ofc-20210331

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


☐			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


		PAGE
PART I: FINANCIAL INFORMATION

Item 1:	Financial Statements
Consolidated Financial Statements
	Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020 (unaudited)	3
	Consolidated Statements of Operations for the Three Months Ended March 31, 2021 and 2020 (unaudited)	4
	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2021 and 2020 (unaudited)	5
	Consolidated Statements of Equity for the Three Months Ended March 31, 2021 and 2020 (unaudited)	6
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020 (unaudited)	7






Notes to Consolidated Financial Statements (unaudited)		9
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4:	Controls and Procedures	38

PART II: OTHER INFORMATION

Item 1:	Legal Proceedings	38
Item 1A:	Risk Factors	39
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3:	Defaults Upon Senior Securities	39
Item 4:	Mine Safety Disclosures	39
Item 5:	Other Information	39
Item 6:	Exhibits	40

SIGNATURES		41

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)