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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 | September 30, 2023 |
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
COPT DEFENSE PROPERTIES
(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
| | |
CORPORATE OFFICE PROPERTIES TRUST |
(Former name, former address and former fiscal year, if changed from last report)
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 | CDP | 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 October 23, 2023, 112,546,290 of COPT Defense Properties’ 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
COPT Defense Properties and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
(unaudited)
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
Assets | | | |
Properties, net: | | | |
Operating properties, net | $ | 3,148,434 | | | $ | 3,258,899 | |
Projects in development or held for future development | 319,763 | | | 297,499 | |
Total properties, net | 3,468,197 | | | 3,556,398 | |
Property - operating right-of-use assets | 40,487 | | | 37,020 | |
| | | |
Assets held for sale, net | — | | | 161,286 | |
Cash and cash equivalents | 204,238 | | | 12,337 | |
Investment in unconsolidated real estate joint ventures | 41,495 | | | 21,460 | |
Accounts receivable, net | 40,211 | | | 43,334 | |
Deferred rent receivable | 142,041 | | | 125,147 | |
Lease incentives, net | 60,506 | | | 49,757 | |
Deferred leasing costs (net of accumulated amortization of $39,298 and $35,270, respectively) | 68,033 | | | 69,339 | |
Investing receivables (net of allowance for credit losses of $3,623 and $2,794, respectively) | 87,535 | | | 84,621 | |
| | | |
Prepaid expenses and other assets, net | 86,514 | | | 96,576 | |
Total assets | $ | 4,239,257 | | | $ | 4,257,275 | |
Liabilities and equity | | | |
Liabilities: | | | |
Debt, net | $ | 2,415,783 | | | $ | 2,231,794 | |
Accounts payable and accrued expenses | 135,605 | | | 157,998 | |
Rents received in advance and security deposits | 32,063 | | | 30,016 | |
Dividends and distributions payable | 32,645 | | | 31,400 | |
Deferred revenue associated with operating leases | 24,590 | | | 11,004 | |
Property - operating lease liabilities | 32,940 | | | 28,759 | |
| | | |
Other liabilities | 17,936 | | | 18,556 | |
Total liabilities | 2,691,562 | | | 2,509,527 | |
Commitments and contingencies (Note 17) | | | |
Redeemable noncontrolling interests | 21,822 | | | 26,293 | |
Equity: | | | |
Shareholders’ equity: | | | |
Common Shares of beneficial interest ($0.01 par value; 150,000,000 shares authorized; shares issued and outstanding of 112,547,846 at September 30, 2023 and 112,423,893 at December 31, 2022) | 1,125 | | | 1,124 | |
Additional paid-in capital | 2,489,717 | | | 2,486,116 | |
Cumulative distributions in excess of net income | (1,010,885) | | | (807,508) | |
Accumulated other comprehensive income | 6,094 | | | 2,071 | |
Total shareholders’ equity | 1,486,051 | | | 1,681,803 | |
Noncontrolling interests in subsidiaries: | | | |
Common units in COPT Defense Properties, L.P. (“CDPLP”) | 25,337 | | | 25,808 | |
| | | |
Other consolidated entities | 14,485 | | | 13,844 | |
Noncontrolling interests in subsidiaries | 39,822 | | | 39,652 | |
Total equity | 1,525,873 | | | 1,721,455 | |
Total liabilities, redeemable noncontrolling interests and equity | $ | 4,239,257 | | | $ | 4,257,275 | |
See accompanying notes to consolidated financial statements.
COPT Defense Properties and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Revenues | | | | | | | |
Lease revenue | $ | 155,268 | | | $ | 146,481 | | | $ | 459,510 | | | $ | 430,147 | |
Other property revenue | 1,339 | | | 1,206 | | | 3,731 | | | 3,066 | |
Construction contract and other service revenues | 11,949 | | | 34,813 | | | 42,012 | | | 130,570 | |
Total revenues | 168,556 | | | 182,500 | | | 505,253 | | | 563,783 | |
Operating expenses | | | | | | | |
Property operating expenses | 61,788 | | | 57,663 | | | 182,808 | | | 168,960 | |
Depreciation and amortization associated with real estate operations | 37,620 | | | 35,247 | | | 112,215 | | | 104,323 | |
Construction contract and other service expenses | 11,493 | | | 33,555 | | | 40,249 | | | 126,509 | |
Impairment losses | 252,797 | | | — | | | 252,797 | | | — | |
General, administrative, leasing and other expenses | 10,576 | | | 9,450 | | | 31,424 | | | 27,833 | |
Total operating expenses | 374,274 | | | 135,915 | | | 619,493 | | | 427,625 | |
Interest expense | (17,798) | | | (15,123) | | | (50,759) | | | (44,355) | |
Interest and other income, net | 2,529 | | | 597 | | | 6,928 | | | 4,399 | |
Gain on sales of real estate | — | | | 16 | | | 49,392 | | | 12 | |
Loss on early extinguishment of debt | — | | | — | | | — | | | (342) | |
| | | | | | | |
(Loss) income from continuing operations before equity in (loss) income of unconsolidated entities and income taxes | (220,987) | | | 32,075 | | | (108,679) | | | 95,872 | |
Equity in (loss) income of unconsolidated entities | (68) | | | 308 | | | (21) | | | 1,514 | |
Income tax expense | (152) | | | (67) | | | (467) | | | (224) | |
(Loss) income from continuing operations | (221,207) | | | 32,316 | | | (109,167) | | | 97,162 | |
Discontinued operations | — | | | — | | | — | | | 29,573 | |
Net (loss) income | (221,207) | | | 32,316 | | | (109,167) | | | 126,735 | |
Net loss (income) attributable to noncontrolling interests: | | | | | | | |
Common units in CDPLP | 3,691 | | | (476) | | | 1,882 | | | (1,828) | |
| | | | | | | |
Other consolidated entities | 1,329 | | | (919) | | | 164 | | | (2,357) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Net (loss) income attributable to common shareholders | $ | (216,187) | | | $ | 30,921 | | | $ | (107,121) | | | $ | 122,550 | |
| | | | | | | |
Basic earnings per common share: (1) | | | | | | | |
(Loss) income from continuing operations | $ | (1.94) | | | $ | 0.28 | | | $ | (0.96) | | | $ | 0.83 | |
Discontinued operations | — | | | — | | | — | | | 0.26 | |
Net (loss) income attributable to common shareholders | $ | (1.94) | | | $ | 0.28 | | | $ | (0.96) | | | $ | 1.09 | |
Diluted earnings per common share: (1) | | | | | | | |
(Loss) income from continuing operations | $ | (1.94) | | | $ | 0.27 | | | $ | (0.96) | | | $ | 0.83 | |
Discontinued operations | — | | | — | | | — | | | 0.25 | |
Net (loss) income attributable to common shareholders | $ | (1.94) | | | $ | 0.27 | | | $ | (0.96) | | | $ | 1.08 | |
(1) Basic and diluted earnings per common share are calculated based on amounts attributable to common shareholders.
See accompanying notes to consolidated financial statements.
COPT Defense Properties and Subsidiaries
Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Net (loss) income | $ | (221,207) | | | $ | 32,316 | | | $ | (109,167) | | | $ | 126,735 | |
Other comprehensive income: | | | | | | | |
Unrealized income on interest rate derivatives | 2,042 | | | 1,101 | | | 6,816 | | | 4,646 | |
Reclassification adjustments on interest rate derivatives recognized in interest expense | (1,146) | | | (77) | | | (2,711) | | | 1,680 | |
| | | | | | | |
| | | | | | | |
Total other comprehensive income | 896 | | | 1,024 | | | 4,105 | | | 6,326 | |
Comprehensive (loss) income | (220,311) | | | 33,340 | | | (105,062) | | | 133,061 | |
Comprehensive loss (income) attributable to noncontrolling interests | 4,994 | | | (1,593) | | | 1,964 | | | (4,820) | |
Comprehensive (loss) income attributable to common shareholders | $ | (215,317) | | | $ | 31,747 | | | $ | (103,098) | | | $ | 128,241 | |
See accompanying notes to consolidated financial statements.
COPT Defense Properties 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 September 30, 2022 | | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | |
Redemption of common units | | — | | | — | | | — | | | — | | | (86) | | | (86) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Share-based compensation (1,408 shares redeemed, net of issuances) | | — | | | 1,045 | | | — | | | — | | | 1,389 | | | 2,434 | |
Redemption of vested equity awards | | — | | | (48) | | | — | | | — | | | — | | | (48) | |
Adjustments to noncontrolling interests resulting from changes in ownership of CDPLP | | — | | | 1,301 | | | — | | | — | | | (1,301) | | | — | |
Comprehensive income | | — | | | — | | | 30,921 | | | 826 | | | 799 | | | 32,546 | |
Dividends | | — | | | — | | | (30,917) | | | — | | | — | | | (30,917) | |
Distributions to owners of common units in CDPLP | | — | | | — | | | — | | | — | | | (471) | | | (471) | |
| | | | | | | | | | | | |
Distributions to noncontrolling interests in other consolidated entities | | — | | | — | | | — | | | — | | | (8) | | | (8) | |
Adjustments for changes in fair value of redeemable noncontrolling interests | | — | | | 1,265 | | | — | | | — | | | — | | | 1,265 | |
| | | | | | | | | | | | |
Balance at September 30, 2022 (112,423,263 common shares outstanding) | | $ | 1,124 | | | $ | 2,484,702 | | | $ | (827,072) | | | $ | 2,632 | | | $ | 39,280 | | | $ | 1,700,666 | |
| | | | | | | | | | | | |
For the Three Months Ended September 30, 2023 | | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Redemption of common units | | — | | | — | | | — | | | — | | | (86) | | | (86) | |
Share-based compensation (9,291 shares issued, net of redemptions) | | — | | | 1,052 | | | — | | | — | | | 1,407 | | | 2,459 | |
Redemption of vested equity awards | | — | | | (48) | | | — | | | — | | | — | | | (48) | |
Adjustments to noncontrolling interests resulting from changes in ownership of CDPLP | | — | | | 1,324 | | | — | | | — | | | (1,324) | | | — | |
Comprehensive (loss) income | | — | | | — | | | (216,187) | | | 870 | | | (5,588) | | | (220,905) | |
Dividends | | — | | | — | | | (32,081) | | | — | | | — | | | (32,081) | |
Distributions to owners of common units in CDPLP | | — | | | — | | | — | | | — | | | (547) | | | (547) | |
| | | | | | | | | | | | |
Distributions to noncontrolling interests in other consolidated entities | | — | | | — | | | — | | | — | | | (7) | | | (7) | |
Adjustments for changes in fair value of redeemable noncontrolling interests | | — | | | 393 | | | — | | | — | | | — | | | 393 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Balance at September 30, 2023 (112,547,846 common shares outstanding) | | $ | 1,125 | | | $ | 2,489,717 | | | $ | (1,010,885) | | | $ | 6,094 | | | $ | 39,822 | | | $ | 1,525,873 | |
See accompanying notes to consolidated financial statements.
COPT Defense 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 Nine Months Ended September 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 | | | — | | | — | | | — | | | — | | | (462) | | | (462) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Share-based compensation (95,730 shares issued, net of redemptions) | | | 1 | | | 3,066 | | | — | | | — | | | 4,045 | | | 7,112 | |
Redemption of vested equity awards | | | — | | | (1,168) | | | — | | | — | | | — | | | (1,168) | |
Adjustments to noncontrolling interests resulting from changes in ownership of CDPLP | | | — | | | (77) | | | — | | | — | | | 77 | | | — | |
Comprehensive income | | | — | | | — | | | 122,550 | | | 5,691 | | | 2,720 | | | 130,961 | |
Dividends | | | — | | | — | | | (92,759) | | | — | | | — | | | (92,759) | |
Distributions to owners of common units in CDPLP | | | — | | | — | | | — | | | — | | | (1,412) | | | (1,412) | |
| | | | | | | | | | | | | |
Distributions to noncontrolling interests in other consolidated entities | | | — | | | — | | | — | | | — | | | (23) | | | (23) | |
Adjustments for changes in fair value of redeemable noncontrolling interests | | | — | | | 1,342 | | | — | | | — | | | — | | | 1,342 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Balance at September 30, 2022 (112,423,263 common shares outstanding) | | | $ | 1,124 | | | $ | 2,484,702 | | | $ | (827,072) | | | $ | 2,632 | | | $ | 39,280 | | | $ | 1,700,666 | |
| | | | | | | | | | | | | |
For the Nine Months Ended September 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 | | | — | | | — | | | — | | | — | | | (540) | | | (540) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Share-based compensation (123,953 shares issued, net of redemptions) | | | 1 | | | 3,092 | | | — | | | — | | | 3,543 | | | 6,636 | |
Redemption of vested equity awards | | | — | | | (1,199) | | | — | | | — | | | — | | | (1,199) | |
Adjustments to noncontrolling interests resulting from changes in ownership of CDPLP | | | — | | | 22 | | | — | | | — | | | (22) | | | — | |
Comprehensive (loss) income | | | — | | | — | | | (107,121) | | | 4,023 | | | (3,820) | | | (106,918) | |
Dividends | | | — | | | — | | | (96,256) | | | — | | | — | | | (96,256) | |
Distributions to owners of common units in CDPLP | | | — | | | — | | | — | | | — | | | (1,639) | | | (1,639) | |
| | | | | | | | | | | | | |
Distributions to noncontrolling interests in other consolidated entities | | | — | | | — | | | — | | | — | | | (22) | | | (22) | |
Adjustments for changes in fair value of redeemable noncontrolling interests | | | — | | | 1,686 | | | — | | | — | | | — | | | 1,686 | |
Reclassification of redeemable noncontrolling interests to equity | | | — | | | — | | | — | | | — | | | 2,670 | | | 2,670 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Balance at September 30, 2023 (112,547,846 common shares outstanding) | | | $ | 1,125 | | | $ | 2,489,717 | | | $ | (1,010,885) | | | $ | 6,094 | | | $ | 39,822 | | | $ | 1,525,873 | |
See accompanying notes to consolidated financial statements.
COPT Defense Properties and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| | | | | | | | | | | |
| For the Nine Months Ended September 30, |
| 2023 | | 2022 |
Cash flows from operating activities | | | |
Revenues from real estate operations received | $ | 476,679 | | | $ | 431,447 | |
Construction contract and other service revenues received | 59,245 | | | 130,710 | |
Property operating expenses paid | (183,061) | | | (179,306) | |
Construction contract and other service expenses paid | (51,220) | | | (128,428) | |
General, administrative, leasing and other expenses paid | (24,739) | | | (24,630) | |
Interest expense paid | (42,829) | | | (37,561) | |
Lease incentives paid | (21,072) | | | (8,360) | |
Sales-type lease costs paid | (7,236) | | | — | |
| | | |
| | | |
| | | |
| | | |
Other | 3,869 | | | 3,262 | |
Net cash provided by operating activities | 209,636 | | | 187,134 | |
Cash flows from investing activities | | | |
Development and redevelopment of properties | (211,100) | | | (223,298) | |
| | | |
Tenant improvements on operating properties | (57,020) | | | (22,550) | |
Other capital improvements on operating properties | (13,310) | | | (28,705) | |
| | | |
| | | |
Proceeds from sale of properties | 189,506 | | | 220,810 | |
| | | |
Investing receivables funded | (213) | | | (19,000) | |
| | | |
Leasing costs paid | (10,698) | | | (10,544) | |
| | | |
| | | |
| | | |
Other | 988 | | | 852 | |
Net cash used in investing activities | (101,847) | | | (82,435) | |
Cash flows from financing activities | | | |
Proceeds from debt | | | |
Revolving Credit Facility | 291,000 | | | 451,000 | |
Unsecured senior notes | 336,375 | | | — | |
| | | |
| | | |
Repayments of debt | | | |
Revolving Credit Facility | (427,000) | | | (254,000) | |
| | | |
Term loan facility | — | | | (200,000) | |
Scheduled principal amortization | (2,289) | | | (2,469) | |
Other debt repayments | (15,902) | | | — | |
| | | |
| | | |
| | | |
| | | |
| | | |
Common share dividends paid | (95,095) | | | (92,731) | |
| | | |
| | | |
| | | |
| | | |
| | | |
Other | (6,055) | | | (7,417) | |
Net cash provided by (used in) financing activities | 81,034 | | | (105,617) | |
Net increase (decrease) in cash and cash equivalents and restricted cash | 188,823 | | | (918) | |
Cash and cash equivalents and restricted cash | | | |
Beginning of period | 16,509 | | | 17,316 | |
End of period | $ | 205,332 | | | $ | 16,398 | |
See accompanying notes to consolidated financial statements.
COPT Defense Properties and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(in thousands)
(unaudited)
| | | | | | | | | | | |
| For the Nine Months Ended September 30, |
| 2023 | | 2022 |
Reconciliation of net (loss) income to net cash provided by operating activities: | | | |
Net (loss) income | $ | (109,167) | | | $ | 126,735 | |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | |
Depreciation and other amortization | 114,041 | | | 106,084 | |
Impairment losses | 252,797 | | | — | |
| | | |
| | | |
Amortization of deferred financing costs and net debt discounts | 3,889 | | | 3,503 | |
Increase in deferred rent receivable | (2,899) | | | (13,660) | |
Gain on sales of real estate | (49,392) | | | (28,576) | |
| | | |
Share-based compensation | 6,226 | | | 6,542 | |
| | | |
| | | |
Other | (2,382) | | | (2,238) | |
Changes in operating assets and liabilities: | | | |
Decrease in accounts receivable | 3,111 | | | 2,098 | |
Increase in lease incentives and prepaid expenses and other assets, net | (3,199) | | | (7,646) | |
Decrease in accounts payable, accrued expenses and other liabilities | (5,436) | | | (2,502) | |
Increase (decrease) in rents received in advance and security deposits | 2,047 | | | (3,206) | |
| | | |
Net cash provided by operating activities | $ | 209,636 | | | $ | 187,134 | |
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 | $ | 204,238 | | | $ | 12,643 | |
Restricted cash at end of period | 1,094 | | | 3,755 | |
Cash and cash equivalents and restricted cash at end of period | $ | 205,332 | | | $ | 16,398 | |
Supplemental schedule of non-cash investing and financing activities: | | | |
Decrease in accrued capital improvements, leasing and other investing activity costs | $ | (18,931) | | | $ | (21,401) | |
| | | |
| | | |
Recognition of operating right-of-use assets and related lease liabilities | $ | 6,714 | | | $ | 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 | $ | 4,105 | | | $ | 5,901 | |
| | | |
Dividends/distributions payable | $ | 32,645 | | | $ | 31,407 | |
| | | |
| | | |
Adjustments to noncontrolling interests resulting from changes in CDPLP ownership | $ | (22) | | | $ | 77 | |
Decrease in redeemable noncontrolling interests and increase in equity to adjust for changes in fair value of redeemable noncontrolling interests | $ | (1,686) | | | $ | (1,342) | |
Reclassification of redeemable noncontrolling interests to equity | $ | 2,670 | | | $ | — | |
See accompanying notes to consolidated financial statements.
COPT Defense Properties and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
1. Organization
COPT Defense Properties (“CDP”) and subsidiaries (collectively, the “Company”, “we” or “us”) is a fully-integrated and self-managed real estate investment trust (“REIT”) focused on owning, operating and developing properties in locations proximate to, or sometimes containing, key U.S. Government (“USG”) defense installations and missions (which we refer to herein as our Defense/IT Portfolio). Our tenants include the USG and their defense contractors, who are primarily engaged in priority national security activities, and who generally require mission-critical and high security property enhancements. In September 2023, we changed our name from Corporate Office Properties Trust to COPT Defense Properties to better describe our investment strategy’s focus on locations serving our country’s priority defense activities. As of September 30, 2023, our Defense/IT Portfolio included:
•188 operating properties totaling 21.3 million square feet comprised of 15.8 million square feet in 159 office properties and 5.5 million square feet in 29 single-tenant data center shells. We owned 24 of these data center shells through unconsolidated real estate joint ventures;
•six properties under development (three office properties and three data center shells) that will total approximately 971,000 square feet upon completion; and
•approximately 670 acres of land controlled that we believe could be developed into approximately 8.1 million square feet.
We also owned eight other operating properties totaling 2.1 million square feet and approximately 50 acres of other developable land in the Greater Washington, DC/Baltimore region as of September 30, 2023.
We conduct almost all of our operations and own almost all of our assets through our operating partnership, COPT Defense Properties, L.P. (“CDPLP”) and subsidiaries (collectively, the “Operating Partnership”), of which CDP is the sole general partner. CDPLP owns real estate directly and through subsidiary partnerships and limited liability companies (“LLCs”). In addition to owning real estate, CDPLP 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”). In September 2023, we changed CDPLP’s name from Corporate Office Properties, L.P. to COPT Defense Properties, L.P.
Equity interests in CDPLP are in the form of common and preferred units. As of September 30, 2023, CDP owned 97.9% of the outstanding CDPLP common units (“common units”) and there were no preferred units outstanding. Common units not owned by CDP carry certain redemption rights. The number of common units owned by CDP is equivalent to the number of outstanding common shares of beneficial interest (“common shares”) of CDP, and the entitlement of common units to quarterly distributions and payments in liquidation is substantially the same as that of CDP common shareholders.
In September 2023, the ticker symbol under which our common shares are publicly traded on the New York Stock Exchange (“NYSE”) changed from “OFC” to “CDP”.
2. Summary of Significant Accounting Policies
Basis of Presentation
These consolidated financial statements include the accounts of CDP, the Operating Partnership, their subsidiaries and other entities in which CDP 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 $1.7 million as of September 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 September 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 September 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 | | $ | 1,748 | | | $ | — | | | $ | — | | | $ | 1,748 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Interest rate derivatives | | — | | | 6,736 | | | — | | | 6,736 | |
Total assets | | $ | 1,748 | | | $ | 6,736 | | | $ | — | | | $ | 8,484 | |
Liabilities: (2) | | | | | | | | |
Deferred compensation plan liability | | $ | — | | | $ | 1,748 | | | $ | — | | | $ | 1,748 | |
| | | | | | | | |
| | | | | | | | |
(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.
Nonrecurring Fair Value Measurements
As part of our closing process for the three months ended September 30, 2023, we conducted our quarterly review of our portfolio of long-lived assets to be held and used for indicators of impairment. As a result of this process, we shortened the expected holding periods for six operating properties in our Other segment and a parcel of land located in Baltimore, Maryland, Northern Virginia and Washington, D.C. We determined that the carrying amount of the properties would not likely be recovered from the undiscounted cash flows from the operations and sales of the properties over the shortened holding periods. Accordingly, we recognized impairment losses of $252.8 million on these properties during the period. The combined fair value of these properties as of September 30, 2023 was $311.3 million, as determined using significant unobservable inputs (Level 3 of the fair value hierarchy).
The table below sets forth quantitative information about significant unobservable inputs used for the Level 3 fair value measurements reported above as of September 30, 2023 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
Valuation Technique | | Fair Values on Measurement Date | | Unobservable Input | | Range (Weighted Average (1)) |
Discounted cash flow (2) | | $ | 257,800 | | | Terminal capitalization rate | | 6.5% - 9.5% (8.0%) |
| | | | Discount rate | | 7.5% - 10.5% (9.0%) |
| | | | | | |
| | | | | | |
| | | | | | |
Comparable sales price (3) | | $ | 53,500 | | | Comparable sales price | | N/A |
(1)Weighted average calculation based on relative fair value.
(2)This technique was used for the operating properties in Baltimore, Maryland and Washington, D.C. For the properties in Baltimore, Maryland, the terminal capitalization rate was 9.5% and the discount rate was 10.5%. For the property in Washington, D.C., the terminal capitalization rate was 6.5% and the discount rate was 7.5%.
(3)This technique was used for the operating properties in Northern Virginia and a parcel of land in Baltimore, Maryland.
4. Properties, Net
Operating properties, net consisted of the following (in thousands):
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
Land | $ | 476,818 | | | $ | 539,809 | |
Buildings and improvements | 4,039,089 | | | 3,986,524 | |
Less: Accumulated depreciation | (1,367,473) | | | (1,267,434) | |
Operating properties, net | $ | 3,148,434 | | | $ | 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 September 30, | | For the Nine Months Ended September 30, |
Lease revenue (1) | | 2023 | | 2022 | | 2023 | | 2022 |
Fixed | | $ | 120,408 | | | $ | 113,700 | | | $ | 354,908 | | | $ | 337,558 | |
Variable | | 34,860 | | | 32,781 | | | 104,602 | | | 92,589 | |
| | $ | 155,268 | | | $ | 146,481 | | | $ | 459,510 | | | $ | 430,147 | |
(1)Excludes lease revenue from discontinued operations of which $1.5 million was fixed and $527,000 was variable for the nine months ended September 30, 2022.
Lessee Arrangements
As of September 30, 2023, our balance sheet included $43.1 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 | | September 30, 2023 | | December 31, 2022 |
Right-of-use assets | | | | | | |
Operating leases - Property | | Property - operating right-of-use assets | | $ | 40,487 | | | $ | 37,020 | |
Finance leases - Property | | Prepaid expenses and other assets, net | | 2,584 | | | 2,207 | |
Total right-of-use assets | | | | $ | 43,071 | | | $ | 39,227 | |
Lease liabilities | | | | | | |
Operating leases - Property | | Property - operating lease liabilities | | $ | 32,940 | | | $ | 28,759 | |
Finance leases - Property | | Other liabilities | | 420 | | | — | |
Total lease liabilities | | | | $ | 33,360 | | | $ | 28,759 | |
As of September 30, 2023, our operating leases had a weighted average remaining lease term of 48 years and a weighted average discount rate of 7.31%, while our finance leases had a weighted average remaining lease term of nine 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 September 30, | | For the Nine Months Ended September 30, |
Lease cost | | | 2023 | | 2022 | | 2023 | | 2022 |
Operating lease cost | | | | | | | | | | |
Property leases - fixed | | Property operating expenses | | $ | 1,808 | | | $ | 1,031 | | | $ | 5,146 | | | $ | 3,082 | |
Property leases - variable | | Property operating expenses | | 17 | | | 16 | | | 50 | | | 49 | |
Finance lease cost | | | | | | | | | | |
Amortization of property right-of-use assets | | Property operating expenses | | 18 | | | 7 | | | 57 | | | 23 | |
Interest on lease liabilities | | Interest expense | | 10 | | | — | | | 33 | | | — | |
| | | | $ | 1,853 | | | $ | 1,054 | | | $ | 5,286 | | | $ | 3,154 | |
The table below presents the effect of property lease payments on our consolidated statements of cash flows (in thousands):
| | | | | | | | | | | | | | | |
| | | For the Nine Months Ended September 30, |
Supplemental cash flow information | | | 2023 | | 2022 |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
Operating cash flows for operating leases | | | $ | 4,432 | | | $ | 2,515 | |
Operating cash flows for financing leases | | | $ | 33 | | | $ | — | |
Financing cash flows for financing leases | | | $ | 14 | | | $ | — | |
| | | | | |
| | | | | |
Payments on property leases were due as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2023 | | | | | | |
Year Ending December 31, | | Operating Leases | | Finance Leases | | | | | | | | |
2023 (1) | | $ | 1,624 | | | $ | 15 | | | | | | | | | |
2024 | | 6,633 | | | 61 | | | | | | | | | |
2025 | | 2,250 | | | 63 | | | | | | | | | |
2026 | | 1,662 | | | 65 | | | | | | | | | |
2027 | | 1,677 | | | 66 | | | | | | | | | |
Thereafter | | 130,495 | | | 366 | | | | | | | | | |
Total lease payments | | 144,341 | | | 636 | | | | | | | | | |
Less: Amount representing interest | | (111,401) | | | (216) | | | | | | | | | |
Lease liability | | $ | 32,940 | | | $ | 420 | | | | | | | | | |
(1)Represents the three months ending December 31, 2023.
6. Real Estate Joint Ventures
Consolidated Real Estate Joint Ventures
The table below sets forth information as of September 30, 2023 pertaining to our investments in consolidated real estate joint ventures, which are each variable interest entities (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Nominal Ownership % | | | | September 30, 2023 |
| | Date Acquired | | | | | Total Assets | | Encumbered Assets | | Total Liabilities | | Mortgage Debt |
Entity | | | | Location | | | | |
LW Redstone Company, LLC (1) | | 3/23/2010 | | 85% | | Huntsville, Alabama | | $ | 697,483 | | | $ | 100,176 | | | $ | 109,271 | | | $ | 50,939 | |
Stevens Investors, LLC | | 8/11/2015 | | 95% | | Washington, DC | | 126,846 | | | — | | | 1,112 | | | — | |
M Square Associates, LLC | | 6/26/2007 | | 50% | | College Park, Maryland | | 99,395 | | | 57,579 | | | 49,882 | | | 48,931 | |
| | | | | | | | $ | 923,724 | | | $ | 157,755 | | | $ | 160,265 | | | $ | 99,870 | |
(1)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 | | | | | September 30, 2023 | | December 31, 2022 |
Redshift JV LLC | | 1/10/2023 | | 10% | | 3 | | | $ | 21,083 | | | $ | — | |
BREIT COPT DC JV LLC | | 6/20/2019 | | 10% | | 9 | | | 10,870 | | | 11,568 | |
Quark JV LLC | | 12/14/2022 | | 10% | | 2 | | | 6,730 | | | 6,758 | |
B RE COPT DC JV III LLC | | 6/2/2021 | | 10% | | 2 | | | 2,812 | | | 3,134 | |
B RE COPT DC JV II LLC (2) | | 10/30/2020 | | 10% | | 8 | | | (2,327) | | | (1,459) | |
| | | | | | 24 | | | $ | 39,168 | | | $ | 20,001 | |
(1)Included $41.5 million and $21.5 million reported in “Investment in unconsolidated real estate joint ventures” as of September 30, 2023 and December 31, 2022, respectively, and $2.3 million and $1.5 million for investments with deficit balances reported in “other liabilities” on our consolidated balance sheets as of September 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 September 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 our share of 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):
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
Notes receivable from the City of Huntsville | $ | 74,347 | | | $ | 69,703 | |
Other investing loans receivable | 16,811 | | | 17,712 | |
Amortized cost basis | 91,158 | | | 87,415 | |
Allowance for credit losses | (3,623) | | | (2,794) | |
Investing receivables, net | $ | 87,535 | | | $ | 84,621 | |
The balances above include accrued interest receivable, net of allowance for credit losses, of $4.2 million as of September 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 September 30, 2023 carries a stated interest rate of 12.0% and matures in 2024.
The fair value of these receivables was approximately $92 million as of September 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 | | September 30, 2023 |
| | | September 30, 2023 | | December 31, 2022 | |
| | | | Stated Interest Rates | | Scheduled Maturity |
Mortgage and Other Secured Debt: | | | | | | | | | |
Fixed rate mortgage debt | | | $ | 66,870 | | | $ | 84,433 | | | 3.82% to 4.62% (2) | | 2024-2026 |
Variable rate secured debt | | | 33,000 | | | 33,318 | | | SOFR + 0.10% + 1.45% to 1.55% (3) | | 2025-2026 |
Total mortgage and other secured debt | | | 99,870 | | | 117,751 | | | | | |
Revolving Credit Facility | | | 75,000 | | | 211,000 | | | SOFR + 0.10% + 0.725% to 1.400% (4) | | October 2026 (5) |
Term Loan Facility | | | 124,205 | | | 123,948 | | | SOFR + 0.10% + 0.850% to 1.700% (6) | | January 2026 (7) |
Unsecured Senior Notes | | | | | | | | | |
2.25%, $400,000 aggregate principal | | | 397,339 | | | 396,539 | | | 2.25% (8) | | March 2026 |
5.25%, $345,000 aggregate principal | | | 335,450 | | | — | | | 5.25% (9) | | September 2028 |
2.00%, $400,000 aggregate principal | | | 397,350 | | | 396,988 | | | 2.00% (10) | | January 2029 |
2.75%, $600,000 aggregate principal | | | 590,937 | | | 590,123 | | | 2.75% (11) | | April 2031 |
2.90%, $400,000 aggregate principal | | | 395,160 | | | 394,848 | | | 2.90% (12) | | December 2033 |
Unsecured note payable | | | 472 | | | 597 | | | 0% (13) | | May 2026 |
Total debt, net | | | $ | 2,415,783 | | | $ | 2,231,794 | | | | | |
(1)The carrying values of our debt other than the Revolving Credit Facility reflect net deferred financing costs of $5.6 million as of September 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 September 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 September 30, 2023 was 2.45%; excluding the effect of these swaps, the weighted average interest rate on this debt as of September 30, 2023 was 6.92%.
(4)The weighted average interest rate on the Revolving Credit Facility was 6.48% as of September 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 6.73% as of September 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 unamortized discounts and commissions totaling $2.2 million as of September 30, 2023 and $2.8 million as of December 31, 2022. The effective interest rate under the notes, including amortization of the such costs, was 2.48%.
(9)The carrying value of these notes reflects unamortized commissions totaling $8.5 million as of September 30, 2023. The effective interest rate under the notes, including amortization of such costs, was 5.83%. Refer to the paragraphs below for further disclosure.
(10)The carrying value of these notes reflects unamortized discounts and commissions totaling $1.9 million as of September 30, 2023 and $2.1 million as of December 31, 2022. The effective interest rate under the notes, including amortization of such costs, was 2.09%.
(11)The carrying value of these notes reflects unamortized discounts and commissions totaling $7.9 million as of September 30, 2023 and $8.5 million as of December 31, 2022. The effective interest rate under the notes, including amortization of such costs, was 2.94%.
(12)The carrying value of these notes reflects unamortized discounts and commissions totaling $4.0 million as of September 30, 2023 and $4.2 million as of December 31, 2022. The effective interest rate under the notes, including amortization of such costs, was 3.01%.
(13)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 $39,000 as of September 30, 2023 and $65,000 as of December 31, 2022.
All debt is owed by the Operating Partnership. While CDP is not directly obligated by any debt, it has guaranteed CDPLP’s Revolving Credit Facility, Term Loan Facility and Unsecured Senior Notes.
On September 12, 2023, we issued $345.0 million aggregate principal amount of 5.25% Exchangeable Senior Notes due 2028 (the “5.25% Notes”) in a private placement. The proceeds from this issuance, after deducting the initial purchasers’ commissions, but before other offering expenses, were $336.4 million. The notes bear interest at a rate of 5.25% per year, payable semi-annually in arrears on March 15 and September 15 of each year, beginning on March 15, 2024. The notes mature on September 15, 2028 unless earlier exchanged, redeemed or repurchased.
Prior to the close of business on the business day immediately preceding June 15, 2028, the notes will be exchangeable at the option of the noteholders only in the event of certain circumstances and during certain periods defined under the terms of the
notes. On or after June 15, 2028, the notes will be exchangeable at the option of the holders at any time prior to the close of business on the business day immediately preceding the maturity date. Upon exchange, the principal amount of notes is payable in cash. The remainder of the exchange obligation, if any, as determined based on the exchange price per common share at the time of settlement, is payable in cash, common shares or a combination thereof at our election. The exchange rate of the notes initially equaled 33.3739 of our common shares per $1,000 principal amount of notes (equivalent to an initial exchange price of approximately $29.96 per common share). The exchange rate is subject to adjustment upon the occurrence of some events, but will not be adjusted for any accrued and unpaid interest.
We may redeem the notes at our option, in whole or in part, on any business day on or after September 21, 2026, and prior to the 51st scheduled trading day immediately preceding the maturity date, if the last reported sale price of our common shares has been at least 130% of the exchange price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption. The redemption price will be equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.
These notes are unconditionally guaranteed by CDP. The table below sets forth interest expense recognized on these notes for the three and nine months ended September 30, 2023 (in thousands):
| | | | | | | | |
Interest expense at stated interest rate | | $ | 956 | |
Interest expense associated with amortization of debt discount and issuance costs | | 124 | |
Total | | $ | 1,080 | |
Certain of our debt instruments require that we comply with a number of restrictive financial covenants. As of September 30, 2023, we were compliant with these financial covenants.
Our debt matures on the following schedule (in thousands):
| | | | | | | | | | | |
Year Ending December 31, | | September 30, 2023 | |
2023 (1) | | $ | 763 | | |
2024 | | 29,983 | | |
2025 | | 23,717 | | |
2026 | | 646,300 | | |
2027 | | — | | |
Thereafter | | 1,745,000 | | |
Total | | $ | 2,445,763 | | (2) |
(1)Represents the three months ending December 31, 2023.
(2)Represents scheduled principal amortization and maturities only and therefore excludes net discounts and deferred financing costs of $30.0 million.
We capitalized interest costs of $1.5 million in the three months ended September 30, 2023, $2.0 million in the three months ended September 30, 2022, $3.5 million in the nine months ended September 30, 2023 and $4.9 million in the nine months ended September 30, 2022.
The following table sets forth information pertaining to the fair value of our debt (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value |
Fixed-rate debt | | | | | | | |
Unsecured Senior Notes | |