends paid | (30,862) | | | (30,817) | |
| | | |
| | | |
| | | |
Distributions paid to redeemable noncontrolling interests | (635) | | | (11,870) | |
Redemption of vested equity awards | (2,290) | | | (1,492) | |
Other | (2,256) | | | (3,132) | |
Net cash provided by financing activities | 50,389 | | | 197,002 | |
Net increase in cash and cash equivalents and restricted cash | 18,247 | | | 144,757 | |
Cash and cash equivalents and restricted cash | | | |
Beginning of period | 22,033 | | | 18,130 | |
End of period | $ | 40,280 | | | $ | 162,887 | |
See accompanying notes to consolidated financial statements.
Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(in thousands)
(unaudited)
| | | | | | | | | | | |
| For the Three Months Ended March 31, |
| 2021 | | 2020 |
Reconciliation of net income to net cash provided by operating activities: | | | |
Net (loss) income | $ | (6,079) | | | $ | 25,550 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and other amortization | 37,876 | | | 33,015 | |
| | | |
| | | |
| | | |
Amortization of deferred financing costs and net debt discounts | 1,335 | | | 961 | |
Increase in deferred rent receivable | (5,671) | | | (2,230) | |
| | | |
| | | |
Share-based compensation | 1,904 | | | 1,389 | |
Loss on early extinguishment of debt | 33,166 | | | — | |
| | | |
Other | (1,452) | | | (52) | |
Changes in operating assets and liabilities: | | | |
(Increase) decrease in accounts receivable | (2,983) | | | 4,547 | |
Decrease in prepaid expenses and other assets, net | 6,609 | | | 15,548 | |
Decrease in accounts payable, accrued expenses and other liabilities | (21,530) | | | (16,213) | |
Decrease in rents received in advance and security deposits | (2,503) | | | (297) | |
| | | |
Net cash provided by operating activities | $ | 40,672 | | | $ | 62,218 | |
Reconciliation of cash and cash equivalents and restricted cash: | | | |
Cash and cash equivalents at beginning of period | $ | 18,369 | | | $ | 14,733 | |
Restricted cash at beginning of period | 3,664 | | | 3,397 | |
Cash and cash equivalents and restricted cash at beginning of period | $ | 22,033 | | | $ | 18,130 | |
| | | |
Cash and cash equivalents at end of period | $ | 36,139 | | | $ | 159,061 | |
Restricted cash at end of period | 4,141 | | | 3,826 | |
Cash and cash equivalents and restricted cash at end of period | $ | 40,280 | | | $ | 162,887 | |
Supplemental schedule of non-cash investing and financing activities: | | | |
Decrease in accrued capital improvements, leasing and other investing activity costs | $ | (20,454) | | | $ | (4,795) | |
| | | |
| | | |
Recognition of operating right-of-use assets and related lease liabilities | $ | 328 | | | $ | — | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Increase (decrease) in fair value of derivatives applied to accumulated other comprehensive loss and noncontrolling interests | $ | 1,959 | | | $ | (37,573) | |
| | | |
Dividends/distributions payable | $ | 31,305 | | | $ | 31,301 | |
| | | |
Decrease in noncontrolling interests and increase in shareholders’ equity in connection with the conversion of common units into common shares | $ | 121 | | | $ | 182 | |
Adjustments to noncontrolling interests resulting from changes in COPLP ownership | $ | 545 | | | $ | 453 | |
Increase in redeemable noncontrolling interests and decrease in equity to carry redeemable noncontrolling interests at fair value | $ | 482 | | | $ | 4,101 | |
See accompanying notes to consolidated financial statements.
Corporate Office Properties Trust and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
1. Organization
Corporate Office Properties Trust (“COPT”) and subsidiaries (collectively, the “Company”, “we” or “us”) is a fully-integrated and self-managed real estate investment trust (“REIT”). We own, manage, lease, develop and selectively acquire office and data center properties. The majority of our portfolio is in locations that support the United States Government (“USG”) and its contractors, most of whom are engaged in national security, defense and information technology (“IT”) related activities servicing what we believe are growing, durable, priority missions (“Defense/IT Locations”). We also own a portfolio of office properties located in select urban/urban-like submarkets in the Greater Washington, DC/Baltimore region with durable Class-A office fundamentals and characteristics (“Regional Office”). As of March 31, 2021, our properties included the following:
•182 properties totaling 21.0 million square feet comprised of 16.3 million square feet in 156 office properties and 4.7 million square feet in 26 single-tenant data center shell properties (“data center shells”). We owned 17 of these data center shells through unconsolidated real estate joint ventures;
•a wholesale data center with a critical load of 19.25 megawatts;
•10 properties under development (eight office properties and two data center shells), including three partially-operational properties, that we estimate will total approximately 1.4 million square feet upon completion; and
•approximately 820 acres of land controlled for future development that we believe could be developed into approximately 10.4 million square feet and 43 acres of other land.
We conduct almost all of our operations and own almost all of our assets through our operating partnership, Corporate Office Properties, L.P. (“COPLP”) and subsidiaries (collectively, the “Operating Partnership”), of which COPT is the sole general partner. COPLP owns real estate directly and through subsidiary partnerships and limited liability companies (“LLCs”). In addition to owning real estate, COPLP also owns subsidiaries that provide real estate services such as property management, development and construction services primarily for our properties but also for third parties. Some of these services are performed by a taxable REIT subsidiary (“TRS”).
Equity interests in COPLP are in the form of common and preferred units. As of March 31, 2021, COPT owned 98.3% of the outstanding COPLP common units (“common units”) and there were no preferred units outstanding. Common units not owned by COPT carry certain redemption rights. The number of common units owned by COPT is equivalent to the number of outstanding common shares of beneficial interest (“common shares”) of COPT, and the entitlement of common units to quarterly distributions and payments in liquidation is substantially the same as that of COPT common shareholders.
COPT’s common shares are publicly traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “OFC”.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of COPT, the Operating Partnership, their subsidiaries and other entities in which COPT has a majority voting interest and control. We also consolidate certain entities when control of such entities can be achieved through means other than voting rights (“variable interest entities” or “VIEs”) if we are deemed to be the primary beneficiary of such entities. We eliminate all intercompany balances and transactions in consolidation.
We use the equity method of accounting when we own an interest in an entity and can exert significant influence over but cannot control the entity’s operations. We discontinue equity method accounting if our investment in an entity (and net advances) is reduced to zero unless we have guaranteed obligations of the entity or are otherwise committed to provide further financial support for the entity.
When we own an equity investment in an entity and cannot exert significant influence over its operations, we measure the investment at fair value, with changes recognized through net income. For an investment without a readily determinable fair value, we measure the investment at cost, less any impairments, plus or minus changes resulting from observable price changes for an identical or similar investment of the same issuer.
These interim financial statements should be read together with the consolidated financial statements and notes thereto as
of and for the year ended December 31, 2020 included in the Company’s and Operating Partnership’s 2020 Annual Report on Form 10-K. The unaudited consolidated financial statements include all adjustments that are necessary, in the opinion of management, to fairly state our financial position and results of operations. All adjustments are of a normal recurring nature. The consolidated financial statements have been prepared using the accounting policies described in the Company’s and Operating Partnership’s 2020 Annual Report on Form 10-K as updated for our adoption of recent accounting pronouncements discussed below.
Reclassification
We reclassified certain amounts from the prior period to conform to the current period presentation of our consolidated financial statements with no effect on previously reported net income or equity.
Recent Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board issued guidance containing practical expedients for reference rate reform related activities pertaining to debt, leases, derivatives and other contracts. The guidance is optional and may be elected over time as reference rate reform activities occur. In 2020, we elected to apply an expedient to treat any changes in loans resulting from reference rate reform as debt modifications (as opposed to extinguishments) and hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of the hedge accounting expedients preserves the presentation of derivatives consistent with past presentation. We will continue to evaluate the impact of this guidance and may apply other elections as applicable as additional changes in the market occur.
3. Fair Value Measurements
Recurring Fair Value Measurements
We have a non-qualified elective deferred compensation plan for Trustees and certain members of our management team that, prior to December 31, 2019, permitted participants to defer up to 100% of their compensation on a pre-tax basis and receive a tax-deferred return on such deferrals. We froze additional entry into the plan effective December 31, 2019. The assets held in the plan (comprised primarily of mutual funds and equity securities) and the corresponding liability to the participants are measured at fair value on a recurring basis on our consolidated balance sheets using quoted market prices, as are other marketable securities that we hold. The balance of the plan, which was fully funded and totaled $3.0 million as of March 31, 2021, is included in the line entitled “prepaid expenses and other assets, net” on our consolidated balance sheets along with an insignificant amount of other marketable securities. The offsetting liability associated with the plan is adjusted to fair value at the end of each accounting period based on the fair value of the plan assets and reported in “other liabilities” on our consolidated balance sheets. The assets of the plan are classified in Level 1 of the fair value hierarchy, while the offsetting liability is classified in Level 2 of the fair value hierarchy.
The fair values of our interest rate derivatives are determined using widely accepted valuation techniques, including a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate market data and implied volatilities in such interest rates. While we determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our interest rate derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default. However, as of March 31, 2021, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivatives and determined that these adjustments are not significant. As a result, we determined that our interest rate derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
The carrying values of cash and cash equivalents, restricted cash, accounts receivable, other assets (excluding investing receivables) and accounts payable and accrued expenses are reasonable estimates of their fair values because of the short maturities of these instruments. The fair values of our investing receivables, as disclosed in Note 7, were based on the discounted estimated future cash flows of the loans (categorized within Level 3 of the fair value hierarchy); the discount rates used approximate current market rates for loans with similar maturities and credit quality, and the estimated cash payments include scheduled principal and interest payments. For our disclosure of debt fair values in Note 9, we estimated the fair value of our unsecured senior notes based on quoted market rates for publicly-traded debt (categorized within Level 2 of the fair value hierarchy) and estimated the fair value of our other debt based on the discounted estimated future cash payments to be made on such debt (categorized within Level 3 of the fair value hierarchy); the discount rates used approximate current market rates for loans, or groups of loans, with similar maturities and credit quality, and the estimated future payments include scheduled
principal and interest payments. Fair value estimates are made as of a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgment.
For additional fair value information, refer to Note 7 for investing receivables, Note 9 for debt and Note 10 for interest rate derivatives.
The table below sets forth our financial assets and liabilities accounted for at fair value on a recurring basis as of March 31, 2021 and the hierarchy level of inputs used in measuring their respective fair values under applicable accounting standards (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Description | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
Assets: | | | | | | | | |
Marketable securities in deferred compensation plan (1) | | | | | | | | |
Mutual funds | | $ | 3,005 | | | $ | — | | | $ | — | | | $ | 3,005 | |
Other | | 14 | | | — | | | — | | | 14 | |
Other marketable securities (1) | | 31 | | | — | | | — | | | 31 | |
Interest rate derivatives (1) | | — | | | 77 | | | — | | | 77 | |
Total assets | | $ | 3,050 | | | $ | 77 | | | $ | — | | | $ | 3,127 | |
Liabilities: | | | | | | | | |
Deferred compensation plan liability (2) | | $ | — | | | $ | 3,019 | | | $ | — | | | $ | 3,019 | |
Interest rate derivatives | | — | | | 7,640 | | | — | | | 7,640 | |
Total liabilities | | $ | — | | | $ | 10,659 | | | $ | — | | | $ | 10,659 | |
(1)Included in the line entitled “prepaid expenses and other assets, net” on our consolidated balance sheet.
(2)Included in the line entitled “other liabilities” on our consolidated balance sheet.
4. Properties, Net
Operating properties, net consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
Land | $ | 528,166 | | | $ | 528,269 | |
Buildings and improvements | 3,735,591 | | | 3,711,264 | |
Less: Accumulated depreciation | (1,157,059) | | | (1,124,253) | |
Operating properties, net | $ | 3,106,698 | | | $ | 3,115,280 | |
2021 Development Activities
During the three months ended March 31, 2021, we placed into service 46,000 square feet in one newly-developed property. As of March 31, 2021, we had 10 properties under development, including three partially-operational properties, that we estimate will total 1.4 million square feet upon completion.
5. Leases
Lessor Arrangements
We lease real estate properties, comprised primarily of office properties and data center shells, to third parties. These leases encompass all, or a portion, of properties, with various expiration dates. Our lease revenue is comprised of: fixed lease revenue, including contractual rent billings under leases recognized on a straight-line basis over lease terms and amortization of lease incentives and above- and below- market lease intangibles; and variable lease revenue, including tenant expense
recoveries, lease termination revenue and other revenue from tenants that is not fixed under the lease. The table below sets forth our composition of lease revenue recognized between fixed and variable lease revenue (in thousands):
| | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended March 31, | | |
Lease revenue | | 2021 | | 2020 | | | | |
Fixed | | $ | 112,425 | | | $ | 104,109 | | | | | |
Variable | | 32,199 | | | 26,903 | | | | | |
| | $ | 144,624 | | | $ | 131,012 | | | | | |
Fixed contractual payments due under our property leases were as follows (in thousands):
| | | | | | | | | | | | | | |
| | As of March 31, 2021 |
Year Ending December 31, | | Operating leases | | Sales-type leases |
| | | | |
2021 (1) | | $ | 316,963 | | | $ | 662 | |
2022 | | 382,423 | | | 960 | |
2023 | | 328,713 | | | 960 | |
2024 | | 280,360 | | | 960 | |
2025 | | 201,594 | | | 960 | |
Thereafter | | 752,774 | | | 4,516 | |
Total contractual payments | | $ | 2,262,827 | | | 9,018 | |
Less: Amount representing interest | | | | (2,511) | |
Net investment in sales-type leases | | | | $ | 6,507 | |
(1)Represents the nine months ending December 31, 2021.
Lessee Arrangements
As of March 31, 2021, our balance sheet included $79.9 million in right-of-use assets associated primarily with land leased from third parties underlying certain properties that we are operating or developing, with various expiration dates. Our property right-of-use assets consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | |
Leases | | Balance Sheet Location | | March 31, 2021 | | December 31, 2020 |
Right-of-use assets | | | | | | |
Operating leases - Property | | Property - operating right-of-use assets | | $ | 39,810 | | | $ | 40,570 | |
Finance leases - Property | | Property - finance right-of-use assets | | 40,091 | | | 40,425 | |
Total right-of-use assets | | | | $ | 79,901 | | | $ | 80,995 | |
Property lease liabilities consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | |
Leases | | Balance Sheet Location | | March 31, 2021 | | December 31, 2020 |
Lease liabilities | | | | | | |
Operating leases - Property | | Property - operating lease liabilities | | $ | 30,176 | | | $ | 30,746 | |
Finance leases - Property | | Other liabilities | | 28 | | | 28 | |
Total lease liabilities | | | | $ | 30,204 | | | $ | 30,774 | |
The table below sets forth the weighted average terms and discount rates of our property leases as of March 31, 2021:
| | | | | | | | |
Weighted average remaining lease term | | |
Operating leases | | 50 years |
Finance leases | | < 1 year |
Weighted average discount rate | | |
Operating leases | | 7.16 | % |
Finance leases | | 3.62 | % |
The table below presents our total property lease cost (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Statement of Operations Location | | For the Three Months Ended March 31, | | |
Lease cost | | | 2021 | | 2020 | | | | |
Operating lease cost | | | | | | | | | | |
Property leases - fixed | | Property operating expenses | | $ | 973 | | | $ | 427 | | | | | |
Property leases - variable | | Property operating expenses | | 10 | | | 4 | | | | | |
Finance lease cost | | | | | | | | | | |
Amortization of property right-of-use assets | | Property operating expenses | | 9 | | | 9 | | | | | |
| | | | | | | | | | |
| | | | $ | 992 | | | $ | 440 | | | | | |
The table below presents the effect of property lease payments on our consolidated statements of cash flows (in thousands):
| | | | | | | | | | | | | | | |
| | | For the Three Months Ended March 31, |
Supplemental cash flow information | | | 2021 | | 2020 |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
Operating cash flows for operating leases | | | $ | 782 | | | $ | 311 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Payments on property leases were due as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2021 | | |
Year Ending December 31, | | Operating leases | | Finance leases | | Total | | | | | | |
2021 (1) | | $ | 2,408 | | | $ | 14 | | | $ | 2,422 | | | | | | | |
2022 | | 3,297 | | | 14 | | | 3,311 | | | | | | | |
2023 | | 3,352 | | | — | | | 3,352 | | | | | | | |
2024 | | 3,403 | | | — | | | 3,403 | | | | | | | |
2025 | | 1,749 | | | — | | | 1,749 | | | | | | | |
Thereafter | | 123,979 | | | — | | | 123,979 | | | | | | | |
Total lease payments | | 138,188 | | | 28 | | | 138,216 | | | | | | | |
Less: Amount representing interest | | (108,012) | | | — | | | (108,012) | | | | | | | |
Lease liability | | $ | 30,176 | | | $ | 28 | | | $ | 30,204 | | | | | | | |
(1)Represents the nine months ending December 31, 2021.
6. Real Estate Joint Ventures
Consolidated Real Estate Joint Ventures
The table below sets forth information pertaining to our investments in consolidated real estate joint ventures as of March 31, 2021 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | March 31, 2021 (1) |
| | Date Acquired | | Nominal Ownership % | | | | Total Assets | | Encumbered Assets | | Total Liabilities |
Entity | | | | Location | | | |
LW Redstone Company, LLC (2) | | 3/23/2010 | | 85% | | Huntsville, Alabama | | $ | 418,577 | | | $ | 91,802 | | | $ | 89,723 | |
Stevens Investors, LLC | | 8/11/2015 | | 95% | | Washington, DC | | 161,585 | | | 160,137 | | | 87,305 | |
M Square Associates, LLC | | 6/26/2007 | | 50% | | College Park, Maryland | | 101,511 | | | 61,909 | | | 53,653 | |
| | | | | | | | $ | 681,673 | | | $ | 313,848 | | | $ | 230,681 | |
(1)Excludes amounts eliminated in consolidation.
(2)While net cash flow distributions to the partners vary depending on the source of the funds distributed, cash flows are generally distributed as follows: (1) cumulative preferred returns of 13.5% on our partner’s $9.0 million in invested capital; (2) cumulative preferred returns of 13.5% on our invested capital; (3) return of our invested capital; (4) return of our partner’s invested capital; and (5) any remaining residual 85% to us and 15% to our partner.
Unconsolidated Real Estate Joint Ventures
The table below sets forth information pertaining to our investments in unconsolidated real estate joint ventures accounted for using the equity method of accounting (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Date Acquired | | Nominal Ownership % | | Number of Properties | | Carrying Value of Investment (1) |
Entity | | | | | March 31, 2021 | | December 31, 2020 |
B RE COPT DC JV II LLC (2) | | 10/30/2020 | | 10% | | 8 | | | $ | 15,840 | | | $ | 15,988 | |
BREIT COPT DC JV LLC | | 6/20/2019 | | 10% | | 9 | | | 13,094 | | | 13,315 | |
| | | | | | 17 | | | $ | 28,934 | | | $ | 29,303 | |
(1)Included in the line entitled “investment in unconsolidated real estate joint ventures” on our consolidated balance sheets.
(2)Our investment in B RE COPT DC JV II LLC was lower than our share of the joint venture’s equity by $7.4 million as of March 31, 2021 and December 31, 2020 due to a difference between our cost basis and our share of the joint venture’s underlying equity in its net assets. We recognize adjustments to our share of the joint venture’s earnings and losses resulting from this basis difference in the underlying assets of the joint venture.
7. Investing Receivables
Investing receivables consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
Notes receivable from the City of Huntsville | $ | 67,870 | | | $ | 65,564 | |
Other investing loans receivable | 6,041 | | | 6,041 | |
Amortized cost basis | 73,911 | | | 71,605 | |
Allowance for credit losses | (2,080) | | | (2,851) | |
Investing receivables, net | $ | 71,831 | | | $ | 68,754 | |
The balances above include accrued interest receivable, net of allowance for credit losses, of $601,000 as of March 31, 2021 and $4.8 million as of December 31, 2020.
Our notes receivable from the City of Huntsville funded infrastructure costs in connection with our LW Redstone Company, LLC joint venture (see Note 6) and carry an interest rate of 9.95%. Our other investing loans receivable carry an interest rate of 8.0%.
The fair value of these receivables was approximately $75 million as of March 31, 2021 and $73 million as of December 31, 2020.
8. Prepaid Expenses and Other Assets, Net
Prepaid expenses and other assets, net consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
Lease incentives, net | $ | 35,100 | | | $ | 35,642 | |
Construction contract costs in excess of billings, net | 13,046 | | | 10,343 | |
Prepaid expenses | 10,873 | | | 19,690 | |
Furniture, fixtures and equipment, net | 10,461 | | | 10,433 | |
Net investment in sales-type leases | 6,507 | | | 6,573 | |
Non-real estate equity investments | 5,530 | | | 5,509 | |
Restricted cash | 4,141 | | | 3,664 | |
Marketable securities in deferred compensation plan | 3,019 | | | 3,027 | |
Deferred financing costs, net (1) | |