ofc-20240331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)


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


For the quarterly period ended			March 31, 2024


☐			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

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 April 22, 2024, 112,634,870 of COPT Defense Properties’ Common Shares of Beneficial Interest, $0.01 par value, were issued and outstanding.

TABLE OF CONTENTS

FORM 10-Q


		PAGE
PART I: FINANCIAL INFORMATION
Item 1:	Financial Statements
Consolidated Financial Statements
	Consolidated Balance Sheets as of March 31, 2024 and December 31, 2023 (unaudited)	3
	Consolidated Statements of Operations for the Three Months Ended March 31, 2024 and 2023 (unaudited)	4
	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2024 and 2023 (unaudited)	5
	Consolidated Statements of Equity for the Three Months Ended March 31, 2024 and 2023 (unaudited)	6
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2024 and 2023 (unaudited)	7






Notes to Consolidated Financial Statements (unaudited)		9
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4:	Controls and Procedures	38

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

SIGNATURES		40

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

COPT Defense Properties and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share data)

(unaudited)


	March 31, 2024		December 31, 2023
Assets
Properties, net:
Operating properties, net	$	3,272,452	$	3,246,806
Projects in development or held for future development	245,426		256,872
Total properties, net	3,517,878		3,503,678
Property - operating right-of-use assets	40,368		41,296


Cash and cash equivalents	123,144		167,820
Investment in unconsolidated real estate joint ventures	40,597		41,052
Accounts receivable, net	50,088		48,946
Deferred rent receivable	153,788		149,237
Lease incentives, net	61,150		61,331
Deferred leasing costs (net of accumulated amortization of $41,846 and $41,448, respectively)	70,902		70,057
Investing receivables (net of allowance for credit losses of $2,361 and $2,377, respectively)	82,523		81,512

Prepaid expenses and other assets, net	92,457		82,037
Total assets	$	4,232,895	$	4,246,966
Liabilities and equity
Liabilities:
Debt, net	$	2,416,873	$	2,416,287
Accounts payable and accrued expenses	111,981		133,315
Rents received in advance and security deposits	37,557		35,409
Dividends and distributions payable	33,906		32,644
Deferred revenue associated with operating leases	34,019		29,049
Property - operating lease liabilities	33,141		33,931

Other liabilities	16,406		18,996
Total liabilities	2,683,883		2,699,631
Commitments and contingencies (Note 17)
Redeemable noncontrolling interests	22,966		23,580
Equity:
Shareholders’ equity:
Common Shares of beneficial interest ($0.01 par value; 150,000,000 shares authorized; shares issued and outstanding of 112,640,861 at March 31, 2024 and 112,555,352 at December 31, 2023)	1,126		1,126
Additional paid-in capital	2,487,468		2,489,989
Cumulative distributions in excess of net income	(1,009,964)		(1,009,318)
Accumulated other comprehensive income	3,849		2,115
Total shareholders’ equity	1,482,479		1,483,912
Noncontrolling interests in subsidiaries:
Common units in COPT Defense Properties, L.P. (“CDPLP”)	29,214		25,502

Other consolidated entities	14,353		14,341
Noncontrolling interests in subsidiaries	43,567		39,843
Total equity	1,526,046		1,523,755
Total liabilities, redeemable noncontrolling interests and equity	$	4,232,895	$	4,246,966

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 March 31,
	2024		2023
Revenues
Lease revenue	$	165,433	$	150,560
Other property revenue	1,230		1,121
Construction contract and other service revenues	26,603		15,820
Total revenues	193,266		167,501
Operating expenses
Property operating expenses	66,746		59,420
Depreciation and amortization associated with real estate operations	38,351		36,995
Construction contract and other service expenses	26,007		15,201

General, administrative, leasing and other expenses	11,747		10,490
Total operating expenses	142,851		122,106
Interest expense	(20,767)		(16,442)
Interest and other income, net	4,122		2,256
Gain on sales of real estate	—		49,378


Income before equity in income (loss) of unconsolidated entities and income taxes	33,770		80,587
Equity in income (loss) of unconsolidated entities	69		(64)
Income tax expense	(168)		(125)


Net income	33,671		80,398
Net income attributable to noncontrolling interests:
Common units in CDPLP	(608)		(1,293)

Other consolidated entities	(454)		(326)



Net income attributable to common shareholders	$	32,609	$	78,779

Earnings per common share:


Net income attributable to common shareholders - basic	$	0.29	$	0.70



Net income attributable to common shareholders - diluted	$	0.29	$	0.70

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 March 31,
	2024		2023
Net income	$	33,671	$	80,398
Other comprehensive income (loss):
Unrealized income (loss) on interest rate derivatives	2,981		(215)
Reclassification adjustments on interest rate derivatives recognized in interest expense	(1,180)		(591)


Total other comprehensive income (loss)	1,801		(806)
Comprehensive income	35,472		79,592
Comprehensive income attributable to noncontrolling interests	(1,129)		(1,531)
Comprehensive income attributable to common shareholders	$	34,343	$	78,061

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 March 31, 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	—		—		—		—		(373)		(373)


Share-based compensation (89,964 shares issued, net of redemptions)	1		1,059		—		—		754		1,814
Redemption of vested equity awards	—		(1,113)		—		—		—		(1,113)
Adjustments to noncontrolling interests resulting from changes in ownership of CDPLP	—		(2,342)		—		—		2,342		—
Comprehensive income	—		—		78,779		(718)		832		78,893
Dividends	—		—		(32,091)		—		—		(32,091)
Distributions to owners of common units in CDPLP	—		—		—		—		(544)		(544)

Distributions to noncontrolling interests in other consolidated entities	—		—		—		—		(8)		(8)
Adjustments for changes in fair value of redeemable noncontrolling interests	—		781		—		—		—		781

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

For the Three Months Ended March 31, 2024
Balance at December 31, 2023 (112,555,352 common shares outstanding)	$	1,126	$	2,489,989	$	(1,009,318)	$	2,115	$	39,843	$	1,523,755




Redemption of common units	—		—		—		—		(1,180)		(1,180)
Share-based compensation (85,509 shares issued, net of redemptions)	—		1,158		—		—		1,652		2,810
Redemption of vested equity awards	—		(1,039)		—		—		—		(1,039)
Adjustments to noncontrolling interests resulting from changes in ownership of CDPLP	—		(3,255)		—		—		3,255		—
Comprehensive income	—		—		32,609		1,734		660		35,003
Dividends	—		—		(33,255)		—		—		(33,255)
Distributions to owners of common units in CDPLP	—		—		—		—		(655)		(655)

Distributions to noncontrolling interests in other consolidated entities	—		—		—		—		(8)		(8)
Adjustments for changes in fair value of redeemable noncontrolling interests	—		615		—		—		—		615


Balance at March 31, 2024 (112,640,861 common shares outstanding)	$	1,126	$	2,487,468	$	(1,009,964)	$	3,849	$	43,567	$	1,526,046

See accompanying notes to consolidated financial statements.

COPT Defense Properties and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	For the Three Months Ended March 31,
	2024		2023
Cash flows from operating activities
Revenues from real estate operations received	$	173,830	$	152,273
Construction contract and other service revenues received	11,445		18,765
Property operating expenses paid	(58,314)		(55,753)
Construction contract and other service expenses paid	(18,894)		(21,999)
General, administrative, leasing and other expenses paid	(11,828)		(11,681)
Interest expense paid	(20,996)		(12,031)
Lease incentives paid	(6,578)		(10,350)



Interest and other income received	3,551		1,316

Other	(1,226)		(1,795)
Net cash provided by operating activities	70,990		58,745
Cash flows from investing activities
Acquisitions of operating properties and related intangible assets	(15,210)		—
Development of properties	(39,932)		(71,282)
Tenant improvements on operating properties	(7,946)		(22,568)
Other capital improvements on operating properties	(13,084)		(5,512)


Proceeds from sale of properties	—		189,325



Leasing costs paid	(2,666)		(4,655)



Other	(73)		(125)
Net cash (used in) provided by investing activities	(78,911)		85,183
Cash flows from financing activities
Proceeds from debt
Revolving Credit Facility	—		95,000



Repayments of debt
Revolving Credit Facility	—		(188,000)


Scheduled principal amortization	(769)		(790)
Other debt repayments	—		(15,902)





Common share dividends paid	(32,104)		(30,941)





Other	(3,546)		(2,900)
Net cash used in financing activities	(36,419)		(143,533)
Net (decrease) increase in cash and cash equivalents and restricted cash	(44,340)		395
Cash and cash equivalents and restricted cash
Beginning of period	169,424		16,509
End of period	$	125,084	$	16,904

See accompanying notes to consolidated financial statements.

COPT Defense Properties and Subsidiaries

Consolidated Statements of Cash Flows (continued)

(in thousands)

(unaudited)


	For the Three Months Ended March 31,
	2024		2023
Reconciliation of net income to net cash provided by operating activities:
Net income	$	33,671	$	80,398
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and other amortization	38,959		37,597



Amortization of deferred financing costs and net debt discounts	1,699		1,250
Change in net deferred rent receivable and liability	496		(6,869)
Gain on sales of real estate	—		(49,378)

Share-based compensation	2,645		1,733


Other	(178)		(376)
Changes in operating assets and liabilities:
Increase in accounts receivable	(1,303)		(2,802)
(Increase) decrease in lease incentives and prepaid expenses and other assets, net	(2,498)		9,361
Decrease in accounts payable, accrued expenses and other liabilities	(4,649)		(16,806)
Increase in rents received in advance and security deposits	2,148		4,637

Net cash provided by operating activities	$	70,990	$	58,745
Reconciliation of cash and cash equivalents and restricted cash:
Cash and cash equivalents at beginning of period	$	167,820	$	12,337
Restricted cash at beginning of period	1,604		4,172
Cash and cash equivalents and restricted cash at beginning of period	$	169,424	$	16,509

Cash and cash equivalents at end of period	$	123,144	$	15,199
Restricted cash at end of period	1,940		1,705
Cash and cash equivalents and restricted cash at end of period	$	125,084	$	16,904
Supplemental schedule of non-cash investing and financing activities:
Decrease in accrued capital improvements, leasing and other investing activity costs	$	(19,113)	$	(11,043)


Recognition of operating right-of-use assets and related lease liabilities	$	277	$	6,697
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 (decrease) in fair value of derivatives applied to accumulated other comprehensive income and noncontrolling interests	$	1,801	$	(806)

Dividends/distributions payable	$	33,906	$	32,630


Adjustments to noncontrolling interests resulting from changes in CDPLP ownership	$	3,255	$	2,342
Decrease in redeemable noncontrolling interests and increase in equity to adjust for changes in fair value of redeemable noncontrolling interests	$	(615)	$	(781)

See accompanying notes to consolidated financial statements.

COPT Defense Properties and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

1. Organization

COPT Defense Properties (“COPT Defense”) 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. As of March 31, 2024, our Defense/IT Portfolio included:

•193 operating properties totaling 22.0 million square feet comprised of 16.3 million square feet in 163 office properties and 5.7 million square feet in 30 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), including one partially-operational property, that will total approximately 959,000 square feet upon completion; and

•approximately 650 acres of land controlled that we believe could be developed into approximately 7.7 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 March 31, 2024.

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 COPT Defense 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”).

Equity interests in CDPLP are in the form of common and preferred units. As of March 31, 2024, COPT Defense owned 97.5% of the outstanding CDPLP common units (“common units”) and there were no preferred units outstanding. Common units not owned by COPT Defense carry certain redemption rights. The number of common units owned by COPT Defense is equivalent to the number of outstanding common shares of beneficial interest (“common shares”) of COPT Defense, and the entitlement of common units to quarterly distributions and payments in liquidation is substantially the same as that of COPT Defense common shareholders.

COPT Defense’s common shares are publicly traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “CDP”.

2. Summary of Significant Accounting Policies

Basis of Presentation

These consolidated financial statements include the accounts of COPT Defense, the Operating Partnership, their subsidiaries and other entities in which COPT Defense 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, 2023 included in our 2023 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 2023 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.

Recent Accounting Pronouncements

In November 2023, the Financial Accounting Standard Board (“FASB”) issued guidance to improve reportable segment disclosure requirements. This guidance requires disclosure of incremental segment information on an annual and interim basis and is effective for us beginning after December 15, 2024. Early adoption is permitted. The guidance will be applied retrospectively to all periods presented unless it is impracticable to do so. We are currently assessing the impact of this guidance on our future related disclosures.

In December 2023, the FASB issued guidance to improve income tax disclosures. This guidance requires enhanced annual disclosures primarily related to existing rate reconciliation and income taxes paid disclosure requirements and is effective for us for annual periods beginning after December 15, 2024. Early adoption is permitted. We expect to apply this guidance prospectively. We are currently assessing the application of this guidance but do not expect it to materially affect our future related disclosures.

In March 2024, the FASB issued guidance to reduce complexity and diversity in practice in determining whether a profits interest award is accounted for as a share-based payment. This guidance is effective for us for annual and interim periods beginning after December 15, 2024. Early adoption is permitted. This guidance can be applied either retrospectively to all prior periods presented in the financial statements or prospectively to profits interest or similar awards granted or modified on or after the effective date for our application of this guidance. We are currently assessing the application of this guidance on our future related disclosures.

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 $2.0 million as of March 31, 2024, 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 March 31, 2024, 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 March 31, 2024 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	$	1,959	$	—	$	—	$	1,959



Interest rate derivatives	—		4,359		—		4,359
Total assets	$	1,959	$	4,359	$	—	$	6,318
Liabilities: (2)
Deferred compensation plan liability	$	—	$	1,959	$	—	$	1,959

(1)Included in the line entitled “prepaid expenses and other assets, net” on our consolidated balance sheet.

(2)Included in the line entitled “other liabilities” on our consolidated balance sheet.

4. Properties, Net

Operating properties, net consisted of the following (in thousands):


	March 31, 2024		December 31, 2023
Land	$	488,371	$	482,964
Buildings and improvements	4,218,702		4,164,004
Less: Accumulated depreciation	(1,434,621)		(1,400,162)
Operating properties, net	$	3,272,452	$	3,246,806

On March 15, 2024, we acquired 6841 Benjamin Franklin Drive, a 202,000 square foot operating office property in Columbia, Maryland (included in the Fort Meade/BW Corridor sub-segment of our Defense/IT Portfolio reportable segment) that was 56% leased, for a purchase price of $15.0 million. The table below sets forth the allocation of the purchase price and transaction costs associated with this acquisition (in thousands):


Land, operating properties	$	5,428
Building and improvements	2,534
Intangible assets on real estate acquisitions	7,248


Total acquisition cost	$	15,210

Intangible assets recorded in connection with this acquisition included the following (dollars in thousands):


			Weighted Average Amortization Period (in Years)
Tenant relationship value	$	3,752	12.4
In-place lease value	2,229		2.4
Above-market leases	1,267		2.4
	$	7,248	7.6

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 March 31,
Lease revenue	2024		2023
Fixed	$	126,198	$	116,039
Variable	39,235		34,521
	$	165,433	$	150,560

Lessee Arrangements

As of March 31, 2024, our balance sheet included $42.9 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	March 31, 2024		December 31, 2023
Right-of-use assets
Operating leases - Property	Property - operating right-of-use assets	$	40,368	$	41,296
Finance leases - Property	Prepaid expenses and other assets, net	2,547		2,565
Total right-of-use assets		$	42,915	$	43,861
Lease liabilities
Operating leases - Property	Property - operating lease liabilities	$	33,141	$	33,931
Finance leases - Property	Other liabilities	409		415
Total lease liabilities		$	33,550	$	34,346

As of March 31, 2024, our operating leases had a weighted average remaining lease term of 51 years and a weighted average discount rate of 7.32%, 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 cost (in thousands):


	Statement of Operations Location	For the Three Months Ended March 31,
Lease cost		2024		2023
Operating lease cost
Property leases - fixed	Property operating expenses	$	1,859	$	1,535
Property leases - variable	Property operating expenses	34		17
Finance lease cost
Amortization of property right-of-use assets	Property operating expenses	19		20
Interest on lease liabilities	Interest expense	9		13
		$	1,921	$	1,585

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


	For the Three Months Ended March 31,
Supplemental cash flow information	2024		2023
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	1,724	$	1,185
Operating cash flows for financing leases	$	9	$	13
Financing cash flows for financing leases	$	6	$	4

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


	March 31, 2024
Year Ending December 31,	Operating Leases		Finance Leases
2024 (1)	$	5,099	$	46
2025	2,403		63
2026	1,815		65
2027	1,830		66
2028	1,847		69
Thereafter	139,906		297
Total lease payments	152,900		606
Less: Amount representing interest	(119,759)		(197)
Lease liability	$	33,141	$	409

(1)Represents the nine months ending December 31, 2024.

6. Real Estate Joint Ventures

Consolidated Real Estate Joint Ventures

The table below sets forth information as of March 31, 2024 pertaining to our investments in consolidated real estate joint ventures, which are each variable interest entities (dollars in thousands):


		Nominal Ownership %		March 31, 2024
	Date Formed			Total Assets		Encumbered Assets		Total Liabilities		Mortgage Debt
Entity			Location
LW Redstone Company, LLC (1)	3/23/2010	85%	Huntsville, Alabama	$	723,509	$	98,418	$	98,619	$	50,205
Stevens Investors, LLC	8/11/2015	95%	Washington, D.C.	130,123		—		3,579		—
M Square Associates, LLC	6/26/2007	50%	College Park, Maryland	98,456		56,944		50,317		48,337
				$	952,088	$	155,362	$	152,515	$	98,542

(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 Formed	Nominal Ownership %	Number of Properties	Carrying Value of Investment (1)
Entity				March 31, 2024		December 31, 2023
Redshift JV LLC	1/10/2023	10%	3	$	21,021	$	21,053
BREIT COPT DC JV LLC	6/20/2019	10%	9	10,321		10,629
Quark JV LLC	12/14/2022	10%	2	6,722		6,727
B RE COPT DC JV III LLC	6/2/2021	10%	2	2,533		2,643
B RE COPT DC JV II LLC (2)	10/30/2020	10%	8	(2,982)		(2,777)
			24	$	37,615	$	38,275

(1)Included $40.6 million and $41.1 million reported in “investment in unconsolidated real estate joint ventures” and $3.0 million and $2.8 million for investments with deficit balances reported in “other liabilities” on our consolidated balance sheets as of March 31, 2024 and December 31, 2023, respectively.

(2)Our investment in B RE COPT DC JV II LLC was lower than our share of the joint venture’s equity by $6.8 million as of March 31, 2024 and December 31, 2023 due to a difference between our cost basis and our share of the joint venture’s underlying equity in its net assets. We recognize adjustments to our share of the joint venture’s earnings and losses resulting from this basis difference in the underlying assets of the joint venture.

7. Investing Receivables

Investing receivables consisted of the following (in thousands):


	March 31, 2024		December 31, 2023
Notes receivable from the City of Huntsville	$	78,017	$	77,022
Other investing loan receivable	6,867		6,867
Amortized cost basis	84,884		83,889
Allowance for credit losses	(2,361)		(2,377)
Investing receivables, net	$	82,523	$	81,512

The balances above include accrued interest receivable, net of allowance for credit losses, of $822,000 as of March 31, 2024 and $6.0 million as of December 31, 2023.

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 March 31, 2024 carries a stated interest rate of 12.0% and matures in 2024.

The fair value of these receivables was approximately $85 million as of March 31, 2024 and $84 million as of December 31, 2023.

8. Debt, Net

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



	Carrying Value (1) as of					March 31, 2024
	March 31, 2024		December 31, 2023
					Stated Interest Rates		Scheduled Maturity
Mortgage and Other Secured Debt:
Fixed-rate mortgage debt	$	65,753	$	66,314		3.82% to 4.62% (2)		2024-2026
Variable-rate secured debt	32,789		32,894			SOFR + 0.10% + 1.45% to 1.55% (3)		2025-2026 (4)
Total mortgage and other secured debt	98,542		99,208
Revolving Credit Facility	75,000		75,000			SOFR + 0.10% + 0.725% to 1.400% (5)		October 2026 (6)
Term Loan Facility	124,376		124,291			SOFR + 0.10% + 0.850% to 1.700% (7)		January 2026 (8)
Unsecured Senior Notes
2.25%, $400,000 aggregate principal	397,879		397,608			2.25% (9)		March 2026
5.25%, $345,000 aggregate principal (10)	336,237		335,802			5.25% (11)		September 2028
2.00%, $400,000 aggregate principal	397,593		397,471			2.00% (12)		January 2029
2.75%, $600,000 aggregate principal	591,489		591,212			2.75% (13)		April 2031
2.90%, $400,000 aggregate principal	395,371		395,265			2.90% (14)		December 2033
Unsecured note payable	386		430			0% (15)		May 2026
Total debt, net	$	2,416,873	$	2,416,287

(1)The carrying values of our debt other than the Revolving Credit Facility reflect net deferred financing costs of $5.0 million as of March 31, 2024 and $5.3 million as of December 31, 2023.

(2)The weighted average interest rate on our fixed-rate mortgage debt was 4.10% as of March 31, 2024.

(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 March 31, 2024 was 2.45%; excluding the effect of these swaps, the weighted average interest rate on this debt as of March 31, 2024 was 6.93%.

(4)Most of this debt matures in 2025, with the ability for us to extend such maturity by two 12-month periods at our option, provided that there is no default on the debt and we pay an extension fee of 0.10% of the debt balance for each extension period.

(5)The weighted average interest rate on the Revolving Credit Facility was 6.48% as of March 31, 2024, excluding the effect of interest rate swaps that hedge the risk of interest rate changes (see Note 9).

(6)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.

(7)The interest rate on this loan was 6.73% as of March 31, 2024, excluding the effect of interest rate swaps that hedge the risk of interest rate changes (see Note 9).

(8)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.

(9)The carrying value of these notes reflects unamortized discounts and commissions totaling $1.7 million as of March 31, 2024 and $1.9 million as of December 31, 2023. The effective interest rate under the notes, including amortization of such costs, was 2.48%.

(10)As described further in our 2023 Annual Report on Form 10-K, these notes have an exchange settlement feature under which the notes may, under certain circumstances, be exchangeable at the option of the holders. Upon exchange, the principal amount of notes is payable in cash, with the remainder of the exchange obligation, if any, as determined based on the exchange price per common share at the time of settlement, payable in cash, common shares or a combination thereof at our election. As of March 31, 2024, the exchange rate of the notes equaled 33.3882 of our common shares per $1,000 principal amount of notes (equivalent to an exchange price of approximately $29.95 per common share).

(11)The carrying value of these notes reflects unamortized commissions totaling $7.7 million as of March 31, 2024 and $8.1 million as of December 31, 2023. The effective interest rate under the notes, including amortization of such costs, was 5.83%.

(12)The carrying value of these notes reflects unamortized discounts and commissions totaling $1.7 million as of March 31, 2024 and $1.8 million as of December 31, 2023. The effective interest rate under the notes, including amortization of such costs, was 2.09%.

(13)The carrying value of these notes reflects unamortized discounts and commissions totaling $7.4 million as of March 31, 2024 and $7.6 million as of December 31, 2023. The effective interest rate under the notes, including amortization of such costs, was 2.94%.

(14)The carrying value of these notes reflects unamortized discounts and commissions totaling $3.8 million as of March 31, 2024 and $3.9 million as of December 31, 2023. The effective interest rate under the notes, including amortization of such costs, was 3.01%.

(15)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 $25,000 as of March 31, 2024 and $32,000 as of December 31, 2023.

All debt is owed by the Operating Partnership. While COPT Defense is not directly obligated by any debt, it has guaranteed CDPLP’s Revolving Credit Facility, Term Loan Facility and Unsecured Senior Notes. All of our mortgage and other secured debt as of March 31, 2024 was for consolidated real estate joint ventures (see Note 6).

The table below sets forth interest expense recognized on the 5.25% Exchangeable Senior Notes due 2028 (the “5.25% Notes”) for the three months ended March 31, 2024 (in thousands):


Interest expense at stated interest rate	$	4,528
Interest expense associated with amortization of debt discount and issuance costs	382
Total	$	4,910

Certain of our debt instruments require that we comply with a number of restrictive financial covenants. As of March 31, 2024, we were compliant with these financial covenants.

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


Year Ending December 31,	March 31, 2024
2024 (1)	$	29,214
2025	23,717
2026	646,300
2027	—
2028	345,000
Thereafter	1,400,000
Total	$	2,444,231	(2)

(1)Represents the nine months ending December 31, 2024.

(2)Represents scheduled principal amortization and maturities only and therefore excludes net discounts and deferred financing costs of $27.4 million.

We capitalized interest costs of $589,000 in the three months ended March 31, 2024 and $770,000 in the three months ended March 31, 2023.

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


	March 31, 2024				December 31, 2023
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Fixed-rate debt
Unsecured Senior Notes	$	2,118,569	$	1,880,835	$	2,117,358	$	1,876,611
Other fixed-rate debt	66,139		63,013		66,744		63,692
Variable-rate debt	232,165		232,105		232,185		232,270
	$	2,416,873	$	2,175,953	$	2,416,287	$	2,172,573

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	March 31, 2024		December 31, 2023
$	10,580	(1)	1.678%	SOFR + 0.10%	8/1/2019	8/1/2026	$	639	$	571
$	22,400	(2)	0.573%	SOFR + 0.10%	4/1/2020	3/26/2025	963		1,084
$	150,000		3.742%	One-Month SOFR	2/1/2023	2/2/2026	2,071		681
$	50,000		3.747%	One-Month SOFR	2/1/2023	2/2/2026	686		222
							$	4,359	$	2,558

(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

March 31,
2024

December 31,
2023

Interest rate swaps designated as cash flow hedges

Prepaid expenses and other assets, net

4,359

2,558

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


	Amount of Income (Loss) Recognized in AOCI on Derivatives				Amount of Income Reclassified from AOCI into Interest Expense on Statement of Operations
Derivatives in Hedging Relationships	For the Three Months Ended March 31,					For the Three Months Ended March 31,
	2024		2023				2024		2023
Interest rate derivatives	$	2,981	$	(215)			$	1,180	$	591

Based on the fair value of our derivatives as of March 31, 2024, we estimate that approximately $3.6 million of gains will be reclassified from accumulated other comprehensive income (“ AOCI”) as a decrease to interest expense over the next 12 months.

We have agreements with each of our interest rate derivative counterparties that contain provisions under which, if we default or are capable of being declared in default on defined levels of our indebtedness, we could also be declared in default on our derivative obligations. Failure to comply with the loan covenant provisions could result in our being declared in default on any derivative instrument obligations covered by the agreements. As of March 31, 2024, we were not in default with any of these provisions. As of March 31, 2024, we did not have any derivatives in liability positions.

10. Redeemable Noncontrolling Interests

Redeemable noncontrolling interests on our consolidated balance sheets include the ownership interests of our partners in LW Redstone Company, LLC and Stevens Investors, LLC due to the partners’ rights to require us to acquire their interests. Effective in June 2023, these rights expired for our Stevens Investors, LLC partners, which resulted in our reclassification of their interests from redeemable noncontrolling interests to the noncontrolling interests in subsidiaries section of equity. The table below sets forth the activity for redeemable noncontrolling interests (in thousands):


	For the Three Months Ended March 31,
	2024		2023
Beginning balance	$	23,580	$	26,293

Distributions to noncontrolling interests	(468)		(763)
Net income attributable to noncontrolling interests	469		699
Adjustments for changes in fair value of interests	(615)		(781)

Ending balance	$	22,966	$	25,448

We determine the fair value of the interests based on unobservable inputs after considering the assumptions that market participants would make in pricing the interest. We apply a discount rate to the estimated future cash flows allocable to our partners from the properties underlying the respective joint ventures. Estimated cash flows used in such analyses are based on our plans for the properties and our views of market and economic conditions, and consider items such as current and future rental rates, occupancy projections and estimated operating and development expenditures.

11. Equity

As of March 31, 2024, we had remaining capacity under our at-the-market stock offering program equal to an aggregate gross sales price of $300 million in common shares.

We declared dividends per common share of $0.295 in the three months ended March 31, 2024 and $0.285 in the three months ended March 31, 2023.

See Note 15 for disclosure of common share activity pertaining to our share-based compensation plans.

12. Information by Business Segment

We have the following reportable segments: Defense/IT Portfolio; and Other. We also report on Defense/IT Portfolio sub-segments, which include the following: Fort George G. Meade and the Baltimore/Washington Corridor (“Fort Meade/BW Corridor”); Northern Virginia Defense/IT Locations (“NoVA Defense/IT”); Lackland Air Force Base (in San Antonio, Texas); locations serving the U.S. Navy (“Navy Support”), which included properties proximate to the Washington Navy Yard, the Naval Air Station Patuxent River in Maryland and the Naval Surface Warfare Center Dahlgren Division in Virginia; Redstone Arsenal (in Huntsville, Alabama); and data center shells (properties leased to tenants to be operated as data centers in which the tenants fund the costs for the power, fiber connectivity and data center infrastructure).

We measure the performance of our segments through the measure we define as net operating income from real estate operations (“NOI from real estate operations”), which includes: real estate revenues and property operating expenses; and the net of revenues and property operating expenses of real estate operations owned through unconsolidated real estate joint ventures (“UJV” or “UJVs”) that is allocable to our ownership interest (“UJV NOI allocable to COPT Defense”). Amounts reported for segment assets represent long-lived assets associated with consolidated operating properties (including the carrying value of properties, right-of-use assets, net of related lease liabilities, intangible assets, deferred leasing costs, deferred rents receivable and lease incentives) and the carrying value of investments in UJVs owning operating properties. Amounts reported as additions to long-lived assets represent additions to existing consolidated operating properties, excluding transfers from non-operating properties, which we report separately.

The table below reports segment financial information for our reportable segments (in thousands):


	Defense/IT Portfolio
	Fort Meade/BW Corridor		NoVA Defense/IT		Lackland Air Force Base		Navy Support		Redstone Arsenal		Data Center Shells		Total Defense/IT Portfolio		Other		Total














Three Months Ended March 31, 2024
Revenues from real estate operations	$	78,068	$	21,426	$	16,411	$	8,226	$	16,808	$	8,457	$	149,396	$	17,267	$	166,663
Property operating expenses	(27,890)		(9,262)		(8,688)		(3,626)		(5,792)		(943)		(56,201)		(10,545)		(66,746)
UJV NOI allocable to COPT Defense	—		—		—		—		—		1,740		1,740		—		1,740
NOI from real estate operations	$	50,178	$	12,164	$	7,723	$	4,600	$	11,016	$	9,254	$	94,935	$	6,722	$	101,657
Additions to long-lived assets	$	26,340	$	4,491	$	—	$	598	$	672	$	—	$	32,101	$	4,790	$	36,891
Transfers from non-operating properties	$	1,575	$	993	$	9	$	—	$	32,884	$	3,075	$	38,536	$	9	$	38,545
Segment assets at March 31, 2024	$	1,458,458	$	489,544	$	187,232	$	161,210	$	584,790	$	434,194	$	3,315,428	$	312,784	$	3,628,212
Three Months Ended March 31, 2023
Revenues from real estate operations	$	69,777	$	19,829	$	15,605	$	7,925	$	13,414	$	6,692	$	133,242	$	18,439	$	151,681
Property operating expenses	(24,520)		(7,572)		(7,945)		(3,543)		(4,636)		(594)		(48,810)		(10,610)		(59,420)
UJV NOI allocable to COPT Defense	—		—		—		—		—		1,642		1,642		—		1,642
NOI from real estate operations	$	45,257	$	12,257	$	7,660	$	4,382	$	8,778	$	7,740	$	86,074	$	7,829	$	93,903
Additions to long-lived assets	$	12,135	$	2,398	$	62	$	759	$	6,594	$	—	$	21,948	$	3,289	$	25,237
Transfers from non-operating properties	$	5,781	$	238	$	28	$	2,650	$	14,392	$	3,311	$	26,400	$	13	$	26,413
Segment assets at March 31, 2023	$	1,390,273	$	486,649	$	193,160	$	169,235	$	472,237	$	324,422	$	3,035,976	$	549,138	$	3,585,114

The following table reconciles our segment revenues to total revenues as reported on our consolidated statements of operations (in thousands):


	For the Three Months Ended March 31,
	2024		2023
Segment revenues from real estate operations	$	166,663	$	151,681
Construction contract and other service revenues	26,603		15,820

Total revenues	$	193,266	$	167,501

The following table reconciles UJV NOI allocable to COPT Defense to equity in income (loss) of unconsolidated entities as reported on our consolidated statements of operations (in thousands):


	For the Three Months Ended March 31,
	2024		2023
UJV NOI allocable to COPT Defense	$	1,740	$	1,642
Less: Income from UJV allocable to COPT Defense attributable to depreciation and amortization expense and interest expense	(1,671)		(1,704)
Add: Equity in loss of unconsolidated non-real estate entities	—		(2)
Equity in income (loss) of unconsolidated entities	$	69	$	(64)

As previously discussed, we provide real estate services such as property management, development and construction services primarily for our properties but also for third parties. The primary manner in which we evaluate the operating performance of our service activities is through a measure we define as net operating income from service operations (“NOI from service operations”), which is based on the net of revenues and expenses from these activities. Construction contract and other service revenues and expenses consist primarily of subcontracted costs that are reimbursed to us by the customer along with a management fee. The operating margins from these activities are small relative to the revenue. We believe NOI from service operations is a useful measure in assessing both our level of activity and our profitability in conducting such operations. The table below sets forth the computation of our NOI from service operations (in thousands):


	For the Three Months Ended March 31,
	2024		2023
Construction contract and other service revenues	$	26,603	$	15,820
Construction contract and other service expenses	(26,007)		(15,201)
NOI from service operations	$	596	$	619

The following table reconciles our NOI from real estate operations for reportable segments and NOI from service operations to net income as reported on our consolidated statements of operations (in thousands):


	For the Three Months Ended March 31,
	2024		2023
NOI from real estate operations	$	101,657	$	93,903
NOI from service operations	596		619
Depreciation and other amortization associated with real estate operations	(38,351)		(36,995)

General, administrative, leasing and other expenses	(11,747)		(10,490)
Interest expense	(20,767)		(16,442)
Interest and other income, net	4,122		2,256
Gain on sales of real estate	—		49,378


Equity in income (loss) of unconsolidated entities	69		(64)
UJV NOI allocable to COPT Defense included in equity in income (loss) of unconsolidated entities	(1,740)		(1,642)
Income tax expense	(168)		(125)


Net income	$	33,671	$	80,398

The following table reconciles our segment assets to our consolidated total assets (in thousands):


	March 31, 2024		March 31, 2023
Segment assets	$	3,628,212	$	3,585,114
Operating properties lease liabilities included in segment assets	33,550		35,327
Non-operating property assets	245,828		345,518
Other assets	325,305		212,033
Total consolidated assets	$	4,232,895	$	4,177,992

The accounting policies of the segments are the same as those used to prepare our consolidated financial statements. In the segment reporting presented above, we did not allocate interest expense, depreciation and amortization, gain on sales of real estate and equity in income (loss) of unconsolidated entities not included in NOI to our real estate segments since they are not included in the measure of segment profit reviewed by management. We also did not allocate general, administrative, leasing and other expenses, interest and other income, net, income taxes and noncontrolling interests because these items represent general corporate or non-operating property items not attributable to segments.

13. Construction Contract and Other Service Revenues

We disaggregate in the table below our construction contract and other service revenues by compensation arrangement as we believe it best depicts the nature, timing and uncertainty of our revenue (in thousands):


	For the Three Months Ended March 31,
	2024		2023
Construction contract revenue:
Guaranteed maximum price	$	13,640	$	6,743
Firm fixed price	10,900		5,879
Cost-plus fee