ofc-20230630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended			June 30, 2023


☐			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 July 21, 2023, 112,534,746 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 June 30, 2023 and December 31, 2022 (unaudited)	3
	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2023 and 2022 (unaudited)	4
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2023 and 2022 (unaudited)	5
	Consolidated Statements of Equity for the Three and Six Months Ended June 30, 2023 and 2022 (unaudited)	6
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2023 and 2022 (unaudited)	8






Notes to Consolidated Financial Statements (unaudited)		10
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4:	Controls and Procedures	41

PART II: OTHER INFORMATION
Item 1:	Legal Proceedings	41
Item 1A:	Risk Factors	41
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 3:	Defaults Upon Senior Securities	42
Item 4:	Mine Safety Disclosures	42
Item 5:	Other Information	42
Item 6:	Exhibits	42

SIGNATURES		43

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

Corporate Office Properties Trust and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share data)

(unaudited)


	June 30, 2023		December 31, 2022
Assets
Properties, net:
Operating properties, net	$	3,272,670	$	3,258,899
Projects in development or held for future development	399,565		297,499
Total properties, net	3,672,235		3,556,398
Property - operating right-of-use assets	41,652		37,020

Assets held for sale, net	—		161,286
Cash and cash equivalents	14,273		12,337
Investment in unconsolidated real estate joint ventures	41,928		21,460
Accounts receivable, net	47,363		43,334
Deferred rent receivable	136,382		125,147
Lease incentives, net	59,541		49,757
Deferred leasing costs (net of accumulated amortization of $37,451 and $35,270, respectively)	69,218		69,339
Investing receivables (net of allowance for credit losses of $3,250 and $2,794, respectively)	86,708		84,621

Prepaid expenses and other assets, net	77,046		96,576
Total assets	$	4,246,346	$	4,257,275
Liabilities and equity
Liabilities:
Debt, net	$	2,176,174	$	2,231,794
Accounts payable and accrued expenses	135,784		157,998
Rents received in advance and security deposits	32,021		30,016
Dividends and distributions payable	32,636		31,400
Deferred revenue associated with operating leases	9,199		11,004
Property - operating lease liabilities	33,923		28,759

Other liabilities	27,699		18,556
Total liabilities	2,447,436		2,509,527
Commitments and contingencies (Note 17)
Redeemable noncontrolling interests	22,215		26,293
Equity:
Shareholders’ equity:
Common Shares of beneficial interest ($0.01 par value; 150,000,000 shares authorized; shares issued and outstanding of 112,538,555 at June 30, 2023 and 112,423,893 at December 31, 2022)	1,125		1,124
Additional paid-in capital	2,486,996		2,486,116
Cumulative distributions in excess of net income	(762,617)		(807,508)
Accumulated other comprehensive income	5,224		2,071
Total shareholders’ equity	1,730,728		1,681,803
Noncontrolling interests in subsidiaries:
Common units in Corporate Office Properties, L.P. (“COPLP”)	29,563		25,808

Other consolidated entities	16,404		13,844
Noncontrolling interests in subsidiaries	45,967		39,652
Total equity	1,776,695		1,721,455
Total liabilities, redeemable noncontrolling interests and equity	$	4,246,346	$	4,257,275

See accompanying notes to consolidated financial statements.

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2023		2022		2023		2022
Revenues
Lease revenue	$	153,682	$	142,277	$	304,242	$	283,666
Other property revenue	1,271		969		2,392		1,860
Construction contract and other service revenues	14,243		42,557		30,063		95,757
Total revenues	169,196		185,803		336,697		381,283
Operating expenses
Property operating expenses	61,600		54,116		121,020		111,297
Depreciation and amortization associated with real estate operations	37,600		34,812		74,595		69,076
Construction contract and other service expenses	13,555		41,304		28,756		92,954

General, administrative, leasing and other expenses	10,358		9,056		20,848		18,383
Total operating expenses	123,113		139,288		245,219		291,710
Interest expense	(16,519)		(14,808)		(32,961)		(29,232)
Interest and other income, net	2,143		1,593		4,399		3,802
Gain on sales of real estate	14		(19)		49,392		(4)
Loss on early extinguishment of debt	—		—		—		(342)

Income from continuing operations before equity in income of unconsolidated entities and income taxes	31,721		33,281		112,308		63,797
Equity in income of unconsolidated entities	111		318		47		1,206
Income tax expense	(190)		(4)		(315)		(157)
Income from continuing operations	31,642		33,595		112,040		64,846
Discontinued operations	—		—		—		29,573
Net income	31,642		33,595		112,040		94,419
Net income attributable to noncontrolling interests:
Common units in COPLP	(516)		(496)		(1,809)		(1,352)

Other consolidated entities	(839)		(789)		(1,165)		(1,438)



Net income attributable to common shareholders	$	30,287	$	32,310	$	109,066	$	91,629

Basic earnings per common share: (1)
Income from continuing operations	$	0.27	$	0.29	$	0.97	$	0.55
Discontinued operations	—		—		—		0.26
Net income attributable to common shareholders	$	0.27	$	0.29	$	0.97	$	0.81
Diluted earnings per common share: (1)
Income from continuing operations	$	0.27	$	0.29	$	0.96	$	0.55
Discontinued operations	—		—		—		0.26
Net income attributable to common shareholders	$	0.27	$	0.29	$	0.96	$	0.81

(1) Basic and diluted earnings per common share are calculated based on amounts attributable to common shareholders.

See accompanying notes to consolidated financial statements.

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Comprehensive Income

(in thousands)

(unaudited)


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2023		2022		2023		2022
Net income	$	31,642	$	33,595	$	112,040	$	94,419
Other comprehensive income:
Unrealized income on interest rate derivatives	4,989		1,008		4,774		3,545
Reclassification adjustments on interest rate derivatives recognized in interest expense	(974)		754		(1,565)		1,757


Total other comprehensive income	4,015		1,762		3,209		5,302
Comprehensive income	35,657		35,357		115,249		99,721
Comprehensive income attributable to noncontrolling interests	(1,499)		(1,405)		(3,030)		(3,227)
Comprehensive income attributable to common shareholders	$	34,158	$	33,952	$	112,219	$	96,494

See accompanying notes to consolidated financial statements.

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Equity

(Dollars in thousands)

(unaudited)


	Common Shares		Additional Paid-in Capital		Cumulative Distributions in Excess of Net Income		Accumulated Other Comprehensive Income		Noncontrolling Interests		Total
For the Three Months Ended June 30, 2022
Balance at March 31, 2022 (112,418,811 common shares outstanding)	$	1,124	$	2,479,119	$	(828,473)	$	164	$	38,602	$	1,690,536

Redemption of common units	—		—		—		—		(164)		(164)


Share-based compensation (5,860 shares issued, net of redemptions)	—		1,007		—		—		1,370		2,377
Redemption of vested equity awards	—		(61)		—		—		—		(61)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP	—		1,036		—		—		(1,036)		—
Comprehensive income	—		—		32,310		1,642		666		34,618
Dividends	—		—		(30,913)		—		—		(30,913)
Distributions to owners of common units in COPLP	—		—		—		—		(472)		(472)

Distributions to noncontrolling interests in other consolidated entities	—		—		—		—		(8)		(8)
Adjustments for changes in fair value of redeemable noncontrolling interests	—		38		—		—		—		38

Balance at June 30, 2022 (112,424,671 common shares outstanding)	$	1,124	$	2,481,139	$	(827,076)	$	1,806	$	38,958	$	1,695,951

For the Three Months Ended June 30, 2023
Balance at March 31, 2023 (112,513,857 common shares outstanding)	$	1,125	$	2,484,501	$	(760,820)	$	1,353	$	42,655	$	1,768,814




Redemption of common units	—		—		—		—		(81)		(81)
Share-based compensation (24,698 shares issued, net of redemptions)	—		981		—		—		1,382		2,363
Redemption of vested equity awards	—		(38)		—		—		—		(38)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP	—		1,040		—		—		(1,040)		—
Comprehensive income	—		—		30,287		3,871		936		35,094
Dividends	—		—		(32,084)		—		—		(32,084)
Distributions to owners of common units in COPLP	—		—		—		—		(548)		(548)

Distributions to noncontrolling interests in other consolidated entities	—		—		—		—		(7)		(7)
Adjustments for changes in fair value of redeemable noncontrolling interests	—		512		—		—		—		512
Reclassification of redeemable noncontrolling interests to equity	—		—		—		—		2,670		2,670

Balance at June 30, 2023 (112,538,555 common shares outstanding)	$	1,125	$	2,486,996	$	(762,617)	$	5,224	$	45,967	$	1,776,695

See accompanying notes to consolidated financial statements.

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Equity (continued)

(Dollars in thousands)

(unaudited)


	Common Shares		Additional Paid-in Capital		Cumulative Distributions in Excess of Net Income		Accumulated Other Comprehensive Income (Loss)		Noncontrolling Interests		Total
For the Six Months Ended June 30, 2022
Balance at December 31, 2021 (112,327,533 common shares outstanding)	$	1,123	$	2,481,539	$	(856,863)	$	(3,059)	$	34,335	$	1,657,075




Redemption of common units	—		—		—		—		(376)		(376)


Share-based compensation (97,138 shares issued, net of redemptions)	1		2,021		—		—		2,656		4,678
Redemption of vested equity awards	—		(1,120)		—		—		—		(1,120)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP	—		(1,378)		—		—		1,378		—
Comprehensive income	—		—		91,629		4,865		1,921		98,415
Dividends	—		—		(61,842)		—		—		(61,842)
Distributions to owners of common units in COPLP	—		—		—		—		(941)		(941)

Distributions to noncontrolling interests in other consolidated entities	—		—		—		—		(15)		(15)
Adjustments for changes in fair value of redeemable noncontrolling interests	—		77		—		—		—		77


Balance at June 30, 2022 (112,424,671 common shares outstanding)	$	1,124	$	2,481,139	$	(827,076)	$	1,806	$	38,958	$	1,695,951

For the Six Months Ended June 30, 2023
Balance at December 31, 2022 (112,423,893 common shares outstanding)	$	1,124	$	2,486,116	$	(807,508)	$	2,071	$	39,652	$	1,721,455



Redemption of common units	—		—		—		—		(454)		(454)


Share-based compensation (114,662 shares issued, net of redemptions)	1		2,040		—		—		2,136		4,177
Redemption of vested equity awards	—		(1,151)		—		—		—		(1,151)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP	—		(1,302)		—		—		1,302		—
Comprehensive income	—		—		109,066		3,153		1,768		113,987
Dividends	—		—		(64,175)		—		—		(64,175)
Distributions to owners of common units in COPLP	—		—		—		—		(1,092)		(1,092)

Distributions to noncontrolling interests in other consolidated entities	—		—		—		—		(15)		(15)
Adjustments for changes in fair value of redeemable noncontrolling interests	—		1,293		—		—		—		1,293
Reclassification of redeemable noncontrolling interests to equity	—		—		—		—		2,670		2,670


Balance at June 30, 2023 (112,538,555 common shares outstanding)	$	1,125	$	2,486,996	$	(762,617)	$	5,224	$	45,967	$	1,776,695

See accompanying notes to consolidated financial statements.

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	For the Six Months Ended June 30,
	2023		2022
Cash flows from operating activities
Revenues from real estate operations received	$	311,501	$	285,858
Construction contract and other service revenues received	31,479		90,663
Property operating expenses paid	(101,842)		(99,512)
Construction contract and other service expenses paid	(31,982)		(88,833)
General, administrative, leasing and other expenses paid	(18,516)		(17,782)
Interest expense paid	(29,975)		(26,732)
Lease incentives paid	(16,457)		(7,739)





Other	(3,295)		2,797
Net cash provided by operating activities	140,913		138,720
Cash flows from investing activities
Development and redevelopment of properties	(145,395)		(142,862)

Tenant improvements on operating properties	(43,642)		(16,734)
Other capital improvements on operating properties	(8,034)		(21,590)


Proceeds from sale of properties	189,506		220,780



Leasing costs paid	(9,120)		(4,121)



Other	251		(565)
Net cash (used in) provided by investing activities	(16,434)		34,908
Cash flows from financing activities
Proceeds from debt
Revolving Credit Facility	197,000		329,000



Repayments of debt
Revolving Credit Facility	(237,000)		(224,000)

Term loan facility	—		(200,000)
Scheduled principal amortization	(1,536)		(1,618)
Other debt repayments	(15,902)		—





Common share dividends paid	(63,016)		(61,814)





Other	(4,222)		(6,865)
Net cash used in financing activities	(124,676)		(165,297)
Net (decrease) increase in cash and cash equivalents and restricted cash	(197)		8,331
Cash and cash equivalents and restricted cash
Beginning of period	16,509		17,316
End of period	$	16,312	$	25,647

See accompanying notes to consolidated financial statements.

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Cash Flows (continued)

(in thousands)

(unaudited)


	For the Six Months Ended June 30,
	2023		2022
Reconciliation of net income to net cash provided by operating activities:
Net income	$	112,040	$	94,419
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and other amortization	75,806		70,235



Amortization of deferred financing costs and net debt discounts	2,500		2,351
Increase in deferred rent receivable	(12,771)		(11,603)
Gain on sales of real estate	(49,392)		(28,560)

Share-based compensation	3,946		4,301


Other	(1,603)		(2,207)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable	(4,029)		9,374
Decrease in lease incentives and prepaid expenses and other assets, net	8,389		8,407
Increase (decrease) in accounts payable, accrued expenses and other liabilities	4,022		(3,480)
Increase (decrease) in rents received in advance and security deposits	2,005		(4,517)

Net cash provided by operating activities	$	140,913	$	138,720
Reconciliation of cash and cash equivalents and restricted cash:
Cash and cash equivalents at beginning of period	$	12,337	$	13,262
Restricted cash at beginning of period	4,172		4,054
Cash and cash equivalents and restricted cash at beginning of period	$	16,509	$	17,316

Cash and cash equivalents at end of period	$	14,273	$	20,735
Restricted cash at end of period	2,039		4,912
Cash and cash equivalents and restricted cash at end of period	$	16,312	$	25,647
Supplemental schedule of non-cash investing and financing activities:
Decrease in accrued capital improvements, leasing and other investing activity costs	$	(17,627)	$	(6,222)


Recognition of operating right-of-use assets and related lease liabilities	$	6,697	$	683
Recognition of finance right-of-use assets and related lease liabilities	$	434	$	—




Investment in unconsolidated real estate joint venture retained in property disposition	$	21,121	$	—






Increase in fair value of derivatives applied to accumulated other comprehensive income and noncontrolling interests	$	3,209	$	5,072

Dividends/distributions payable	$	32,636	$	31,400


Adjustments to noncontrolling interests resulting from changes in COPLP ownership	$	1,302	$	1,378
Decrease in redeemable noncontrolling interests and increase in equity to adjust for changes in fair value of redeemable noncontrolling interests	$	(1,293)	$	(77)
Reclassification of redeemable noncontrolling interests to equity	$	2,670	$	—

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 submarkets in the Greater Washington, DC/Baltimore region with durable Class-A office fundamentals and characteristics (“Regional Office”). As of June 30, 2023, our properties included the following:

•194 properties totaling 23.0 million square feet comprised of 17.8 million square feet in 166 office properties and 5.3 million square feet in 28 single-tenant data center shells. We owned 24 of these data center shells through unconsolidated real estate joint ventures;

•nine properties under development (five office properties and four data center shells), including one partially-operational property, that will total approximately 1.5 million square feet upon completion; and

•approximately 680 acres of land controlled for future development that we believe could be developed into approximately 9.0 million square feet and approximately 40 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 June 30, 2023, COPT owned 97.9% 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

These 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, 2022 included in our 2022 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 our 2022 Annual Report on Form 10-K.

Reclassifications

We reclassified certain amounts from prior periods to conform to the current period presentation of our consolidated financial statements with no effect on previously reported net income or equity.

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. Effective December 31, 2019, no new investments of deferred compensation were eligible for the plan. The assets held in the plan (comprised of mutual funds) 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. The balance of the plan, which was fully funded and totaled $1.8 million as of June 30, 2023, is included in the line entitled “prepaid expenses and other assets, net” on our consolidated balance sheets. 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, as disclosed in Note 9, 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 June 30, 2023, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivatives and determined that these adjustments were 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 8, we estimated the fair value of our unsecured senior notes based on quoted market rates for our senior notes (categorized within Level 1 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.

The table below sets forth our financial assets and liabilities accounted for at fair value on a recurring basis as of June 30, 2023 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: (1)
Marketable securities in deferred compensation plan	$	1,822	$	—	$	—	$	1,822



Interest rate derivatives	—		5,840		—		5,840
Total assets	$	1,822	$	5,840	$	—	$	7,662
Liabilities: (2)
Deferred compensation plan liability	$	—	$	1,822	$	—	$	1,822

(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):


	June 30, 2023		December 31, 2022
Land	$	539,870	$	539,809
Buildings and improvements	4,066,866		3,986,524
Less: Accumulated depreciation	(1,334,066)		(1,267,434)
Operating properties, net	$	3,272,670	$	3,258,899

2023 Dispositions

On January 10, 2023, we sold a 90% interest in three data center shell properties in Northern Virginia based on an aggregate property value of $211.3 million and retained a 10% interest in the properties through Redshift JV LLC, a newly-formed joint venture. Our partner in the joint venture acquired the 90% interest from us for $190.2 million. We account for our interest in the joint venture using the equity method of accounting, as described further in Note 6. We recognized a gain on sale of $49.4 million. The table below sets forth the components of the properties’ assets, which were classified as held for sale on our consolidated balance sheet as of December 31, 2022 (in thousands):



Properties, net	$	156,691
Deferred rent receivable	4,595



Assets held for sale, net	$	161,286

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 leases. The table below sets forth our composition of lease revenue recognized between fixed and variable lease revenue (in thousands):


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
Lease revenue (1)	2023		2022		2023		2022
Fixed	$	118,461	$	112,691	$	234,500	$	223,858
Variable	35,221		29,586		69,742		59,808
	$	153,682	$	142,277	$	304,242	$	283,666

(1)Excludes lease revenue from discontinued operations of which $1.5 million was fixed and $527,000 was variable for the six months ended June 30, 2022.

Lessee Arrangements

As of June 30, 2023, our balance sheet included $44.3 million in right-of-use assets associated primarily with land leased from third parties underlying certain properties that we are operating with various expiration dates. Our property right-of-use assets and property lease liabilities on our consolidated balance sheets consisted of the following (in thousands):


Leases	Balance Sheet Location	June 30, 2023		December 31, 2022
Right-of-use assets
Operating leases - Property	Property - operating right-of-use assets	$	41,652	$	37,020
Finance leases - Property	Prepaid expenses and other assets, net	2,603		2,207
Total right-of-use assets		$	44,255	$	39,227
Lease liabilities
Operating leases - Property	Property - operating lease liabilities	$	33,923	$	28,759
Finance leases - Property	Other liabilities	426		—
Total lease liabilities		$	34,349	$	28,759

As of June 30, 2023, our operating leases had a weighted average remaining lease term of 47 years and a weighted average discount rate of 7.32%, while our finance leases had a weighted average remaining lease term of ten years and a weighted average discount rate of 9.14%. The table below presents our total property lease costs (in thousands):


	Statement of Operations Location	For the Three Months Ended June 30,				For the Six Months Ended June 30,
Lease cost		2023		2022		2023		2022
Operating lease cost
Property leases - fixed	Property operating expenses	$	1,803	$	1,032	$	3,338	$	2,051
Property leases - variable	Property operating expenses	16		17		33		33
Finance lease cost
Amortization of property right-of-use assets	Property operating expenses	19		8		39		16
Interest on lease liabilities	Interest expense	10		—		23		—
		$	1,848	$	1,057	$	3,433	$	2,100

The table below presents the effect of property lease payments on our consolidated statements of cash flows (in thousands):


	For the Six Months Ended June 30,
Supplemental cash flow information	2023		2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	2,806	$	1,676
Operating cash flows for financing leases	$	23	$	—
Financing cash flows for financing leases	$	9	$	—

Payments on property leases were due as follows (in thousands):


	June 30, 2023
Year Ending December 31,	Operating Leases		Finance Leases
2023 (1)	$	3,242	$	30
2024	6,623		61
2025	2,249		63
2026	1,662		65
2027	1,677		67
Thereafter	130,495		366
Total lease payments	145,948		652
Less: Amount representing interest	(112,025)		(226)
Lease liability	$	33,923	$	426

(1)Represents the six months ending December 31, 2023.

6. Real Estate Joint Ventures

Consolidated Real Estate Joint Ventures

The table below sets forth information as of June 30, 2023 pertaining to our investments in consolidated real estate joint ventures, which are each variable interest entities (dollars in thousands):


		Nominal Ownership %		June 30, 2023 (1)
	Date Acquired			Total Assets		Encumbered Assets		Total Liabilities		Mortgage Debt
Entity			Location
LW Redstone Company, LLC (2)	3/23/2010	85%	Huntsville, Alabama	$	661,917	$	96,088	$	105,280	$	51,301
Stevens Investors, LLC	8/11/2015	95%	Washington, DC	167,132		—		1,738		—
M Square Associates, LLC	6/26/2007	50%	College Park, Maryland	100,933		58,171		50,445		49,220
				$	929,982	$	154,259	$	157,463	$	100,521

(1)Excludes amounts eliminated in consolidation.

(2)We fund all capital requirements. Our partner receives distributions of $1.2 million of annual operating cash flows and we receive the remainder.

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				June 30, 2023		December 31, 2022
Redshift JV LLC	1/10/2023	10%	3	$	21,151	$	—
BREIT COPT DC JV LLC	6/20/2019	10%	9	11,096		11,568
Quark JV LLC	12/14/2022	10%	2	6,747		6,758
B RE COPT DC JV III LLC	6/2/2021	10%	2	2,934		3,134
B RE COPT DC JV II LLC (2)	10/30/2020	10%	8	(1,999)		(1,459)
			24	$	39,929	$	20,001

(1)Included $41.9 million and $21.5 million reported in “Investment in unconsolidated real estate joint ventures” as of June 30, 2023 and December 31, 2022, respectively, and $2.0 million and $1.5 million for investments with deficit balances reported in “other liabilities” on our consolidated balance sheets as of June 30, 2023 and December 31, 2022, respectively.

(2)Our investment in B RE COPT DC JV II LLC was lower than our share of the joint venture’s equity by $6.9 million as of June 30, 2023 and $7.0 million as of December 31, 2022 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.

As described further in Note 4, on January 10, 2023, we sold a 90% interest in three data center shell properties in Northern Virginia and retained a 10% interest in the properties through Redshift JV LLC, a newly-formed joint venture. We concluded that the joint venture is a variable interest entity. Under the terms of the joint venture agreement, we and our partner receive returns in proportion to our investments, and our maximum exposure to losses is limited to our investment, subject to certain indemnification obligations with respect to nonrecourse debt secured by the properties. The nature of our involvement in the activities of the joint venture does not give us power over decisions that significantly affect its economic performance.

7. Investing Receivables

Investing receivables consisted of the following (in thousands):


	June 30, 2023		December 31, 2022
Notes receivable from the City of Huntsville	$	72,544	$	69,703
Other investing loans receivable	17,414		17,712
Amortized cost basis	89,958		87,415
Allowance for credit losses	(3,250)		(2,794)
Investing receivables, net	$	86,708	$	84,621

The balances above include accrued interest receivable, net of allowance for credit losses, of $2.5 million as of June 30, 2023 and $2.9 million as of December 31, 2022.

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 loan receivable as of June 30, 2023 carries a stated interest rate of 12.0% and matures in 2024.

The fair value of these receivables was approximately $91 million as of June 30, 2023 and $87 million as of December 31, 2022.

8. Debt, Net

Our debt consisted of the following (dollars in thousands):



	Carrying Value (1) as of					June 30, 2023
	June 30, 2023		December 31, 2022
					Stated Interest Rates		Scheduled Maturity
Mortgage and Other Secured Debt:
Fixed rate mortgage debt	$	67,415	$	84,433		3.82% to 4.62% (2)		2024-2026
Variable rate secured debt	33,106		33,318			SOFR + 0.10% + 1.45% to 1.55% (3)		2025-2026
Total mortgage and other secured debt	100,521		117,751
Revolving Credit Facility	171,000		211,000			SOFR + 0.10% + 0.725% to 1.400% (4)		October 2026 (5)
Term Loan Facility	124,120		123,948			SOFR + 0.10% + 0.850% to 1.700% (6)		January 2026 (7)
Unsecured Senior Notes
2.25%, $400,000 aggregate principal	397,071		396,539			2.25% (8)		March 2026
2.00%, $400,000 aggregate principal	397,229		396,988			2.00% (9)		January 2029
2.75%, $600,000 aggregate principal	590,664		590,123			2.75% (10)		April 2031
2.90%, $400,000 aggregate principal	395,055		394,848			2.90% (11)		December 2033
Unsecured note payable	514		597			0% (12)		May 2026
Total debt, net	$	2,176,174	$	2,231,794

(1)The carrying values of our debt other than the Revolving Credit Facility reflect net deferred financing costs of $4.8 million as of June 30, 2023 and $5.4 million as of December 31, 2022.

(2)The weighted average interest rate on our fixed rate mortgage debt was 4.10% as of June 30, 2023.

(3)Including the effect of interest rate swaps that hedge the risk of interest rate changes, the weighted average interest rate on our variable rate secured debt as of June 30, 2023 was 2.45%; excluding the effect of these swaps, the weighted average interest rate on this debt as of June 30, 2023 was 6.67%.

(4)The weighted average interest rate on the Revolving Credit Facility was 6.28% as of June 30, 2023, excluding the effect of interest rate swaps that hedge the risk of interest rate changes (see Note 9).

(5)The facility matures in October 2026, with the ability for us to extend such maturity by two six-month periods at our option, provided that there is no default under the facility and we pay an extension fee of 0.0625% of the total availability under the facility for each extension period.

(6)The interest rate on this loan was 6.56% as of June 30, 2023, excluding the effect of interest rate swaps that hedge the risk of interest rate changes (see Note 9).

(7)This facility matures in January 2026, with the ability for us to extend such maturity by two 12-month periods at our option, provided that there is no default under the facility and we pay an extension fee of 0.125% of the outstanding loan balance for each extension period.

(8)The carrying value of these notes reflects an unamortized discount totaling $2.4 million as of June 30, 2023 and $2.8 million as of December 31, 2022. The effective interest rate under the notes, including amortization of the issuance costs, was 2.48%.

(9)The carrying value of these notes reflects an unamortized discount totaling $2.0 million as of June 30, 2023 and $2.1 million as of December 31, 2022. The effective interest rate under the notes, including amortization of the issuance costs, was 2.09%.

(10)The carrying value of these notes reflects an unamortized discount totaling $8.1 million as of June 30, 2023 and $8.5 million as of December 31, 2022. The effective interest rate under the notes, including amortization of the issuance costs, was 2.94%.

(11)The carrying value of these notes reflects an unamortized discount totaling $4.1 million as of June 30, 2023 and $4.2 million as of December 31, 2022. The effective interest rate under the notes, including amortization of the issuance costs, was 3.01%.

(12)This note carries an interest rate that, upon assumption, was below market rates and it therefore was recorded at its fair value based on applicable effective interest rates. The carrying value of this note reflects an unamortized discount totaling $47,000 as of June 30, 2023 and $65,000 as of December 31, 2022.

All debt is owed by the Operating Partnership. While COPT is not directly obligated by any debt, it has guaranteed COPLP’s Revolving Credit Facility, Term Loan Facility and Unsecured Senior Notes.

Certain of our debt instruments require that we comply with a number of restrictive financial covenants. As of June 30, 2023, we were compliant with these financial covenants.

Our debt matures on the following schedule (in thousands):


Year Ending December 31,	June 30, 2023
2023 (1)	$	1,516
2024	29,983
2025	23,717
2026	742,300
2027	—
Thereafter	1,400,000
Total	$	2,197,516	(2)

(1)Represents the six months ending December 31, 2023.

(2)Represents scheduled principal amortization and maturities only and therefore excludes net discounts and deferred financing costs of $21.3 million.

We capitalized interest costs of $1.2 million in the three months ended June 30, 2023, $1.4 million in the three months ended June 30, 2022, $2.0 million in the six months ended June 30, 2023 and $2.9 million in the six months ended June 30, 2022.

The following table sets forth information pertaining to the fair value of our debt (in thousands):


	June 30, 2023				December 31, 2022
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Fixed-rate debt
Unsecured Senior Notes	$	1,780,019	$	1,401,467	$	1,778,498	$	1,433,561
Other fixed-rate debt	67,929		63,545		85,030		80,330
Variable-rate debt	328,226		328,340		368,266		367,896
	$	2,176,174	$	1,793,352	$	2,231,794	$	1,881,787

9. Interest Rate Derivatives

The following table sets forth the key terms and fair values of our interest rate swap derivatives (dollars in thousands):


							Fair Value at
Notional Amount			Fixed Rate	Floating Rate Index	Effective Date	Expiration Date	June 30, 2023		December 31, 2022
$	10,760	(1)	1.678%	SOFR + 0.10%	8/1/2019	8/1/2026	$	811	$	806
$	22,625	(2)	0.573%	SOFR + 0.10%	4/1/2020	3/26/2025	1,641		1,825
$	150,000		3.742%	One-Month SOFR	2/1/2023	2/2/2026	2,545		—
$	50,000		3.747%	One-Month SOFR	2/1/2023	2/2/2026	843		—
							$	5,840	$	2,631

(1)The notional amount of this instrument is scheduled to amortize to $10.0 million.

(2)The notional amount of this instrument is scheduled to amortize to $22.1 million.

Each of these swaps was designated as a cash flow hedge of interest rate risk.

The table below sets forth the fair value of our interest rate derivatives as well as their classification on our consolidated balance sheets (in thousands):

Fair Value at

Derivatives

Balance Sheet Location

June 30,
2023

December 31,
2022

Interest rate swaps designated as cash flow hedges

Prepaid expenses and other assets, net

5,840

2,631

The table below presents the effect of our interest rate derivatives on our consolidated statements of operations and comprehensive income (in thousands):